f/J CORNELL UNIVERSITY LIBRARY Transferred to , MAIN LIBRARY PAT? a"^^^ — -^ Jdte«!^ V- *- 3P3S?:hL. — ' '^~t"fl ^^ ip~ R#^ ^y^ :i:^ T> ■s |L ^^ _W-U-T7-=^ _^^ 4UfiU^ "— ""KC^fWf 'isaHip ^mr-t 4^^. JJ r MAVnn l^r>n WiFNifc :^BB« ■MP'i'^ .n GAYLORD Cornell University Library HJ 241.D51 1903 ... Financial history of the Un tfd Stat 3 1924 011 404 781 .i- Cornell University Library The original of tliis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924011404781 AMERICAN CITIZEN SERIES EDITED BY ALBERT BUSHNELL HART, LL.D. FINANCIAL HISTORY OF THE UNITED STATES DAVIS RICH DEWEY, Ph.D. ^tntvicmx Cttiieir ^evit^ (3 Financial History of The United States BY i> * ' DAVIS RICH DEWEY, Ph.D., PROFESSOR OF ECONOMICS AND STATISTICS, MASSACHUSETTS INSTITUTE OF TECHNOLOGY. Second Edition LONGMANS, GREEN, AND CO., 91 AND 93 Fifth Avenue, New York LONDON AND BOMBAY 1903 1^ ' 1^03 ^ 1 ! fJH;! Vli'i^ Copyright, ms. ./!!■' By Longmans, Green, and Co. All rights reserved. First edition, February, 1903. Second edition, revised, November, 1903. KtiibcBiita Press : John Wilson and Son, Cambridge, U.S.A. TO THE SEMINARY OF THE DEPARTMENT OF HISTORY, POLITICS, AND ECONOMICS OF JOHNS HOPKINS UNIVERSITY, Of which the author was a member from 1883 to 1886. Under the guidance of Adams, Ely, and Jameson, we read and learned. The first has gone, leaving affectionate memories and organized activities of permanent usefulness ; the others are still doing their work in a spirit of broad-minded sympathy and fine scholarship. Preface. The attempt to compress into a volume of moderate size an account of Federal finance from the Colonial period down to the present time occasions perplexity. Some knowledge of politics and economics must be pre-supposed, but the exact measure it is difficult to estimate. In order to place readers as far as possible on a common basis, the reference lists which are scat- tered through the volume have been constructed on a generous plan. In no way, however, are these lists to be regarded as conditional to an understanding of the text ; they are simply opportunities for a better prepar- ation, or a further study of special topics. In writing this work, I have kept two things constantly in mind : first, its proportions, or the general perspec- tive; and second, the relations of financial legislation to democracy. It is easy in the light of accumulated ex- perience to pass judgment on the errors of the past, but historical study, in my opinion, is more fruitful if the reader endeavors to interpret the past in accordance with the experience which was available at the time the occurrences took place. Past environment is the true test of past action. With this conviction, I have endeavored to refrain, possibly not with entire consist- ency, from emphasizing the mistakes of previous gen- erations. A work on "American Finance" might well viii Preface. have a didactic purpose, but this is a history and not a treatise. In determining the proportions of this volume, I have been obliged to pass by many incidents of keen interest ; the omissions aie necessarily far greater than the inclu- sions. The result is doubtless a loss of interest, but it is hoped that the gain from an orderly presentation of the essential facts may be a substantial compensation. It is impossible to include by name all of those who have given friendly counsel, but I wish to thank in particular the editor of this series. Professor Hart, and Professor Henry B. Gardner, of Brown University. The former undertook a very considerate reading of the manuscript, and without the support of his knowledge of American history my task would have been much more difficult. To Professor Gardner I am under great in- debtedness ; his learning and sound judgment have constantly stood me in good stead, and strengthened a friendship of long standing. I also wish to make acknowledgment to Professor Bullock, who has done pioneer work for several periods of American finance; his investigations justify the hope that he will find opportunity to write a larger work on the finances of our country. I am in a special way indebted to my colleague, Professor Currier, to Mr. S. N. D. North, and to various officials of the Treasury Department. Massachusetts Institute of Technology, Boston, January, 1903. SUGGESTIONS FOR STUDENTS, TEACHERS, AND READERS. I. Introductory Reading : Political History and Biography. It is hardly necessary to say that the student of American finance should be acquainted with the main outlines of the political history of the United States, and also have some general knowledge of that part of applied economics which deals with taxation and mon- etary questions. It is believed that a knowledge of American his- tory as represented in the series, " Epochs of American History," will enable the reader to apply an intelligent judgment to the following narrative of fiscal events, but as a further help precise page references have been given in the several chapters to general historical works which show the relation of politics to financial affairs. With this end in view, as an introduction to more special reading, the following list of histories and biographies is also suggested. Of the larger histories, that by Schouler is probably the most helpful single work, as it extends over a long period, 1783-1861, and gives prominence to tariff and banking questions. Of the biographies, those of Lodge on Hamil/on, Stevens on Gal- latin, Schurz on Clay, Sumner on Jackson, and Hart on Chase are to be recommended. These and other works are noted below; the descriptive notes will enable the student to select the volumes relating to the period in which he may be interested. Adams, Henry. History of the United States of America {A\xx- ing the administrations of Jefferson and Madison), (N. Y., 1889-1891. 9 vols.) — An authoritative history for the period covered. The index in Vol. IX is very full ; see Bank of U. S. ; Banks, State ; Dallas, A. J. ; Finances ; Gallatin ; Loans ; Man- ufactures ; Specie; Specie payments; Taxes; Treasury notes. Adams, Henry. The Life of Albert Gallatin. (Philadelphia, 1880.) — Of the greatest value for 1801-1813, pp. 267-492. Blaine, James Gillespie. Twenty Years of Congress, from Lincoln to Garfield. (Norwich, Conn., 1884. 2 vols.) — Valua- ble as a record of political events. Extracts from many debates ; Vol. I, chapters 18, 19, 22 treat of the finances of Civil War period; Vol. II, chapters 13 and 24 of post-bellum financial legislation. X Suggestions for Students, Etc. BouTWELL, George Sewall. Reminiscences of Sixty Years in Public Affairs. (N. Y., 1902. 2 vols.) — Is interesting for side- lights on the establishment of the internal revenue system and on bond issues after the Civil War. Dallas, George Mifflin. Life and Writings of A. J. Dallas. (Philadelphia, 1 871.) GoRDY, John Pancoast. A History of Political Parties in the United States. (Vol. I, 2d ed., N. Y., 1900.) — Only one vol- ume has appeared, covering the period from 1781-1809. Con- cise and valuable for Constitution, and Hamilton's policy; see chapters 2-9, 13. Hart, Albert Bushnell. Salmon Portland Chase. (Boston, etc., 1899.) — The best critical biography of Chase ; see chapters 9 and II on finances of the Civil War, and chapter 15 on the Supreme Court decisions. HoLST, Hermann Eduard von. The Cotistitutional and Politi- cal History of the United States. Translated by John J. Lalor and others. (Chicago, 1 877-1 892. 7 vols, and an index vol.) — Devoted primarily to political aspects of slavery ; consult, however, in index. Vol, IX, Bank; Banks; Commercial Crisis, 1837; ditto, 1857; Nullification; Public Lands ; Sub-Treasury; Tariff. Lodge, Henry Cabot. Alexander Hamilton. (Boston, etc. nth ed., 1895.) — An appreciative study by a pohtical admirer. See especially chapters 5-6. McCULLOCH, Hugh. Men and Measures of Half u Century. (N. Y., 1889.) — Though discursive and anecdotal, it throws much light on banking in the West before the Civil War, and on financial operations of the treasury at its close. McMaster, John Bach. History of the People of tlu United States from the Revolution to the Civil War. (N. Y., 1S83- 1901. 5 vols, published.) — The volumes published, covering the period 1 783-1830, contain serviceable indexes and descriptive tables of contents ; currency, banking, and tariff controversies are described. Morse, John ToRREY, Jr. Life of Alexander Hamilton. (Bos- ton, 1876. 2 vols.) — A fuller biography than that of Lodge; sympathetic yet critical. Rhodes, James Ford. History of the United States from the Compromise of 1850. (N. Y., 1892-1899. 4 vols.) — The vol- umes published bring the narrative down to 1864. Suggestions for Students, Etc. xi Shepard, Edward M. Martin Van Buren. (Boston, etc., 1888.) — Contains an excellent study of economic conditions, I 830-1 840. Sherman, John. Recollections of Forty Years, a Biography. (The Werner Company, Chicago, N. Y., etc., 1895.) — As an account of the author's active participation in public finance, the memoirs are of great interest. SCHOULER, James. History of the United States of America under the Constitution. (Rev. ed., N. Y., 1895-1899. 6 vols.) — Covers the period 1 783-1 861 ; a most serviceable account of political events ; the descriptive tables of contents can be used to advantage. Schuckers, Jacob William. Life and Public Services of Sal- mon Portland Chase. (N. Y., 1874.) — Contains extracts from documents and letters ; a full biography, but not critical. SCHURZ, Carl. Life of Henry Clay. (2 vols. 5th ed,, Boston and N. Y., 1888.) — An excellent biography, but the tariff con- tests, 1820-1830, are not brought into prominence ; see, however. Vol. II for the period 1833-1837. Stevens, John Austin. Albert Gallatin. (4th ed., Boston, 1886.) — The author was equipped by business training to treat of finance. See chapter 6 for period 1801-1812. Sumner, William Graham. Alexander Hamilton. (In " Makers of America " series, N. Y., 1890.) — A critical and almost harsh study of Hamilton ; very valuable to the student of finance. Sumner, William Graham. Andrew Jackson. (Boston, etc. nth ed., 1888.) — Shows wide reading in contemporary docu- ments ; treats of land, internal improvements, tariff, second U. S. Bank, and currency. Tyler, Samuel. Mem.oir of Roger Brooke Taney, Chief Justice of the Supreme Court of the United States. (Baltimore, 1872. Rev. ed., 1876.) II. Financial Histories There are but few histories devoted exclusively to public finance; only one, indeed, that by Bolles, covers the general field over an extended period. The reader must therefore rely upon works on taxation, the tariff, coinage, and banking, and for special topics and episodes will often find the most sati..) — Second Supplement, 1887-1891. (Boston, etc., 1893.)— Third Supplement, 1892-1896. (Boston, etc., 1897.) — The standard guide to periodical literature; con- sult especially Bank of United States; Banks; Bankmg; Cur- rency; Silver; Tariff; United States, Finances of. PooRE, Ben Perley. A Descriptive Catalogue of the Govern- ment Publications of the United States, Sept. 5, 1774, to March 4, 1881. (Washington, 1885.) — Not very easily used, but the only index available for the period as a whole. IX. Special Exercises and Investigation. In no subject of applied economics is there more abundant op- portunity for individual and special investigation than in that of American finance. As ^an example of immediate interest, it is suggested that the student read the daily treasury statement, which can be obtained by application to the Treasury Department, or may be found in the columns of the principal financial daily and weekly newspapers. The writer has secured useful results by assigning to the several members of a class the graphic representation of the principal facts found in the daily treasury statement, such as the amount of cash in the treasury, the amount of money in the national bank depositories to the credit of the treasurer of the United States, and the daily receipts and expenditures. The daily checking of these and similar tables leads to the development of a keen judgment not only as to what is occurring, but as to what may occur on the morrow. As illustrating the range of practical exercises which quickly introduce the student to the consideration of current questions, a few subjects are suggested : — 1. The price of government securities as quoted in Miles' Register, the Bankers^ Magazine, the Commercial and Financial Chronicle^ or BradstreeP s, with ■ reasons for fluctuations. 2. The chronological history of a loan bill, as derived from the Annals of Con- gress, the Globe, or Record. 3. The history of a loan, its issues and redemptions. xxviii Suggestions for Students, Etc. 4. 'I'he deposit of government funds in national banks over a period of years, and tlie reasons for changes, 5. The history of the tariff duties on a single commodity, as tea, wool, salt, sugar ; with this can be combined a study of import figures for the same commodity, 6. The classification of expenditures according to a logical scheme. The expen- ditures of the government have never been tabulated in a detailed and systematic way; and it is hoped that in the near future monographs may be written devoted to an historical account of the several branches of public ex- penditures. As contributory to this larger work, much preliminary research can be done to advantage by the individual student. 7. The assignment of a speech of a senator or representative on some financial question, with the requirement that all facts be checked by reference to official documents. 8. The distribution of votes on a financial bill; this is of more value for the earlier period of our history, for since the Civil War votes on the tariff have been strictly drawn on party lines. 9. The preparation of bibliographies with special reference to government docu- ments. No labor here is too slight; the reports of congressional committees are buried treasures, awaiting energetic pick and shovel. Contents. Page Suggestions for Students, etc. . ix Chapter I. Colonial Finance. 1. References ... i 2. Scope of the Work ... .... . . . 2 3. Economic Factors .... 5 4. Expenditures . 8 5. Taxation 9 6. Tariffs ; Import and Export Duties ....... 14 7. Control of Appropriations . 17 8. Money and Coinage .... . ... 18 9. Bills of Credit ... 21 10. Loan Banks . . . . ... . . . . 24 11. English Legislation against Paper Currency . . 28 12. Taxation by England 30 II. Revolution and the Confederacy, 1775-1788. 13. References ... ... 33 14. Governmental Confusion .... 34 15. Issues of Bills of Credit ; Continental Money . ... 36 i5. Depreciation of the Currency . . 39 17. Was Paper Money Necessary ? ... 41 18. State Taxation and Requisitions . .... 44 19. Domestic Loans ... ... . ... 45 20. Foreign Loans . . 47 21. Financial Provisions in the Articles of Confederation . 49 22. Effort to Secure a National Tax 49 23. Fiscal Machinery 52 24. Bank of North America 54 25. Financial Collapse, 1783-1789 . ... . . 56 Page 60 XXX Contents. Chapter III. Financial Provisions of the Constitution. 26. References 27. Financial Sections of the Constitution 60 28. Taxation ^^ 29. Borrowing ; Bills of Credit . . 67 30. Coinage ..... . ■ .... 70 31. Appropriations .... 72 32. Popular Objections to the Financial Powers ■ . • 73 IV. Establishment of a National System. 33. References .... . • • . ■ 75 34. Economic Conditions in 1789 . . . . 7^ 35. '^gariff Measures . .80 36. Rfinciple of Protection . . 84 37. Establishment of the Treasury Department . 85 38. Internal Organization of the Treasury Department . 87 39. Funding of the Debt 89 40. Assumption of State Debts ... 92 41. Character of the New Debt . . 94 V. New Financial Needs, 1790-1801. 42. References 97 •^ 43. First United States Bank . .... 98 44. Mint and Coinage .... . .... lOt 45. Excise Tax on Whiskey . . 105 46. Other Excise Duties ; Carriage Tax . . 106 47. Direct Taxation ..... . 109 48. Summary of Receipts, 1789-1801 . . . no 49. Expenditures, 1789-1801 . . .111 50. The Debt, 1789-1801 .... . . 112 51. Sinking Fund ; Management of the Debt . 113 52. The Administrations of Hamilton and Wolcott . 115 VI. Economies and War, 1801-1816. 53. References . . . 118 54. Economies and Reduction of Taxation . 119 55. New Demands upon the Treasury ... . . 121 56. Receipts and Expenditures, i8oi-i8it . . . 123 57. Reduction of Debt ; Sinking Fund . . . 124 ^« 58. End of the United Stales Bank 126- Sg. Inadequate Preparation for War 128 Contents. XXXI Chapter VI. Economies and War, 1801-1816 (continued). 60. Treasury Administration, War Period War Loans Issue of Treasury Notes Internal Revenue Taxes ; Other Taxes . Expenditures and Receipts, 1812-1815 VII. Problems of Reorganization after War. 65. References . . . ... Currency Disorder Establisliment of the Second United Career of the Banl<, 1816-1819 . Local Banks, 1815-1830 .... United States Bank, 1823-1829 . . Constitutionality of the Bank Issues of Banks Owned by Stat^ . Tariff of i8r6 Financial Embarrassments, 1816-1821 Receipts and Expenditures, 1816-1833 . . Difficulties in Management of the Funded Debt 61. 62. 63- 64. 66. ' 68. 69. 70. 71- 72. 73- 74- 75- 76. VIII. Tariff Legislation, 1818-1833. 78. 79- 80. 81. 82. 83- 84. IX. Struggle for Increased Protection ; Tariff of 1824 Tariff of 1828 Intense Opposition to the Tariff . . . Tariff of 1832 Nullification; Compromise Tariff .... Problems of Customs Administration Analysis of Tariff Reasoning . . Attack upon the Bank ; the Surplus, 1829-1837. 85. References . . .... . • ... Criticism of the Bank .... .... Unsuccessful Effort to Recharter . ... Removal of the Deposits The Pet Banks Change in Coinage Ratio .... ... Internal Improvements . . . .... Sales of Public Lands . . Surplus Revenue . ... Distribution of the Surplus 86. 87. 88. 89. 90. -91. 92. 93' 94- Page 131 132 135 138 141 143 144 145 150 153 156 ■57 i6q . 161 i6s 168 170 172 -173 176 181 183 18s 189 191 197 198 201 203 209 210 • 212 216 217 219 xxxii Contents, Chapter Page X. Panic of 1837 and Restoration of Credit. 95. References . . 223 96. Speculative Prosperity . 224 97. The Specie Circular 227 98. Panic of 1837 ; Suspension of Specie Payments . . . 229r- 99. Distress of the Treasury ... 231 100. Issue of Treasury Notes and Loans 234 loi. Independent Treasury . , 235 102. Tariff of 1842 237 103. Struggle for a New Bank . ... ... 239 104. State Repudiation . . 243 105. Receipts and Expenditures, 1834-1846 .... 246 XI. Tariff, Independent Treasury, and State Banks, 1846-1860. io5. References ... . 248 107. Tariff of 1846 249 108. The Independent Treasury Re-established . . . 252 109. Finances of the Mexican War . . .... 255 no. Commercial Expansion ... 256 111. Progress toward Lower Duties 257 112. Local Banking, 1837-1861 . .... . 259 ■-JI3. Tariff of 1857 ; Panic . . 262 114. Morrill Tariff 265 115. Receipts and Expenditures, 1846-1861 .... . 267 Civil War; Legal Tenders. ;i6. References 271 ~'--ii7. The Situation in i860 ... 2-2 118. Appointment of Chase ... 274 119. Revenue Measures, July, 1861 . . 276 120. Placing the Loan of jSi 50,000,000 .... 2-8 121. Suspension of Specie Payments 2S1 122. Issue of Legal-Tender Notes 2S4 123. Convertibility of the Greenback . . 290 124. Depreciation of the Greenback 292 125. Gold Premium . 204 XIII. Loans, Taxation, and Banking of the Civil War. 126. References .... . 298 127. Taxation in 1861-1862 . . jqq 1 28. Increase of Taxes -502 Contents. XXXlll Chapter XIII. Loans, Taxation, etc., of the Civil War {continued). 129. Income Tax 130. Loan Act of February, 1862 . . 131. Temporary Indebtedness . 132. Loan Act of March 3, 1863 . . . 133. Short-Time Notes ... 134. Financial Situation in 1864 .... 135. Administration of Secretary Fessenden 136. Summary of Loans ... . . . , 137. Loan Policy of Chase ... . . . . 138. Arguments in Favor of a National Banking System 139. National Banking Act of 1863 . . 140. Receipts and Expenditures, 1861-1865 .... XIV. Funding of the Indebtedness. 141. References 142. 143- 144. 145- 146. 147. 148. 149. 150. 151. 152. Character of the Public Debt in 1865 Funding or Contraction . . Theories of Resumption . . Arguments against Contraction Funding Act of April 12, 1866 . Abandonment of Contraction . Payment of Bonds in Currency Taxation of Bonds . . The Refunding Act of 1870 . Sale of Bonds Abroad . Sinking Fund J XV. Greenbacks and Resumption. 153. References ..... . . . 154. Volume of Treasury Notes . . 155. Constitutionality of Legal-Tender Notes 156. Issues in Times of Peace 157. Sale of Gold .... . . . . 158. Panic of 1873 .... 159. Resumption Act of 1875 • • • 160. Resumption Accomplished . . . . 161. Greenback Party XVI. Banking and Taxation, 1866-1879. 162. 163. Page 3°S 306 309 310 312 312 314 316 317 320 326 329 References . Bank-Note Circulation 331 332 333 335 338 340 343 344 35° 352 354 356 359 360 362 366 368 370 372 374 378 383 383 xxxiv Contents. Chapter Page XVI. Banking and Taxation, 1866-1879 {continued). 164. Relations of the Banks to the Government . . . 387 165. Antagonism to the National Banking System . 389 166. Revision of Internal Revenue System . . . . . 391 167. Tariff Changes . 396 168. Receipts and Expenditures, 1866-1879 . 398 XVII. Silver and Banking, 1873-1890. 169. References . 402 170. Demonetization of Silver . 403 / 171. Struggle for Free Coinage; Bland Act . . . 405 172. Coinage under the Bland Act ... . 407 173. Unsuccessful Efforts to stop Coinage . . 409 174. Continued Opposition to National Banks . 410 175. Decline in Bank Circulation .... . 411 XVIII. Surplus Revenue and Taxation.. 1880-1890. 176. References ... . . 414 177. Surplus Revenue ...... . 415 178. Deposit of Funds in National Banks . . 417 179. Reduction of Internal Revenue Duties . . 180. Tariff Revision ... . . ... 181. Unsuccessful Democratic Tariff Measures . 182. Increased Expenditures 183. Treasury Purchase of Bonds 184. The Public Debt, 1880-1890 ... 431 XIX. Silver and the Tariff, 1890-1897. 185. References .... .... ^-it 186. Silver Act of i8go ... . . 436 187. McKinley Tariff of 1890 438 188. The Gold Reserve and its Decline . . . . . 440 189. Panic of 1893 ; Repeal of Silver Purchases . . . 444 V 190. Sale of Bonds for Gold .... . . . 447 igi. Legality of the Bond Issues . 450 192. The Gorman-Wilson Tariff 455 193. Currency Measures . . ... 458 194. Struggle for Free Coinage 460 XX. Tariff, War, and Currf.ncv Act. 195. References ^g, 196. Dingley Tariff, 1897 -53 418 420 423 426 429 Contents. XXXV Chapter XX. Tariff, War, and Currency Act (continued). 197. Spanish War Finance igS. Currency Act of 1900 199. Redemption o£ Treasury Notes . ... 200. National Banks .... . . 201. Refunding 202. Receipts and Expenditures, 1891-1901 . . Page 465 468 469 471 472 473 XXI. Legislation and Administration. 203. References ... . . 204. Initiative in Tariff Bills 205. Appropriation Bills . . 206. Collection of Revenue . 207. Custody of the Public Funds 208. The Mint 209. Supervision of Banks . 210. Accounting System . . 211. Public Debt Statement . . . 212. Miscellaneous Treasury Bureaus APPENDIX . INDEX . . 477 478 483 488 492 49S 495 498 499 SOI 503 513 CHARTS I. Ordinary Expenditures, 1791-181 1 . . . II. Ordinary Expenditures, 1810-1835 . III. Ordinary Expenditures, 1836-1861 . . . IV. Local Banlt Statistics, 1834-1863 . . V. Ordinary Receipts, 1791-1861 VI. Ordinary Receipts and Expenditures, 1791 1861 VII. Premium on Gold, 1862-1879 VIII. Ordinary Expenditures, 1866-1882 . IX. Receipts from Internal Revenue, 1863-1880 X. Silver, 1867-1899 XI. Receipts from Internal Revenue, 1881-1898 XII. Ordinary Expenditures, 1881-1901 . . . XIII. Bank Circulation, 1878-1890 . ... XIV. Net Gold in Treasury, 1893-1897 . . . XV. Treasury Notes Redeemed in Gold, 1885- 1900 XVI. Composition of the Public Debt, 1891-1901 XVII. Ordinary Receipts, 1861-1901 XVIII. Ordinary Receipts and Expenditures, 1861 igoi To face page ill 141 246 260 ■ 267 269 376 399 395 406 420 428 430 442 444 474 475 476 Financial History of the United States. CHAPTER I. COLONIAL FINANCE. 1. References. Bibliographies : Bogart and Rawles, 3-9 ; Channing and Hart, 284- 285; 289 (Stamp Act) ; A. M. Davis, Currency and Banking in the Prov- ince of Massachusetts Bay, in Pub. of Amer. Econ. Assn., Third Series, I, No. 4, ch. XXII; J. Winsor, Narrative History of America, V, 170- 177; and monographs referred to below in fohns Hopkins University Studies and Columbia College Studies. The notes in C. J. Bullock, Monetary History of United States, furnish many references on money. Fac-siniile cuts of paper money are found in Winsor and in Davis. Commodities as Money: H. White, 10-22; S. W. Rosendale, Wam- pum Currency, in Sound Currency, III, No. 8 (March, 1896); C. J. Bullock, 7-12; W. B. Weeden, Indian Money, m. J. H. U. Studies, II, 385-481. Coinage: Bullock, 12-28; D. K. y^ zX^on, History of American Coin- age, 1—7 ; J. H. Hickox, A Historical Account of A?nerican Coinage (Albany, 1858, Plates) ; S. S. Crosby, Marly Coins of America (Boston, 1875, Plates).; C. H. Swan, Jr., Spanish Silver Dollars in Massachusetts, in Sound Currency, VI, 73-80; W. G. Sumner, The Spanish Dollar and the Colonial Shilling, in Amer. Hist. Rev. (July, 1898); W. G. Sumner, Coin Shilling of Massachusetts Bay, in Yale Review, VII, 247, 405 (Nov., 1898, and Feb., 1899). Paper Money: (i) Contemporary : W. Douglass, Discourse con- cerning the Currencies of the British Plantations in America (1740), reprinted and edited by C. J. Bullock, in Stud. Amer. Econ. Assn., II, No. 5 (especially pp~^5-3i8) ; J. Wright, The American Negotiator of the Various Currencies of the British Colonies in America (1761); South Carolina's First Paper Money (1739), in Sound Currency, V, 34-45; B. Franklin, Works (Bigelow, ed.), I, 359-383; IV, n-15, 79-94; A. B. Hart, American History, II, 251-254. (ii) General : G. Bancroft, Plea for the Constitution, 9-28; C. J. Bullock, 29-59; W. Gouge, Money, Part II, 1-25; J. J. Knox, 1-8; F. A. Walker, Money, 305-326; H. 2 Colonial Finance. [§ z White, 120-134; W. G. Sumner, History of American Currency, 1-43. (iii) Special: H. Phillips, Historical Sketches of the Paper Currency of the American Colonies (2 vols., 1865) ; F. F. McLeod, Fiat Money and Currency Inflation in New England from 1620 to 1739, in Annals Amer. Acad. Pol. Sci., XII, 57-77 (Sept., 1898) ; H. Bronson, Historical Account of Connecticut Currency, in Papers of New Haven Col. Hist.Soc.,1 (1865); J. G. Palfrey, History of New England, V, 96-109 (Massachusetts) ; A. M. Davis, Currency and Banking in the Province of Massachusetts Bay, in Ptib. of Amer. Econ. Assn., Third Series, I, No. 4 (Dec, 1900, Plates) ; C. H. J. Douglass, Financial History of Massachusetts, 117-135; 8. S. Rider and B. R. Potter, Some Account of the Bills of Credit or Paper Money of R. /., 1710-1786; H. White, New York's Colonial Currency, in Sound Currency, V, 50-64; C. J. BuUocIt, 207-259 (New Hampshire), 125-183 (North Carolina); C. W. Macfarlane, Pennsylvania Paper Cur- rency in Annals Amer. Acad. Pol. Sci., VIII, 50-126; P. A. Bruce, Economic History of Virginia, II, ch. 19; W. Z. Ripley, Financial His- tory of Virginia, 108-144 (hard money), 145-166 (paper money). Colonial Banking: H. White, 248-258; A. M. Davis, Currency and Banking in the Prov. of Mass. Bay; Part II, Bankings in Pub. of Amer. Econ. Assn., Third Series, II, No. 2 (May, 1901), particularly ch. 12; A. M. Davis, A Connecticut Land Bank of the i%th Century in Quar. Jour, of Econ., XIII, 70. Taxation : The Stamp Act, 1765, in American History Leaflets, No. 21 (May, 1895); B. Franklin, Works, IV, 97-111; 288-299; V, 440-531 ; A. B. Hart, American History, \\, 394-417 ; W. MacDonald, Select Charters, 272 (Sugar Act), 281 (Stamp Act), 322 (Revenue Act), 327 (Tea Act); C. C. Plehn, Introduction to Public Finance, 139-142; E. R. A. Seligman, Income Tax in American Colonies and States, in Pol. Sci. Quar., X, 220- 247; W. Hill, Colonial Tariff's, in Quar. Jour, of Econ., VII, 78-100; O. L. Elliott, The Tarifl' Controversy, 5-66, in Leland Stanford, Jr., Univ. Monographs Hist., No. I ; J. D. Goss, History of Tarifl' Administration in the U. S., in Col. Coll. Stud., I, No. 2, 10-23; W. C. Y\siiax, American Trade Regulations before 1789, in Papers of Amer. Hist. Assn., Ill, 221 ; W. G. Sumner, Alexander Hamilton, 37-52 (taxation by England) ; F. R. Jones, History of Taxation in Connecticut, 1636-1776, in J. H. U. Stud., XIV, No. 8; C. H. J. Douglass (as above), 13-95; J- C Schwab, History of New York Property Tax, in Pub. Amer. Econ. Assn., V, No. 5 ; E. L. Whitney, Government of the Colony of S. C, in J. H. U. Stud., XIII, 97-109; W.Z.Ripley (as above), 11-107; P. A. Bruce, Economic History of Virginia (see index for taxes, duties, customs, taxation). 2. Scope of the Work. The term finance, according to the precise academic defini- tion of modern authorities, refers to the receipts and expendi- tures of an individual, company, or government. "The § 2] Scope of the Work. 3 supply and application of state resources constitute the subject matter of public finance," is the definition given by Prof. Bastable ; and successive American writers on this subject, Adams, Plehn, and Daniels, use the term in substantially the same sense. In the following narrative of American experi- ence the expression "financial history" will be given a broader scope and will include also some consideration of the monetary system of the country, such as coinage and bank issues. This extension is made partly for convenience, since the two subjects of money and of finance in its narrow- est interpretation are related in interest to the student of public affairs ; and partly because it is impossible to explain the policy of the government of the United States, either as to expenditures or to income, without reference to the devel- opment of public opinion and experience in the management of its monetary operations. In no country of the world has national finance been so quickly and so violently affected by political environment and current economic experience as in the United States. This influence has been due to many causes, — in part to the sudden break with the parent country in 1775, leaving ani- mosities which grew into suspicion or contempt for European experience ; in part to the abstract political philosophy which early obtained a strong hold upon the reasoning of political leaders in America and which led to a confidence in abstract ideas beyond practical possibilities ; and in part to the new- ness of our economic life and the enormous scale on which the resources of the country have been developed. A com- plete and satisfactory treatment of the financial history of the United States might well involve, therefore, the bases of Ameri- can political philosophy as expressed in constitutional law and judicial interpretation, and also a view of the material exten- sion of the country as witnessed in the unparalleled growth of agriculture, manufactures, mining, transportation, and foreign commerce. Such an extended treatment is obviously impos- sible within the limits set for this work : but the reader 4 Colonial Finance. [§ 2 should be alert to connect this narrative of financial measures with the underlying forces of political opinion and economic development. The financial history of the present government of the United States has its roots in the methods, experiences, and political philosophy of the thirteen colonies. In part the revenue systems of those settlements were prescribed by external authorities or inspired by non-resident commercial interests ; in part they were the expression of local needs, enunciated by freemen slowly learning to legislate for them- selves. The colonies were established at different times and under different impulses, and it is consequently natural that they should have tried a variety of revenue measures, for the most part crude and yet on the whole not badly adapted to new and raw conditions of material life. Rarely, except in time of war, were the demands upon the colonial treasuries burdensome or excessive, and the adjustment of revenue to expenditure or of expenditure to revenue was easily made. Most of the colonies fell into the error of too abundant issues of paper money ; at first, to meet special strains, and, later, in many instances to discharge ordinary obligations which should have been met by taxation ; but this error was fostered by the argument that the community needed a greater supply of money both as loanable capital and as- a medium of exchange, — an argument entirely distinct from budgetary requirements. With the revolt against England in the latter part of the eighteenth century there arose the necessity of some national system of finance to meet expenditures under- taken in a common cause, particularly in the support of the army. A national system had to be created not only out of the varied and crude financial experiences of the thirteen colonies, but also in a time of political confusion, when there was little opportunity for inquiry, deliberation, and careful maturing of plans. Financial disaster was the result. During the closing years of the Revolution and after the treaty of peace in 1783 rapid and critical experiments were tried, § 3] Economic Factors. 5 leading finally to a new constitution which laid the founda- tion of the present federal financial system of the United States. Introductory to the federal system of finance which will chiefly occupy this narrative, two chronological periods must therefore be considered : ( i ) the financial experiences of the colonies; and (2) the finances of the Revolution together with the transition experiments of the Confederacy. In the treatment of colonial financial practice it will be impossible to consider each colony separately, either in fiscal organization or as to ways and means for getting revenue. The survey must serve simply to disclose the more important methods and fiscal instruments with which the people of the United States had become acquainted on their own soil during the years of preparation for their national independent career. 3. Economic Factors. The economic life of the colonies was extremely simple, and yet was active in many different ways. The settlements were scattered over an extended seaboard and differed in climate and natural resources. They differed also in occupa- tions ; besides the plantations of sugar, tobacco, rice, and indigo in the South, and the smaller farms of tillage and pasturage in New England and the middle colonies, every- where were fisheries, forests of timber and naval stores, and scattered outposts of hunters and trappers. In many ways these wide-spread communities were sufficient for the satisfac- tion of their own economic wants. With wonderful resource- fulness the people resorted to household manufactures covering an extended range of commodities, but the standards of life had been so far developed that each section called for supplies from abroad, such as English woollens, linens, ammunition, and household supplies. The people of New England en- gaged in the manufacture of clapboards, hoops, shingles, and framed timber, which they exported to the West Indies in exchange for sugar, rum, and molasses ; in part these latter 6 Colonial Finance. [§ 3 commodities were used at home and in part they were dis- posed of in other markets to help settle the indebtedness to England. But, more than all else, Northern settlers found their security against bankruptcy in the construction of ships and in the fisheries. Ships were exported to England ; and fish were sent in colonial bottoms to Portugal, Spain, and Italy; cargoes were secured in these countries for England, and the profits of this freighting did much to settle the international balance of trade. The colonies of New York, New Jersey, and Pennsylvania had much the same products as those in New England, with the exception of fish. Richer in soil and warmer in climate, they were able to raise large quantities of wheat and other grains, to manufacture them into flour, and easily to dispose of them in the West Indies. In payment the middle colonies likewise secured funds in bills of exchange for use in buying goods in England. The products of the Southern colonies were in immediate demand in the mother country, and hence the commerce of this section was more direct. It will thus be seen that for the economic prosperity of a large part of the settlements the trade of the West Indies was necessary ; and as the struggle to gain this trade was keen the regulations prescribed by England were frequently disregarded. This restrictive legislation, commonly called the navigation laws, began in 1660 by limiting the export market of colonial sugar, cotton, tobacco, indigo, ginger, and dyeing woods to the English dominions ; but gradually other commodities, as rice, naval stores, and furs, were placed upon the " enumerated list," to the great embarrassment of colonial enterprise. So, too, the importation of European goods was restricted to British, that is, English or colonial built, shipping, laden in England, thus requiring all American vessels, if importing continental produce, to make an immediate clearing from England itself. From these harsh regulations modifications were made in permitting exportations of enumerated goods § 3] Economic Factors. 7 not only to the mother country, but also to that part of Europe lying to the south of Cape Finisterre, to certain parts of Africa, and to the West Indies in general. The frequent changes in the navigation policy of England, its interference with the natural course of trade to the prejudice of settlements strug- gling against odds, and the disrespect shown to law through constant evasion, must be taken into account in seeking for an explanation for a part of the later antagonism of the colo- nies to the mother country.* Manufactures were but slightly developed outside of the household at any time before the Revolution. Labor was expensive, and more profitable when directed to other pur- suits. There were a few fulling-mills, hat-making establish- ments, an occasional paper-mill, charcoal furnaces for pig iron, some forges for making bar iron, and slitting-mills. There was, however, enough manufacturing enterprise to arouse the fears of English manufacturers, and in a few but important instances to lead to repressive legislation in the field of manu- factures, especially woollens, hats, and iron. In spite of all the laws calculated to reduce the colonists to industrial de- pendency, the settlements as a whole prospered, — as a matter of fact, the laws in many instances were not enforced with stringency. The higher custom-house officials, with the con- sent of the treasury, were permitted to live in England, and treated their offices as sinecures. Apparently the statesmen in control of English affairs recognized that it would be dis- astrous to the fortunes of the colonies to compel strict Obedi- ence, and under this policy of toleration there grew up a large illicit but permitted trade. The white population of the colonies at about the middle of the eighteenth century amounted to a little over a million. ' Professor Ashley in a recent and exhaustive study concludes, that, with the exception of the molasses business, the great buUc of the American trade was strictly legal. It is a source of regret that I have not had the opportunity to make an examination of this subject in accordance with the evidence submitted. 8 Colonial Finance. [§ 4 One-third was in New England, a little more in the middle colonies, and about one-quarter in the settlements south of Pennsylvania. The annual value of the imports was about ;^900,ooo just after the date referred to, but it greatly increased because of the shipments on account of the war with France; and the commercial interests of the colonists were brought much more prominently to the surface. The exports did not quite equal the imports in value according to the custom-house valuations, and this explains the constant drain of specie, and the agitation for issues of paper currency to supply commercial needs of exchange. It is hardly necessary to add that there were no bankers in the colonies ; such functions of banking as were then devel- oped were carried on by merchants. The differentiation of commercial occupations had hardly begun ; there were few if any joint-stock companies, and associated action on any large scale was unknown. The individual merchant, when oppor- tunity arose and ambition led, was a factor, an exchange-agent and banker, a ship-owner, and, in general, undertook all the financial responsibilities which are now shared by several kinds of corporations under forms of restricted hability. The indi- vidual relied upon himself; he was careful, therefore, not to get into debt, because standing debt indicated a serious de- parture from right living, to be punished by imprisonment. Undoubtedly the harsh provisions of the debtor laws which were tenaciously maintained long after expanding industry jus- tified the use of credit, had much to do with inspiring paper money issues, from which it was believed relief would come. 4. Ezpeuditures. Taxation is necessitated by public expenditure, and this in turn depends upon the stage of refinement of civic life which has been developed. The coloni:\l governments were of a simple type. In the early days of settlement the support of the governor was probably the most burdensome single charge placed upon a colony. The salaries of the few executive § s] Taxation. 9 assistants or heads of departments were small, and in many- instances the governor and inferior officers were paid by fees, thus lessening the need of regular taxation. Occasionally there was additional expenditure for the support of a colonial agent in London. The legislative sessions were short, and the pay of members when allowed not large. The court-houses were often handsome but never large, and there was no need for a highly organized and expensive judiciary. In times of peace there was no local navy, not even in the ship-building colonies. The military burden was met for the most part by a system of locally organized militia, the expenses of which were assessed upon the individual members or upon the town or county. No expensive public works were undertg.ken, the demand being confined to bridges, highways, and a few public buildings. Nor had there been developed that clqiss of ex- penditures, now so common, for the satisfaction of humanita- rian and social impulses, as for the care of the sick, poor, insane, or criminals, except by the local units of administra- tion. Only in case of an Indian war or conflict with France, the great rival of England on the North American continent, was any heavy demand made upon the colonial treasuries; hence taxation was light. 5. Taxation. The colonists were acquainted with taxation under two dif- ferent forms. The English government in accordance with its trade and navigation laws established a revenue or customs sen'ice which was entirely under its control, the officers being appointed by the Crown. The regulations and duties imposed under these laws were primarily designed to protect the com- merce and manufactures of the mother country rather than to enrich the treasury, and the revenue thus collected at the custom houses was insignificant. Besides the imperial system of tax- ation, each colony had its own methods of raising revenue for local needs ; and here may be found the greatest variety of taxes, including direct taxes upon persons and property. I o Colonial Finance. [§ s indirect taxes upon consumption through excise or internal duties, and a system of tariff and customs duties which some of the colonies established in addition to the system maintained by England. The administrative methods of the colonies were simple and in keeping with the immature development of commerce and industry. In some of the colonies there was no separate fiscal organization for the collection of taxes, the duty being entrusted to the judicial machinery, especially the sheriff. The taxing systems of the colonies varied from each other according to the economic conditions of the several sections of the country ; they have been conveniently classified by Seligraan into three different types. In the democratic com- munities of New England we find the primitive poll tax and a tax on the gross produce of the land, which was finally expanded into a general property tax ; to these was then added a faculty tax. In the Southern colonies with their class supremacy the land tax was naturally unpopular among the landholders, and taxes laid upon slaves found little favor because they also reached only the influential and ruling part of the community. Consequently taxation was mainly indirect through import and export duties. In the middle colonies conditions cannot be so easily classified either as democratic or aristocratic ; the trading class with Dutch methods domi- nated, and this naturally favored the excise system which had been developed in Holland. The New England preference for property and poll taxes was natural, for the early settlers of these colonies left England at a time when property and poll taxes were common in the form of tenths, fifteenths, and subsidies. For example, Massachusetts in 1 646 enacted that a single tax should equal 2od. a poll and id. in a pound of property, in money or its equivalent ; on this unit as a basis the single tax was doubled, trebled, etc., by the authorities as the occasion demanded, — a practice which recalls the doubling or trebling of the " fif- teenth " in England. In King Philip's War the rate was § s] Taxation. 1 1 raised to sixteen units ; the average was, however, about four. Such a system of taxation was highly congenial in communi- ties where general land ownership was normal and property was widely distributed. Negotiable securities were unknown'. There were no large estates or division of settlers into classes widely differing from each other in fortune or social attain- ments ; property was mainly in land, buildings, and cattle, contributing visible wealth known to all and consequently easy to assess. Business transactions were limited in amount, and of a direct or simple character. To tax the visible, tangible property was substantially to tax the entire accumulations of the community, and the varying value of land was not an obstacle, because as a rule the early land taxes were based on product rather than on value. The poll tax was the complement of the property tax : each adult male in Massachusetts was valued at the same property sum, as for example, ;^2o ; and the poll tax was then levied at a penny or its multiple per pound, as in the case of the property tax. This system of poll reduplication would obviously work injustice to the poor, and under the second charter was discarded. Closely identified with and supplementary to the property and poll taxes was the faculty or income tax ; laborers, arti- sans, and tradesmen paid according to their incomes or earnings. In the Massachusetts law of November 4, 1646, it was ordered that " every laborer, artificer, and handicraftsman that usually take in summer time above i8d. by the day- wages or work by great, which by due valuation amounts to more than i8d. by the day shall pay per annum 3s. 4d. into the treasury over and beside the 2od. before mentioned." Men in other callings, as smiths, butchers, bakers, etc., should be "rated proportionable to the produce of the estates of other men j " and again by another act the classes above mentioned were taxed on the capitalized value of their wages. Other New England colonies followed Massachusetts in the taxation of profits ; and later the faculty tax was introduced into Penn- I 2 Colonial Finance. [§ s sylvania, Delaware, Maryland, and a few of the Southern colo- nies. The faculty tax of the period under consideration was not, however, a true income tax in the modern sense ; individ- uals, like articles of personal property and plots of land, were arbitrarily assessed at fixed amounts according to the occupa- tion followed, and in some cases the tax became antiquated . and an unjust class-tax based upon certain assumed earnings. Indirect taxation in Massachusetts was of less impor- tance. Tonnage duties were here imposed, as in nearly all the colonies. Import duties were levied upon luxu- ries and in particular upon wines and liquors ; and in the excise schedule wines and spirits were the principal articles selected. In 1737 an excise was placed upon coaches, chariots, chaises, and chairs ; and a few years later for a brief period upon tea, coffee, arrack, snuff, and earthenware. The Southern colonies made but little use of the property tax, but relied chiefly upon indirect taxation, supplemented at times by the poll tax. In Virginia, which may be taken as representative of the Southern group, attempts were made to tax real estate, but owing to the opposition of the planters and land-owning class, its development was slow. Though the poorer classes were strenuous in opposing the poll tax, it continued in force, but was gradually reinforced by the im- position of customs duties upon the imported liquors and slaves as well as upon the exports of tobacco. The burden of the poll tax and the discrimination thereby shown against the landless and smaller tenants was indeed one of the causes of Bacon's Rebellion in 1676. With the growth of negro slavery in the eighteenth century the poll tax also became unpopular with the wealthy planters, who were financially responsible for the amounts imposed upon their slaves. Still at the beginning of the French and Indian War of 1756, which created heavy burdens, the poll tax bore the charge of the campaign ; and in 1 763 it alone produced more than all the other taxes on land, tobacco, and slaves imported, to- § s] Taxation. 1 3 gether with the licenses, fees, and carriage duties. With the close of the French War there was a return to the old system of indirect taxation as far as was practicable, but the contest had left permanent fiscal results in the establishment of special taxes, as those on coaches, chariots, and fees from licensing and in suits at law. In the colony of New York a more mixed system of taxa- tion prevailed. While the early settlers were under Dutch rule and the colony was known as New Netherlands it was to be expected that Dutch fiscal methods would prevail. In her system of landed estates under powerful patroons who would oppose any direct tax upon land the New Netherlands re- sembled Virginia; but more than that. New Amsterdam, the principal city, was from the first pre-eminently a trading centre. In Holland indirect taxes were laid upon the impor- tant foreign commerce enjoyed in that day by this enterprising commonwealth, and excise duties were levied upon wine, beer, and liquor. These two forms of taxation, being the principal sources of revenue in the mother country, were speedily in- troduced by the colonial commercial company into the New Netherlands, and were also in harmony with the economic con- ditions of the settlement. Goods were imported from Holland to the island of Manhattan and thence distributed along the Hudson and throughout the interior. As New Amster- dam lay in the direct line of commerce between New England and the settlements of Virginia, it became the centre of an export trade, the chief articles of which were tobacco and furs, and especially beaver skins. The excise taxation of the Netherlands also found a fruitful application in this colony, as there were numerous distilleries, breweries, and wine-presses. When the colony was transferred to English control in 1664, the new authorities, according to English precedent, made a beginning in the development of a direct property tax, and after the establishment of the colonial assembly in 1683 permanently incorporated it into the revenue system. The increasing freedom in land tenure and the agricultural settlement of the interior made the pro- 14 Colonial Finance. [§ 6 cess more easy, so that in the latter part of the eighteenth century the method of taxation in New York was similar to that employed in New England. In addition to the property tax New York also continued import duties . and excises; and the quit rents of the settlers which were still retained furnished a small supply of revenue for the colonial treasury. 6. Tariffs ; Import and Export Duties. In the rapid summarization of the sources of revenue in Massachusetts, Virginia, and New York mention has been made of import and export duties. In view of the part which customs revenue has played in the American fiscal system developed since 1789 some further description should be given to these taxes. The colonies had a long experience with trade tariffs. Nearly every assembly levied import duties for its own treasury in addition to those imposed by England in the execution of the navigation laws. The objects for which these duties were imposed varied as they do now : sometimes they were imposed to check the importation of articles, consumption of which was regarded as useless or injurious ; sometimes as retaliatory weapons against rival col- onies or European nations other than England ; and some- times for protection of home industries. In communities, however, which were largely self-sufficient in satisfying their economic wants, which constructed their own furniture and tools, spun and wove their own cloth, and limited their food to the products of their own farms, the volume of international exchange could not be large, and a system of duties on im- ported goods was necessarily restricted in its scope. In the imposition of such taxes for non-revenue purposes there was no consistent or permanent policy developed, and generally distinctly protective acts were short-lived. An ex- ample of sumptuary legislation was the measure enacted in 1638 in Massachusetts ordering that "whosoever shall buy or receive out of any ship any fruit, spice, sugar, wine, strong water, or tobacco shall pay to the treasurer one-sixth part of § 6J Tariffs; Import and Export Duties. 15 the price or value thereof; and every person who shall buy or receive any of the said commodities with intent to retail the same to others shall pay the treasurer one-third part of the value or price thereof." Connecticut levied heavy duties upon the export of lumber in order to husband her supply of building materials. Maryland enacted discriminating duties against provisions and liquors brought in from Pennsylvania; and Virginia in return retaliated against Maryland by imposing fees upon the latter's shipping. For protecting home indus- tries Massachusetts at one time imposed double rates on all commodities brought in by inhabitants of Rhode Island, Con- necticut, and New Hampshire. There was an impost of 5 s. per hogshead on all molasses and 60s. per hogshead on all rum imported into Massachusetts by foreigners, and also dis- crimination in favor of Massachusetts shipping. Pennsylvania in 1 704 for protective purposes taxed the importation of hops. Indeed, tariff duties are too numerous to permit specification ; apart from temporary and hastily devised acts. Professor William Hill classifies them under four heads: (i) tonnage duties or taxes on shipping; (2) export duties on tobacco; (3) import duties on slaves; (4) regular tariif schedules in which wines and liquors were the most important items. Of all these taxes the most general were the tonnage duties, known also as castle duties or powder duties, the latter name arising from the fact that the ship's owner was obliged to turn over to the colonial government an amount of powder and shot according to the ship's burden ; later these payments were commuted into cash. Although the primary purpose of the tonnage duty was revenue, to be specifically applied to national defence, its maintenance gave considerable protection to local shipping, since home vessels were frequently exempt from payment. Duties on exports were common, generally levied only for revenue, and the range of commodities selected was wide. Virginia placed export duties on tobacco, skins, furs, wool, and iron; Connecticut, upon timber and staves; New Jersey, 1 6 Colonial Finance. [§ 6 upon staves and many other products of the forests ; Canada, upon skins and furs ; South Carolina, upon leather, furs, skins, Indian slaves, and timber ; Maryland, upon tobacco constantly, and at times upon furs, skins, beef, pork, bacon, iron, flour, wheat, and all European goods. The export duty on tobacco was naturally found only in the Southern colonies ; in Mary- land it was utilized for payments to the proprietor in support of the government and for colonial needs of a general char- acter, while in Virginia it became one of the most important and regular elements of the revenue. Here the duty ranged from 2 to lo shiUings a hogshead of 500 lbs. The import tax on slaves also found its principal operation in the Southern colonies. Although the tax was levied in Pennsylvania, New York, and Massachusetts, and possibly other colonies, its pro- ceeds were small, not only because few slaves were imported, but because the rates were low. In the development of a general tariff schedule South Car- olina went the farthest ; a large number of articles were taxed and rates were higher than elsewhere. In 1703 a general tariff was enacted in which specific duties were placed upon liquors, provisions, and slaves, and an ad valorem rate of 3 per cent, upon all other commodities. During succeeding years until 1740 ad valorem duties were low, varying from I to 5 per cent., while the list of specific duties was con- tinually enlarged until the end of the colonial period. In Massachusetts the tariff schedule was briefer and the rates im- posed were still more insignificant ; nevertheless tariff legisla- tion was systematic, and the tariff law was regularly renewed from 1692 until 1774, — English goods, however, were not subject to duties after 17 19. Specific duties were imposed on wine, rum, tobacco, sugar, molasses, and dye goods, and ad valorem duties on all other commodities at a rate at first of id. on 20s. worth in 1692, increased to 2d. in 1731, to 4(1. in 1739, and continued at that rate until 1774. In New York the heavy duties imposed during Dutch rule and at the com- mand of the Duke of York " had an influence in accustoming §7] Control of Appropriations. \j the colonists to tariff taxes, so that when they were allowed an assembly and permitted to make their own laws for raising revenue they collected most of it by duties on imports and exports." In the other colonies the import duties were hardly important enough to justify the name of tariff systems, and in some none can be found. Connecticut, Pennsylvania, Mary- land, and North Carolina taxed only a few articles besides liquors, while Maryland imposed duties only for temporary purposes or for special objects rather than as a source of constant revenue. From this confused mass of colonial tariff legislation a few points of permanent interest may be extracted. In the early tariffs specific duties were the exception, and low ad valorem duties varying from i to 5 per cent, were the general rule ; but in the course of time there was a change toward specific duties, both to avoid fraud and to secure a more defi- nite tax. The tariffs were enacted but for short periods, and in the bills of levy it was common to specify the object for which the revenue would be applied. As to whether duties were actually collected according to the laws enacted. Pro- fessor Hill is of the opinion that there was gross evasion, first because the open disregard of the English navigation laws must have had demoralizing results as to obedience of local law ; and, secondly, because the returns of revenue from this source were so small, — in New York, for instance, the impost did not produce more than one-fifth of what was due. 7. Control of Appropriations. Although the expenditures of the several colonies as a rule were not large, the provincial assemblies early showed a dis- position, like the English House of Commons, to keep as firm a grasp as possible over appropriations, and their insistence led to continued contests with the governors. It was the wish of the Crown that the governors be granted permanent support, but the colonists almost invariably insisted upon limit- ing supplies for salary to one year, partly to prevent encroach- 1 8 Colonial Finance. [§ 8 ment upon their liberties, partly to prevent misapplication of funds, and largely in order to preserve a useful weapon in controversies with the governor. The home government also intended that after supplies had been voted the signature of the governor alone should be necessary for warrants drawn on the public treasury, opportunity being given to the assembly only to inspect the accounts. Here again the colonists ex- tended their claims; and some of the assemblies after pass- ing bills involving appropriations determined that no payments should be made except upon a distinct vote of the legislature. They wished not only to vote supplies but to control disburse- ments and to audit the accounts. A few of the colonies went so far as to elect their own treasurers, entirely independent of the control of the governors, and thus they thrust the executive into the background in the management of the finances. So great was the dislike of executive control in matters involving taxation and expenditure that it was not uncommon, when special appropriations were made for ex- traordinary expenditures, to appoint special commissioners to supervise these particular accounts, in order that executive influence might be reduced to a minimum. This jealous fear of the provincial governor later had its fruit in the effort of the Continental Congress to manage the finances through committees and boards instead of intrusting them to a single head. Gerry of Massachusetts in his opposition to the estab- lishment of a department of the treasury under a single secretary was simply maintaining the principle which had previously been so tenaciously upheld in his colony, that the treasurer should at all times be accountable to the assembly. 8. Money and Coinage. The early colonists were poor and brought little ready money with them from Europe, nor did they have credit abroad. As no silver or gold mines were worked in the set- tlements, the only source of supply of the precious metals was through trade and shipping ; th:it is, by exporting commodities § 8] Money and Coinage. 1 9 to a greater value than were imported, or by acting as carriers for English commerce. The colonists were, however, in con- stant want of manufactured commodities and articles of luxury which could be obtained only on the continent, and conse- quently, even if the balance of trade in staples with England or the West Indies was favorable, the final settlement of indebted- ness to America was more likely to be made in merchandise than in silver. The consequence was that the quick amount of a standard money medium did not keep pace with expand- ing industry and internal commerce. To meet the current need of instruments of commercial exchange, the colonists repeated most of the monetary experiments which had been previously made in other communities and tried some novelties of their own. The situation became the more complicated since the colonies were not forced by any controlling head to adopt uniform monetary legislation. Barter was resorted to in the earlier stages of settlement ; then certain staple com- modities were declared by law to be legal tender in payment of debts. Curious substitutes were employed, such as shells or wampum. Corn, cattle, peltry, furs were monetary media in New England ; tobacco and rice in the South. The term bills of students at Harvard College were for many years met by the payment of produce, live stock, meat, and " occasionally with various articles raked up from the family closets of student debtors." One student, later president of the college, in 1649 settled his bill with " an old cow,'' and the accounts of the construction of the first college building include the entry, " Received a goat 30s. plantation of Watertown rate, which died." Taxes were paid in commodities at rates of valuation con- siderably higher than the market, and storehouses in some colonies were maintained in which public property was de- posited by tax-gatherers. As commodities acceptable for money payment were valued at rates above the market price, a discrimination was shown against silver, which tended to keep specie out of circulation. In the endeavor to retain the 20 Colonial Finance. [§ 8 small supply of silver which came in through trade, the colo- nists frequently made another error in declaring current silver to be of legal value higher than the mint value as determined at the place of coinage. The course of trade was such that Spanish and Portuguese rather than English coins became the most common, and the coin principally in use was the Spanish silver dollar or piece of eight reals ; but as if to increase the disorder, the colonists retained the English system of pounds, shillings, and pence, as their money of account. An accu- rate mathematical valuation made the "piece of eight" equal to 4S. 6d. of English money. If that ratio had been pre- served there would have been no interference with the free circulation of the coin according to the natural flow of trade. At first, for purposes of convenience the customary rate at which the piece of eight circulated was made five shillings (an overvaluation of ii per cent.), but in 1652, when a mint was established in Massachusetts, shillings and smaller coins were minted at a rate a little less than six shillings to a heavy piece of eight. In Virginia it was resolved to raise the value of the Spanish coin to six shillings, in the hope that specie might be attracted by favorable estimation. New York went still farther and in i67& increased the valuation to six shillings and ninepence, and later in some of the colonies the valua- tion was placed as high as eight shillings, and in one or two instances even higher. The valuation of money was thus differently regulated by statute in different colonies, and the confusion was the greater because of the circulation of light coins which drove out the heavy coins or good money. The colonists were not alone in their foolish attempts to legislate a valuation of coin other than as value by weight; they were simply imitating what had been previously tried in Europe. In spite of all these legis- lative efforts to attract specie it disappeared ; in \ain were laws passed in some colonies against the exportation of coin ; in vain were Massachusetts searchers given extraordi- nary powers to examine outgoing vessels. In 1 704 the English § 9] Bills of Credit. 2 1 Crown endeavored to rectify the evil by a general regulation of the value of Spanish money, and fixed the maximum rating of a piece of eight at six shillings currency. This gave rise to the term " proclamation " money, and rated silver coins at a third above their sterling value. Again a few years later Parliament attempted to clinch this proclamation by making it a felony to pay or receive the coins at above the specified rates. The spirit of this legislation was then defeated by the colonists, who passed laws fixing the price of silver at so much per ounce without reference to the proclamation, and who also turned to paper issues and banking schemes with greater readiness. Massachusetts was the only colony which ever established a mint ; placed under the operation and management of John Hull, its operations were confined to minting small silver pieces, familiarly known as pine-tree shillings. Vigorous attempts were made to force the managers to pay a portion of the profits to the government, but with little success, and in 1684 the mint was closed by order of the Crown. Attempts to establish mints in Virginia and Maryland were unsuccessful. 9. Bills of Credit. Since there was a scarcity of circulating medium, caused by the constant drain of specie for export, it is not strange that projects for converting credit into wealth should have sprung up in the colonies, especially when we remember that in the mother country the same period witnessed numerous like schemes, some of them of large proportions. Several plans were devised during the seventeenth century for the establish- ment of banks or funds for the issue of. currency, based upon the deposit or pledge of securities. The first important issues of paper money were, however, due to a somewhat different reason, — the fiscal requirements of an exhausted treasury. The experience of Massachusetts will serve as a useful illus- tration : In 1690 this commonwealth made an issue of ^7000 of bills of credit, soon increased to ;^40,ooo, in order to pay 2 2 Colonial Finance. [§ 9 the soldiers who engaged in the expedition against Louisburg in the French War. This was an extraordinary and unexpected measure, for it had been anticipated that the cost of the attack would be met from the proceeds of the victory. The govern- ment of the colonies was passing through a crisis ; its very legality was questioned, and it was utterly impracticable to raise in a few days as large a sum of money as would be necessary. This issue is thus described by Cotton Mather : " The General Assembly first passed an Act, for the levying of such a sum of Money as was wanted . . . and this Act was a Fund, on which the Credit of such a Sum, should be rendered passable among the people. Hereupon, there was appointed an Able and Faithful Committee of Gentlemen, who printed from Copper Plates, a just Number of Bills, and Flourished, Indented, and Contrived them, in such a manner as to make it Impossible to Counterfeit any of them, without a speedy Discovery of the Counterfeit ; besides which, they were all Signed by the Hands of three belonging to that Committee." . . . "The public Debts to the Sailors and Souldiers, now upon the point of Mutiny (for, Arma Tenenti, Omnia dat, qui Justa negat!) were in these Bills paid immediately." The text of one of these Massachusetts notes was as follows : — "This indented bill of ten shiUings, due from the Massa- chusetts Colony to the Possessor, shall be in value equal to money, and shall be accordingly accepted by the Treasurer, and Receivers subordinate to him in all publick payments, and for any stock at any time in the Treasury. Boston in New England December the loth, 1690. By order of the General Court." These early emissions being payable in one year were l)ractically due or exchequer bills in anticipation of taxes, and for some years were redeemed, though ;\s promptly replaced by further anticipations. At first they depreciated, but they circulated at paj for a time while the issues were limited §9] Bills of Credit. 23 in quantity and were indirectly declared to be legal tender, by giving them a premium of 5 per cent, over silver in the payment of taxes. The issues were enlarged and in 1704 the time of redemption was extended to two years, in 1709 to four years, in 17 10 to five years, in 1711 to six years, and later to thirteen years. Delay became a habit and the continuance of these forced loans gradually weakened the willingness of the people to submit to taxation even for cur- rent expenditures, or to apportion with prudence taxes accord- ing to expenditures. Depreciation now set in and together with the introduction of bills of neighboring colonies drove silver out of circulation. The question of the issue of paper currencies finally developed a running dispute between the provincial legislature and the royal governors, who insisted upon adequate taxation to cancel these credit obligations. In 1 7 1 1 Massachusetts introduced a variation from the issue of bills based upon public credit and secured on the pledge of taxes, by an issue in the form of bills to certain Boston merchants, to enable them to secure supplies for a public undertaking. This method was repeated in 17 14 on a more open and general scale, when ^50,000 in public bills were issued and loaned on real estate security for five years at 5 per cent, interest, one-fifth to be paid back each year ; and opportunity was given for a general subscription by the public. Under this scheme no provision had to be made for redemption by laying taxes, and another advantage was found in the interest which the public treasury would receive without any real outlay of capital. Similar issues of loan-bills took place in 171 6, 1721, and 1728, making the total amount ^260,000 ; these circulated side by side with the ordinary bills of credit. In the issue of paper currency Massachusetts was quickly followed by New Hampshire, Rhode Island, Connecticut, New York, and New Jersey, — all these previous to 1711. South Carolina fell into line in 17 12, Pennsylvania in 1723, Maryland in 1734, Delaware in 1 739, Virginia in 1755, and 24 Colonial Finance. [§ lo Georgia in 1760. Space cannot be given to the history of all these issues ; they were monotonously alike in character, in origin, and in results. Ingenuity in devising variations of the main principle appears to have been exhausted. There were interest-bearing notes, some of which were legal tender, while others were not ; there were non-interest-bearing notes, some of which were legal tender for future obligations but not for past debts; some were legal tender for all purposes, and others not legal tender between private persons, but receivable for all public payments. In some instances funds arising from certain sources of taxation were pledged for the redemption of the notes, in others not. In some cases they were payable on demand ; in others, at some future time. Sometimes they were issued by committees, and sometimes by a specially designated official. 10. Loan Banks. Reference has been made to the loan bills of Massachusetts as distinguished from bills of credit. A third form of paper money is the issue of the so-called " loan banks." Banking institutions of that period were exceedingly crude measured by the experience of modern private finance : even the mother country two hundred years ago had had but little experience in this field. A colonial bank was not at all like that of modern days, — a convenient institution for receiving deposits, making discounts, and negotiating drafts, — it was, as Francis A. Walker tersely defined it, " simply a batch of paper money," whether organized by private individuals or by public Author- ity; the issuers never had permanent places of business, or special resources or corporate existence ; indeed they rarely had any property to pledge as a basis of credit. In Massachusetts, private banks to loan bills upon real estate, personal security, and merchandise were organized in the seventeenth century, but of their history little is known : they were certainly short-lived, and it is probable that the issue of government notes in 1690 checked the development § lo] Loan Banks. 25 of institutions of this character. In 1714 when a proposition was made " for a partnership to emit bills on security, to be supplemented by obtaining the signatures of citizens to an agreement to receive such bills in trade," opposition was shown to granting to a private company such valuable privi- leges and opportunities for profit, and consequently there was substituted a rival scheme for the establishment of a pubhc bank which should emit^ bills on real-estate security. As always in such cases, some inadequate security was taken, and the finances of the colonial government suffered additional embarrassment. In 1733 the project for a private bank again engaged public attention, inspired in part by the excessive circulation of Rhode Island bills within Massachusetts ; and a company of merchants issued ;£i 10,000 of notes redeem- able in ten years in silver at 19 shillings per ounce, the security of the notes depending solely upon the solvency of the merchants. Inasmuch as silver rose rapidly in value after this issue, on account of further large colonial emissions of paper currency, the merchant notes went to a premium and were soon hoarded. The most notable private banking scheme in Massachusetts was projected in 1 740 ; since a circulating medium was scarce, it was proposed to set up a bank on land security ; and sub- scriptions were invited to a capital stock of ;^i 50,000, that is, people were requested to apply for loans in certain amounts in bills of the bank; the only cash payment required was 40 shillings in each ;^iooo subscribed, for the purposes of organization. " Each subscriber was to furnish satisfactory mortgage security for his loan, on which he was to pay inter- est at the rate of 3 per cent, per annum, and the principal was to be paid in twenty annual instalments of 5 per cent, each. These payments were to be made in ' manufactory notes,' as the notes of the company were called, or in hemp, flax, cordage, bar-iron, cast-iron, and certain other enumerated commodities." There was no agreement to redeem the notes, nor was there any real capital. As Mr. Davis, the learned 26 Colonial Finance. [§ lo historian of this institution, observes, " It is obvious that it was possible for the mortgage loans of the Land Bank to be paid off entirely in commodities, thus leaving the notes afloat without other security than was afforded by the partner- ship." The career of this bank, as well as that of its rival, the Silver Bank, was summarily cut short in 174 1 by the application of the parliamentary " Bubble " Act, originally enacted in 1720 at the time of that financial craze in England which was promoted by the extravagant schemes of John Law. By far the larger part of these bills were redeemed, but, owing to the insolvency and dishonesty of some of the holders, the accounts were never satisfactorily settled. For more than twenty-five years there was litigation, legislation, and meetings of com- mittees devoted to the consideration of this troublesome affair. In Pennsylvania a public loan bank was managed with success and won the praise of English officials, who in general were not partial to issues of paper money. In 1722 the colony of Pennsylvania became industrially depressed because of previous unwise enterprises, and, in the words of Keith, " labored under great discouragement for want of a cur- rency ; " many were leaving Philadelphia ; " the shop-keepers had no money to go to market, and the farmer's or planter's crop was then reduced to the lowest value ; so that all the European goods imported, as well as the bread and flour or country produce, were bought up and engrossed at a low price, by a cabal of only four or five rich men, who retailed them again on credit at what rate they pleased, taking advan- tage of the people's necessities and circumstances _; by which means they soon got the whole country into their debt, exact- ing bonds of everybody at 8 per cent., which was then the legal interest. This made such an universal clamor all over the province, that when the assembly met the latter end of the same year, they hastened to prepare a bill for establish- ing a paper currency ; but instead of following the same method which had been hitherto used in the neighboring colonies, by taxing the people in order to raise an annual fund for sinking § lo] Loan Banks. 27 the paper, they invented a much more commodious and expedient way." They established a loan-office governed by four commissioners, who were empowered to issue and loan bills of very small denominations, the largest not exceeding 20 shillings; the security was to be land of double the value lent, together with a bond and judgment on the borrower's whole estate, with the condition that one-twelfth of the sum should be annually paid back with interest at 5 per cent. Not less than ;!£^20 nor more than ;^200 could be loaned to any one person, and the accounts were to be inspected by a committee of the assembly once in every six weeks. " It is inconceivable to think what a prodigious good effect immediately ensued on all the affairs of that province ; the shipping from the west of England, Scotland, and Ireland, which just before used to be detained five, six, and some- times nine months in the country before they could get in the debts due to them and load, were now despatched in a month or six weeks at farthest. The poor middling people who had any lands or houses to pledge, borrowed from the loan-office, and paid off their usurious creditors. The few rich men who had before this given over all trade, except that of usury — were obliged to build ships, and launch out again into trade." In 1739 a similar fund was issued. for sixteen years, and was equally well managed, receiving the commendation of Thomas Pownal. The reasons for the greater success of Pennsylvania was perhaps due to the wiser provisions for redemption, — in Massachusetts, for example, the period was either too short, as five years from 17 14; or too long and indefinite, with no demand for payments by instalments ; hence it was easy for borrowers to put off the day of settling their obligations, until they were financially involved. In Pennsylvania all the bills were issues against instalment mortgages running for sixteen years, and this colony was also careful not to issue excessive amounts, and imposed more adequate taxes for the support of the government. 28 Colonial Finance. [§ii 11. EngUsh Legislation against Paper Currency. The issue of paper money did not go unopposed. The de- preciation was so great that every department of business and industry was affected, — in 1740 sterling exchange in Massa- chusetts was quoted at 550. The significance of this is clear when it is understood that at the rating of six New England shillings to the Spanish or Mexican dollar, 133^^ shillings law- ful money were equivalent to 100 shillings; sterling exchange at 550 meant therefore a depreciation of paper, currency of about three-fourths; and in 1750, when exchange was noo, a depreciation of nearly nine-tenths. In Rhode Island the earlier bills were finally worth but litde more than 4 per cent, of their face value. In New York and Pennsylvania results were not so serious, but in the Caro- linas depreciation took away nine-tenths of the value of the bills. As the colonies made their issues independently of each other, there was much jealousy in regard to the circula- tion of bills of a neighboring government, and many colonial laws were enacted to prevent it. Under the familiar principle of Gresham's law, the poorly regulated bills of Rhode Island tended to displace the better protected bills of Massachusetts, even in Massachusetts. Serious complications also arose because of the circulation of various issues of a colony at the same time. Old issues were abandoned in apparent despair of redemption and taken up at various discounts by new issues. Mr. Davis relates that in January, 1736— 1737, the Massachusetts council approached the subject in a very serious mood and voted that " whereas his majesty's good subjects have for many years been great sufferers by the uncertain and sinking state of the bills of pub- lic credit, which difficulty doubtless more particularly moved this court in a very solemn manner to implore divine guidance and blessing in the present sessions : wherefore to comply with this obligation and profession, it seems necessary that this court shall do all that is possible to remedy this threaten- ing mischief." The remedy adopted was the emission of bills § ii] English Legislation. 29 of credit in a new form of value i to 3 of the old issue. Thus bills were known as old tenor and new tenor ; and as the same downward remedy was easy, in Massachusetts we find various other substitute issues, as middle tenor, new tenor firsts, and new tenor seconds. As a rule the issues of the colonies south of New England, with the exception of the Carolinas, were made in greater moderation, and the conditions of redemption were more carefully observed. Virginia did not emit bills until after the middle of the eighteenth century. The evil of depreciation was greatest in the New England colonies, partly because, being introduced there first, the bills had a longer career, and partly because of the more frequent establishment of loan banks of issue, private and public, which helped to confuse and demoralize public opinion in regard to the proper func- tions and limitations of paper currency. In Massachusetts, between i'jo2 and 1750 inclusive, ;^4, 634,700 bills were issued, of which ;^2, 8 14,900 were retired, leaving outstand- ing ;£'r,8i9,8oo. The years 1732, 1739, and 1749 were the only years during the whole period in which no emis- sions were made. The English government showed its dis- approbation of the reckless monetary issues by suppressing the Land Bank in Massachusetts in 1741 ; and finally in 1 75 1 Parliament exercised its prerogative, and enacted a law forbidding any further issue of legal- tender bills of credit by the New England colonies, and in 1764 this earlier pro- hibition was extended to all the other colonies. The re- striction, however, did. not apply to treasury notes not legal tender, which were issued for very brief periods in anticipation of taxes. During this period some of the colonies endeavored to redeem their notes. Massachusetts, out of the funds voted , by Parliament as payment for expenditures in King George's War, retired her currency at the rate of 7j^ to i ; and Con- necticut a little later at 8% to i. The interference of the home government in prohibiting paper issues had more than immediate results. It provoked 30 Colonial Finance, [§ 12 colonial opposition, was regarded as an unjustifiable inter- ference With local liberties, and helped to develop the grow- ing discontent with government by England. At the time the Land Bank of Massachusetts was suppressed a contemporary writer wrote that the temper of the people was irritated and inflamed to such a degree that Ihey seemed ripe for tumult and disorder; two-thirds of the House of Representatives were bitter partisans or abettors of the Land Bank scheme; and while many in the colony recognized the possible evils of the project, the arbitrary extension of the Bubble Act, origi- nally designed for England and Ireland, excited so general a feeling of hostility to English interference that any good from efforts in the way of educating the people to sounder ideas was largely lost. Franklin in 1766 told England that one of the reasons for the ill-feeling in America toward her authority was the prohibition of paper money. The restrictive act of England did not entirely suppress colonial paper money; under the exceptions prescribed, temporary treasury notes as well as the notes of loan banks which had not been sup- pressed continued to circulate; so that in 1774 it was esti- mated that ^12,000,000 were in current use. Hence in the crisis of the Revolution the colonists could hardly be expected to turn away from paper currency. The story of the colonial issues belongs perhaps more prop- erly to the history of commerce or of money than to financial history, but this protracted and disturbing experience had much to do with creating in later times erroneous opinions concerning public finance. Accustomed to rely largely upon bills of credit, the colonists in some sections were a\-erse to taxation, and the explanation of the disastrous financiering of the Revolutionary War is to be found in a study of the financial experiences and monetary abuses extending over all the settle- ments from the beginning of the eighteenth century. 12. Taxation by England. Until 1765 England attempted to collect but little revenue from the colonies for her own imperial purposes, and that little § iz] Taxation by England. 31 had been secured through tonnage taxes, customs, and port dues, which had for their chief object the regulation of trade in accordance with the purposes of the Navigation Acts. Al- though the English government showed little disposition to enforce these laws, the colonies recognized the right of Parlia- ment to regulate commerce, and if dues had been demanded on this score alone it is possible that open hostilities would have been long deferred. There might have been irritation and protests, but the abstract political privilege of England was acknowledged. As Rufus Choate said, " Even James Otis in that great argument of 1761, upon the subject of writs of assistance, which breathed (I may use the vivid expression of John Adams) ' the breath of life into America,' admitted, upon the ground of necessity, the power of England to pass her whole series of acts of trade ' as regulations of commerce,' while he utterly denied their validity as laws of revenue." Original evidence in regard to the attitude of the colonists may be found in a resolution put forth by the colonists in one of their declarations of rights : " But from the necessity of. the case, and a regard for the mutual interests of both countries, we cheerfully consent to the operation of such acts of the British Parliament as are bond fide restrained to the regulation of our external commerce for the purpose of securing the commercial advantages of the whole empire to the mother-country and the commercial benefits of its re- spective members ; excluding every idea of taxation, internal or external, for raising a revenue on the subjects in America without their consent." In 1763 England determined to strengthen her military position against France ; and, in order to prosecute war more vigorously and promptly than she had been able to do in the past, to quarter a permanent body of troops in America. For this purpose ;^300,ooo were needed annually, and it was pro- posed by the English ministry that one-third of this sum should be assessed upon the colonies through stamp duties levied upon certain legal and commercial papers. This was an in- 32 Colonial Finance. [§ iz ternal tax requiring for its collection special officials, and was a clear departure from the principle of levying duties for the restriction of trade, and it was also inquisitorial as compared with customs duties. The principle that taxation should depend upon consent of the payers had long been claimed as a fundamental right and had been incorporated in early legisla- tion. Not only was the order given to enforce the commercial laws with vigor, but new import duties were placed upon molasses, coffee, and East India goods, white sugar and indigo from foreign colonies, Spanish and Portuguese wine, and wine from Madeira and the Azores. The radical change in policy of the home government aroused great opposition, and the agitation thus began swept away the theoretical reasoning which had previously distinguished between external and in- ternal taxation, and led to hostility to all forms of taxation by England, whether by excise or customs duties. The maxim that there should be no taxation without representation became a part of the avowed current political philosophy. The stamp tax was abandoned in 1766, but a year later the English ministry returned with renewed vigor to its policy of taxation, and imposed import duties upon glass, red and white lead, painters' colors, paper, and tea. It was estimated that the yield of the tax would be about _;^40o,ooo. It was natural that the opposition to this measure should be great. The former protest had been effectual and there was reason to hope that popular agitation would once more gain a victor)'. As a result of the refusal to consume imported goods, the yield of the tax was only ;£i 6,000, of which more than _;£i 5,000 were spent for collections. In 1770 the duties were repealed, save upon tea. It was not long, however, before the final break with England came, for reasons in which taxation played only a part ; nevertheless these measures led to a vigorous dis- cussion of the fundamental principles of the right of taxation, a discussion which found its ultimate solution only in war. CHAPTER II. REVOLUTION AND THE CONFEDERACY, 1775-1788. 13. References. Bibliographies : Channing and Hart, 319 ; Eogart and Rawles, 9-15 ; J. Winsor, Narrative History of America, VII, 81-82 ; C. J. Bullock, Finances of the United States from 1775 to 1789, at beginning of each chapter, and page 266. General Reading : J. P. Gordy, History of Political Parties, I, chs. 2, 3, 4; A. B. Hart, III, 120-137 ; R. Hildreth, History of the United States, III (consult index under paper money, conventions financial, esti- mates, expenditures, requisitions, Morris, Robert) ; McMaster, I, 139- 144, 187-193, 202-208, 266-270, 281-293, 331-361. Proposals to Amend the Articles of Confederation in Amer. History Leaflets, No. 28 (July, 1896) ; Elliofs Debates, I, 96 (address to States by Congress) ; 106 (reply to R. I.); V, 1-108 (consult index: loans, taxation, paper money); 109- 122 (note by Madison). Special Works : Bullock, as above (most valuable single study) ; W. G. Sumner, Financier and Finances of the American Revolution ; Bolles, I ; G. W. Greene, Historical View of the American Revolution, 137-172. Paper Money: J. Elliot, .F2wi/;«j- .S>j-^^»?, 6-16 (paper issues) ; C.J. Bullock, 60-78; H. White, 134-148; W. B. Holt in Sound Currency, V, 81-112; J. J. Knox, 9-12; F. A. Walker, Money, 326-336; Bolles, I, especially chs. 3, 9, 13; W. G. Sumner, History of American Currency, 43-54; De Knight, 12-17. Loans, domestic: Bolles, I, chs. 4-7, 18; foreign: Bolles, I, ch. 17; Morse, Life of Benjamin Franklin, 300-332 ; Franklin's Works (Bigelow, ed.), vol. VI-VIII; De Knight, 17-20, 29-32; Bayley, 299-316; Mc- Master, I, 227-230. Taxation : Federalist, Nos. 30-36 (taxation); Bolles, I,ch. 14; G. T. Curtis, Constitutional History of the f. 5'., 114-134, 162-167; J.Story, Commentaries, Bk. II, ch. 4, sect. 253-265; W. Hill, Early Stages of Tariff Policy in Pub. Am. Econ. Assn., VIII, 38-107 ; M. E. Kelley, Tariff Acts under the Confederation in Quar. Jour, of Econ., II, 473-481 ; G. Bancroft, History of the Constitution ; T. Pitkin, Statistical View, 26- 33 (ed. 1835). Administrative Machinery: Bolles, I, 9-22, 109-116, 267-269, 305-308, 334-340; J. C. Guggenheimer, Development of the Executive 3 33 34 Revolution and the Confederacy. C§ H Departments in Essays in the Constitutional History of the U. S., \Z2-\-ip, 154-160. Bank : Bolles, I, 273-275 ; J. Sparks, Life of Gouverneur Morris, I, 227- 242 ; W. G. Sumner, Alexander Hamilton, 107-1 1 5 ; J- J. Knox, History oj Banking, 25-32 ; W. G. Sumner, Financier of the Revolution, 11, 25-35, 183-192. 14. Governmental Confusion. The first Continental Congress, which met September 5, 1774, contented itself with public addresses. Open warfare did not begin until the following spring ; at first the organiza- tion of the militia and the burden of its support were sustained by the several protesting colonies, and not until June, 1775, did Congress order the raising of an American Continental army. This was followed in September by legislation for fitting out a navy, and later by the establishment of a com- mittee for foreign affairs; the supervision of the frontier Indians and the administration of the post-office were also added to the duties of Congress. For the carrying on of these various activities revenue was obviously needed, but the Continental Congress and such governmental machinery as existed had no compelling powers for the collection of funds. The government was a creature of emergency ; the colonists were content to follow and obey their legislative body against a common enemy, England, but they recognized no authority which could coerce revenue from themselves. Associated in a struggle against what was termed unlawful taxation, the colonists showed no disposition to entrust the power of taxation to a body of delegates whose authority did not rest upon an organic constitution. The financial meas- ures undertaken to carry on the struggle were conse- quently as revolutionary as the war itself. There could be no consistent policy ; and what little system tliere was speed- ily broke down because of. inherent defects. From the confused action of the time we may separate the following questions as of permanent and special interest to the student of finance : •— § hJ Governmental Confusion. 35 1 . The issue of bills of credit. 2. The financial relations of Congress to the States and the system of requisitions. 3. The borrowing of funds both at home and abroad. 4. The ineffectual struggle to secure national taxation. In the adjustment of the several methods of revenue to one another there was no well-defined plan; Congress did one month what it had vigorously opposed a month previously. In general, reliance was placed at the outset upon the issue of bills of credit ; borrowing was then begun in a small measure, and, as the struggle continued, developed more extensively, particularly from Holland and France. Begin- ning with about 1778 many requisitions were systematically made upon the States, to be met by local taxes ; and finally in the latter part of the war a change was made in the financial machinery of the administration by concentrating responsibility upon one person instead of distributing it in committees. With this change came the suggestion of a bank, which would extend the helping hand of private credit after public credit was paralyzed. Owing to the troubled conditions under which the Con- tinental Congress and the national government were estab- lished, to the fluctuating value of the depreciated paper currency which was issued in enormous amounts, and to the indefinite relations between Congress and the several States, — it is difficult to present exact statements of the receipts and expenditures of the government during the revolutionary period. From such data as are available the income of the continental treasury from 1775 ^o ^7^3 ^^ measured in specie has been calculated as follows : — Paper money $37,800,000 Domestic loans 11,585,506 Foreign loans 7,830,517 Taxes 5,795,000 Miscellaneous receipts 2,852,802 Total income .- 1^65,863,825 Outstanding certificates of indebtedness . . . $16,708,000 36 Revolution and the Confederacy. [§ '5 If the total cost of the war were sought, there should be added to the above sums the expenditures of the several States. 15. Issues of Bills of Credit; Continental Money. Almost the first financial step of Congress after hostilities began was to vote an issue of paper money, and within a week of the battle of Bunker Hill, under date of June 22, 1775, authority was given for an issue of $2,000,000 of bills of credit based upon the credit of the States, with a careful apportion- ment of the amount each colony should redeem between 1779 and 1782. Between that date and November 29, 1779, a period of about four years and a half, forty of these emissions with a total issue of $241,552,780 were authorized, and there is a strong possibility that more was surreptitiously put out by the embarrassed treasury officials. At no time, however, was the amount above named in circulation, since from the begin- ning there was some small redemption ; no more were printed after 1779, when Congress voted that the amount of bills in circulation should not exceed $200,000,000. Tabulated by years the number of issues and amounts authorized were as follows : — No. of resolves authorizing issues Amounts 1775 .... 1776 .... 1777 . . . 1778 .... "779 .... 3 4 5 14 M $6,000,000 19,000,000 13,000,000 63,500,300 140,053,480 Total .... 40 $241,553,780 In addition to the continental issues the States put out ■ $209,524,776 of paper notes. Of this sum more than one- half ($128,441,000) was issued by Virginia alone; $33,325,000 by North Carolina, and $33,458,926 by South Carolina; New § 15] Issues of Bills of Credit. 37 England and the Middle States in this crisis were more sparing with their issues. The continental bills were of various denominations ; in the first issue of 1775 it was voted that there should be 49,000 bills of one, two, three, four, five, six, seven, and eight dollars ; in the next year Congress authorized a considerable amount of small bills in notes of fractional parts of a dollar, as two- thirds, one-half, one-third, and one-sixth. In later issues larger denominations were printed, running as high as sixty- five dollars. The first issues could not be supplied as rapidly as needed, and it was quickly found that the signing of the notes would take more time than members could possibly devote to the task ; consequently twenty-eight gentlemen were named and compensated to be signers of bills, each bill being signed by two persons. Much disorder was introduced by the counterfeiting of notes both by English and Americans, and many efforts were made to prevent it, by altering plates, calling in certain issues, and requesting States to pass severe laws for the punishment of counterfeiters. So far as declarations went Congress entered upon the printing of bills with abundant forethought; the pledge of the faith of Congress was early given, and a method of redemption was recommended. The first issue was put forth to meet the immediate emergency of a projected war; the subsequent issues were authorized as a last resort because of the failure of the States to contribute.. It must constantly be borne in mind that there was no real national government ; Congress was little more than a debating association made up of representatives of the several new States ; legislation was practically limited to recommendations instead of the enacting of law ; and when Congress voted recommendations it was assumed that the States would support by appropriate legislation the votes of their respective delegations. In the month following the first issue of bills of credit, Congress asked that each colony provide ways and means to sink its proportion of bills, and crudely apportioned the respon- 38 Revolution and the Confederacy. [§15 sibility among the States according to population, including negroes. It was suggested that the payments be made in four instal- ments, beginning with November 30, 1779, and that this could be brought about by the adoption of provisions that the notes be receivable by the colonial governments for State taxes, and then be transferred to Congress in payment of the amounts assigned to the several States. Again, upon the issue of ^5 ,000,000, ordered May 9, 1776, Congress voted that the thirteen united colonies be pledged for its redemption at such periods and in such manner of appropriation as Congress shall hereafter direct. In a circular " Letter of Congress to the Inhabitants," in the autumn of 1779, solemn attention is directed to the fact that the people had pledged their faith for the redemption of the bills, not only collectively through their representatives, but individually. With no power of taxation. Congress could with little consistency pledge itself for redemption, but had to place the pledge upon the several States. This reliance was a vain hope, for the States, instead of rendering their proportionate shares, increased the difficul- ties by making note issues of their own. Congress itself did not declare these continental notes to be legal tender, but called upon the States to devise the necessary legislation inflicting forfeitures and penalties upon those refusing to accept the bills. This recommendation was more acceptable than that of provision for redemption, and it was generally enacted by the several States that a refusal to accept the bills constituted an extinguishment of the debt. Closely allied with the enactment of State legal-tender laws to give support to the bills was the passage of resolutions in Congress in denunciation of all persons who refused to re- ceive bills. On November 23, 1775, s"^''' disloyal action was brought to the attention of Congress, and a com- mittee was appointed to consider the matter. A report was submitted, and it was resol\-ed " That if any person shall hereafter be so lost to all virtue and regard for his § i6] Depreciation of the Currency. 39 country as to refuse . . . , such person shall be deemed an enemy of his country." With similar ends in view was passed legislation to enforce the regulation of prices when depreciation of the bills became most marked ; monopolizers and engrossers were severely denounced ; and after seeking to punish by fine and imprison- ment persons who should advance the price of commodities, the different States began to hold price conventions and to attempt to fix prices of labor and of commodities. The first of these assemblages was held at Providence in December, 1776, whereupon Congress recommended the plan to other States. 16. Depreciation of the Currency. Since all the attempts to support the credit of the bills failed, depreciation set in early and was quickly accelerated. There is some dispute as to the exact date when the. bills first fell from grace ; according to Ramsay, the people at first received the currency willingly, and during the last months of 1776 the depreciation was slight and gradual; but when the amount of the issues exceeded ^20,000,000, "there was a point both in time and quantity beyond which this congres- sional alchemy ceased to operate.'' In 1779 the depreciation became very marked, and during that year the values of the continental currency in specie on successive dates was as follows : — 1779 January 14, 8 to i 1779 June 4, 20 to i February 3, 10 " " September 17, 24 " " April 2, 17 " " October 14, 30 " " May s, 24 " " November 17, 381^ " " Congress was exceedingly slow to recognize officially in the finance accounts that there was depreciation, but finally, on March 18, 1780, it confessed judgment and made provision for the acceptance of paper in the place of silver at the rate of 40 to I. A tax of ^15,000,000 a month for thirteen months was levied upon the States, to be paid in bills of the old emissions ; 40 Revolution and the Confederacy. [§ i6 these in turn were to be destroyed and replaced by a new tenor or issue in an amount not exceeding one-twentieth of the face value of the old issue. Six-tenths of these bills were to be paid to the States and the rest retained for national pur- poses. The new bills were to be redeemable in specie in five years, to bear interest at 5 per cent., and to be receivable for taxes. Under this law ^119,400,000 of notes were paid in by the States and destroyed ; of the new tenor notes only ^4,400,000 were actually issued. Congress also attempted to give some order to the depreci- ation by resolving " that the value of the bills when loaned shall be ascertained by computing these on a progressive rate of de- preciation commencing with September i, 1777, and continu- ing to March i8, 1780, in geometrical progression and proportional to the time from period to period, assuming the depreciation at the several periods to be as follows : " ^ On March i, 1778, 1.75 for one Spanish milled dollar On Sept. I, 1778, 4 " " " " On March I, 1779, 18 " " " " On March 18, 1780, 40 " " " « Congress also at this time advised the States to repeal the punitive legislation directed against those who refused to re- ceive the bills. As to the actual sacrifice by the people measured in the commcdities which they gave for the national paper currency which was issued, no exact statement is possible, but various estimates have been made of the specie value of the total issues: Jefferson placed it at $36,367,000, Hildreth at ^70,000,000, Bronson at ^53,000,000, and Bullock more recently makes an independent calculation and arrives at estimates varying from J3 7,800,000 to $41,000,000. The old continental currency after 1780 depreciated more 1 In this scale it was assumed tliat there was no depreciation until September 2, 1777. The table may be found in Finance, V, 766. § 1 7] Was Paper Money Necessary ? 41 rapidly than ever. In January, 1781, it was valued at 100 to I, and in May of that year, says Pelatiah Webster, " it ceased to pass as currency, but was afterwards bought and sold as an article of speculation, at very uncertain and desultory prices, from five hundred to one thousand to one." And another writer, Breck, says : " The annihilation was so complete that barber-shops were papered in jest with the bills ; and the sail- ors, on returning from their cruise, being paid off in bundles of this worthless money, had suits of clothes made of it, and with characteristic light-heartedness turned their loss into a frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars." The final and official fate of the Continental currency was not much more glorious. Under the funding act of 1 790 small amounts of new tenor notes were received in subscription for stock ; but the older notes were accepted only at the rate of 100 to I, and of the 1^78,000,000 then estimated to be outstanding only about ;?6,ooo,ooo were subscribed for stock. The re- mainder had probably been lost or destroyed. 17. Was Paper Money Necessary ? How far was the issue of these bills necessary for the main- tenance of the independence of America ? The experience of the United States in the issue of bills of credit has furnished the stock example to nearly every writer on the subject of money. No criticism has been too severe. " Paper money," said Pelatiah Webster, a contemporary of the Revolution, " polluted the equity of our laws, turned them into engines of oppression, corrupted the justice of our public administration, destroyed the fortunes of thousands who had confidence in it, enervated the trade, husbandry, and manufactures of our country, and went far to destroy the morality of our people." Later writers have arraigned the political leadership of the Revolution because Congress did not try taxation at the out- set, urging that the colonists were accustomed to taxation, and were well able to bear it. It is said that the States at an 42 Revolution and the Confederacy. [§ '7 early period of the war " when the fever was up " would have freely followed " recommendations " of Congress, and that it was only natural that the States should refuse the more vigor- ous method of taxation after Congress had exhibited a policy of weakness and error. If we consider only what is possible among a people properly grounded in the principles of monetary science, the criticism against the issue of paper currency during the Revolution is justifiable ; but the question is not what might conceivably have been done, but what could be done in America during the Revolution by fallible statesmen. The nation was en- gaged in a struggle for existence ; at such a time the rules of monetary art, like the ordinary rules and methods of civil pro- cedure, must give way to the prime necessity of using all the resources available. If the result is disastrous, war means a measure of disaster and loss ! Whether the sacrifice could have been lessened by a refusal to issue these forced loans upon the people is a fair question for discussion, but cannot be settled simply by the accumulation of proof that the mone- tary system broke down. Besides the issue of treasury notes, there are at all times practically only two other policies open to a nation : borrowing by voluntary loans, and taxation. At the initiation of the struggle it could not be hoped that the colonies would be able to borrow abroad, and indeed, if it had not been for the hostile feeling of France to England, there is no reason to suppose that the new republic in the early stages of the struggle could have borrowed in Europe at all. As for borrowing at home, that implies an amount of free capital which did not exist in America at that time. The difficulties of laying adequate taxation under the existing plan of confed- erated government was equally great ; for to grant such a power meant for the States to abdicate their privilege of self- taxation enjoyed as colonies and to give up their political independence on a money issue. The colonies, it must be recalled, had chafed under the restrictions placed by Parlia- ment upon colonial issues, and it was natural that one of the § I?] Was Paper Money Necessary ? 43 first measures of popular protest should be a return to the issues of paper which England had denied them. Connecti- cut, Massachusetts, and Rhode Island, in May, 1775, a month before Congress acted, voted local issues, and in June three other colonies followed. Acting under an emer- gency it could not be expected that Congress would frame an independent policy which might antagonize its constit- uents ; nor was this a time to eradicate financial delusions by a campaign of education. The responsibility therefore in a large degree must be thrown back upon the provincial assemblies. The danger of the issues was recognized at the time by the leaders of public opinion ; there was a substantial element of the population, particularly in the larger cities in the East, which stood aloof from the revolt against England, not so much out of opposition as because of the fear that independ- ence would bring excessive issues of paper money with all its consequent derangement to business affairs. Popular opinion, however, was yet to be convinced that either States or nation or individuals must inevitably suffer; and allied with popular ignorance was the more conscious effort for relief, if not repudiation, on the part of debtors in the community, who hoped to find in an inflated currency an easier way to discharge obligations. The actual loss to the individual was in part disguised by the fact that the continental currency passed from hand to hand in daily transactions, and thus the depreciation was distributed. The revolutionary issues are not to be regarded as an isolated act, but as the culminating incident in a half century of financial experience; moreover, the issues were made in so wholesale a fashion, the responsibility of maintaining their credit was so largely divided, the tie between issue and redemption was so weak, that the lesson then learned is little applicable to modern conditions, and we cannot get much practical help for sound finance out of a general denunciation of the continental currency. 44 Revolution and the Confederacy. [§ i8 18. State Taxation and Requisitions. In its attempts at taxation Congress was unsuccessful, for here again it had no independent power of securing revenue. The State might be asked to contribute fixed sums, but the request had no compelling power and was but feebly honored. Whether the States could have raised by direct methods of taxation sufficient supplies for current needs of war, is a question which it is impossible to decide. But it must be remembered that the taxing systems in local operation were of a simple character, designed only for small peace expendi- tures, and that their development in times of war, when there was a partial occupation of territory by the enemy, would have been extremely difficult. Even during the French and Indian Wars, the people in the richer and longer settled portions of the country were free from the harassing disturbances of military campaigns. To meet the extraordinary needs for na- tional military purposes which were necessitated by revolt was a problem which the art of taxation as then developed in America was not prepared to solve. In the instructions which were prepared for Frankhn in October, 1778, excuses were made for the neglect of taxation : it was argued that America had never been heavily taxed, nor for a continued length of time ; and, since the contest was upon the very question of taxation, the laying of imposts, unless from the last necessity, would be madness. What was accomplished by the mild method of requisitions, or assessment of taxes on States, may easily be described. Beginning with November, 1777, requisition followed requisi- tion, varying in amounts and in times and methods of payment. Some of the amounts called for appear absurdly large, but they measure the inflated prices of the period, caused by the de- preciated currency. The States, however, did not meet the demands even with paper currency ; between November 22, 1777, and October 6, 1779, there were four requisitions calling for |!95,ooo,ooo in paper money, but the payments on these § ig] Domestic Loans. 45 amounted to only ^54,667,000. The three specie requisitions of August 26, 1780, ;?3, 000,000; November 4, 1780, ^1,642,- 988; March 16, 1781, ^6,000,000, amounting in all to ^10,- 642,988, yielded only ^1,592,222. The productivity of the several requisitions in specie value until January i, 1784, was as follows, according to the table prepared by Professor Bullock : — Requisitions (4) Nov. 22, 1777, to Oct. 6, 1779 Specific requisition, 1780 Specie requisitions (3) before Oct., 1781 . . Specie requisitions Oct., 1781, to Jan., 1784 . Total receipts, value in specie .... 11,856,000 881,000 1,592,000 1,466,000 15,795.0°° ^ In 1780 resort was had to a demand on the States for specific supplies of corn, beef, pork, rum, hay, etc., — a fiscal method recalHng a stage of primitive economic organization. In furnishing these supplies there was much inefficiency and great waste. Some of these requisitions provided that they might be met by the payment of specie or new tenor bills, or commissary certificates, or partly in certificates of interest, known as indents. The system of requisitions proved of little importance until after the war was over ; it could not succeed, for it lacked any well organized plan of assessment. As Pro- fessor Sumner says, " It was impossible to know how much each State ought to pay, and there was no adequate publication of the facts as to what each State had paid. Being in the dark as to facts, each State maintained that it had paid more than its share." 19. Domestic Loans. The loans of the United States during the period 177 6-1 789 may be conveniently grouped under two headings, domestic and foreign. The borrowing of money by Congress, with the exception of a small loan in June, 1775, for the purchase of gunpowder, was not authorized until October 3, 1776, nearly 1 This is exclusive of the requisitions of March 18, 1780, which were laid for the purpose of calling in the old paper, and which yielded no new net revenue. 46 Revolution and the Confederacy. [§ 19 a year and a half after the commencement of the Revolution. By that time bills of credit had been issued, and little was forthcoming in the way of taxes for the use of Congress ; con- sequently authority was given for borrowing ^5, 000,000 at the rate of 4 per cent. For placing the loan, loan-ofifices were established in each State ; lenders received indented certifi- cates corresponding to the modern coupon bonds in denomi- nations from ^300 to |;iooo; commissioners, remunerated at the rate of one-eighth of one per cent, on the amounts received, were appointed by the State authorities, in order to allay local jealousy ; and payment was promised in three years. The rate of interest offered was too low, and in the subsequent loans of January 14 and February 22, 1777, the rate was increased to 6 per cent. Again the results were not favorable : during the first year between October, 1776, and September, 1777, the amount received was only ^3, 787,000. About this time Con- gress was able to secure a loan from France, and it was deter- mined to meet the interest on the domestic loan certificates by bills of exchange drawn upon the foreign fund in possession of the American envoys in Paris. This increased the credit of the home loan-offices, so that from September, 1777, until the offices were closed, 163,289,000 in paper was subscribed, of which the specie value was only ^7, 684,000, according to the scale of depreciation adopted by Congress in 1780. After March i, 1782, the interest was not met, and indents, or certificates of interest indebtedness, were issued ; since these were receivable for taxes by the States, they were in part re- deemed and cancelled by payment into the federal treasury on State account. In addition to the loan-office certificates, there were other forms of certificates, such as those issued by quarter- masters, commissaries, and other purchasing agents. So urgent were the needs of the army, that throughout the war it was necessary to impress large quantities of supplies, particularly wagons, horses, and aids for transportation, in return for which certificates of value were given. These obligations were of a great variety and contracted without order or system, and the §20] Foreign Loans. 47 amount outstanding in 1790 was estimated by Hamilton at i!i6, 708,000. Short-time and temporary loans to the amount of ^1,272,842 were also obtained in 1782 and 1783 from the new Bank of North America. 20. Foreign Loans. Funds were obtained either in loans or subsidies from the governments of France and Spain and from private bankers in Holland. The first assistance came from France in 1776 in the form of a subsidy through the agency of Beaumarchais, over whose accounts the United States afterwards had a pro- tracted dispute ; and a small subsidy was secured from the Spanish treasury. Through the importunities of Franklin, France also granted subsidies of 2,000,000 livres in 1777 and 6,000,000 livres in 1781. In all, these sums which maybe regarded as gifts, amounted to ^1,996,500. Between 1777 and 1783 the United States borrowed from France, ^6,352,500 ; Holland, Ji, 304,000; Spain, ^174,017, — making a total of $7,830,517- By years the foreign loans were obtained as follows : — France Spain Holland 1777 ^181,500 1778 544.500 1779 i8i,5oo 1780 . . . 726,000 I78I . I1737.763 Ji28,8o4 1782 . 1,892,237 45,213 $720,000 1783 1,089,000 584,000 Total . . . $5,352,500 $174,017 $1,304,000 Attempts were early made to obtain loans to be repaid in France, secured by the exportation of goods from America, particularly tobacco ; but the danger of capture by English cruisers broke this policy. The earlier negotiations were clothed in secrecy for fear on the part of France and Spain 48 Revolution and the Confederacy. [§ 20 of political complications witli England ; and the intercourse of tlie American agents and later of the envoys with the French officials reveals most pathetically the financial straits of the American government. Without warning the en- voys were drawn upon by Congress, and only by repeated pleadings with the French government could they secure funds with which to honor the drafts. The French loans were granted for political reasons, and not until 1782 did there appear the first evidence of a national credit in Europe ; John Adams then secured loans from bankers in Holland, the more welcome since after 1783 France withdrew her aid. Congress first and last authorized loans far larger than could actually be secured, for the needs of the government were unceasing and repeated authorizations and applications had to be made. The foreign loans were either indefinite in length or ran for periods not over fifteen years ; interest was 5 per cent., except on 10,000,000 livres of the French loans, which drew 4 per cent. Of the sums loaned by France little was actually received by the treasury in this country, as it was expended in France for supplies, but one instalment served a good purpose in paying the in- terest on domestic loans, and another was the specie foun- dation of the Bank of North America. The service of France to the United States is not, however, to be measured by the direct money payment, for it is estimated that she spent J6,ooo,ooo for the French army and navy in the American cause. The growing credit of the new republic is reflected in the favorable rate of interest, 5 per cent., demanded on the Dutch bankers' loans. By 1782 it was seen in Holland that victory was assured, and there was not only nn in- telligent appreciation of the immense resources of the country which could be applied to the extinction of the debt, but confidence in the political integrity of the new government. § zz] Effort to Secure a National Tax. 49 21. Financial Provisions in the Articles of Confederation. In 1 781 the Articles of Confederation went into effect; this instrument for national government brought little succor to the treasury. The financial provisions were as follows : — ■ No State shall lay any imposts or duties which may inter- fere with any stipulations in treaties entered into by Congress. All expenses for the common defence or general welfare shall be deferred out of a common treasury supplied by the several States in proportion to the value of land and improve- ments; the taxes to be levied under the direction of the State authorities. Power was given to Congress to ascertain the necessary sums of money to be raised, to appropriate the same, to borrow money or emit bills on the credit of the United States, transmitting every half year to the several States an account of the sums borrowed or emitted, these grants of power being subject to the assent of nine States as represented in Congress. The omissions were more important than the actual pro- visions, though even the latter were too attenuated to breathe a healthy vitality into the administration of the finances. As a vigorous commentator expresses it, the Articles " gave to the confederation the power of contracting debts, and at the same time withheld the power of paying them. ... It provided the mode in which its treasury should be supplied for the reimbursement of the public credit. But over the sources of that supply, it gave the government contracting the debt no power whatever. Thirteen independent legislatures granted or withheld the means according to their own convenience." 22. Effort to Secure a National Tax. The ill success of Congress in securing revenue from the States led in the latter years of the war to a more determined effort to obtain a national tax. As just stated, under the Articles of Confederation adopted in 1781, the powers of tax- ation were explicitly restricted within a narrow compass, and, 4 50 Revolution and the Confederacy. [§ zz more than this, it was provided " that no treaty of commerce shall be made whereby the legislative power of the respective States shall be restrained from imposing such imposts and duties on foreigners as their own people are subjected to, or from prohibiting the exportation and importation of any species of goods or commodities whatsoever." This left the mak- ing of tariffs to the States. Though Congress could not coerce it hoped to persuade ; following a suggestion of a price con- vention held at Hartford, it early in 1781 recommended a duty of 5 per cent, upon imports, excepting arms, ammunition, and clothing, or other articles imported for the United States or any State, also excepting wool cards and cotton cards, and wire for making them, and salt during the war. Inasmuch as unani- mous consent was necessary for constitutional amendments, the attempt failed through the opposition of one State, Rhode Island, which asserted that the tax would bear more heavily upon commercial States, that its collection would ne- cessitate officers irresponsible to the State, and that it would give power to Congress to collect money for its expenditures indefi- nitely and without accounting to the State. " She considered it the most precious jewel of sovereignty that no State be called upon to open its purse but by the authority of the State and by her own officers." Letters were addressed to Rhode Island in protest ; a committee was sent to remonstrate and to con- vince, but the opposition was too strong. In the midst of these fruitless endeavors Morris in 1781 proposed in addition a land tax, a poll tax, and an excise on distilled liquors, from each of which it was estimated the yield would be $500,000, and the import duties were expected to produce Si, 000,000 a year. This proposition was renewed in 1782, but came to naught, and the government was still powerless to collect revenue. In 1783 the plan for a national tariff was revived in a con- stitutional amendment prepared by Congress, which provided for specific duties on certain classes of goods, namely, liquors, sugars, teas, coffees, cocoa, molasses, and pepper, and an ad § zz] Effort to Secure a National Tax. 51 valorem rate on all other goods. The tariff was to run for twenty-five years, and the revenue thus obtained was to be applied only to the payment of interest on the public debt, and in no way used for current expenditures. In order that State pride might be appealed to, and local apprehension of the dangers of a national system be lessened, the collection of duties was to be made by State officials. The appeal met with a slow response. As late as 1786, four States had failed to accept the measure, — New York, Georgia, Rhode Island, and Maryland. During the year the three latter gave way, but this time New York was refractory and brought failure to the plan. The reluctance of some of the States to grant a national impost was also due to a commendable desire to secure com- mercial freedom without interference. During the war most of the local tariffs had been abandoned, owing to the interrup- tions of trade; later, when peace was re-established, many people, remembering the harassing restrictions of the Naviga- tion Acts, which were associated with a government of tyranny, looked forward to opportunities of unfettered trade. As a historian of our early tariff history says, " Liberty was the watchword of the age. What Locke, Rousseau, and Voltaire had done to awaken a desire for political liberty and equality the Physiocrats and Adam Smith were doing for industrial and commercial freedom. Whether or no their teachings were widely known in America, the lawmakers of the time immedi- ately after the Revolution certainly followed them in leaving commerce as free as possible ; and in some instances they "stated explicitly their adherence to the doctrine of free-trade and their respect for the advocates of that doctrine." In spite of these hopes, force of circumstances drove the new States into the contrary policy and the re-imposition of tariffs. Burdened with debts the new States felt the need of revenue from every possible source. The severity of the English customs laws was now realized more acutely than when as colonists they were accustomed to evade them, with the tole- ration of England. As an independent nation they were cut 52 Revolution and the Confederacy, [§ 23 off commercially from all the advantages of the West India trade. A desire for retaliation was naturally awakened, and in some quarters the need of protection was openly avowed. Even Massachusetts, whose commercial interests were most important, in 1786 passed a law bearing the preamble, "And whereas it is the duty of every people blessed with a fruitful soil and a redundancy of raw materials to give all due en- couragement to the agriculture and manufactures of their own country " ; and the act specifically provided that more than fifty different commodities, if produced on foreign soil, should be declared contraband and prohibited from being brought into the State. Other States, including Pennsylvania and New York, acted in the same way. The deprivations caused by the long war had started many manufactures into life, and for their per- petuation protective support of tariffs was warmly urged. 23. Fiscal Machinery. The administrative machinery in charge of the finances of the government underwent many changes during the period under consideration. For a long time Congress jealously kept in its own hands the executive control as well as legislation. In 1775 two treasurers were appointed to receive and pay out the public funds. Next a committee of claims was authorized, composed of thirteen congressional delegates, and this in turn was supplemented in February, 1776, by a standhig committee of five members of Congress, whose business it was to superin- tend the officials engaged in financial affairs, and to attend to the emission of bills of credit. This treasury board, under which was the office of accounts with an auditor-general at its head, may be regarded as the germ of the later treasury de- partment. In 1778 the entire system of book-keeping was remodelled ; provision was made for the appointment of a comptroller, auditor, treasurer, and two chambers of accounts ; accounts were examined and adjusted by the auditor and sent to one of the chambers of accounts for correction ; they were then returned and examined a second time by the auditor, who §2 3] Fiscal Machinery. 53 had the final decision, save upon appeal to Congress. The account having been finally endorsed by the auditor, was for- warded to the comptroller, by whom drafts were issued on the treasurer. The next year the congressional treasury was set aside to make place for a new board of five, of which three commissioners should not be delegates in Congress. 1 The movement in all the executive service was toward con- centration of authority, and in February, 1781, the treasury commission was abolished, and in its place was ordered the appointment of a superintendent of finance. For this position Robert Morris was chosen. A merchant and trader of Phila- delphia, engaged in large affairs, his experience had made him a valuable member of the local assembly of Pennsylvania and of Congress ; it also opened the way for charges of gain- seeking ! John Adams wrote of him : " I think he has a masterly understanding, an open temper, and an honest heart ; and if he does not always vote for what you and I would think proper, it is because he thinks that a large body of people remain who are not yet of his mind. He has vast de- signs in the mercantile way, and no doubt pursues mercantile ends which are always gain ; but he is an excellent member of our body." On the face of it Morris was given large powers J he was authorized to examine the state of the public finances, report plans for getting revenue, direct the execution of the orders of Congress respecting revenues or expenditures, superintend and control the settlement of the public accounts, and perform other duties relating to his department. Some changes were also made in the accountings to the comp- troller was given the duties of the late auditor-general, retain- ing none of the functions possessed by the comptroller under the law of 1778; and a register was appointed for the first time. Morris was clear as to the necessities of the time. On the one hand there must be retrenchment and economy, for which there was ample opportunity, because of the previous loose administration under a system of congressional committees 54 Revolution and the Confederacy. [§ 24 which employed an excessive number of agents and sub- agents in buying and distributing supplies. What was of still more importance, Morris endeavored to collect the requisitions from the States, to create a national revenue and impost, and to place the revenue on a specie basis in order that some degree of stability might be introduced into the budget. He put new life into the loan policy and hoped to plant govern- ment credit on a more stable foundation, through the estab- lishment of a bank aided by his personal credit. Because of his knowledge of mercantile affairs and banking connections abroad he knew how to bring about more orderly dealings in foreign exchange in the execution of the foreign loans ; and his appreciation of the need of specie led to greater pressure upon the American envoys in foreign capitals to negotiate loans. The last investments from France were useful in found- ing a bank, and Morris took advantage of the improving credit of the United States as shown by the Dutch loans. Yet Morris after all had little real power; he could not overcome the fundamental obstacles in the way of healthy finance ; State pride, jealousy, and bickering withstood his appeals to the States to levy taxes. Early in 1 783 he tendered his resignation, but was prevailed upon to continue in office until December, 1784. There is no doubt that difficulties were intentionally placed in his way because of the repugnance to giving powers of iinance to a single person. Morris was charged with irregularities in his accounts and with specula- tion to his own advantage in government property; these charges he answered in detail, but his business relationships were so involved and his private interests so complicated with public affairs that it was difficult to maintain before the public a position of impartial devotion to public welfare. 24. Bank of North America. The establishment of a financial institution or bank was early suggested .-xs an important aid to the government in organizing facilities of credit The first experiment under- §M] Bank of North America. 55 taken in July, 1780, known as the Bank of Pennsylvania, was, in the words of Morris, " nothing more than a patriotic sub- scription of continental money for the purpose of purchasing provisions for a starving army." The subscribers protected themselves by holding the bills drawn by Congress on the envoys abroad, as collateral security until the supplies were paid for. In the following year Morris submitted a plan in which a bank with real commercial functions should be in- corporated ; its special advantage to the government lay in the advancing of loans to the treasury in anticipation of ex- pected resources. Congress consequently approved the rec- ommendation and incorporated the Bank of North America with a permitted capitalization of ^10,000,000. The amount actually subscribed was pitifully small; only by the greatest exertions could ;g 70,000 be secured from private subscribers, and if the government had not made a subscription of ^250,000 in specie, which opportunely arrived from France, the project would doubtless have failed. The bank then was practically founded upon government funds but managed by officials of its own selection. Small short-time loans from the funds subscribed were made by the bank to the government, and as the treasury made a special effort to repay these loans in preference to other claims the practical result was the maintenance of a convenient working balance which the gov- ernment could depend upon for immediate necessities. The accounts of the bank with the treasury were as follows : — Amounts borrowed Repayments I7S2 1783 1784 $923,308 349i534 $863,394 388,981 18,467 Total . . . $1,272,842 $1,272,842 The bank paid in dividends to the United States ^22,867, while the United States paid to the bank for interest on loans 56 Revolution and the Confederacy. [§ 25 ^29,719. Besides direct loans to the government the bank was an aid in discounting the notes of individuals who held claims against the government, and, from the connection of the wealthy men in the management of the bank, inspired con- fidence in the abilities of the government itself to meet its obligations ; it gave Morris additional opportunity to strengthen the credit of the government by his own private endorsement. The relations of the bank with the government ceased after peace was established, and the bank then fell into popular disfavor in Pennsylvania, as it was regarded as the representa- tive of an oppressive money power. Finally in 1787 it secured a charter from Pennsylvania and as a local institution entered upon a long career. 25. Financial Collapse, 1783-1789. The indebtedness of the national government apart from outstanding bills of credit at the beginning of 1 784 was sub- stantially as follows : Foreign, including arrears of interest $7,921,886 * Loan OfBce certificates . ... 11,585,000 Unliquidated certificates of indebtedness . . . 16,708,000 Arrears of interest on domestic debt 3,109,000 Total JS39,323,886 The annual interest charges on this indebtedness were approximately 11,875,000, divided as follows: foreign, ;?37S,ooo; domestic, ^1,500,000. In addition to the above debt there were the bills of credit which had been practically repudiated, and the indebtedness of the States; the latter amounted to about |2r,ooo,ooo, of which $18,271,787 was afterwards recognized as incurred strictly for war purposes and assumed in the federal debt in 1790. At the close of the war a reduction in expenditures was ex- pected but was not easily made. The pay of the soldiers during the war was inadequate because of the depreciation of the paper currency, and was often delayed beyond the limit of patience. Although the rank and file were in part § zj] Financial Collapse. 57 appeased by bounty lands, the ofiScers were not so easily satis- fied, and on account of their position could more vigorously enforce tkeir demands; accordingly in 1783 it was voted to allow to the officers a bonus of full pay for five years. But still there were no funds, and once more recourse was made to promises and certificates of indebtedness carrying interest. Government credit indeed sank, so low that liquidated and certificated claims against it were worth less than fifteen cents on a dollar. In brief, the expenditures valued in specie, from 1 784 to 1789, were 1^4,432,279. In addition there were new unpaid accounts at the national treasury in September, 1789, of ;?! 89,906. The receipts for this period were : Requisitions iS:,945,325 Foreign loans . •. . . . 2,296,000 Miscellaneous sums ... 338,568 Total 14,579.893 The financial transactions for this period are summarized by Bullock as follows : " The principal of the domestic debt had been decreased ^960,9 15 by the receipts from the public lands; while the arrears of interest had increased from ^3,109,000 to $11,493,858 at the end of 1789, in spite of the fact that $2,371,000 of indents had been drawn in by taxes. The principal of the foreign debt had increased from $7,830,- 517 to $10,089,707, while the arrears of foreign interest had grown from $67,037 to $1,640,071 at the end of 1789." During these years Holland proved a source of constant help ; the foreign loans there placed, 1 784-1 789, were : 1784 $1,395,200 1785 • • 53.600 1786 47.200 1787 ■ I29,2CO 1788 . . . ... 270,800 1789 ,. 400,000 Total $2,296,000 58 Revolution and the Confederacy. [§25 Not only did the treasury continue embarrassed but there was much popular unrest, political and industrial, as is fre- quently the case after a long war. The issue of paper money by States was once more agitated, and seven of the States, in- cluding Rhode Island, New York, New Jersey, Pennsylvania, North Carolina, South Carolina, and Georgia, authorized new emissions. In Massachusetts a serious insurrection, headed by Daniel Shays, demanded the issue of credit money ; and in the other colonies there were bitter contests between the party of inflation and its opponents. The reasons for distress, however, were not fundamental or necessarily long-enduring ; it is a mistake to conclude that the country was drifting toward inevi- table ruin because many people were in debt. In what way the country was suffering from the disturbances of war is set forth in the following striking passage from a contemporary student of finance and public economy. Tench Coxe : " Among the principal causes of their unhappy situation were the inconsiderate spirit of adventure to this country, which pervaded almost every kingdom in Europe, and the prodigious credit there given to our merchants on the return of peace. To these may be added the high spirits and the golden dreams which naturally followed such a war, closed with so much honor and success. Triumphant over a great enemy, courted by the most powerful nations in the world, it was not in human nature that America should immediately com- prehend her new situation. Really possessed of the means of future greatness, she anticipated the most distant benefits of the Revolution, and considered them as already in her hands. She formed the highest expectations, many of which, however, serious experience has taught her to relinquish, and now that the thoughtless adventures and imprudent credits from foreign countries take place no more, and time has been given for cool reflection, she can see her real situation and need not be discouraged." At heart the country was economically sound, but the national financial system was weak, and in 1786 it broke down § 25] Financial Collapse. 59^ completely ; further borrowing at home or abroad was almost impossible ; requisitions were of slight avail ; domestic creditors were throughly alarmed, and when the efforts to secure unan- imous consent for a national tax failed, it was agreed that, if a federated republic were to continue, the government, par- ticularly in its relations to finance and commerce, must be remodelled. Every keen-sighted statesman of the period rec- ognized the necessity, although there was great variance of opinion as to the degree of readjustment. The dissatisfaction resulted in the Convention of 1787, which framed a new constitution. CHAPTER III. FINANCIAL PROVISIONS OF THE CONSTITUTION. 26. References. J. Elliot, Debates, V; G. Bancroft, History of the Constitution (con- sult table of contents) ; G. T. Curtis, Constitutional History of t/ie U. S-, I, chs. 26-27; R. UMr&th, History 0/ the United States, 111,508-523; J. P. Gordy, Political Parties, I, ch. 7 ; L. H. Boutell, Life of Roger Sherman, ch. 8; J. Story, Commentaries on the Constitution (fifth ed., useful for references to judicial opinions), Bk. II, ch. 14 (taxes); chs. 15, 42 (loans); ch. 17 (coinage); ch. 25 (bank); ch. 26 (internal improve- ments) ; T. M. Cooley, Principles of Constitutional Law (third ed., references to judicial opinions), ch. iv, § i, 2, 5, 6; T. M. Cooley, Laws of Taxation (second ed., 1886), 83-85, 90-99, 109-112; J. R. Tucker, Constitution of the United States, 457-508 (taxation) ; G. Bancroft, Plea for the Constitution, 42-52 (paper money) ; C. J. Bullock, 74-78 (paper money); J. J. Knox, 12-18 (paper money); C. J. Bullock, Direct Tojces under the Constitution, in Pol. Sci. Quar., XV (1900), 217-239, 452-481 ; also in Vale Review, IX, 439-451 ; X, 6-29; E. J. James, The Legal Ten- der Decisions, in Pub. Amer. Econ. Assn., Ill, 64-71 (also A'ote, p. 80); J. B. Thayer, in Harvard Law Review, I, 79; H. C. Adams, Finance, 113-116 (budget). 27. Financial Sections of the Constitution. For the history of the drafting of the Constitution, the con- tending principles which clashed in the convention, and the compromises which were thereby forced, the reader mubt refer to special treatises. In brief there were two plans before the convention : the one, narrow in its scope, proposed to continue the general form of government established under the Articles of Confederation but to give Congress power to levy duties for revenue and to regulate commerce ; the other was more far-reaching and looked to a fundamental change in the very principle of the federal organization by the substi- tution of centralized power for a confederacy. Apart from differences of opinion resulting from the study of political 60 §27] Financial Sections. 6i philosophy, different practical interests had to be reconciled, — the large States as against the small States ; the States with a free population as against the States with slaves ; and com- mercial States as against those with little or no foreign inter- course. Many of the conclusions reached were therefore the result of compromises rather than the expression of clear-cut and definite conviction as to the superior merit of the proposition involved. Public finance in the Constitution, which became the funda- mental law of the nation in 1789, is especially provided for in the clauses governing taxation, loans, coinage, appropriations, and accounts. The following articles deal expUcitly with these subjects : Taxation: "The Congress shall have power to lay and collect taxes, duties, imposts, and excises, to pay the debts and provide for the common defence and general welfare of the United States ; but all duties, imposts, and excises shall be uniform throughout the United States." (Art. I, Sect. 8, § i.) " No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken." (Art. I, Sect. 9, § 4.) " No tax or duty shall be laid on articles exported from any State." (Art. I, Sect. 9, § 5.) "Nor shall vessels bound to or from one State be obliged to enter, clear, or pay duties in another." (§ 6.) " No State shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws ; and the net produce of all duties and imposts, laid by any State on imports or exports shall be for the use of the treasury of the United States ; and all such laws shall be subject to the revision and control of the Congress. No State shall without the consent of Congress lay any duty of tonnage." (Art. I, Sect. 10, § 2.) Initiative of Revenue Bills : " All bills for raising revenue shall originate in the House of Representatives j but the 62 Provisions of the Constitution. [§28 Senate may propose or concur with amendments, as on other bills." (Art. I, Sect. 7, § i.) Loans : [The Congress shall have power] " to borrow money on the credit of the United States." (Art. I, Sect. 8, § 2.) Coinage: [Congress shall have power] "to coin money, regulate the value thereof, and of foreign coin." (Art. I, Sect. 8, § 5.) Indebtedness : " All debts contracted and engagements en- tered into before the adoption of this Constitution shall be as valid against the United States under this Constitution as under the Confederation." (Art. VI, Sect, i.) Appropriations : " No money shall be drawn from the treasury but in consequence of appropriations made by law." (Art. I, Sect. 9, § 6.) [Congress shall have power] "to raise and support armies, but no appropriation of money to that use shall be for a longer term than two years." (Art. I, Sect. 8, § 12.) Accounts : " A regular statement and account of the receipts and expenditures of all public money shall be pub- lished from time to time." (Art. I, Sect. 9, § 6.) Restriction on States : " No State shall coin money ; emit bills of credit; make anything but gold and silver coin a tender in payment of debts." (Art. I, Sect. 10.) 28. Taxation. In taxation the grant of federal power was large, — so large as to be alarming to those who feared the rule of a central government. Convinced that the bestowal of power to secure revenue must be more generous than under the Articles of Confederation, it was agreed that taxes might be collected from the people without intervention of State or local officers. The limitations are : first, that all duties, imposts, and excises must be uniform throughout the United States ; second, that direct taxes shall be in proportion to population ; and, third, that no export duties shall be imposed by Congress or by States. The reason for the first limitation is clear; State § 2 8] Taxation. 63 jealousy demanded an explicit declaration that imports and excises should not vary to the benefit of one section over against another. All parts of the country were to be placed upon the same footing. Unsuccessful attempts have been made to interpret the word " uniform " as referring not only to territory but to individuals : so that for example in the imposition of an income tax no exceptions can be made in favor of small incomes, and no variations shall be admitted in the rate, but it has been well established that the right to tax includes the right to make individual exemptions or discriminations. The second limitation, on apportionment of direct taxes, was adopted only after long and wearisome debate. The rule of the Articles of Confederation by which taxes were imposed upon the several States according to the ascertained value of the land with its buildings and improvements was an ' effort to apportion according to wealth ; but none of the States ever made adequate assessment of the value of land, and apparently did not intend to do their duty in that respect. The defect had been quickly recognized, but when it was pro- posed to change to a basis of population a new complication arose, because part of the States were slave-holding. In the convention the difference of interest between States with many slaves and those with few or none was tangled with the question of the proper basis of representation in the House of Eepresentatives. The South wished to keep any advantage of numbers and yet avoid any burden of taxation laid on a basis of population. A compromise was finally reached by which the North yielded on the question of repre- sentation, the South on that of taxation, and a half-way point was found in the so-called federal ratio by which slaves counted at three-fifths their number, both for representation and for direct taxes. The result was that slaves helped to increase the political power of the Southern States. At one stage of the debate, in the hope of securing common action, it was proposed that all taxation including every branch 64 Provisions of the Constitution. [§ 28 of revenue, indirect as well as direct, should be apportioned by population. As was clearly shown, by such a restriction Congress would be embarrassed, if not completely blocked, in raising any revenue by import or other indirect taxes, and would thus be driven back to the intolerable system of requisi- tions upon the States; the amendment was consequently abandoned. As a fiscal device the system of taxes in pro- portion to numbers has slight justification ; and the Constitu- tion seems hardly to have considered the probable incidence of taxation thus crudely imposed. With a more even dis- tribution of property, apportionment according to population might work with fairness ; but property does not accumulate in any such proportion, and the principle would have worked grave injustice had taxes been frequently collected in this manner. Even Gouverneur Morris, who proposed the restric- tion, afterwards saw the disadvantages which might arise from it, and, before the convention adjourned, endeavored without success to remove the difficulty. The acceptance of this illogical method of distributing direct taxes was probably due to a belief that such taxes would rarely be levied, and the previous failure of requisitions — direct taxes under another name — had a powerful influence in persuading the unpreju- diced to favor indirect taxes as a better means of supporting public credit. The restriction that capitation and direct taxes should not be laid until a census was taken was inserted at the insistence of the Southern delegates, so as to prevent the immediate imposition of a tax which might bear unfairly upon slave- holders. The denial of power to tax exports was the work of the important States of the seaboard, under the leadership of South Carolina. There were many leaders in the convention who rightly urged that the financial powers of the government would not be complete without the power to tax exports as well as imports; Washington, Madison, ^^'ilson, Gouverneur Morris, and Dickinson all favored it, but the South especially § z8] Taxation. 65 stood in opposition. Tobacco, rice, and indigo, staple prod- ucts of the Southern States, furnished nearly one-third of the exports ; South Carolina declared that her exports in a single year were _;^6oo,ooo ; and her delegates would not assent to the possibility of a system of taxation which might prove a discriminating burden upon the products of her soil. The protection of the commercial interests of the Southern States also appears in the limitation of the tax on slaves (who might be imported up to 1808) to a maximum of ten dollars for each person. Notwithstanding the number of explicit constitutional limita- tions on taxation, the actual workings of the tax system have been much affected by what the Constitution does not say. Taxes must be laid and collected for " the common defense and general welfare," but it is difficult to define what is a pubhc purpose. Since the federal tax laws seldom state the particular objects for which the revenue shall be used, it is useless to make constitutional objection to a particular tax, on the ground that it may furnish means for a later improper expenditure. The definition of the term "direct tax" has proved trouble- some; it is probable that the makers of the Constitution intended to limit its application to polls and land ; yet, though the Supreme Court has had occasion to deliver several im- portant decisions bearing upon this subject, no satisfactory interpretation has been reached. The question later becomes of great practical importance in determining the right of Con- gress to impose an income tax. The constitutional restrictions on the States in regard to taxation were designed not only to strengthen the resources of the federal treasury, but also to fasten more firmly in the hands of the general government all the powers which might indirectly affect commerce ; hence State tariffs either on imports or exports are expressly forbidden, because they disturb the uniformity of commercial regulations with foreign countries. This clause has shorn the revenue re- 5 66 Provisions of the Constitution. [§ 28 sources of the States more than was anticipated ; for, though the States retain concurrent powers of taxation on all objects of taxation except imports, new conditions of commerce have given to the federal government a growing advantage. A century ago production and trade were limited to a narrow circle by lack of transportation ; under the present conditions of commercial exchange, extending across a continent, the opportunity of the State to lay excise taxes either on manu- factures or sales is seriously restricted, and thus this important source of revenue is practically monopolized by the general government. In like measure the constitutional provision in regard to federal control of interstate commerce necessarily checks the State in taxing goods brought from other States to be used within its own border. Again, the Constitution pro- vides that the citizens of each State shall be entitled " to all the privileges and immunities of the citizens of the several States " : this effectually prevents States from laying dis- criminating taxes upon the citizens of sister commonwealths. Corporations, however, are not regarded as citizens so far as this clause is concerned, and consequently their status is an exception to the rule of equal privileges. The question of the initiation of revenue bills gave rise to one of the great compromises of the Constitution. It was agreed that the smaller States should have equal representa- tion in the Senate on condition that the House, where the large States were the more powerful, possess the exclusive right to originate revenue bills. The wisdom of the clause was gravely questioned by many of the leading men in the convention ; once it was thrown out of the draft ; but it was again inserted as the quid pro quo for the exclusive right to the Senate to ratify treaties, to judge impeachments, and to confirm appointments. The limitation is not complete, inas- much as the Senate can propose or concur with amendments as on other bills ; and, as will be shown later, the Senate in practice has gone much farther in encroachments on the pre- rogative of the House. In limiting the initiative of revenue § 29] Borrowing ; Bills of Credit. 67 bills to the House of Representatives an analogy may be found in the English Parliamentary custom which provides that all money bills shall originate with the House of Commons. The term " to raise revenue," however, is not construed as including post-office bills, mint bills, or bills relating to the sale of pub- lic lands. 29. Borrowing ; Bills of Credit. The borrowing power of the national government is well- nigh complete ; there is no limitation as to time, manner, place, amount, security, payment, or interest. A broad inter- pretation gives Congress the right to establish a bank, inas- much as the credit of the government is thereby strengthened and its borrowing powers enlarged. During the Civil War the question was raised whether Congress was given the right to make a forced loan through the emissions of bills of credit. Full discussion of this point belongs to a later period ; but so frequent and insistent has been the reference to the intentions of the fathers of the Constitution that it is necessary here to quote an extract from the debate on the proposition to strike out " and emit bills on the credit of the United States " : — Mr. Gouverneur Morris. — If the United States had credit, such bills would be unnecessary, i£ they had not, unjust and useless. Mr. Madison. — Will it not be sufficient to prohibit the making them a, tender? This will remove the temptation to emit them with unjust views. And promissory notes, in that shape, may in some emergencies be best. Mr. Morris. — Striking out the words will leave room still for notes of a responsible minister, which will do all the good without the mischief. The moneyed interest will oppose the plan of government, if paper emis- sions be not prohibited. Mr. Gorham was for striking out without inserting any prohibition. If the words stand, they may suggest and lead to the measure. Mr. Mason had doubts on the subject. Congress, he thought, would not have \he power unless it were expressed. Though he had a mortal hatred to paper money, yet, as he could not foresee all emergencies, he was unwilling to tie the hands of the legislature. He observed that the late war could not have been carried on had such a prohibition existed. Mr. Goeham. — The power, as far as it will be necessary or safe, is involved in that of borrowing. 68 Provisions of the Constitution. [§ 29 Mr. Mercer was a friend to paper money, though in the present state and temper of America he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether. It will stamp suspicion on the government to deny it a dis- cretion on this point. It was impolitic, also, to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan, and it was impolitic to pur- chase their further attachment with the loss of the opposite class of citi- zens. Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experi- ments which had been made were now fresh in the public mind, and had excited the disgust of all the respectable part of America. By withhold- ing the power from the new government, more friends of influence would be gained to it than by almost anything else. Paper money can in no case be necessary. Give the government credit, and other resources will offer. The power may do harm, never good. Mr. Randolph, notwithstanding his antipathy to paper money, could not agree to strike out the words, as he could not foresee all the occa- sions that might arise. Mr. Wilson. — It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered. And, as long as it can be resorted to, it will be a bar to other resources. Mr. Butler remarked that paper was a legal tender in no country in Europe. He was urgent for disarming the government of such a power. Mr. Mason was still averse to tying the hands of the legislature alto- gether. If there was no example in Europe, as just remarked, it might be observed, on the other side, that there was none in which the govern- ment was restrained on this head. Mr. Read thought the words, if not struck out, would be as alarm- ing as the mark of the beast in Revelation. Mr. Langdon had rather reject the whole plan than retain the three words " and emit bills." On the motion for striking out : New Hampshire, Massachusetts, Connecticut, Pennsylvania, Delaware, Virginia, North Carolina, South Carolina, Georgia, — aye, 9; New Jersey, Maryland, — no, r. Note by Mr. Madison. — This vote in the affirmative by Virginia was occasioned by the acquiescence of Mr. Madison, who became satis- fied that striking out the words would not disable the government from the use of public notes, as far as they could be safe and p'roper, and would only cut off the pretext for a paper curioncy, and particularly for making the bills a tender, either for public or private debts.i ^ Madison PaptrSy vol. iii., pp. 154.^-1346. § 29] Borrowing ; Bills of Credit. 69 The question was thus left in such a doubtful form that it is difficult now to decide whether the convention intended to deny absolutely to CongreBs the right to emit bills of credit under any circumstances whatever. Mr. Bancroft, an authority on the history of the Constitution, declares that the refusal is so clear that according to all rules by which public documents are interpreted the prohibition should not even be treated as questionable ; he cites in proof the statement just quoted from the debates and makes a striking argument in support of this conclusion. A possible element of doubt is raised when it is remembered that the discussion in the convention was over the clause making a positive grant of power to Con- gress rather than over an express denial. Hamilton, who took a leading part in the agitation for a new Constitution, only . three years later in 1790, appears to have felt that the prohi- bition was not literally complete. " The emitting of paper money by the authority of government is wisely prohibited to the individual States by the national Constitution ; and the spirit of that prohibition ought not to be disregarded by the government of the United States. The wisdom of the Gov- ernment will.be shown in never trusting itself with the use of so seducing and dangerous an expedient." It is also difficult to believe that the issue of treasury notes in 181 2, although not payable on demand or legal tender, would have been so easily accomplished if the framers of the Constitution who were still influential in public affairs had been confident in their conviction that the Constitution had absolutely taken away the right of emission of bills of credit. At any rate, the subsequent action of Congress from 1812 to i860 in repeatedly authorizing bills of credit, and from 1862 to the present day in emitting legal tenders, affords a striking example of the ease with which the Constitution has been adjusted, if not strained, in order to meet real or fanciful emergencies. Of more immediate importance at the time was the consti- tutional clause forbidding the States to emit bills of credit. It was first proposed that State issues should depend upon JO Provisions of the Constitution. [§ 3° national consent, and fear was expressed that an absolute pro- hibition in the Constitution would arouse serious antagonism. The prohibition, however, was carried by eight States, Virginia alone voting in the negative and Maryland divided. 30. Coinage. The question of coinage belongs more properly to a special treatise on money, but in recent years an interpretation has been given to the term which makes it necessary to refer briefly to its meaning. The word is generally applied to the making of gold, silver, or other metallic pieces of money. Advocates of government paper money, such as the Greenback Party, have defined " to coin " as " to make " or " to fabri- cate " ; and hence assert that the clause in question gives the United States power specifically to issue and emit bills of credit as money. Since there was but little specie in the country in 1787, it is absurd to suppose — so the argument runs — that a power, the granting of which has for its very purpose the raising and supporting of an army, creating and maintaining a navy, etc., could be confined to the right of simply minting metallic coins. Two con- temporary authorities have been cited : Franklin, who ad- vocated the coinage of land into credit, and credit into coin called paper money ; and Jefferson, who alluded to the use of treasury certificates as coining and striking money. Although the term may have been loosely used in colonial times, the federal courts for a long period in their interpretation restricted the right of coinage to metallic forms of money. In later years, in the endeavor to justify the legal-tender notes and to give the general government complete supremacy over the currency of the whole country, judicial authority has accepted the broader construction. Thus Justice Strong in Shollen- berger v. Brinton said, " I cannot think it a latitudinarian con^ struction of the Constitution to regard the phrase ' coin money and regulate its value ' as synonymous with making money or supplying a currency. ... If coining money and regulating §3°] Coinage. 71 its value means no more than putting a stamp on pieces of metal, and declaring what they are worth, it is no power over the currency, and there is no legalized currency. Stamping pieces of metal does not make them money. Coining money therefore, and regulating its value, means something more than making coins out of metallic substances. . . . When the Constitution was adopted the great thing sought in regard to the currency was uniformity of value. This could not be se- cured by local legislation. Hence the restrictions on the States, and the grant to the federal legislature without any ex- press restriction. An exclusively metallic currency was not suited to the exigencies of a civilized and commercial age. It had proved inadequate during the Revolutionary War, and could not meet the wants of a rapidly extending trade." ^ Again, from the power to regulate commerce ingenious efforts have been made to justify federal power over the cur- rency. " Of all that goes to make up the sum," writes Hare, " or contributes to the successful prosecution of commerce, nothing is so important as the circulating medium." And Webster declared, " The regulation of money is not so much an inference from the commercial power conferred on Con- gress as it is a part of it. Money is one of the things without which in modern times we can form no idea of commerce." The word "money" in connection with coinage has also been the subject of controversy, in that it includes both silver and gold. If this be the constitutional intention, it has been argued, quoting the words of Webster, " Neither Congress nor any other authority can legally demonetize either silver or gold. The command to Congress is to coin money, not to destroy it; to create legal-tender money for the use of the people ; and the grant of authority to create money cannot be construed to mean authority to destroy money." Bimetallists and silver advocates in late discussions have made frequent reference to this interpretation. 1 Justice Strong, 52 Pa., 67. 72 Provisions of the Constitution. [§31 31. Appropriations. While there may be ambiguities in the Constitution in regard to the getting of revenue, there has been still more perplexity in interpreting its meaning as to the spending of public revenues. No express checks were placed in the Constitution upon the methods of appropriations, except those already quoted. As to the range or scope of appro- priations there have been two widely different schools of interpretation, depending in turn upon different convictions in regard to the powers entrusted to Congress by the Con- stitution. Congress is given power to " pay the debts and provide for the common defense and general welfare of the United States." Over the meaning of the latter clause there has been a searching and at times bitter controversy : on one side are the strict constructionists, who limit the power of Congress to those expressly enumerated ; and, on the other, the broad constructionists, who justify congressional action over a wide range of activities in regard to which the Consti- tution is silent. Particularly has there been a struggle over the constitutionality of appropriations for education and in- ternal improvements, but for a full discussion of these subjects the reader must be referred to treatises on the constitutional law of the United States. At one stage of the debate on the Constitution, it was determined to limit the right of initiating appropriation bills to the House of Representatives, as in the case of revenue bills, but no restriction appeared in the final draft. In the general division of powers between the executive and legislative branches of the government there was a jeal- ous safeguarding of democracy ; the president as executive is given little power in the making of the budget ; he is practically confined to drawing up formal estimates of receipts and expenditures, based upon existing legislation ; and his responsibility and power end there, except that he retains the power of veto of revenue and appropriation bills. As this § 32] Objections to the Financial Powers. 73 veto power must be applied to the bill as a whole, and not to individual items, the power over appropriation bills is rarely exercised for fear of crippling some important service of the government ; and in the case of revenue bills it would not be exercised unless the executive and legislature were in radical opposition over the policy of framing a tariff. 32. Popular Objections to the Financial Pcwers. When the draft of the Constitution was finally placed before the people for ratification, there was a most active discussion, at first in pamphlets, letters, and newspapers, and then in the State conventions. Dissenting critics found defects in every section. The substance of the opposition was that the new form of government would lead to centralized power, mon- archy, and tyranny. In the first place attention was called to the fact that the condition of the country was not so bad as people supposed; State indebtedness had already been much reduced and there were indications of returning national credit ; important aid was to be expected from the sale of the lands in the West ; and it was loudly asserted that this satisfactory progress in the restoration of public credit would be stopped if a federal system were put in operation, entailing an increase in expenses. The exclusive grant of import duties to Congress in particu- lar was denounced as depriving the States of resources abso- lutely necessary for the integrity of their own individual credit, both for the support of internal government and the liquida- tion of the State debts. Most abhorrent of all was the grant of internal taxation to the federal government. Citizens were solemnly asked what would be their reflections when the tax- master thundered at their doors for the duty on that light which is the bounty of heaven, when a host of rapacious col- lectors invade the land, who will "wrest from you the hard product of your industry, turn out your children from their dwellings, perhaps commit your bodies to a jail." Well might a contemporary writer exclaim, "This is the mere frenzy of 74 Provisions of the Constitution. [§32 declaration, the ridiculous conjuration of spectres and hob- goblins." Nevertheless these fears were sincere ; and their existence must be taken into account by the student of American finance. Less creditable was the desire on the part of the less well-to-do in the community, the unsuccessful in business and the debtor class, to perpetuate unsettled condi- tions in the hope that contracts and the payment of debts might not be too strictly enforced. " The same causes," observes Curtis, " which led individuals to take to legislation for irregular relief from the burden of their private contracts, led them also to regard public obligations with similar impa- tience." By vigorous pleading the cause of the Constitution triumphed, and in April, 1789, the new government was inaugurated. CHAPTER IV. ESTABLISHMENT OF A NATIONAL SYSTEM. 33. References. Bibliographies: Bogart and Rawles, 15-19; Channing and Hart, 331 ; W. MacDonald, Select Documents, 4y, 61. Tariff: (i) Sources, Hamilton's Report on Manufactures, Ameri- can State Papers, Finance, I, 123-146; also Finance Ref'orts, I, 78-132; also Works, III; also W. MacDonald, Select Documents, g8-H2; also State Papers on the Tariff (Taussig ed.), 1-107 ; E. Young, Customs Tariff Legislation, iv-xvi (debates and votes) ; Stat- utes, I, 24 ; Annals of Congress, 1789-1791, I, 106, et seq.; or Benton's Abridgment, I, 24-44, 57-6;, 71-84. (li) Special: Belles, II, 73-102; O. L. Elliott, The Tariff Controversy (Leland Stanford, Jr., Univ. Pub.), 67-130 (summary of debates) ; U. Rabbeno, Americati Commercial Policy, 111-145 ; W. Hill, Early Stages of the Tariff Policy, in Pub. Amer. Econ. Assn., VIII, 107-132; W. Hill, Protective Purpose of the Tariff Act oi 1789, in fournal of Political Economy, II, 54-77 ; H. C. Adams, Taxation in the U. S. (J. H. U. Studies), 6-30; F. W. Taussig, ch. ii. (iii) Gen- eral: H. C. Lodge, Hamilton, 108-116; W. G. Sumner, Hamilton, 172-183 ; J. T. Morse, Life of Hamilton, I, 357-369 ; McMaster, I, 544-550; Schouler, I, 86-92; R. Hildreth, IV, 65-101 ; J. G. Blaine, Twenty Years in Congress, I, 182-189; H. von Hoist, Constitutional His- tory of the U. S., I, 94-97. Debt : (i) Sources, Hamilton's First Report on Public Credit (Jan. g, 1790), American State Papers, Finance, I, 15-37; also Finance Reports, I, 3-53; iSso Annals of Congress, 1789-1791, II, 2041-2074; also W. Mac- Donald, Select Documents, 46-58 ; also Elliot, Funding System, 23 ; also- Works (ed. 1850), III, or (Lodge ed.) II; Second Report (Dec. 13, 1790), American State Papers, Finance, I, 64-67 ; also Annals of Congress, 1789- 1791, II, 2074-2082 ; also W. MacDonald, Select Documents, 61-66. Report of January, 1795, '" American State Papers, Finance, I, 320-346; also Fi- nance Reports, I, 157-215; also J. Elliot, Funding System, 345. (ii) Debates: Annals of Congress, 1789-1791, I, 1131-1141 et seq., II; or .ff«K^o«'j /4*«flr^»««/, I, 182-184, 190-201, 211-228. (iii) Loans: Bayley, 299-316; Statutes, I, 138, 178; or Dunbar, 10-22. (iv) Special: A. Galiatin, Writings, III, 121-149; Bolles, II, 22-41; J. W. Kearny, Sketch of American Finances, 1-44 ; J. S. Landon, Constitutional History of the U. S., 103-108; H. C. Adams, Public Debt, 161-166, 226; C. F. Dunbar, Some Precedents followed by Hamilton, in Quar. Jour. Econ., 75 76 Establishment of National System. [§ 34 in, 32-45. (v) General: W. G. Sumner, Hamilton, 144-162; H. C. Lodge, Hamilton, 88-96, 117-131 ; J. T. Morse, Life of Hamilton, I, 287- 332; J. P. Gordy, Political Parties, I, 118-129; R. Hildreth, IV, 152-173, 206-215; McMaster, I, 567-593; Schouler, I, 130-142. Treasury Department: Annals of Congress, 1789-1791, I, 400; or Benton's Abridgment, I, 90; Statutes, I, 65; or Dunbar, 7; BoUes, II, 3-21; H. C. Adams, Finance, 193-201; H. C. Lodge, Hamilton, 84-99; J. T. Morse, Life of Hamilton, I, 276-286; R. Hildreth, IV, 152-173, 206-215, 275; A. B. Hart, Handbook of the History of the U. S., 100 (references, especially legal and constitutional). 34. Economic Conditions in 1789. Before entering upon an account of the financial measures of the new government a brief estimate should be made of the economic conditions of the country. The population in 1790 was nearly 4,qoo,ooo, of which about one-sixth was colored, for the most part slaves. It was scattered as a fringe along the Atlantic seaboard from the south of Georgia to the north of Maine; in no latitude did it extend into the interior as far as 500 miles, — Albany was a frontier town and Pitts- burgh a pioneer settlement. The population was still largely rural; there were but six cities of 7500 or more inhabitants, and the largest of these, New York, had only 33,000 people. Work and industry were the rule of life throughout the country. Agriculture busied nine families out of ten; land was cheap and bought on easy credit, for there were unlimited unsettled tracts stretching out to the West, partly in State lands, partly in the national domain. The value of property employed in agriculture was far greater than that devoted to manufact- ures or commerce. Excepting the slave plantations of the South, the farm-holdings were small, and the cultivation of each was carried on by members of the family with little hired labor. This developed throughout the North a general equality of political and social interests, if not of economic welfare. Little change had come about in agricultural products since the colonial period. In the South, particularly in Georgia and the Carolinas, rice of a superior quality was raised in large quantities and formed an important export ; the same § 3-}] Economic Conditions in 1789, jj States also produced indigo for foreign shipment as well as for domestic use. Tobacco was a staple product throughout the South from the borders of Pennsylvania, and contributed a generous share of the exports. The wheat country extended from Virginia to the western end of New England, and Amer- ican flour had an established reputation in the West Indies. Hemp and flax were raised in large quantities and formed the basis of important manufactures. Sheep for their wool, cattle, and dairy products also contributed to the prosperity of the farmer. The export of salt provisions was increasing. One of the most important economic resources was still the forests ; the naval supplies, especially the tar, pitch, and tur- pentine of North Carolina, showed no exhaustion j and lumber and timber products were shipped from almost all the States. Thfe clearing of the forests also yielded a by-product of pot and pearl ashes, the sale of which frequently tided the pioneer over the earlier months of privation. Although agriculture was everywhere the principal occupa- tion, the rapid expansion of settlement caused an increasing demand for mechanics to build the houses, barns, and work- shops ; and progress was making in some lines of manufactures. The growth of manufactures was especially marked after the establishment of peace; it is estimated that in 1787 the im- portation of manufactures into Massachusetts was only one-half what it was twenty years before. As soon as the restrictions of the colonial system were removed, the genius of the American people was displayed in every department of mechanical activ- ity then known, — witness the concise description given by Hamilton in his memorable Report on Manufactures in 1791, as well as the equally authoritative papers of Tench Coxe, in which the capacities of the new republic are defended from the aspersions of English critics, who looked for an easy indus- trial subjugation, even if political supremacy were lost. Hamilton's investigations showed that there were seventeen distinct branches of manufactures which were carried on as reg- ular trades and which had attained a considerable degree of yS Establishment of National System. [§ 34 maturity. Naturally these industries were closely related to raw materials which the country then afforded. As examples may be mentioned the following ; manufactures of leather, trunks, gloves, parchment, and glue ; tanneries were numerous, and foreign competition was hardly to be feared. From iron came bar and sheet iron, rods and nails, stoves, household utensils, and implements of husbandry, some edged tools and hollow ware. There was an abundant supply of charcoal, and iron ore of almost every quality was abundant ; one-half of the steel consumed in the United States was home-made. Of copper there were manufactures of wire, utensils for distillers, sugar refiners, and brewers, and articles for household use. Timber was the raw material of ships, an industry which had been carried to a high point of perfection ; there were also manufactures of cabinet and coopers' wares. From grain came flour, and also the important products of ardent spirits and malt liquors ; the rum distilleries of Massachusetts were dependent for their raw material upon the molasses of the West Indies, but in the Middle States stills were com- mon for the distillation of the home grains and fruits ; the largest part of the malt liquors consumed was the product of domestic breweries. From flax and hemp were produced cables, sail-cloth, cordage, and twine, and though the manufact- ures were not large, there was a promising beginning. Man- ufactures of paper were well advanced, and entirely " adequate to national supply." Different manufactories of glass were on foot, and among the extensive and prosperous domestic manufactures were those of refined sugars and chocolates. In addition there were manufactures of bricks and pottery, hats, oils of animals and seeds, tin-ware, carriages, snuff, starch, painters' colors, and gunpowder. The variety of these manu- factures was no more striking than the resourcefulness in ! household manufacture ; industry as a whole was in the handi- craft stage ; cloths of wool, cotton, and flax were thus produced in the greatest variety ; and in some districts from two-thirds to four-fifths of all the clothing of the inhabitants was made in § 34j Economic Conditions in 1789. 79 the home. Woollen manufactures were only beginning to take a place as a factory industry, while the establishment of cotton mills was not much more than a prophecy. The means of internal communication were undeveloped. The Hudson River was navigable 180 miles from the ocean; the Delaware i6oj and the Potomac 300 miles above the falls near Georgetown. A few short and narrow canals had been constructed. Roads were everywhere poor and transportation was slow. In 1790 there were but 75 post-offices; mails were infrequent, as, for example, but three per week between New York and Boston, requiring in the best of weather five days on the road. These impediments to travel and intercourse con- stituted an important element of friction which needs to be thoroughly appreciated as a partial explanation of the diffi- culty of imposing internal taxes which would be acceptable to / the whole country. The foreign trade can be described more definitely. The I Americans had long enjoyed an economic advantage in the building of ships, and the enterprise of those engaged in the fisheries had developed a skilful and daring race of sailors. The country exported its surplus products of agriculture and forestry, and with the proceeds bought freely of luxuries and manufactures which were not available at home. The value of the exports at this time was about ^20,000,000, and that of the imports probably about the same. Trade returns are, however, too incomplete to present a satisfactory analysis of foreign commerce, particularly of imports. As in the colonial period, exports to the West Indies provided funds with which to pay for imports from Europe. A general survey of economic conditions must also take into account the growth of sectional interests. Slavery in the South was developing an economy of its own ; New York and the New England cities were strongly inclined to commercial undertak- ings ; Pennsylvania was awakening to the possibility of manu- factures. These several interests were to furnish storm-centres in the debates and govern the discussion of economic questions. 8o Establishment of National System. [§ 35 35. Tariff Measures. Before the new federal government was fairly organized it had to settle three fundamentally important financial questions : a revenue must be secured ; machinery for the administration of the finances must be established ; and provision must be made for the debt already accrued. Of these problems the most immediate was the provision for a revenue, and on April 8, 1789, even before the inauguration of the president or the establishment of a treasury department, Madison laid the sub- ject before the House of Representatives in the form of a proposition similar in most respects to the impost measure of 1783- By common expectation taxation was to be first applied to foreign trade ; the country was by its political training averse to internal taxation ; local taxes fell largely on property ; export taxes were prohibited ; and direct taxes could not be laid until an enumeration of the population had been finished. The situation admitted of no delay ; the spring importations would shortly reach port; and therefore Madison proposed "such articles of requisition only as are likely to occasion the least difficulty." The articles upon which specific duties were to be laid were eight in number : rum and spirituous liquors, molasses, wines, tea, pepper, sugar, cocoa, and coffee. The advantage which might have come from taxing the spring im- portations was, however, soon lost, through differences of opinion over details of the impost ; theii as e\er afterwards it was difficult to reconcile taxation to the conflicting economic interests of different sections of the country. ' Hopes were early expressed that the measure might be adequate to the situation of the country in its aid to agricult- ure, manufactures, and commerce ; in other words, that taxation should have other than fiscal objects. It was urged that legis- lation should take into account changes of conditions since 1783, and special consideration was asked for certain indus- tries. The result of divided counsels was a debate of seven §35] Tariff Measures. 8i weeks, devoted chiefly to the rates to be imposed upon mo- lasses, distilled spirits, iron and steel, nails, candles, hemp, and cotton. The North advocated a high duty on rum, a prosperous manufacture which ought to be protected against Jamaica distilleries; while it objected to a high duty upon molasses, which was largely consumed as an article of food in New England and was also the raw material for the famous rum of that section. On the other hand. New England op- posed high duties on hemp, because it would increase the cost of cordage, which was an essential material in shipbuilding, while those interested in Western lands wished to develop the growth of hemp. New England representatives were willing to encourage the manufacture of nails by a protective duty, and Pennsylvania championed the special needs of steel ; but a Southern representative feared that agriculture would be depressed by high prices of farming tools. The interior and agricultural sections of the South vigorously opposed an impost on salt, as an unequal tax which, like an uniform poll tax, would discriminate against the poor, and would be particularly bur- densome to the interior settlements with cattle needing a large supply of salt. In general the South strongly protested against the immense increase in rates proposed in protective amendments, and animadverted on the sectional character of a tariff which was designed to assist the producing manufacturers rather than the purchasing agriculturists. In the Senate there j was a tendency to reduce the rates voted by the House ; partly because the high duties would decrease the revenue ; partly to prevent an incitement to smuggling. The rates of duties as finally fixed by the act of July 4, 1789, provided for specific duties on over thirty kinds of commodities; for ad valorem rates varying from 7J^ to 15 per cent, on a few specified articles, and for a 5 per cent, duty on all articles not enumerated. For example, iron was to pay 71^ per cent. ; glass ware, China ware, and stone ware 10 per cent. Among the specific rates the most important were as follows: cocoa i ct. per lb.; coffee 2j4 cts. per lb.; 6 82 Establishment of National System. [§35 molasses 21^ cts. per gallon; Jamaica spirits 10 cts. per gal.; all other spirits 8 cts. per gal. ; brown sugar i ct. per lb. ; re- fined sugar 3 cts. per lb. ; tea from 6 to 20 cts. per lb. ; salt 6 cts. per bu. ; Madeira wine 18 cts. per gal. ; other wine 10 cts. per gal. ; tarred cordage 75 cts. per cwt. ; untarred 90 cts. per cwt.; hemp 60 cts. per cwt.; nails i ct. per lb.; steel 56 cts. per cwt. ; twine $2 per cwt. There were also specific du- ties on ale, beer, porter, cider, boots and shoes, candles, play- ing cards, woollen and cotton cards, cheese, coal, fish, indigo, iron chains and cables, malt, soap, manufactured tobacco and snuff. It is estimated that the average rate of duty under this tariff, reduced to an ad valorem basis, was 8)^ per cent. In the debate there was httle fiscal generalization ; Madison indeed was the only man to treat the- subject broadly, and he preferred to confine the bill to the object of revenue. He held that if industry, and labor be left to take their own course they will generally be directed to those objects which are the most productive. However, he stated some exceptions to the general rule of freedom : established manufactures ought not to be ruined ; prohibition for sumptuary reasons might be allowed ; and protective duties might be justified for purposes of embargo in time of war and for purposes of defence. The first tariff act was limited to seven years ; plainly Congress was not yet prepared to adopt a high tariff as a permanent system. Small changes and additions were enacted from time to time, but they were limited in duration ; thus the tariff acts of 1790 and ^791 were to be continued until the special purposes for which they were enacted should be subserved ; and the act of 1 792 imposing a temporary addition of 2j^ on the 5 per cent, ad valorem list was limited to two years, although afterwards prolonged until 1797. Until 1 82 1 no separation was made in the statistics of the value of imports between the amounts of dutiable and free goods, so that it is impossible to state the average rate of duty on the commodities which paid an import duty. The §35] Tariff Measures. 83 per cent, paid on the aggregate value of goods imported in the years 1791-1801 was as follows : — Year Per cent Year Per cent >79i 8>^ 1797 lO 1792 II 1798 10!^ 1793 13M 1799 8« '794 14 1 800 iH 1795 9 1 801 9 1795 iH Besides the protective features the act of 1789 included important administrative details ; such as the use of both specific -and ad valorem duties, the granting of drawbacks on goods imported within a year, and the principle of discrimina- tion against the shipping of foreign countries as a whole and against particular countries. Special regard was shown to the trade with the East ; the specific duties placed upon teas were doubled if the importation was made in foreign vessels ; and on all other goods imported from China or India in foreign ships there was the higher ad valorem rate of 12 per cent. This principle of discrimination, though recognized in subsequent tariffs, was gradually abandoned, and any advan- tage thus derived was later sacrificed by the grant of recip- rocal commercial privileges in treaties with foreign powers. On goods imported in vessels built or owned entirely in the United States there was a discount of 10 per cent, on the duties. The original tariff measure included tonnage duties and in determining these there arose the question of foreign dis- crimination against American shipping, and of compelling proper treatment by levying specific rates upon vessels of those foreign nations which did not have trade relations with the United States. These questions were separated and dis- posed of in the tonnage act of July 20, 1789, which imposed a tax of 6 cents per ton upon American built and owned vessels, 30 cents upon vessels American built and foreign 84 Establishment of National System. [§ 36 owned, and 50 cents upon foreign built and foreign owned shipping; in spite of great opposition this discrimination applied also to France. Closely following the tariff measure was an act for regulating the collection of duties. In many of its details it followed the laws of New York, the State which had the largest amount of foreign trade during the period of the Confederacy. The country was divided into collection districts; ports of entry and delivery were enumerated ; and provision was made for the appointment of collectors, naval officers, surveyors, weighers, measurers, gaugers, and inspectors. The administration of the customs during the early years was simple, and in place of a rigid system of forms governing every detail much was left to the discretion of the collectors. A few years later, in 1799, with experience as a guide, more elaborate legislation was enacted, carefully prescribing forms, bonds, schedules, and oaths. 36. Principle of Protection. In the later fierce and partisan discussions over the first tariff the question has often arisen how far it was intended to operate in ways other than for revenue. The preamble un- doubtedly expresses the principle of protection in the words, "Whereas it is necessary for the support of the government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures that duties be laid," nevertheless there has been much dispute as to whether this first tariff was really protective in design. The protectionist character of the first tariff is supported by BoUes, and more recently by Prof. William Hill, in a careful monograph on the " Early Stages of the United States Tariff Policy," who argues that " the encouragement and protection of manufactures was at least as important as any other motive in securing the passage of the act." The considerations which he advances appear to be conclusive. The legislation of the several States had been thoroughly protective ; England by her measures for securing the monopoly of the carrying §37] Treasury Department. 85 trade had so aroused and angered the Americans that the free trade ideas of the early Revolution had practically vanished ; and the statements of the motives of those who took part in the congressional debates are explicit. Not only was Madi- son's revenue measure deliberately set aside for a system of protective duties, but individual members voiced the pro- tective policy boldly, and local interests as in subsequent tariffs played a striking part in the struggle to adjust rates. 37. Establishment of the Treasury Department. As soon as the revenue bill had been sent over to the Senate, the House immediately began to consider the estab- lishment of a treasury department. There was still a lingering feeling that it was unsafe to intrust large financial responsi- bilities to one person, and the House long discussed whether the department should be under a commission or a single head. Gerry discoursed at length on the iniquity of the hurnan race; inquired where a man could be found honest and capable enough to fill the office ; and reminded his hearers of the ugly rumors that preceded Morris's retirement and led to the later abolition of the office of superintendent of finance. The inefficiency, however, of the treasury boards preceding the administration of Morris was as easily remem- bered, and the decision was fortunately in favor of a single secretary. There was more discussion over the powers to be granted to the secretary. The bill as originally introduced authorized the secretary " to devise and report plans for the improvement and management of the revenue." In this phraseology the measure followed the words used by the Continental Congress in 1 781 when it established the superintendency of finance, and in 1784 when it created the revenue board. Neverthe- less, it was feared that the duty of reporting his plans would give the secretary undue influence in Congress, and that it would conflict with the constitutional provision that revenue bills should originate in the House of Representatives. Under 86 Establishment of National System. [§37 the Constitution the House of Representatives was to exer- cise less power over the secretary of the treasury than Congress formerly had over the superintendent of finance and the revenue board, since the heads of departments must be appointed by the president, and were irremovable by Con- gress ; it was therefore urged that caution should be exer- cised in putting powers into the hands of an irresponsible secretary. The final enactment provided that there shall be a depart- ment of the treasury in which there shall be a secretary of the treasury, who shall be the head of the department. This sec- retary was to digest and prepare plans — the word " prepare " being a substitute for "report" — for the improvement and management of the revenue and the support of the public credit, to report budget estimates, to superintend the collec- tion of revenue, to decide on forms of keeping accounts, and to execute the laws relating to the sale of public lands. This legislation further places the treasury department in a specially intimate relationship to Congress, independent of the presi- dent, by prescribing that a call for financial information be made directly to the treasury department without going through the president. The position of the secretary of the treasury was thus made anomalous ; and Gallatin afterwards questioned whether this remarkable distinction, which is found to pervade the laws passed during the early years of Washing- ton's administration, determining the power of the treasury department, was not introduced in order to give to Hamilton a department independent of every e.xecutive control. Ham- ilton indeed claimed the right of making reports and propos- ing reforms without being called upon for the same by Con- gress, but in practice his famous reports were preceded by specific calls. The bill of 1 789 also provided that the report of the secre- tary could be made to each branch of the legislature either in person or in writing ns might be required. When the secre- tary of the treasury in 1 790 announced his readiness to re- § 38] Treasury Department. 87 port on a plan for funding the public debt, the House of Representatives decided that the report should be made in writing, chiefly on the ground that only in that way could it be intelligently considered. Fear was again expressed of the personal influence of Hamilton. Another important point is the confirmation in the statute of the intention of the Constitution to place the responsibility of the budget upon Congress instead of upon the executive as in European countries. The president or the secretary of the treasury may be called upon to assist, but the responsibility rests with Congress. To carry out this practice, in 1795 when the Republicans were in a majority in the House of Representatives under the leadership of Gallatin, it was further ordered that a standing committee on finance should be established. To this germ of the later ways and means committee were referred all reports from the treasury depart- ment, and all propositions relating to revenue ; and to it was given the duty of reporting on the state of the public debt, revenue, and expenditures. 38. Internal Organization of the Treasury Department. Besides providing for a secretary, the law authorized the appointment of a comptroller, auditor, treasurer, register, and an assistant to the secretary to be appointed by the secretary. All save the last are accounting officers and have no other functions. The number of comptrollers and auditors has been increased with the growth of the treasury business, but the titles, duties, and relations of the above officers have practi- cally remained unchanged. In brief, the comptrollers are authorized to look into the propriety of the accounts, and also to countersign warrants drawn by the secretary of the treasury ; the auditors are to see that the accounts are presented in proper clerical form ; the register sees to it that the vouchers of bills are preserved ; and the treasurer that no money leaves the safe-keeping of the government save on proper warrants. The system thus devised abounds in checks and safeguards : 88 Establishment of National System. [§38 no public money can be paid out except under an appropria- tion made by Congress; the executive, represented by the auditor and the comptroller, scrutinizes and endorses the ac- count ; a warrant must be signed by the secretary of the treas- ury, countersigned by the comptroller, and recorded by the register, and only then can the payment be made by the treasurer. In order to strengthen the checks, Madison pro- posed that the comptroller should have a tenure independent of the executive branch, a suggestion which has never been adopted. Although the system is clumsy, it is almost a per- fect protection against payments from the treasury not author- ized by law, or to persons other than the proper recipients. Upon the comptroller rests the responsibility of construing the text of statutes, and of withholding payments on the ground that there is no constitutional or statutory provision for them. The president appointed Alexander Hamilton secretary of the treasury, September ii, 1789. Though only about thirty- five years of age, Hamilton's ability and experience fully justified the selection. While confidential secretary to Wash- ington in the early years of the Revolution, he devoted consid- erable attention to the subjects of finance and trade; in 1781, he communicated to Robert Morris an elaborate plan for a bank, and in 1782 he was receiver of continental taxes in New York. To these special interests he added an experi- ence as congressional delegate, lawyer, and pamphleteer. He had been especially emphatic and insistent in demanding national regulation of commerce for the collection of revenue. Although a revenue bill had been passed before his appoint- ment, Hamilton was well in touch with the needs of the country and immediately displayed a most vigorous initiative. As secretary he prepared many reports, among which the five most important and comprehensive, both in grasp of principle and in practical results, are : Report on Public Credit, January 9, 1790; Report on a National Bank, December 5, 1790; Report on the Establishment of a Mint, May i, 1791 ; Report on Manufactures, December 5, 1791; Second Report on §39] Funding of the Debt. 89 Public Credit, January 21, 1795. So great was his industry and power of statement that he was able to submit the first four of these documents within a period of less than two years. 39. Funding of the Debt. These great reports show plainly that Hamilton from the first had in his mind a clearly conceived financial system, including additional revenue, the adjustment of the national! debt, extinction of the State debts, a national coinage, and al national bank. The first question which he faced and settled was that of the national debt. The federal debt was by no means light ; in addition to the loans contracted abroad, which have been discussed in the previous chapters, there was a mass of unfilled obligations to creditors at home. Hamilton promptly secured a request from the House to prepare a statement in regard to the debt and a plan for its settlement ; and he had it ready January 9, 1 790, as his Report on Public Credit. The foreign debt, which had been for the most part created by loans in definite amounts with precise conditions attached, could be stated with a fair degree of accuracy ; and it does not appear that there were any serious differences of opinion in regard to the necessity of making prompt provision for its payment. " It is agreed," wrote Hamilton, " on all hands that that part of the debt which has been contracted abroad and is denominated the foreign debt ought to be provided for according to the precise terms of the contracts relating to it. The discussions which can arise, therefore, will have reference essentially to the domestic part of it, or to that which has been contracted for at home. It is to be regretted that there is not the same unanimity of sentiment on this part as on the other." This foreign debt, as calcu- lated by Hamilton, amounted, including both principal and arrears of interest, to ^11,710,000.- Not only had the United States been dehnquent in the payment of interest for periods varying from four to six years, but it had failed to pay the instalments of principal which began to be due in 1787. go Establishment of National' System. [§ 39 The amount of the domestic debt was much more difficult to determine, as it consisted of a variety of credit obligations issued by different authorities at different times, bearing dif- ferent rates of interest, with different guarantees of redemption. This was estimated by Hamilton as principal ;? 2 7,383,000, accrued interest ^13,030,000, and to this might be added ^2,000,000 for unliquidated debt. The larger part of the domestic indebtedness was incurred during the Revolutionary War, with subsequent arrearages of interest; between 1783 and 1790 the principal had been, slightly reduced by the sale of public lands, but the unpaid interest had gone on piling up, so that a third part of the domestic indebtedness in 1 790 was represented by arrears of interest. A portion of the credit obligations, although in the form of ordinary loans, had passed current in the community as a monetary medium, and in company with all the other out- standing promises of the government had depreciated in value. The important question then arose : On what basis should these obligations be paid? Should present holders of national certificates of indebtedness be paid the face value of the certificates which they might hold ; or should they be paid face value plus the accrued interest ; or should they be paid not the face value, but what they had paid for them. The present holder of a certificate might have taken for a personal debt of only ^50 a bill dated 1783 for the face value of ;?ioo. Should the government pay Si 00, or $130, or $50 to him and S50 to the original holder? This question was exhaustively discussed by Hamilton in the " First Report on Public Credit," and the conclusion reached that present holders should be paid the full amount. Hamilton rejected the doctrine of discrimination ; in the first place, because it was a breach of contract, and, secondly, a violation of the rights of a fair purchaser. The contract was that the people were to pay the sum expressed in the security to the first holder or his assignee ; every buyer, therefore, stood exactly in the place of the holder, and having acquired that right by § 39] Funding of the Debt. 9 1 fair purchase his claim could not be disputed without manifest injustice. Those who parted with their securities from neces- sity might be hardly treated ; but whatever claim of redress they might have should be brought to the government for settlement on independent grounds of equity. The subject was taken up in the House of Representatives January 28, 1790, and resulted in a bitter debate. Popular feeling was strong in favor of discrimination, inasmuch as it was known that speculators had seized the opportunity of making profit by trading upon the ignorance of the people. Upon the publication of Hamilton's report, certificates went up to fifty cents on the dollar. A member of the House publicly declared that " Since this report has been read in this House, a spirit of havoc, speculation, and ruin has arisen, and been cherished by people who had access to the informa- tion the report contained, that would have made a Hastings blush to have been connected with, though long inured to preying on the vitals of his fellow-men. Three vessels, sir, have sailed within a fortnight from this port freighted with speculation ; they are intended to purchase up the State and other securities in the hands of the uninformed though honest citizens of North Carolina, South Carolina, and Georgia. My soul rises indignant at the avaricious and immoral turpitude which so vile a conduct displays." William Maclay in his Diary, January 15, 1790, notes, "This day the budget, as it is called, was opened in the House of Representatives. An extraordi- nary rise of certificates has been remarked for some time past. This could not be accounted for, neither in Philadelphia or elsewhere. But the report from the treasury explained all." He remarks that he cannot call at a single house but traces of speculation in certificates appear, and one of his associates, Hawkins of North Carolina, told him that on his way to the cap- ital he passed two expresses with very large sums of money on their way to North Carolina for purposes of speculation in certificates. Madison was ready with a compromise, and pro- posed that the present holders be offered the highest price in 92 Establishment of National System. [§40 the market, the residue to go to the original lenders, — he thought it possible to identify the present holders through the presentation of certificates, and the original holders by the office records, — but even he could not devise a remedy for intermediate holders. In spite of opposition Hamilton's plan prevailed ; all holders of certificates were to receive the face value of the government's promise with interest, the only ex- ception being the still outstanding continental bills of credit, which were to be cancelled at only lOO for i in specie. 40. Assumption of State Debts. A second and more burning question connected with the funding scheme wa~s the assumption of the debts of the several thirteen States. The States when they entered the Union under the Constitution of i 789 brought with them a burden of indebtedness, largely the heritage of the common struggle for independence ; and the question arose whether the general government should remove these burdens from the shoulders of the separate States, or the States should be left to pay their respective debts. Hamilton's argument in favor of an assump- tion was exhaustive : it would contribute to a more orderly, stable, and satisfactory arrangement of the national finances ; the payment of public debt could be more conveniently and effectively made by one general plan than by different plans originating with different authorities ; there was danger that the different States in order to secure their own local revenue would adopt different policies of taxation, which would intro- duce confusion and oppress industry ; and as the States had been deprived of an important financial instrument by giving up import duties, the situation of the State creditors would be worse than that of the creditors of the Union unless the federal government came to the rescue. Behind these argu- ments lay Hamilton's policy of consolidating the interests of all the States in order to create political unity ; and for this purpose a debt might indeed be regarded as a blessing. The Southern States strenuously opposed assumption be- §4°] Assumption of State Debts. 93 cause their debts relative to population were much less than those of the North. They thought it wrong that they who had gone through the struggles of the Revolution and had settled their current financial burdens, whether by taxation or by repudiation with its attendant sacrifice to their own citizens, should be obliged to help pay the debts of the Northerners, who had relied more upon borrowing than upon taxation, and were now desirous of saddling their debts upon the South. Here again Hamilton was successful in carrying through his] plan of assumption, but only through a bargain by which the \ South was granted the location of the federal capital in the territory set off from Virginia and Maryland. ^ The amount of stock which the States under the law could subscribe for and which was finally assumed is stated in the following table : — ^•' State Permitted by law Actually as- sumed New Hampshire Massachusetts Rhode Island Connecticut New York New Jersey Pennsylvania Delaware Maryland Virginia Norih Carolina South Carolina Georgia $300,000 4,000,000 200,000 i,6oo,coo 1,200,000 800,000 2,200,000 200,000 800,000 3,500,000 2,400,000 4,000,000 300,000 $282,596 200,000 1 ,600,000 1)183,717 695.203 777,983 59.162 517.491 2,934,416 1,793,804 3,999.651 246,030 Total $21,500,000 $18,271,786 No subscriptions of certificates were received except those which had been issued for services or supplies during the war, and, as the foregoing table indicates, the allowance made by the act for most of the States was ample. Hamilton has been vigorously criticised for thus adding to the national debt ; it is plausibly argued that, if assumption were a matter of justice, the federal government should have 94 Establishment of National System. [§ 41 taken into account the payments already made by the States in the reduction of their debts, or even have gone back and reckoned the requisitions honored or ignored by the several commonwealths. It is also argued that, if the funding had been delayed until an adjustment of accounts of the debtor and creditor States had been made, the obligations for which the United States could have been held responsible would have been reduced by ^8,000,000. Hamilton's justification rested upon political expediency rather than upon a desire to make an exact financial balancing of claims. Not only was a prompt settlement of questions of dispute of greater immedi- ate value than the careful adjustment of the several burdens, but Hamilton wished to gain the support of the capitalistic class, including the holders of State funds. 41. Character of the Ne-w Debt. The funding act of August 4, 1790, under which the old in- debtedness was provided for, authorized three different loans : 1. For the payment of the foreign debt the president was authorized to borrow a sum not exceeding $12,000,000, but nothing in the statute prevented an early redemption. 2. A loan to the full amount of the domestic debt was authorized, subscriptions to be received in any of the certi- ficates of indebtedness which the government had previously issued during the Revolutionary War and the Confederation. No less than seven classes of obligations were defined by the statutes. These were as follows : — (i) Those issued by the register of the treasury. (2) Tliose issued by the commissioners of loans according to the act of Jan. 2, 1779, in exchange for bills of credit emitted May 20, 1777, and April II, 1778. (3) Those issued by commissioners to adjust the accounts of quarter- masters and other supply officers. (4) Those issued by commissioners to adjust accounts in different States. (5) Those issued by the paymaster-general. (6) Those issued for the payment of interest on loans, or indents, (7) Bills of credit, at the rate of 100 to i. §4i] Character of the New Debt. 95 Subscribers to the principal of the new debt received two certificates, one for an amount equal to two-thirds of the subscription to bear 6 per cent interest ; the other for the remaining third, beginning to bear interest after 1800. As the old indebtedness bore a uniform rate of 6 per cent, interest, this legislation practically meant a reduction, until 1 801, to 4 per cent. Holders of old obligations were not obhged to convert ; but, as it was probable that the market rate of interest would fall and the public credit would rise, it was expected that the government would speedily be in a position to extinguish the old debt, which was redeemable at pleasure, and thereby to terminate the interest. Conversion therefore appealed to the reason and interest of creditors rather than to their necessities. To clear off the arrears of interest, a 3 per cent, loan was authorized dating from 1791. 3. A third loan of ^21,500,000 to take up the State in- debtedness was proposed, subscriptions to be receivable in certificates previously issued by the several States for war purposes up to specified amounts. Here again there was a complicated provision for determining the rates of interest : each subscriber received three certificates, one for a sum equal to four-ninths of the subscribed sum with interest at 6 per cent. ; another for two-ninths of the subscribed sum, to bear interest at 6 per cent, after 1 800, and the third certifi- cate for the remaining three-ninths, bearing an interest of 3 per cent. In the assumption of the debts incurred by the States it was necessary to adjust the accounts between the States and Congress which had accumulated during the Revolu- tionary period. Commissioners were appointed to determine how much money the States had advanced to the government and how much the government had advanced to the States, so far as such advances had accrued "for the general or particular defense during the war." The States which had balances placed to their credit were entitled to have them funded upon the same terms with the other part of the domestic debt. 96 Establishment of National System. [§ 41 The debt thus funded became at once stable and suitable for investment. The previous domestic debt was redeemable at pleasure ; but the government agreed to limit the amount of redemption of the new debt in any one year to a specified amount. The government's creditors were so far forth better oif; they were no longer subject to "the prevailing passions, prejudices, or intrigues of a majority of but a single branch of the government." > Quarterly, instead of annual, payments of interest were authorized, at thirteen different places instead of at one. The national revenues were pledged to the pay- ment of interest on domestic stock, subject only to the re- quirements necessary for fulfilling the conditions of the foreign loan, which was always regarded as a prior claim ; and the proceeds of the sales of land in the Western territory were also pledged for the discharge of the debt. As a piece of fiscal workmanship the funding act was too complicated, since it created a variety of new stocks or bonds bearing varying rates of interest with varying terms of redemp- tion. Hence it was difficult to picture clearly the fiscal con- ditions of the government year by year; and charges of treasury juggling with debt statements were common. A more excusable error in the plan as carried out lay in giving too long a life to the new obligations. A few years later in Jefferson's administration it was clear how much more advan- tageous to the treasury would have been the right to pay off at least a portion of the indebtedness at an earlier date. On the whole the funding was successfully carried out, for there was a prompt acceptance of the terms, and within a few years the old confused obligations almost disappeared, as may be seen from the subscriptions to the new stock of the United States : '791 $31,797,481 1792 1793 26,160,777 1794 5,096,678 ' Kearny, p. iS. CHAPTER V. NEW FINANCIAL NEEDS, 1790-1801. 42. References. BlKLlOGRAPHlES: Bogart and Rawles, 19-23; Channing and Hart, 332-333. 340. Bank : (i) Sources : Hamilton's Report in Americaji State Papers, Finance, 1, 67-76 ; also Finance Reports, I, 54-77 ; also Annals of Congress, 1789-1791, II, 2082-2112; 1940 (debates); also W. MacDonald, Select Documents, 67-98 (including opinions of Jefferson and Hamilton) ; also Clarke and Hall, Legislative History of the Bank, 15-35, 37-87 (debates), 86-H2 (cabinet opinions); Benton's Abridgment, 1, 272 (debates); Stal- utes, 1, 191 ; or Dunbar, 22. (ii) SPECIAL : A. Seybert, Statistical Annals (1818) 518-521 ; L. C. Root, in Sound Currency, IV, No. 7 (April, 1897) ; BoUes, II, 127-141; W. G. Sumner, History of Banking in the U. S., I, 22-57; Accounts of the First Bank, in Quar. Jour. Econ., VI, 471-474; C. F. Dunbar, in Quar. Jour. Econ., Ill, 54-58. (iii) General : C. A. Conant, History of Modern Banking, 288-294; H. White, 258-262; J. T. Morse, Life of Hamilton, I, 333-347 ; J. S. Landon, Constitutional History of the U. S., 112-115; R. Hildreth, IV, 256-266; W. G. Sumner, Hamil- ton, 162-170. Coinage: (i) Sources: Hamilton's Report on the Mint, in American State Papers, Finance, I, 97-107; also Finance Reports, I, 133-156; also Annals of Congress, 1789-1791, II, 2112 ; also Old South Leaflets, No. 74; Statutes, I, 246; or Dunbar,227; or Report of Monetary Commission (1898), 463; Report of Inte7-national Monetary Conference (1878), 425-443 (plans of Morris and Jefferson), (ii) Special : D. K. Watson, History of Ameri- ca}! Coinage, 30-70; H. R. Linderman, Money,. 15-27; J. L. Laughlin, Bimetallism in the U. S., 13-24; Bolles, II, 156-174. (iii) General: McMaster, I, 190-199 (plans of Morris and Jefferson) ; J. T. Morse, Life of Hamilton, I, 351-356; H. C. Lodge, Hamilton, 106-108, 130. Excise : (i) Sources : American State Papers, Finance, I, 64-67, 151- 158, 348-350; Annals of Congress, 1789-1791, II, pp. 1890-1910 et seq. (de- bates) ; Annals, 1796-1797, 2791-2867 (report on opposition to excise); J. B. Thayer, Cases on Constitutional Law, II, 1315 (carriage case), or i Curtis' Decisions, 150; A.Gallatin, fFnV/«fj- (Adams ed.), Ill, 87-96. (ii) Special: A. Seybert, Statistical Annals (1818), 455-478; H. C. Adams, Taxation in the U.S., 1789-1816 (J. H. U. Studies), II, 45-60; F. C. Howe, Taxation under Internal Revenue System, 12-38; Bolles, II, 103- 126; C. F. Dunbar, Direct Taxes of 1861, in Quar. Jour, of Econ., Ill, 7 97 98 Financial Needs, 1 79°-i8o I. [§43 436. (iii) General: Stevens, Life of Gallatin, 50-56, 69-99 (Whiskey Rebellion) ; H. C. Lodge, Life of Hamilton, 180-184; J. T. Morse, Alex- ander Hamilton, I, 348-351 ; II, 147-171 ; J- P- Gordy, Political Parties, I, 201-214; R- Hlldreth, IV, 253-255 ; McMaster, II, 25-81, 41-43, 189-203. Debt and Sinking Yv'hV): Statutes, I, 281-433; or Dunbar, 32-35 ; Bolles, II, 56-65; J. Elliot, Funding System, Annals of Congress, 1795- 1796, 1499 (debate over amount of indebtedness) ; E. A. Ross, Sinking Funds, in Pub. Amer. Econ. Assn., VII ; J. W. Kearny, Sketch of American Finances, 45-60. Expenditures: American State Papers, Finance, I, 661 (statistics), 755 (report on accounts) ; Writings of Gallatin (Adams ed.) Ill, 98-121 ; Bolles, II, 182-202 (foot-notes for references). Hamilton's Policy: Annals of Congress, 1791-1793, p. 899 etseq. ; or Benton's Abridgment, I, 418-440 (debate in 1793 on official conduct); Annals, 1799-1801, p. 1273 (report of committee, May 18, 1800); Bolles, II, 175-181 ; C. F. Dunbar, Quar. Jour. Econ., Ill, 32-59; E. C. Lunt, Hamilton as a Political Economist, m Journal of Political Ecottomy, III, 289; J. T. Morse, Life of Hamilton, I, 370-425, II, 20-66; W. G. Sum- ner, Hamilton, 184-190. 43. First United States Bank. Besides the questions of urgency, such as the provision of a revenue, the establishment of an effective administration 'of finance, and the satisfaction of the government's creditors, there were other financial problems which early engaged the attention of Congress. In part these were inspired by Ham- ilton, who had definite convictions on the proper relation of government to finance, and in part they were due to new and unforeseen demands on the treasury. Hamilton was convinced that a national bank would be an important factor in the improvement of national credit. Little in the previous experience of the country ga\e encouragement to such a project. During the Revolutionary period several banking propositions had been discussed, and as a result in the decade 1 780-1 790 three institutions had been established, — the Bank of North America, originally chartered by Con- gress in 1 78 1 at the suggestion of Robert Morris; the Bank of New York, organized in 1 7S4 ; and the Massachusetts Bank. Hamilton had already shown his interest in the subject by co-operating in the founding of the Bank of New York, for § 43] First United States Bank. 99 which he drafted the articles of association. On December 13, 1790, within a few months of his induction into office, he presented an elaborate document in favor of a federal bank. After rapidly reviewing some precedents in the history of other countries he sums up the advantages which would be derived from such an institution : First, there would be an increase of actual capital by an enlargement of notes in circu- lation, by providing greater use of individual notes of hand, and by a gathering up of individual deposits; second, the bank would make it easier for the government to obtain loans ; and, third, it would make it easier for the individual to pay his taxes to the government, since he would have a greater opportunity to borrow, and there would be an increase and quickening of the circulation of money. Hamilton enumerated and discussed the possible economic disadvantages, such as increase of usury ; interference with other kinds of lending ; temptation to overtrading ; disturbance of the natural course of trade ; fictitious credit to bankrupts ; and banishment of gold and silver from the country. The report closed with an outline of a constitution of a bank. In the congressional debate which followed, the opposition dwelt less upon the commercial and fiscal merits and demerits of a bank than upon the charges that a bank would be a monopoly incon- sistent with a free republic. After the debate seemed about at an end, it was renewed with much vigor on the question of constitutionality. Madison recalled that the Constitutional Convention of 1787 had re- jected the insertion of a power to Congress to grant charters of incorporation, and roundly attacked the whole idea, assert- ing that " It appeared on the whole that the power exercised by the bill was condemned by the silence of the Constitution ; was condemned by the rule of interpretation arising out of the Constitution ; was condemned by its tendency to destroy the main characteristics of the Constitution ; was condemned by the expositions of the friends of the Constitution whilst de- pending before the people ; was condemned by the apparent loo Financial Needs, 1790-1801. [§43 intentions of the parties which ratified the Constitution ; was condemned by the explanatory amendments proposed by Congress themselves to the Constitution." The bill passed the House by a sectional vote of 39 to 20 ; in the negative there was only one vote north of Maryland, and in the affirmative but three south of that State. Washing- ton was in doubt as to approving the bill, and asked his cabinet advisers for written opinions on its constitutionality. Ran- dolph, the attorney-general, and Jefferson, secretary of state, submitted adverse opinions, which were then presented to Hamilton for examination. Hamilton's opinion is one of his ablest papers ; it not only solved the president's doubts, but it furnished an arsenal of argument to be drawn upon in the future for a generous interpretation of the Constitution. The charter provided for a capital stock of 1 10,000,000, of which one-fifth was to be subscribed by the government ; the remainder was open to public subscription, one-fourth to be paid in specie and three-fourths in government stock bearing 6 per cent, interest. The government subscription was to be borrowed from the bank, payable in ten annual instal- ments, or sooner if the government should think fit ; the note issues of the bank were limited by the provision that all debts should not exceed the deposits by more than Si 0,000,000, and they were receivable for all payments to the United States ; the establishment of branches was authorized according as the directors might deem proper; and periodical statements of the bank's condition might be called for by the secretary of the treasury. The charter was to run for twenty years, and in the mean time the government pledged itself to grant no other bank charter. Capital was secured without difficulty, and the central bank was opened at Philadelphia, December 12, 1 791, followed by the establishment of eight branches, at Boston, New York, Baltimore, Washington, Norfolk, Charles- ton, Savannah, and New Orleans. In a history of government finance the chief interest in the experience of the United Sta-tes Bank lies in the assistance §44] Mint and Coinage. loi which the bank rendered to the government treasury. In the first place the bank lent the ^2,000,000 contemplated in the charter, and speedily supplemented this aid by other loans made in anticipation of taxes. As revenue in these early years was uncertain, and expenditures increased out of pro- portion, the government had a valuable advantage ; but un- fortunately it proved difficult to discharge the obligation which had been so easily incurred, and by 1796 the debt to the bank had increased to ^6,200,000. The bank then became insistent upon payment because of its own needs, and the government sold a portion of its stock in 1 796-1 797 ; as finan- cial pressure still continued, by 1802 it parted with all its holdings. The sales showed a profit, yielding a premium of ^671,860. In addition the government during its ownership received dividends of ^1,101,720, or about 8^ per cent, annually. As compared with the payments made by the gov- ernment to the bank for its loan, the original investment netted a handsome profit. The second fiscal service which the bank rendered to the government was in caring for its funds. As the government depended for its revenue almost entirely upon customs duties, collected at ports extending along a seaboard of thousands of miles, it would have been difficult for the treasury depart- ment in the early years of its existence to have made the necessary transfers, and as yet there were but few local bank- ing institutions which could have been chosen for depositories. The bank and its branches, however, did not have the exclu- sive privilege of government deposits. In 181 1, even before rechartering was refused, at least eleven local banks were employed, of which eight were in the eastern section of the country ; and the private depositories had the custody of one- third of the public deposits. 44. Mint and Coiuage. During the Revolutionary period metallic money remained in the confusion of the colonial period. Various foreign coinq I02 Financial Needs, I 79°-i 8°^- C§ 44 circulated side by side, as the English guinea, crown, and shil- ling ; the French guinea, pistole, and crown ; the Spanish pis- tole ; and the Johannes, half-johannes, and moidore ; and unequal values were given in different parts of the Union to coins of the same intrinsic worth, thus affording opportunity for clipping and fraudulent change. Various units of account were employed in different sections of the country, which tended to obscure a clear understanding of the economic conditions of the several States. The Articles of Confedera- tion when they went into effect in i78r did not contribute much to remove the complications, for, though Congress had power to regulate the alloy and value of coins struck either by its authority or by that of the States, the right to coin money was still retained by the State. Several reports had been made on the subject of coinage. The first was by Robert Morris, January 15, 1782 ; he advised that a money unit affixed to both metals would not be stable or certain ; that the money unit should be attached to silver alone ; and that no coin should be struck to correspond to the money unit selected. The unit, by a system of elaborate cal- culations, he fixed at ^^^ of a dollar, assigning as a merit of this particular fraction the fact that all the currencies of the several States except one were reducible to it without a remainder ; and that consequently it could be adopted by any State without change in coin. To this Jefferson objected on the ground that the unit was altogether too small and would be inconvenient in commercial computations, and as a substitute he recommended a unit of the value of the Spanish milled dollar, with which the colonies had long been familiar ; and indeed it was the unit in which the public debt and the con- tinental currency were expressed. Jefferson also advised that the money unit be attached to both metals. Although resolu- tions and ordinances were passed by the Continental Congress in favor of a decimal system of coinage, no practical step beyond the coinage of a small amount of copper coins had been taken when the new government came into existence. §44] Mint and Coinage. -103 The country still relied upon foreign coins, as is well illustrated by the provision in the act of July 31, 1789, that duties were payable in the gold coins of England, France, Spain, and Portugal, or in other gold coins of equal fineness. The subject of coinage was exhaustively considered by Hamilton in a report submitted to Congress in May, 1791, in which he stood for a unit expressed in both gold and silver. While gold was to be preferred to silver for certain reasons, he held that it was not safe to abridge the quantity of circulating medium by annulling the use of silver. He recommended that the mint ratio between gold and silver be i to 15, — a propor- tion corresponding to the bullion values at that time, — and proposed that the monetary unit consist of 24^ grains of pure gold or 371 1^ grains of pure silver, the amount of silver cor- responding as nearly as could be determined with that of the Spanish dollar in actual circulation, "each answering to a dollar in the money of account." In accordance with this plan Hamilton recommended the coinage of ten dollar and one dollar gold pieces, one dollar and ten cent silver pieces, and one cent and one-half cent copper pieces. There is nothing whatever in Hamilton's report which countenances silver monometallism ; gold as well as silver was recognized as an actual standard of value at the time, and Hamilton's efforts were directed to determining a ratio between gold and silver which should bring uniformity out of disorder occasioned by the silver coinage then current. The Mint Act of April 2, 1792, substantially followed the suggestions of Hamilton, omitting, however, any provision for the coinage of a gold dollar. In view of the importance which has been given in later discussions of bimetallism to this ini- tial coinage legislation, the following paragraphs of the law are significant : " The money of account of the United States shall be ex- pressed in dollars or units, dimes or tenths, cents or hundredths." " There shall be from time to time struck and coined at the said mint coins of gold, silver, and copper, of the following I04 Financial Needs, 1790-1801. [§44 denominations, values, and description, viz. : eagles — each to be of the value of ten dollars or units, and to contain two hundred and forty-seven grains and four-eighths of a grain of pure, or two hundred and seventy grains of standard, gold . . . ; half-eagles — each . . . ; quarter-eagles — each . . . ; dol- lars or units — each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hun- dred and seventy-one grains and four-sixteenths parts of a grain of pure, or four hundred and sixteen grains of standard, silver." Because there was no distinct provision for the coinage of a gold dollar, it has been hastily concluded by advocates of silver coinage that the original unit of value was the silver dollar. The error has resulted from not observing that there are different kinds of units. The word unit as employed in the Mint Act refers to a unit of numbers, and not, as crudely interpreted, to a unit of value. The act of 1792 has indeed been given greater prominence than it deserves, for the currency question at that time did not arouse much interest. There was more discussion in Congress over the expense of establishing and maintaining a mint than there was over the ratio or the choice of metals. The fierce debate was over the absorbing question whether the coins should be stamped with the figure of the head of the president for the time being or with that of the Goddess of Liberty. There was also fear of enlarging the civil establishment, and thus extending the power of the federal executive. The mint was established at Philadelphia, and at first was placed under the control of the secretary of state, but later, under the advice of Hamilton, it was transferred to the treasury department. Its operations were on a small scale, and there was complaint on one side that it was inefficient, and on the other that it was too expensive ; consequently an attempt, which proved un- successful, was made to abolish the mint and entrust the coinage to private contractors. §45] Excise Tax on Whiskey. 105 45. Excise Tax on Whiskey. The tariff bill of 1789 was passed before there could be a full knowledge of the exact needs of the government or of the productivity of a given schedule of duties, but it soon became evident that more revenue was required ; and Hamilton promptly recommended both an extension of im- port duties and the imposition of excise duties. Congress was loath to vote internal taxes ; the creation of new federal offices was unpopular, while the suggestion that whiskey should bear the important part in this new class of duties aroused intense antagonism. In some sections of the country whiskey was so common an article of daily consumption that its special taxation was regarded as a discriminating burden upon one of the necessities of life. Under these conditions it was argued that a tax upon spirits was in the nature of a poll tax. After the assumption of the State debts and the shoulder- ing of the annual interest charge thereon the need of further revenue became imperative ; and by the act of March 3, 1 79 1, Congress adopted a portion of the recommendations which had been previously submitted by Hamilton. Under this law duties were laid as follows : upon spirits distilled from molasses, sugar, and other foreign materials, 11 to 30 cents a gallon ; upon spirits distilled from domestic articles, as whiskey from grain, 9 to 25 cents a gallon. Administrative machinery to carry out the provisions of the act was also created. The revenue collected under this act could not be applied to current expenses, but was to be devoted solely to the pay- ment of the interest upon the general debt, and, if there were a surplus, it was to be applied to the payment of the principal of that debt. The anticipated opposition to these duties became so strong that reductions in some of the rates were made by an early amendment of the original act. To country pro- ducers was granted the important option of substituting for a tax based on actual product a license tax on the presumptive monthly capacity of the still. By this system manufacturers io6 .Financial Needs, 1 790-1 80 1. [§46 hastened to improve their stills in order to increase the output, so that the tax per gallon was reduced to about 3 cents, and later, according to an estimate in 1801, to three-fifths of a cent ; thus the revenue fell far below reasonable estimates. In spite of all these concessions the tax was regarded with hostility, particularly in the agricultural regions of the Middle and Southern States. It was asserted that the commercial and importing interests of New England disliked the tariff, but looked with complacency on an excise upon an industry in which they were not greatly concerned. The opposition was most marked on the frontier, where transportation was so difficult and expensive that the only way in which corn could be made productive in trade was by its manufacture into a form which would reduce its bulk. The indignation became wide-spread and intense, and finally in 1 794 led to an armed organization in Southwestern Pennsylvania and to an open defiance of the excise officers. Troops were called out ; the Whiskey Insurrection, as it was called, failed as an attempt to defy the national government, but it led to another thresh- ing over of arguments on the wisdom of excise duties. The four main arguments against the tax have been summarized as follows : the taxes tended to contravene the principle of liberty ; they injured morals by inducing false swearing ; they were burdensome because of oppressive penalties ; and they interfered unduly with the process of distilling. These objec- tions were carefully met by Hamilton, but the tax was not popular, and above all it was not fruitful ; its gross return in 1793 was ^422,000, from which heavy deductions had to be made : the cost of collection in the same year was 16.5 per cent., and, if the drawbacks allowed be deducted, the net yield was only 76.5 per cent, of the gross receipts. 46. Other Excise Duties; CEirriage Tax. The unproductiveness of the excise simply led Hamilton and his successor to urge and secure an extension of the system to a wider range of commodities. An act of June 5, §46] Other Excise Duties. 107 1794, provided for taxes on carriages, on sales of certain liquors, on manufacture of snuff, refining of sugar, and on auction sales. On carriages the rates of duty varied according to a classification into coaches driven by box or postilion, chariots with or without panels, two-wheeled top carriages, and other two-wheeled carriages. Like the contemporary English excise law, the schedule of duties did not include wagons used in agriculture or for transportation of commodities. The constitutionality of the act was questioned so far as it imposed a tax on carriages and gave rise to the important decision by the Supreme Court in 1796 in the case of United States V. Hylton. The point of contest was whether the tax upon carriages was direct ; if so, it could be laid only by the rule of federal apportionment as prescribed by the Constitution. The decision of the Supreme Court denied this construction and gave a generous interpretation to the term "in- direct duties," though an interpretation not in harmony with the definitions ordinarily used by modern writers on finance. The terin "duty" was held to be only less comprehensive than the general term "tax." As in Great Britain, — whence the United States took the general ideas of taxes, — the words " duties," " imposts," " excises," " customs," etc., embrace taxes on stamps and tolls for passage, and are not confined to taxes on importations only. A tax on expense was regarded by the court as an indirect tax ; and inasmuch as a carriage was a consumable commodity, and a tax on it was a tax on r the expense of the owner, an annual tax on carriages was to be properly classed as an indirect tax. Furthermore, a tax on carriages could not be a direct tax, because apportion- ment would tend to gross and arbitrary differences in the contribution of each State. The court, without giving a judicial opinion on the exact distinction between direct and indirect taxes, was inclined to believe that the direct taxes contemplated by the Constitution were only two, — a capita- tion or poll tax, without regard to property, profession, or any other circumstance ; and a tax on land. io8 Financial Needs, 1 790-1801. [§46 Professor Dunbar points out that this earlier definition of a direct tax came from the Physiocrats, a school of economic writers who held that agriculture was the only productive employment, and that the net product from land, to be found in the hands of the landowner, is the only fund from which taxation can draw without impoverishing society. This natur- ally led to a classification of taxes as "direct" when laid immediately upon the landowner, and " indirect " when laid upon somebody else. With the interpretation of the Constitu- tion given by the Supreme Court the text-writers on consti- tutional law and lawyers have been in general accord. Justice Story in his " Commentaries " observes that all taxes are divided into two classes, — those which are direct and those which are indirect, — and that under the former denomination - are included taxes on land or real property, and under the latter taxes on consumption. The decision had more than a current significance, and its influence is to be noted later in the discussions upon the income tax. Among the excise duties was a license tax of $5 upon retail- ers of wines and foreign liquors (June 5, 1794) ; a tax so light that it could not cause hardship, although the principle of uniform licenses naturally operated as a premium to large dealers. On the manufacture of snuff a tax of 8 cents a pound was laid June 5, 1794, but this did not prove pro- ductive ; it was soon discovered that the money withdrawn from the treasury under the grant of drawbacks on the export of snuff exceeded the return from the tax itself, and this tax was consequently soon abandoned. Upon the manufacture of sugar a duty of 2 cents a pound was imposed, and as the domestic manufacture supplied nearly all that was consumed in the country the tax met the expectations of Congress. The tax on auction sales (June 9, 1794) was at the rate of 25 cents per $100 for sale of goods connected with hus- bandry and 50 cents per 2 100 upon other goods. The pro- ductiveness of this tax was largely determined by the degree of honesty in the auctioneers, and false accounts were not § 47] Direct Taxation. 1 09 uncommon. As the needs of the government increased, a further extension of excise taxation was made July 6, 1797, by the imposition of duties upon legal transactions, to be collected through the sale of stamps, which were affixed to the legal documents concerned. 47. Direct Taxation. As early as 1794 direct taxation was suggested, and in 1796 the secretary of the treasury was directed to prepare a scheme for that purpose. The principal motives assigned in its favor were the needs of the treasury, and the danger of relying so largely upon revenues derived from commerce, which was liable to disarrangement by European wars : there ought to be other supplies of revenue besides customs to fall back upon. The opposition insisted that direct taxation was irri- tating to the people, and should be used only in extreme cases ;■ it was unequal, and consequently unjust. The first direct tax was imposed by act of July 14, 1798, and the amount to be apportioned among the States was ^2,000,000. It was laid upon all dwelling-houses and lands and on slaves between the ages of twelve and fifty. The assessment was curious and careless ; upon houses the rate was progressive; for example, on houses valued. between ^100 and S500 the rate was two-tenths of one per cent, while on dwelling-houses valued at more than ;?30,ooo the rate was one per cent. Upon every slave the tax was 50 cents. After deducting the sums thus assessed upon dwelling-houses and slaves, within the United States, from the sum appor- tioned to each State, the remainder was assessed upon the land according to a valuation of each piece at such a rate as would produce the given sum. The proportions of the ^2,000,000 assessed was calculated to fall as follows : upon houses, ^1,315,000 ; lands, ;?45 7,000 ; slaves, ;?228,ooo. The tax did not operate according to the estimates made before its passage ; and payments were so tardily made that at the no Financial Needs, 1 790-1 80 1. [§48 end of three years one-fifth of the tax still remained unpaid. In 1800 the receipts were ;j!734,ooo, and in 1801 ;?s 34,000. 48. Summary of Receipts, 1789-1801. On the whole the government made a successful beginning with taxation ; notwithstanding the friction in the levy of the excise duties, the morbid apprehensions of 1787 were shown to be unwarranted. Even if economic development was back- ward, if the population was not compact enough, if opportuni- ties for invasion were easy and the expense of collection great, there was no longer reason to fear that the excise duties would be a despotic invasion of a subject's liberties. Although the receipts were small, the fact that the government had made clear its power to levy the duties was a promise of future financial support. The direct tax proved to be a clumsy and an ineffective instrument of revenue; import duties, however, justified all the claims made for their serviceable- ness ; they steadily increased, being more than twice as much in 1800 as in 1791, and there were no indications that they disturbed the normal course of industry or discriminated against any section or class. The receipts from sales of public lands did not at the time yield much revenue. By years the ordinary receipts of the government from 1791 to 1 80 1 were as follows: — Calendar Customs Internal Miscella- Total year revenue ' neous^ ordinary 1791' $4,399,000 $10,000 $4,409,000 1792 3,443,000 $209,000 17,000 3,669,000 1793 4,255,000 338,000 59,000 4,652,000 1794 4,801,000 274,000 356,000 5,431,000 1795 5,588,000 338,000 ■ 88,000 6,114,000 1796 6,568,000 475,000 1,334,000 8,377,000 1797 7,550,000 -575.000 563,000 8,688,000 1798 7,106,000 644,000 150,000 7,900,000 •799 6,610,000 779,000 157,000 7,546,000 10,848,000 1800 9,081,000 1,543,000 3 324,000 1801 10,751,000 1,582,000 3 602,000 13,935,000 ' Practically two years. ' IncludinR sales of public lands, dividends on bank stock, nndin 1796 and 1797 proceeds of sales of bank stock owned by government, and in 1801 sales of public stores, etc. B Including direct tax in 1800 and iSoi. $3,000000 2,500000 2.000000 1,500000 1,000000 500000 $4.500000 4,000000 3,500000 3,000000 2,500000 2,000000 1,500000 1,000000 SQOOOO NAVY i\ A \ \ ^ ^ 1 \ \ y / \ ^ / /X-rT ] \ MISCELLANEOUS h K \ n / \ / ■""----^^ ^*?fi / \/ ~~~(^ / h / 1 1 1 $4.000000 - 3,500000 3,000000 2,500000 2,000000 1,500000 1,000000 500000 /I ■v r^ ^ INTEREST / \ y — .. ^ / \ / \, -(& (sinking fund) ; H. Adams, Life of Gallatin, 267-297, 348-355 ; E. A. Ross, Sinking Funds, in Piib. Amer. Econ. Assn., VIl, 63-68; H. C. Adams, Fuilic Debts, 266-268 ; H. Adams, History of U. S., I, 238-242, 251-255, 272 ; ]■ P- Gordy, Political Parties in the U. S., I, 398-403, 414- 417; J. A. Stevens, Gallatin, 185-212 (debt), 224-240 (revenue), 251-256 (accounts). Bank ; American State Papers, Finance, II, 351-418, 453, 463, 480, 516 (memorials, Gallatin's report, dividends, deposits) ; J. Elliot, Funding System, 513-517 (Gallatin's report) ; Clarke and Hall, Documentary His- tory of Bank, 115-471 ; Annals of Congress, 1810-1811, p. 488, et seq. ; or Benton's Abridgment, IV, 252, et seq.; Bolles, II, 145-152; A. Gallatin, Works, III, 328-334; H. Adams, Life of Gallatin, 426-430; H. Adams, History of the U. S., Ill, 327-337, V, 207, 327, 337; H. White, 263-270; Schouler, II, 316-319; McMaster, HI, 379-390- War Finance : American State Papers, Finance, II, 374, 412, 441, 497, 523 (Gallatin reports); 538 (report of committee, Feb. 17, 1812); III, 1-19 (review by Dallas, Dec. 8, 1815) ; Gallatin, Works, I, 466; J. Elliot, Funding System, 534 (Gallatin's report on war loans, Jan. 10, 1S12), also Gallatin, Works, I, 501-517, 642; Bolles, II, 219-224; H. C. Adams, Public Debts, 112-126; J. W. Kearny, Sketch of American Finances, 76- iio; H. Adams, Life of Gallatin, 445-452 ; H. Adams, History of U. S., VI, 156-175, 206-209, 438-448; VII, 44, 365-390; VIII, 239-262; J. A. Stevens, Gallatin, 212-224, 239-248; McMaster, IV, 20S-21S, 233-236. Loans and Treasury Notes : American State Papers, Finance, II, 421, 564 (method of subscription), 569; Statutes, II, 694, 798; III, 144, 227; or Dunbar, 62-80; Bayley, 342-354; W. F, de Knight, 45-56; Bolles, 221-224 ; !■ J- Knox, United States Notes, 21-39 (treasury notes). Internal Rkvi;nue and Direct Taws: Amcricin State Papers, Finance, II, 627, 855; Statutes, III, 22, 39, 40, 42, 44, 77, 113, 137, 148, 159 (internal revenue); 53, 164, 25 q (direct); F.C.Howe, Taxation in 118 § 54j Reduction of Taxation. 1 1 9 the U. S. under Internal Revenue System, 39-49 ; Bolles, II, 242-262 ; H. C. Adams, Taxation in the U. S. (J. H. U. Studies), II, 58-59; C. F. Dun- bar, Quar. Jour. Econ., Ill, 442-444 ; J. A. Stevens, Gallatin, 232-235, 243-245 ; H. Adams, History of the U. S., IX, index under " taxes " ; McMaster, III, 441-443. 54. Economies and Reduction of Taxation. The year 1801 marks a great change in financial as in po- litical ideals. The financial policy established by Jefferson's administration was prompted by two fundamental principles of Republican policy : first, the simplification of the civil service, not merely to reduce taxation but to decrease federal execu- tive machinery and patronage ; and, second, the abolition of excise duties, which in Republican party philosophy were still held to be inquisitorial and inconsistent with democratic free- dom, particularly in time of peace. The application of these ideas might naturally, if there were no further disturbing factor, work out a harmonious result in the field of finance, since a reduction of expenditure would justify a reduction of taxation. For secretary of the treasury Gallatin was the logi- cal choice J he was easily the leader among the Republicans in mastery of the principles of political economy, in skill in handling financial details, and in clearness of conviction and intensity of purpose. Like Hamilton of foreign birth, he had devoted himself to a public career; from 1790 to 1795 he was a member of the Pennsylvania legislature, and then entered Congress ; in this body he served on the committee of ways and means. He had been unceasing in his demand for econ- omy, for specific instead of general appropriations, for the extinction of the debt in preference to military and naval expenditures, and for a change in the form of the sinking fund. The Republican party when in opposition had constantly attempted to retrench on the army and navy ; in the troubled times of 1 795 it desired to restore the army to the footing of 1792, and opposed naval appropriations, on the ground that a navy was prejudicial to commerce. When the power came no 1 20 Economies and War. [§ 54 time was lost ; the army was reduced to the peace establishment of 1796 ; the construction of several war vessels was stopped; and savings were made in the diplomatic and customs service. The net ordinary expenditures were thus brought down from nearly ;?7, 500,000, exclusive of interest, for the fiscal year 1800, to less than ^5,000,000 for the year 1801, and to an average of ^4,000,000 during the next three years. A reduction of taxation through the abolition of the excise duties was promptly undertaken, though Gallatin would have been glad to retain them longer. In March, 1802, John Ran- dolph, the chairman of the committee 6f ways and means, upon assurance that economies of J6oo,ooo could be made in the navy, recommended the repeal of these taxes, and declared that the whole system of internal duties was vexatious, oppress- ive, and obnoxious, hostile to the genius of a free people, and tended to multiply officers and increase the burdens of the people. The measure of repeal was quickly carried, April 6, 1802, and by this decisive stroke a net annual revenue of ;?6oo,ooo was lost to the treasury, — of this about five-sixths was derived from the tax on distilled liquors. The Federalists urged that if there was to be a reduction of taxation it should not be on the luxury of distilled spirits, but in the import duties upon tea, coffee, sugar, and salt, the necessities of life ; more- over, the excise revenue was a sure resource, while the fluctua- tions in foreign trade made the impost revenue uncertain ; and it was inexpedient to destroy the administrative machinery or- ganized for the collection of taxes, which had been brought into good working order through ten years of experience. On the other hand, statistics were presented to show the heavy cost of collecting internal revenue duties; 22,000 stills were scattered over the immense territory of the United States, and the licenses paid by 13,000 retailers produced but $65,000. There was but little possibility of materially lessening the ex- pense of collection so long as the objects from which the revenue was drawn were so dispersed. §55] New Demands upon Treasury. 121 55. Ne-w Demands upon the Treasury. It was not long before a special strain was placed upon the treasury by an agreement to pay ? 15,000,000 for the purchase of Louisiana. To meet this outlay Gallatin proposed the issue of ^11,250,000 new 6 per cent, stock, redeemable after fifteen years in four annual instalments ; ^2,000,000 was to be paid cash down from the surplus in the treasury, and the remainder was to be met by a temporary loan. The purchase came at a fortunate time, since the customs in 1802 amounted to ^12,400,000 as compared with $10,700,000 in 1801 and $9,100,000 in 1800. The country was taking advantage of the European war ; its neutral commerce was expanding at an unprecedented rate ; exports were large and prices high, customs revenue was pouring into the treasury, so that on January i, 1803, there was a balance to the good of over $5,000,000. The success of the loan was more than had been anticipated. The abundant revenue on the one hand and the economies in expenditure on the other made it possible to effect the purchase from the sale of the new stock, and ready money, without recourse either to a temporary loan or to new taxes. It soon become necessary to seek for further revenue because of war with Tripoli. Instead of restoring the excise duties the act of March 26, 1804, authorized an addition of 2j4 per cent, on all imported articles which paid ad valorem duties, and an additional duty of 10 per cent, upon goods imported in foreign vessels. The proceeds of this act constituted a special fund known as the Mediterranean Fund, to be used for the protec- tion of the commerce and the seamen of the United States against the Barbary Powers, and to be levied until a treaty had been made. In spite of Jefferson's avowed policy of peace in foreign relations, and (Jallatin's persistent efforts to hold the navy department, as well as the war establishment, down to a policy of Republican economy and strict accountability, the administration was thus forced into extraordinary naval expen- 122 Economies and War. [§ 55 ditures. Gallatin, however, did not propose that the demands of the navy should be lost in the general budget, but intended by making this a special fund based upon special taxes to keep before the public a clear apprehension of the burden it was carrying. Another important interruption to Gallatin's plans of re- trenchment and debt extinguishment took place in 1806, when Randolph proposed the repeal of the salt tax. The tax, though always unpopular, had been retained because of its productivity, since it then yielded more than a half million dollars per annum. Randolph had already shown his inde- pendence of the administration, and apparently was seeking opportunity to exhaust its patience ; he complained that the government was inconsistent in not adhering to its loudly proclaimed policy of making expenditures according to spe- cific appropriations, and he wished therefore to straiten and punish the treasury. The Federalists supported the repeal, possibly to embarrass the government, and many Republicans followed Randolph, not so much for the reason he assigned as because of the general unpopularity of the tax. The measure at first failed in the Senate, but in the course of the year the administration recognized the popularity of Ran- dolph's proposition and submitted in advance a bill for the abolition of this duty, which was duly enacted March 3, 1807. The next blow fell in 1807, when the misunderstandings with Europe on account of the establishment of the continental system, the issues of the English orders in council, the Berlin- Milan decrees, and the impressment of American seamen came to a head; anl Jefferson reluctantly agreed to an in- crease of expenditures for national defence. While yielding to the growing demands upon the treasury, Jefferson further disturbed financial security by entering upon the alternate policies of non-importation of manufactured goods and of forbidding shipping to leave American ports. This commer- cial warfare soon upset the customs receipts. No financial disadvantages appeared in the returns for 1808; but in 1809 § s6] Receipts and Expenditures. 123 the customs fell from ;?i6,3oo,ooo to ?7, 200,000; expendi- tures for war increased from ^1,300,000 in 1807 to ^3,300,000 in 1809 and expenditures for the navy were larger by more than half a million dollars. The fortification of ports and harbors was hastened, gunboats were purchased, and the regular army enlarged. In December, 1809, Gallatin was forced for the first time to confront a deficit in the budget, which was ^1,300,000 short, exclusive of payments on account of the debt. For- tunately there was a handsome balance in the treasury from past savings, which could provide both for the deficit and current expenditures, as well as for debt requirements. Early in 1809 the Embargo Act was repealed, and commerce, although still burdened with a non-intercourse act, was re- sumed with great vigor. The customs in 1810 yielded ;?8,5oo,ooo and in 181 1 ^13,300,000. Appropriations for the army and navy were again reduced, and thus the immedi- ate financial danger was tided over. Still the causes of irrita- tion toward England were at work; during the year i8ii the country drifted rapidly toward hostilities, and in June, 181 2, war was formally declared. 56. Receipts and Expenditures, 1801-1811. The ordinary receipts during the peace administration of the Republicans are concisely condensed as follows : — Year Customs Other revenue Total 1801 $10,750,000 $2,185,000 $12,935,000 1802 12,438,000 2,557,000 14,995,000 1803 10,479,000 585,000 11,064,000 1804 11,099,000 727,000 11,826,000 1805 12,936,000 624,000 13,560,000 1806 14.667,000 892,000 15,559.000 1807 15,846,000 552,000 16,398,000 1808 16,363,000 697,000 17,060,000 1809 7,258,000' 515,000 7,773,000 1810 8,583,000 800,000 9,384,000 i8ii 13,313,000 r, 109,000 14,422,000 124 Economies and War. [§57 The receipts under "Other" in the above table, in 1801 and 1802, were swollen by the income from internal revenue duties, the delayed direct tax, and the sale of bank stock. After 1803 the revenue from the sale of public lands began to be fruitful and is responsible for nearly all of the subsequent receipts in this column of the table. Expenditures by years during the same period were as follows : — Year War Navy Interest on debt Miscel- laneous ^ Total i8ot $1,673,000 $2,111,000 $4,412,000 $1,197,000 $9,393i<»o 1802 1,179,000 9i5>ooo 4,239,000 1,642,000 7,976,000 1803 822,000 1,215,000 3,949,000 1,965,000 7,952,000 1804 875,000 1,189,000 4,185,000 2,387,000 8,637,000 1805 713,000 1,597,000 2,657,000 4,846,000 9,014,000 1806 1,224,000 1,649,000 3,368,000 3,206,000 9,449,000 '5°Z 1,288,000 1,722,000 3,369.000 1,973,000 8,354.'x» i8o3 2,900,000 1,884,000 2,5S7,ooo 1,719,000 9,061,000 1809 3,34Si000 2,427,000 2,886,000 1,641,000 10,280,000 1810 2,294,000 1,654,000 3,163,000 1,362,000 8,474,000 1811 2,032,000 1,965,000 2,585,000 1,594,000 8,178,000 ^ Including Indians and pensions. The reasons for the fluctuations in the expenditures for war and navy have already been alluded to ; the interest charge was lowered by the decrease in the principal of the public debt, interrupted by the Louisiana purchase ; and the ap- propriations of large amounts for " foreign intercourse " in 1 804-1 806 account for the exceptional increase under " Mis- cellaneous " in those years. 57. Reduction of Debt ; Sinking Fund. During the peace administration of the Republicans there was a remarkable reduction in the debt; between 1801 and 1 81 2 the debt was cut down by ^38,000, 000, and this in spite of the abandonment of the internal taxes and the salt duty, and the assumption of a large sum for the payment of Louisiana. The details of the operation are illustrated in the following table in millions of dollars : — 57] Reduction of Debt. 125 Old D EBT Louisiana ^.s 1 u B Year 13 T3 § -a ■s 1 Foreign, inch ' ing conver sions under of 1795 iav3 II 01 □ ■ss ii 1 •13 1 1801 57.0 2.8 12.4 7-2 3-4 83.0 1802 S5-9 2.8 11.9 7.2 2.7 80.7 1S03 54-7 2-7 10.7 7-2 1.4 77.0 1804 53-5 1.8 7-7 7.2 •9 II. 2 3-7 86-4 1805 5J.2 ■9 6.0 7-2 •7 II. Z 3-7 82.3 1 806 50.8 # 4.2 7-2 II. 2 2.0 75-7 1807 49-3 # ■•5 6.4 II.2 •5 69.2 1808 44.8 # •4 2.7 5;6 II. 2 .2 65-1 1809 37-4 « .2 7-8 # II. 2 * 57-0 1810 36.1 # 5.6 * II. 2 « 53-1 1811 34-7 # 1.8 # II. 2 # 48.0 1812 33.2 * •5 * 1 1. 2 * " 45- a * Less than $100,000. The foreign debt, including the stocks of 1 795 which were issued as a substitute in place of a portion of this, and the costly loans of i 798 and 1800, were wiped out, and no further recourse was made to temporary loans. Gallatin had little respect for a sinking fund. At best he thought it rendered the accounts complex and embarrassed the policy of debt extinction ; in his opinion a better way was to apply the surplus of receipts over expenditures directly to the discharge of debts. In spite of this conviction, he did not feel prepared to abolish the sinking fund, which had been in operation for more than a decade and was supported by popular opinion because believed to be a substantial check on the treasury department. The purpose of his practical recommendations was to increase the permanent annual ap- propriations for the use of the fund to $7,300,000, and after the Louisiana purchase to $8,000,000. The significance of this legislation lay in Gallatin's perception that it was probable that there would be a surplus revenue over and above what was necessary to meet the demands of the sinking fund act of 1795, and this he desired to use for debt reduction beyond all possible claims which might be advanced from other 126 Economies and War, [§58 quarters. He wished especially to leave no unused funds for the army and navy, with which he had little sympathy. Owing to the abundant revenue of the period, the payment of the debt went on with a rush, for which the good luck of the country is entitled to credit as much as any special wisdom of Jefferson and his advisers. The financial experience of this period of peace is summed up in the following table in millions of dollars : — Year Taxes If as ii s a s. 1 to a 1 "(3 ** 1801 1802 1803 1804 1805 1806 1807 1808 1809 i8ia 1811 10.7 12.4 10.4 11.0 12.9 14.5 .5.8 16.3 7-2 8.5 I.O ,6 .2 ■5 .2 12.3 >3-2 10.7 11.2 12.9 14.6 16,3 7.2 8-5 '3-3 .6 1-7 •3 .6 .6 .8 i -5 .8 I.I I2.g 14.9 II.O 11.8 «3-5 15-5 16.3 17.0 7-7 9-3 14.4 9-3 7-9 1:1 9.0 9.0 10.2 8.4 8.1 3.5. 7.0 31 3-2 4-5 6.1 8.0 g.o •9 6-3 2-5 58. End of the United States Bank. The year 181 1 marks not only the end of the peace admin- istration but also the winding up of the United States Bank. In 1808 the directors of this institution memorialized Congress for a renewal of the charter, and the subject was referred to Gallatin, who made an elaborate report, March 2, 1809, in favor of the bank. He suggested some changes by which it might be more useful to the government, such as requiring the payment of interest on government deposits when in excess of ^3,000,000, and the adoption of a regulation that the bank should loan to the government at any time a sum not to exceed 60 per cent, of its capital. Gallatin enumerated the advantages derived by the government from the bank, in its § 58] End of the United States Bank. 1 27 safe-keeping of the public deposits, in the collection of the revenues, in the transmission of pubKc moneys, in the facili- ties granted to importers, and in loans that had been made to the government, in all amounting to ^6,200,000. In Congress there was strong opposition to renewal of the charter; the numerous State banks established since 1790 had a diligent ' eye to their own interest. In 1790 there were but three such banks ; in 1800 there were 28 with a capital of ^21,300,000, and, in 181 1, 88 with a capital of ^42,600,000. The United States Bank was also unpopular because of the large foreign holdings in the bank's stock, amounting to 18,000 shares out of a total of 25,000 ; this use of foreign capital was construed to be a large foreign tribute in dividends ; and, though foreign stockholders could not vote, indirectly they could exert a " malignant influence." T^he extravagant char- acter of this opposition was summed up by Senator Crawford in the following language : " The member who dares to give his opinion in favor of the renewal of the charter is instantly charged with being bribed by the agents of the bank, with being corrupt, with having trampled upon the rights and liberties of the people, with having sold the sovereignty of the United States to foreign capitalists, with being guilty of perjury by having violated the Constitution." 'The constitu- tionality of the bank was once more questioned, and the mere fact that Gallatin and his followers could find any merit at all in what was originally regarded as a federal invention only strengthened the purpose of some of the Republicans who held grudges against the administration." In all the writings and speeches called forth by the contest there was little economic analysis or criticism ; the bank was regarded as an undemocratic, political institution ; or as an institution helpful in centralizing the forces of a weak govern- ment. The bill for renewal was finally lost in the Senate, February 20, 1 811, by the deciding vote of the vice-president, George Clinton. It then became necessary for the government to turn to local banks for the custody of its funds. In 181 2 128 Economies and War. [§ 59 twenty-one local institutions were employed, chiefly in the principal ports of entry, so that the collectors might have agents at command with whom the duty bonds of importers were placed for collection. 59. Inadequate Preparation for War. When war was declared in June, 18 iz, although there had been several years of warning during which preparation might well have been undertaken, Congress was not ready with a financial policy adequate to meet the extraordinary demands. Little had been accomplished either in placing the army and navy upon a possible war footing or in devising fiscal resources against the gathering crisis. Gallatin had given some atten- tion to the problem, realizing from the beginning of the strained relations th%t war with England was possible ; but unfortunately in the various statements of his views during the period between 1807 and 181 2 he wavered. Un- doubtedly he felt the pressure of the unflagging antagonism of party opponents, who wished to discredit him with Jeffer- son, and he was encouraged by temporary revivals of better conditions in the treasury. In 1807, when hostilities first appeared imminent, Gallatin outlined the financial principles which ought to be applied in case of war; he proposed that war expenditures should be met with loans, and that taxes should be increased only to provide for the annual expenses on a peace establishment, the interest on the existing debt, and the interest on any new loans. Gallatin arrived at this opinion on the theory that maritime war in the United States would deeply affect the resources of individuals, commercial profits would be cur- tailed, and the surplus of agricultural produce would fail to reach its accustomed foreign market ; sucli losses and priva- tions he was not willing to aggra\ ate by ta.\es beyond what was strictly necessary. For the increased taxation which would be required Gnllatin suggested a revival of the duty on salt, the continuance of the Mediterranean duties, and § 59] Inadequate Preparation for War. i 29 possibly a doubling of existing import duties. The excise duties, "however ineligible, will doubtless be cheerfully paid as war taxes if necessary." In 1808 Gallatin took away much of the pith of his recom- mendations by declaring that in no event would he insist on internal taxes. He was rejoiced at the auspicious- conditions for borrowing money ; the high price of public stocks, the reduction of the public debt, the unimpaired credit of the general government, and the large amount of existing bank- stock in the United States left no doubt in his mind that necessary loans could be had on reasonable terms. In 1809 there was another change ; not only was the war cloud still threatening, but there was an actual deficiency in the budget, hence Gallatin once more revived the possibility of internal duties in case the revenue were affected by war. For the present, however, he recommended only the continuation _ of the Mediterranean duties, unless a permanent increase in the military and naval establishments were contemplated. A few months later, February 26, 18 10, in response to a communication from the committee on ways and means, Gallatin again elaborated his views, placing the emphasis upon credit rather than on taxation, and thus developing the doc- trine of war financiering which is associated with his name. As to the details of borrowing, he held that loans might be obtained from the holders of the old 6 per cent, stock, which was then falling due ; from the banks that might in this way find a use for funds idle because commerce was blocked ; and from individuals who would accept public lands as collateral security; lastly, he suggested the issue of treasury notes bearing interest and payable in one year. Loans, however, were to be relied upon for war, and war only, as it was inconsistent to borrow money to pay ordinary running expenses. " To meet these loans in the future we must depend on coming prosperity and the wisdom of suc- cessors ; that is, favorable circumstances and rigid economy." Congress easily accepted a waiting policy, and in March, 9 130 Economies and War. [§ 59 181 1, authorized a loan of ^5,000,000. It was not until December 9, 181 1, that Gallatin clearly demanded internal revenue taxes. For this change of opinion he held Congress responsible : since he could no longer borrow from the United States Bank, the government was denied an important instru- ment of credit. A proposition for excise duties coming from a Republican secretary was an ini^katicjn fora party squabble ; the committee on ways and means, in accordance with Gallatin's suggestion, reported a schedule of duties. A warm discussion took place, but it was hard to persuade Congress of the necessity ; although a deficit was disclosed in the budget and it was generally agreed that war would take place, the proposi- tion was defeated. It was late in the day to educate Congress to a strong policy of taxation, and that body showed its dis- regard for Gallatin's advice by authorizing, March 14, 1812, another loan amounting to ^11,000,000. In spite, then, of needs which were early apparent, Congress determinedly and definitely turned away from a policy of adequate taxation. War was declared in June, 1812 ; for immediate wants an issue of treasury notes to the amount of ?5,ooo,ooo was authorized June 30, and customs duties were doubled the following day. This latter act, however, gave but little financial comfort, since a large part of the country's commerce was with that nation which now became a public enemy ; for a few months only vessels returning home paid the increased duties on their cargoes, and thereafter while the war lasted this source of revenue shrank to less than one-half of the returns in the previous decade. With the recommendation made in December, 181 1, Gal- latin appears to have left the responsibility of laying excise duties once for all with Congress, for in his annual report at the end of 181 2 after war was declared he refrained from renewing the recommendation. If therefore the government was poorly equipped with instruments of revenue, the respon- sibility lies only in part with Gallatin ; he had wavered in his advocacy of internal duties, and yet in a final judgment of his \ § 60] Treasury Administration. 1 3 1 abilities at this crisis due weight should be given to the cliques within the party which worked for his downfall and undoubtedly led him at this time to rely too much upon hope" and credit, instead of vigorously and continuously insisting upon the needs of the present. 60. Treasury Administration, War Period. A partial explanation of the failures in the administration of financial affairs during the war of 1812-1814 will be found in the political intrigues within the Republican party, and particularly in the factious elements found in Pennsylvania, Gallatin's own State. Gallatin clearly recognized the strength of this opposition, and, wearied with the contest, tendered his resignation early in 1 8 1 1 ; he could not, however, be spared, and at the urgent request of Madison retained his post. His enemies, nevertheless, did not cease to break down his influ- ence, so that finally in May, 1813, in the very midst of finan- cial distress, Gallatin felt it wiser, if not to resign outright, at least to absent himself temporarily from political affairs at home. He consequently undertook a diplomatic mission and left the management of the treasury to William Jones, secretary of the navy. This was an unfortunate arrangement, for the office needed a strong man, devoted solely to financial affairs; it was no time to drift. In February, 1814, Gallatin entered upon another diplomatic service and definitely resigned from the treasury. Madison then turned to Alexander J. Dallas of Pennsylvania, a lawyer, independent in party criticism, a conservative, and friend of Gallatin. For these reasons he was distasteful to the radical element in Pennsylvania, and was' successfully opposed by the senators of that State. The appointment, after being declined by Richard Rush, comp- troller in the treasury department, was offered to George W. Campbell of Tennessee. Although he represented the admin- istration in the Senate, he brought no support and could not command the confidence of capitalists ; he proved a failure 132 Economies and War. [§ 61 and held office but a few months. Dallas was again nom- inated, and the opposition in the Senate being overcome by the stress of public affairs he was confirmed October 6, 1814. Dallas was an able man, but the evil had been done before his opportunity came ; his chief work lay in restoring the. currency through the re-estabhshment of a United States Bank. 61. War Loans. As the war was sustained on public credit rather than by taxation, it is appropriate that the system of government loans should receive first consideration. The successive phases of the loan policy and their relation to other financial measures may be seen in the following chronological summary : — 181Z, March 14 Six per cent, loan, $11,000,000. 18 1 2, June 12 War declared. 181 2, June 30 Treasury notes, $5,000,000. 1812, July I Customs duties doubled. 1813, February 8 Loan, $16,000,000. 1813, February 25 Treasury notes, $5,000,000. 1813, July 22 and August 2 . Internal revenue duties and direct tax. 1813, August 2 Loan, $7,500,000. 1814, March 4 Treasury notes, $10,000,000. 1814, March 24 ... . Loan, $25,000,000. 1814, August Suspension of specie payments. 18 14, November 15 . . . Loan, $3,000,000. 1814, December 15 . . . . Internal revenue duties increased. 1814, December 24 . . . Treaty of peace. 1814, December 26 . . . Treasury notes, $10,500,000 1815, January 18 . . . . New internal taxes 1815, February 24 . . Treasury notes, $25,000,000. 1815, February 24 Seven per cent. loan. As already indicated Congress, in March, 181 2, three months before war was declared, authorized a loan of Ji 1,000,000 to meet a probable deficit and the new ex- penditures for an enlargement of the army, the purchase of ordnance and equipment, the erection of fortifications, and the construction of ships. The loan bore 6 per cent, inter- est, and in accordance with the usual American policy none of it could be sold under par. In the preliminary debate § 6i] War Loans. i to some members severely questioned the wisdom of throwing upon the market so large an amount of stock, accompanied by no adequate provision for paying even the interest ; and doubted whether sufficient moneyed capital available for loans really existed in the country at large. A considerable part of the banking capital rested upon credit instead of assets, and was of such a character that its holders were compelled to manage it with the utmost caution, and it was pointed out that in case of war much of the country's capital would be turned to manufactures, which would offer more tempting profits. The government on the whole was successful in placing this first loan, but as further demands followed the real situation was revealed. Public credit began to fail ; and in making the ;^ 1 6,000,000 loan of February 8, 18 13, it became necessary to accept bids below par. It was with difficulty that the negotiations were carried out at all, and then' only after a second opening of the subscription books and the acceptance of modifications dictated by subscribers. It was soon dis- covered that little financial support could be expected from the Eastern States, — largely because of the bitterness of the commercial interests, whose prosperity had long been endan- gered by Jefferson's pohcy of embargo, non-intercourse, and finally the declaration of war. The subscriptions, for example, to this loan were geographically as follows : — States east of New York ... $486,700 State of New York . .... 5,720,000 Philadelphia 6,858,400 Baltimore and District of Columbia . ... 2,393,900 State of Virginia 187,000 Charleston, S.C 354,000 $16,000,000 New England carried her opposition to the extreme point ; of the $41,010,000 borrowed by the government exclusive of treasury notes and temporary loans up to the end of 18 14, she contributed less than ^3,000,000. The government also suffered in not being able to engage the co-operation of any 134 Economies and War. [§ 6i strong banking institution, and the loss of the United States Bank was now distinctly felt. The distress of the treasury was also manifest in the delayed grant to the executive of power to raake special terms for loans. Up to this time government securities had not been sold at less than par, although in one instance it had been necessary to offer 8 per cent, interest to se- cure subscriptions. On August 2, 1813, however, a loan of ^7,500,000 was authorized on condition that the stock be sold for not less than 88 per cent., and as affairs were tempo- rarily in a somewhat more favorable condition, this loan was secured at an average rate of 88^4 per cent. The loans of the next year were negotiated under more disadvantageous terms, for in borrowing the first instalment of the 1 2 5, 000,000 loan, under the act of March 24, 1814, the government abandoned its restrictions and was forced to agree that if more favorable terms were extended to any later subscribers equally advan- tageous terms be extended to previous purchasers. In this way it was made the interest of every holder of the first part of the loan to depress the price of government securities in order to secure further premiums from the treasury. Subscrip- tions were received at 1 2 per cent, discount ; later at 20 per cent. ; and still later, when subscriptions for a portion were accepted in State bank-notes worth but 65 per cent, in specie, the previous subscribers hastened to demand supplementary stock to the amount of the difference between the old and the new discount. At the close of the war, when public credit rose, the last war loan, authorized March 3, 1815, was more successfully negotiated at an average discount of little less than S per cent. The total loss to the government in disposing of its loans during the war period, 181 2-18 16, was enormous : in 1830 the committee of ways and means of the House esti- mated that for loans of over ;g8o,ooo,ooo the treasury received but ^34,000,000 as measured in specie. §62] Issue of Treasury Notes. 135 62. Issue of Treasury Notes. Treasury notes were issued immediately after the declaration of war in the summer of 1 8 1 2 . Following a suggestion of Gal- latin a bill was reported providing for a block which, together with the amount subscribed for the loan, should not exceed $11,000,000, to bear interest at ^% per cent., equal to one and a half cents per day on one hundred dollars, to be retired in one year and to be receivable in all payments due the United States. The proposition did not go unprotested ; the usual prophecy of depreciation and impaired credit was made. In favor it was urged that the proposed interest-bearing notes had many advantages over bank paper : they rested on the credit of the United States and were receivable for taxes and public dues ;' there was no resemblance between them and continental money, since when the latter was issued the na- tional government had no compelling powers over the States for revenue ; now its credit was sound and its power to raise revenue unquestioned. Though not secured by any specific fund set apart for their redemption, the entire duties and taxes of the year were indirectly pledged for this purpose, since the notes were receivable in payment of such duties and taxes. The measure passed the House by 85 to 41, and became law June 30, 181 2. If the issue of these notes had been stopped at this point they might well have been considered a kind of exchequer bills, or a temporary loan to anticipate future revenue, since the bills were payable in one year after issue, were interest- bearing, and receivable for public dues. Even the conserva- tive Gallatin declared that this annual anticipation of revenue, though liable to abuse, facilitated both the collection of reve- nue and the making of loans if kept within strict bounds. On February 25, 1813, another issue of ISjOoOjO^o ^^s voted ; not, however, without a further debate in which the possibility of ill was duly set forth. By another year not so much self-restraint was displayed, and in March, 1814, I 36 Economies and War. [§ 6z J 1 0,060,000 was aufhorized; and later in December, when the needs of the government became exceedingly pressing and loans were obtained only with a heavy discount, further legis- lation was enacted under which ^8,318,000 was issued. New arguments were now discovered in favor of treasury notes ; they were held more desirable than stock sold at a ruinous discount. Since many banks had suspended specie payments, and the country was in monetary disorder. United States treasury notes, receivable everywhere for dues and customs and guaranteed by the United States, might well be useful in providing a more stable currency. Even Dallas, the new secretary of the treasury, presented a report which ap- proached an endorsement of the issue of legal-tender notes. Influenced by these considerations Congress passed an act, February 24, 1815, even when it was thought a treaty of peace had been signed, authorizing the issue of ^25,000,000 treasury notes, — without, however, any legal- tender quality. By this time opposition to the issue of such notes had been practically silenced ; the barriers had been broken down, and if the war had continued it is likely that many of the abuses which had attended the issue during the Revolutionary War would have been repeated. The notes of the earlier issues were not intended to be currency, but in the la'st act no definite provision was made for redemption, and all notes issued of a denomination less than ;?ioo bore no interest. The total amounts issued under the several acts were as follows : — Act of June 30, 1812 , $5,000,000 " " February 25, 1813 5,000,000 " " March 4, 1814 10,000,000 " " December 26, 1814 8,318,400 " " February 24, 181 5, large notes 4,969,400 " " " " " small notes 3,392,994 $36,680,794 Not all of these notes, however, were in circulation at one time, for the later issues in part were used to replace the § 6z] Issue of Treasury Notes. 137 earlier ones which were promptly redeemed. The amounts outstanding on January i each year were as follows : — 1813 162,835,500 1814 4,907,300 1815 10,646,480 1816 17,619,625 1817 3,450,000 Since these were the first issues of anything like paper money by the United States under the Constitution the characteristics of the treasury notes deserve special notice : (i) Notes issued under the first two acts were in denomina- tions of not less than ^100; under the next two in denom- inations of not less than ^20 ; and under the last from $3 upwards. (2) Notes issued under the first three acts were not originally fundable into stock, but were subsequently made so by the acts of December 26, 18 14, and February 24, 1815. The notes of 1815 were made fundable by the act of issue. (3) Notes issued under the first four statutes were made payable in one year ; under the last at no fixed date. (4) All save the small treasury notes, which were non-interest-bearing, bore interest at a rate of 5% per cent. (S) None of the notes bore a formal promise to pay coin on demand, but all were in form of a receipt for all dues payable to the government. (6) None had any legal-tender qualities, though it is likely that such notes could have been issued had the war lasted a little longer. (7) The notes, with the exception of the later issues, were too large to get into general chrculation. (8) The notes remained at par in specie until the banks generally suspended specie payments in August, 1814. (9) At the close of the war the notes remaining outstanding were rapidly funded into interest-bear- ing stock. A ccimparison of the amounts borrowed by years 181 2-1 8 16, distinguishing between the long-term loans and treasury notes, with the net increase in debt each year according to Bayley's tables, is shown in the following table in milhons of dollars : — 138 Economies and War. [§63 Year Loans Teeasuhy Notes Total 1 s ! « 1— < 1 g a e 1 1 1 s 1812 1813 1814 1815 1S16 13.7 22.9 18.3 71 5.6 4.0 '•7 3-4 3.0 18.9 16.6 19-3 4.8 2.8 6.1 8-3 IS.2 42 5-S 2.7 9.7 2.8 6.1 24 12.S 5.5' 15.5 29.0 25.6 37-9 12.0 5.6 4.0 7-5 6.1 12.7 9.9 . 25.0 19. 1 ' Decrease. 63. Internal Revenue Taxes ; Other Taxes. One reason why Congress did not in 181 2 enter upon in- ternal taxation promptly and vigorously was the difficulty of framing the details of a new schedule of duties. Notwith- standing the urgency, a large part of the long discussion in the spring of 18 12 over a bill to levy taxes on spirits was devoted to the inconsequential question whether the tax on distilled spirits should be levied upon the stills or should be a gallon tax. Although war was upon the country the settle- ment of this detail was regarded by some members as involv- ing a momentous principle ; in favor of a tax on stills it was urged that fewer offices would serve, oaths might be dispensed with, houses and cellars of distilleries would not be searched, and the firesides of the people would not be invaded by excise officers. On the other hand the proposed tax on stills would yield only $275,000, a sum altogether insignificant in view of immediate needs ; it would equal hardly a cent a gallon as compared with 7.18 cents per gallon levied during the admin- istration of Washington. The question of a whiskey excise was also complicated by the proposition to impose a tax upon land, and some Western merchants thought each of these would bear more hardly upon the people of that region, who were the least able to contribute. The evils of an excise sys- tem were depicted in vivid colors; nevertheless the West expressed its willingness to incur the responsibility of a tax §63] Internal Revenue Taxes. 139 on stills rather than to defeat the great work in which the nation was engaged. The House of Representatives could not bring itself to the passage of any measure at that time, and in June, 1812, postponed the whole subject by a vote of 72 to 46. During the winter of 181 2-18 13 the question of internal revenue taxation was again raised, but time for consideration was then Hmited. The taunt by Mr. Cheves expressed the truth : " It was said last session that you would have time to lay internal revenue duties at this session, but I then said it was a mistake. You now find this to be the fact. By your indecision when the country was convinced they were neces- sary you have set the minds of the people against taxes. But, were it otherwise, you have not time now to lay them for the next year." In the summer of 1813 the president called Con- gress together for a special session, and the administration insisted upon the need of further taxation. A direct tax of ^3,000,000 was immediately enacted to be assessed for the first time in 1814, and Congress laid duties on carriages, a duty on refined sugar, a license tax upon distillers of spirituous liquors, stamp duties, an auction tax, and a license tax upon retailers of wines and spirituous liquors. The duties imposed, however, were not high ; outside of the direct taxes a revenue of only $2,000,000 was expected, and no advantage could be derived from the direct tax until the second year. Congress was again assembled in special session in Septem- ber, 1 8 14, to replenish an exhausted treasury and to restore public credit. Existing internal duties were increased and duties rendered permanent as follows: (i) the direct tax was doubled to ^6,000,000, to be assessed annually; (2) the duty on carriages was raised; (3) the tax on distillers of spirituous liquors was continued and a tax on distilled spirits was added ; (4) duties on sales at auction and on hcenses to retailers of wines and spirituous liquors and foreign merchan- dise were raised; (5) rates of postage were raised 50 per cent. ; (6) in addition new duties were imposed on certain 140 Economies and War. [§63 manufactured articles made in the United States and on certain articles in use, as household furniture and watches. Although effective supplies were thus tardily granted and did not become available until the closing years of the war, they proved of welcome assistance in the restoration of the disordered finances. There was great delay in the collection of these duties, and for years after the repeal of the taxes returns into the treasury from this source find an entry in the budget. The amounts accruing and the duties actually re- ceived from the internal duties (as estimated in a report of the committee on ways and means, December 9, 181 7) were as follows : — Year Accrued Collected 1814 1815 1816 1817 fo,262,i97 6,242,504 4,633.799 3,002,000 $1,910,995 4,976,530 5,281,111 3,000,000 Total $17,140,500 $15,168,636 The annual cost of collection was high, varying from 7.8 to 4.8 per cent. The most productive of the excise duties were those on distilled spirits, the licenses for stills and retailers, and on auction sales. The system was not long enough in force to become effective in its administration or to afford the treasury officers definite data for reliable estimates. This latter difficulty was increased by the fact that there was too little general information at that time in regard to public re- sources or industrial conditions. The three direct taxes imposed, with collections, were as follows : — Year Imposed Collected 1814 1815 1816 .817 )p3,ooo,ooo 6,000,000 3,000,000 ;?-■.= i>i,4i)7 2,162,673 4,aS3i635 1,834,187 $2,000000 INDIANS WAR $8,000000 E, 000000 4,000000 2,000000 |. NAVY ^ x^ K / \ 1 ,/ >-n [\— 1— T— T — r" ' 1 1 1 1 1 10 11 12 13 14 15 16 17 13 19 20 21 22 23 24 23 26 27 28 29 30 31 32 33 34 35 No. II. — ORDINARY EXPENDITURES, 1810-1833. (Continuation of Cliart No. i, different scale.) §64] Expenditures and Receipts. 141 These taxes were apportioned among the States on the census of 18 10, and the first act went so far as to apportion to each county in the several States the amount it should pay, thereby creating great inequalities. To avoid this evil the second act did not attempt to apportion the quotas among the counties, but left it to the States to equalize the burdens in the several collection districts. In view of the infrequent attempts throughout our history to levy a direct tax, it is sug- gestive to note that the several assessments made upon the States were met with a fair degree of exactitude and prompt- ness. If there was an unequal incidence, there was little grumbling, thus showing a distinct advance from the disastrous policy of requisitions under the Confederacy. As soon as the war was over prompt efforts were made to repeal the internal revenue duties. Dallas, who did not ap- prove such a sweeping measure, declared that there was a sufficient scope for the operation of a permanent system of internal duties, and recommended at least the retention of the licenses on distilleries and retailers, the duty on refined sugar and the stamp duties. For the time being Congress followed this advice, but when President Monroe, in his first annual message in December, 18 17, in deference to popular pressure recommended their repeal, a measure to that effect was quickly passed. 64. Expenditures and Receipts, 1812 - 1815. Although the war was over early in 1815, the military and naval expenditures continued heavy throughout 1816; by years the expenditures, 1812-1815, were as follows: — Year War Navy Interest on debt Miscella- neous ^ Total 1812 1813 1S14 i8is' $11,817,000 19,652,000 20,350,000 14,794.000 $3,959,000 6,446,000 7,311,000 8,660,000 $2,451,000 3,599,000 4,593,000 5,990,000 $2,052,000 1,983,000 2,465,000 3,499,000 $20,280,000 31,681,000 34,720,000 32,943,000 1 Including Indians and pensions. 142 Economies and War. [§64 The outgo during these four years was nearly as much as in the preceding twenty; the net results of this financial experience is seen in the following table in millions of dollars : — Year Taxes S.2- 1 •5 g s S IS ! - a £E Q H S fS 1812 8.9 8.q 0.8 q.8 20.2 10.4 1813 13-2 13-2 I.I 14.3 .?«■<> 17-3 1814 6.0 1.6 2.2 9.8 "•3 ll.l 34.7 23.0 181S 7-3 4-7 2.1 14. 1 '■5 15" 32.9 17-3 A comparison of the deficits and increase of debt during this period shows an excess of over ^13,000,000 of money borrowed above what was actually needed ; as a result the treasury began the year 1816 with the largest balance to its credit since the organization of the government. CHAPTER VII. PROBLEMS OF REORGANIZATION AFTER WAR. 65. References. Bibliographies : Bogart and Rawles, 29-31 ; Channing and Hart, 356-359- Bank and Currency Reform : (i) Sources, American State Papers, Finance, II, 872 (Dallas, report on banking, Nov. 27, 1814); 891 (Madi- son's reto) ; III, 57-61 (plan of Dallas, Dec. 24, 1815); 306-391 (report on Bank, Jan. 16, 1819); Clarke and 'H.s.W, Documentary History of the Bank, 472-713, 781-795 (Marshall's opinion in McCulloch v. Mary- land); Messages of the Presidents (Richardson ed.), I, 555 (Madison's veto); Statutes, III, 266; or Dunbar, 80; or W. MacDonald, Select Docu- ments, 207; Finance Reports, II, 481-513 (Crawford's report on cur- rency, Feb. 12, 1820; valuable); or American State Papers, Finance, III, 494; A. Gallatin, Writings, III, 282-287; H. Clay, Speeches, I, 74-80 (ed. 1857); J. C. Calhoun, Works, II, 153-162 (ed. 1853); D. Webster, Works, III, 35-59 (ed. 1851); J. B. Thayer, Cases on Constitutional Law, 271-285, 1340-1346. (ii) Special. BoUes, II, 278-283,317-326,359-374; L. C. Root in Sound Currency, IV, No. 17 (Sept., 1897); C. A. Conant, History of Modern Banking, iij^-yai; H. White, 271-281 ; W. Gouge, History of Paper Money, II, 55-121 ; W. G. Sumner, History of Banking, 1, 63-190 ; R. C. H. Catterall, Issues of Second Batik, vn Jour, of Pol. Econ., V (1897), 421, 544 (foot-notes); W. G. %Mxmitt, American Currency, I <^?>i, (disorders in 1819). (iii) General: W. G. Sumner, Life of Jackson, 231-235; J. A. Stevens, Gallatin, 270- 275 ; H. Adams, History of U. S., VIII, 249-251, 257-261 ; IX, 56, 82, 106- III, 116-118; McMaster, IV, 281-308 (local banks), 309-318 (organization of Bank), 484-490 (banking disorders), 495-505 (taxation of the Bank) ; Schouler, II, 447-449; III, 109-119 (difficulties in 1819). Resumption of Specie Payments: American State Papers, Finance, IV, 132 (report of Dallas); Statutes, III, 343 (resolution, April 30, 1816), or Dunbar, 95 ; A. Gallatin, Writings, III, 287-293 ; BoUes, II, 318-322 ; W. G. Sumner, American Currency, 74 ; H. Adams, History of U. S., IX, 118-119, 128-132. Tariff of 1816 : American State Papers, Finance, III, 32-35, 52-54, 82-85 (memorials), 85-99, 103-107 ; E. Young, Customs Tariff Legislation, xxxvii-xl; Statutes, III, 310; Bolles, II, 284-2931359-366; O. L. Elliott, The Tariff Controversy, 137-192; F. W. Taussig, Tariff History, 29-31, 1 44 Reorganization after War. [§ 66 40, so; Calhoun, PVaris, II, 163-173; R. Hildreth, 582-588, 630; H. Adams, History of U. S., IX, 111-116; McMaster, IV, 319-343- Payment of Dkbt; Finance Reports, II, 251 (1823), 282 (1824), 316 (1825) ; American State Papers, Finance, III, 800 (report, April 15, 1822, retrenchment of expenditures) ; Statutes, IIP, 379 (sinking-fund act, March 3, 1817); or Dunbar, 97 ; BoUes, II, 303-316, 523-526; J. W. Kearny, Sketch of American Finances, III, 150; \L. A. Ross, Sinking Funds, in Pub. Amer. Econ. Assn., VII, 70-76. Loans: Bayley, 355-360; W. F. de Knight, 57-61. 66. Currency Disorder. Upon the advent of peace the most important task was the re-establishment of the currency on a sound specie basLs. When Congress refused to re-charter the United States Bank in 181 1 the field was left free for State banking, and the op- portunity was eagerly seized. Between 181 1 and 1816 the number of these institutions rose from 88 to 246. Many were organized with almost no restrictions ; at best there were serious defects, for there was little past experience to guide either the legislatures which had the power of incorporation or the bank managers ; and there was no organized system of intelligence which would insure prompt publicity as to the condition of banks distributed over the wide area of country. War always brings a demand for new credit, and under this stimulus the notes of the banks were unduly expanded ; the loose credit system of selling public lands in the West led to inflation ; and this movement was hastened because after the suspension of specie payments in August, 1814, the government accepted State bank-notes in the payment of public dues, — hence the bank-note circulation increased from $45,000,000 in 181 2 to ^100,000,000 in 18 17. Besides meeting mercantile demands for credit, the banks found a tempting field for investment of their note issues in government loans. The banks were drawing interest on this stock; they used it for discounting purposes and they also profited by its gradual rise in the investment market. The result was embarrassing, for if, as sometimes happened, banks with small general resources took the loans of the government §67] Second United States Bank. 145 payable in twelve years and issued their own notes payable on demand, the banks had nothing but government stock to meet the notes when presented for payment, and this asset they were not always able to turn into cash. Coupled with the expansion of bank-note circulation was the withdrawal of a large amount of specie from the country ; the dissolution of the United States Bank alone caused the export of ;?7, 000,000 which had been in- vested by Europeans in its stock. The drain of specie was most marked from the banks of the Middle and Southern States, so that when Washington was captured by the British in 1814 all banking institutions except in New England, where more conservative methods prevailed, were forced to suspend specie payments. The disorder of the currency naturally disturbed the operations of the treasury ; imports sought the ports where the currency was the most debased ; and Phila- delphia and Baltimore thus enjoyed a greater apparent pros- perity than Boston. In the latter city it was necessary to make large disbursements, while the revenue receipts were diverted to the Southern ports. The direct loss to the government from poor or worthless bank-notes received dur- ing the four years, 1814-181 7, amounted to over ^5,000,000. The monetary derangement was so acute that the treasury department was obliged to keep four accounts with its de- positories in four standards of value : cash or local currency ; treasury notes bearing interest; treasury notes not bearing interest ; and special deposits. 67. XiBtablishnient of the Second United States Bank. An important part of the vigorous policy outlined by Dallas when he took charge of the treasury department in 18 14 was the establishment of another United States Bank. For this there were two reasons : at first emphasis was placed upon the advantage which the bank would afford in supplying financial resources to an embarrassed treasury ; and later it was held indispensable for the restoration of a national currency. Dallas appropriately recognized the services of a few of the 1 46 Reorganization after War. [§ 67 State banks during the war ; but declared that " the charter restrictions of some of the banks, the mutual relation and depend- ence of the banks of the same State, and even of the banks of the different States, and the duty which the directors of each bank conceive they owe to their immediate constituents upon points of security or emolument, interpose an insuperable obstacle to any voluntary arrangement upon national considerations alone for the establishment of a national medium through the agency of the State banks." In Dallas' view a national bank could conciliate, aid, and lead State banks in the restoration of the currency to a specie basis ; the government in turn would find its benefit in the rise of value of public securities and in increased confidence in the treasury notes. Constitutional objections to a bank reappeared, but President Madison, Secretary Dallas, and the legislative leaders agreed in putting that argument aside and devoting attention to the financial and economic elements involved in the question at issue. For a time it was impossible for the advocates of a bank to agree on details which they could all support ; hence a brief discussion of the various projects brought forward is desirable in order to illustrate the conflicting state of public opinion, although not one of them was finally adopted in its entirety. Three distinct and often conflicting purposes stood out in the debates : the need of a bank to give financial support to the government ; the fear of governmental participation in banking ; and the necessity of properly securing the note cir- culation, — ideas which were the key-notes of similar discussions during the next twenty-five years. Dallas originally proposed (in a report, October 17, 1814) a bank with a capital of ;?50,ooo,ooo j recognizing, however, that it would be impos- sible to secure so large a subscription in coin, he advised that of the ^50,000,000 but S6,ooo,ooo be subscribed in specie, and the remainder in government stock and treasury notes. Provision was made that the government should hold stock in the bank, and that the bank should l^nd ^30,000,000 to the government ; and in the bill reported in the House from § 67] Second United States Bank. 1 47 the committee on ways and means, November 7, the president was given discretionary- power to allow suspension of payment of specie by the bank. The chief purpose of this plan was to secure loans to the government ; the capital of the bank was to consist largely of government credit in the shape of stock, and in return the bank was not absolutely bound down to pay on demand its obligations outstanding in the form of circulating notes. Calhoun objected to a financial partnership of this character in which the government would borrow back its own credit, and in a second plan proposed that the government should use its own credit directly without the intervention of a bank, — that one-tenth of the capital should be in specie and the remainder in treasury notes to be thereafter issued ; beyond this indirect relation the United States was to have no stock in the bank, no control over its operations, and no power to suspend specie payments. This plan would give support to treasury notes to the disadvantage of government stock, but as treasury notes by this time had many friends it was for the moment favored by the House. Dallas came out strong in opposition, because the fresh issue of treasury notes would gratuitously give an advantage to a single class of cred- itors and would tend to depreciate the value of the rest of the public debt ; more than that he held that it would be extremely difficult to get ^45, 000,000 of treasury notes into circulation, either with or without depreciation. In later years Calhoun had to meet repeatedly the charge of inconsistency for his support at this time of a federal banking institution. His answer was always frank : he supported a national bank as an instrument of compulsion to force the local banks to resume specie payments ; distrust of the State banks led him to waive for the time being his political philosophy. In the course of the debate (December 29, 1814) Webster proposed still a third plan, — a bank with a capital of ^30,000,000, with no obligation on the part of the bank to loan money to the government, with no permission to suspend 148 Reorganization after War. [§67 specie payments, and with a penalty on a refusal by the bank to redeem its notes. In support of his measure Mr. Webster delivered an instructive speech : he thought that the advantages to result from a bank were overrated ; for banks are not revenue ; the foundations of revenue must be sunk deeper ; and the principal good from a bank was in the future, not in the present. The bank proposed by Calhoun seemed to him most extraordinary and alarming ; with a capital of ^5,000,000 in specie and ^45,000,000 in government notes, such an in- stitution looked less like a bank than a paper- money depart- ment of the government : " the government is to grow rich because it is to borrow without the obligation of repaying, and it is to borrow of a bank which issues paper without liability to redeem it." The first bill .passed was along the lines suggested by Webster ; the capital authorized was ^30,000,000, of which the United States might subscribe ^5,000,000 in government stock ; of the private subscription of ;^25,ooo,ooo one-half was to be in treasury notes, one-third in stock, and one-sixth in coin. No loan was to be made to the government exceeding §500,000 ; the bank could not purchase government indebted- ness ; and no permission was given to suspend specie pay- ments. This bill did not meet the approval of Secretary Dallas, and was vetoed by President Madison, January 30, 18 15, for the following reasons : the amount of the stock to be subscribed would not be sufficiently in favor of the public credit to cause any considerable or lasting elevation of the market price of government stock ; the people would reap no adequate bene- fits, since the bank was free from all legal obligations to make loans to the government; and the bank as constituted would not provide a sufficient circulating medium, for it would be obliged to pay its notes in specie or be subject to loss of its charter. In brief, Madison's objection was that the bank as proposed would fail to provide a reliable circulating medium, or to furnish loans to the government in return for its franchise. In December, 1815, Secretary Dallas again placed the sub- §67] Second United States Bank. 149 ject before Congress, with some modification of his previous propositions : he now recommended a bank with a capital of but ;?35,ooo,ooo, to consist three-fourths of government stock (with no mention of treasury notes) and one-fourth of specie ; instead of demanding that the bank make loans to the United States it was under obligation to pay a bonus to the government in return for the benefits of its charter ; and, finally, he insisted that no opportunity should be given for a suspension of specie payments in case of emergency. In accordance with these principles a bill was introduced early in 1816. Calhoun gave his support, together with a violent attack upon State banks, which he accused of circulating ^170,000,000 of bank- notes on not more than ^15,000,000 of specie in their vaults. " The metallic currency has left our shores," said he ; " we have treated it with indignity ; it leaves us and seeks a new asylum on foreign shores." Smith of Maryland coincided with Calhoun that a bank was unnecessary but resented the attack upon the State institutions ; during the war, he said, " they had been the pillars of the nation, now they were the caterpillars." John Randolph opposed the bill specifically and in general. A bank " would be an engine of irresistible power in the hands of any administration; it would be in poHtics and finance what the celebrated proposition of Archimedes was in physics, — a place, the fulcrum, from which at the will of the executive the whole nation could be hurled to destruction." "Every man present in the House or out of it, with some rare excep- tions, was either a stockholder, president, cashier, clerk, or door- keeper, runner, engraver, paper-maker, or mechanic in some way or other to a bank." " It was as much swindHng to issue notes with the intent not to pay as it was burglary to break open a house." " But a man might as well go to Constantinople to preach Christianity as to get up here and preach against banks." Clay, then speaker of the House, favored the bank, although formerly, when a member of the Senate, he had opposed the renewal of the charter of the first bank. In explanation he assigned his former opposition to three causes : 1 50 Reorganization after War, [§ 68 first, he had been instructed to oppose the charter by the legis- lature of his own State ; secondly, the old bank had abused its powers in the interest of a political party ; and, thirdly, he had previously doubted the constitutional authority of Congress to establish the bank. The situation in his opinion was changed in 181 6, since it was now clear that such an institution was indispensable to treasury operations. Finally, on March 14, 1816, the new bill, framed more in accordance with the ideas of the administration, was passed by the House by a vote of 80 to 71 ; of the minority 38 were Federalists and 31 were Republicans. The bill passed the Senate and was approved by the president April 10. 68. Career of the Bank, 1816-1819. From the standpoint of note circulation the following pro- visions are of importance : circulation was limited to the total capital of the bank, ^35,000,000; notes were payable in specie on demand, under a penalty of 12 per cent, per annum in case of failure ; notes of denominations of less than five dollars were prohibited ; and the notes were receivable in all payments to the United States. The relations of the bank to the government were twofold : the government subscribed ;?7,ooo,ooo of the capital ; and three-quarters of the remaining ^28,000,000, or ;^2i,ooo,ooo, was to be subscribed in the funded debt of the United States. Five of the twenty-five directors were appointed by the president. The bank was obliged to transfer the public funds of the government from place to place without commission ; the deposit of the funds of the government was to be made with the bank, unless the secretary should otherwise direct, in which case the secretary of the treasury should lay before Congress the reasons for such action. In return for the privileges granted in the charter, the bank wag obliged to pay Ji, 500,000 in three equal instal- ments to the United States, and finally the United States agreed to establish no other bank under federal charter §68] Career of the Bank, 1816-1819. 151 except in the District of Columbia. Congress was given the power to inspect the books of the bank, and if there were rea- son to beUeve that the charter was violated to direct the president to issue a writ of scire facias whereby the bank should show cause why the charter should not be forfeited. The enactment of the bank measure was quickly reinforced by the passage of a joint resolution providing that after Feb- ruary 20, 1 81 7, all dues to the government should be paid in legal currency, treasury notes, notes of the bank of the United States, " and in notes of banks which are payable and paid on demand in the said currency of the United States." State banks were thus given about ten months to get their houses in order if they wished to secure a financial standing with the general government. This was a vigorous demand; the United States Bank had yet to be organized and many local institutions established in the Middle States were reluctant to reduce their loans and contract their circulation so as to rest on a specie basis. In midsummer, i8i6, the banks of the Middle States held a convention and asked that the date of resumption be deferred, giving as a reason that the United States Bank could not be organized in the time assigned, and that they wished the aid of this institution in their efforts to resume. Dallas labored the harder to open the new bank on time ; the stock was taken, directors elected, and an agent sent abroad to purchase bullion. In January, 1817, the bank was opened, and on February 20, the date originally set, the victory rested with the administration. During the first year of its operations the bank was badly managed ; for, instead of tactfully and vigorously taking the lead in restoring banking credit to a sound condition, the officers violated provisions in its charter and undertook through the numerous branches to oppress local banks. Although the charter provided for a subscription of ^7,000,000 in specie, only $2,000,000 was paid in, and instead of the full complement of government stock $12,000,000 was subscribed in the personal notes of stockholders. Discounts were in- 1 5 2 Reorganization after War. [§ 68 judiciously if not illegally made on United States bank stock as collateral; stock jobbing was common; and, through in- side arrangements made with bank officers, speculators bor- rowed money of the bank and bought shares simultaneously. Even the president and other officials of the bank speculated in its stock ; and dividends were paid to stockholders who had not completed their subscriptions. Nor was the bank successful in restoring note circulation to a healthy state ; although resumption was nominally made, specie continued at a slight premium. For this the bank possibly was only in part to blame ; there was too little specie in the country and for- eign trade was adverse. Instead of recognizing this difficulty the bank by sharp practice extended its own circulation be- yond proper limits and also stirred up bitter feeling by en- deavoring to control the circulation of note issues of local banks. Branches in the South and West loaned with great freedom, and as the notes issued on such loans were redeem- able at any branch East or West the capital of the bank was unduly diverted to sections which did not enjoy commercial stability. It was not long before the bank saw the danger, and in August, i8i8, it sent out orders to redeem no notes except at the office where issued ; and in the hope of return- ing to safer ground it reduced its credits. This reversal of policy occurred at a time when commerce was strug- gling to recover itself from the inflation of the war period, and so sudden was it that instead of warding off it hastened the impending disaster ; thus far the bank was not a success as an agency for improving the currency. Two years of reck- less management culminated in the smash of the Baltimore branch with a loss of ^3, 000,000, and in January, 18 19, a motion was introduced into C6ngress looking to a setting aside of the charter ; nothing saved the bank from ruin but placing at the head of its affairs Langdon Cheves, a sound business man. A conservative policy followed, which continued during the presidency of Cheves (1819-1823) and the earlier years of his §69] . Local Banks, 1815— 1830. 153 successor, Biddle. The contraction which followed is made clear in the following figures of circulation and loans : — Year Circulation Loans 1817 $1,911,000 $3,485,000 181S 8,339,000 41,181,000 1819 6,563,000 35,786,000 1820 3,589,000 31,401,000 182 1 4,567,000 30,905,000 1822 5,578,000 28,061,000 1823 4,361,000 30,736,000 During its entire history the bank issued but little circula- tion in New England, and not until its later days any large amount in the Middle States. On account of this sectional- ism in its operations the bank did not come into conflict with the strong local institutions of the East. In the South and West it exercised a strong financial guidance, which was greatly needed, but in doing this it occasioned jealousies and ill-will which counted to its disadvantage in the long run. The dis- tribution of the bank's circulation in 1818, 1823, and 1832 is interesting to note : — Section Sept. 30, 1819 Jan. 2, 1823 April 4, 1832 / New England Middle States .... South Southwest ... West $518,000 969,000 3,960,000 670,000 817,000 $393,000 868,000 2,281,000 744,000 45,ooo $901,000 5,478,000 5,311,000 5,637,000 5,i3r?ooo Total $5,934,000 $4,331,000 $22,458,000 69. Local Banks, 1815-1830. It is difficult to form a clear Oppression of the progress of local banking previous to 1834 iDecfause of lack of complete official reports. The virtue of publicity in accounts of bank- ing institutions was not generally recognized Ot, insisted upon by law. Gallatin, whose essay on Banking and entrency written in 1831 is by far the most thorough discussion of the 154 Reorganization after War. [§69 subject, refers " to the mystery with which it has been thought necessary " in several of the States " to conceal the operations of the banking institutions." This led not only to erroneous opinions on the part of the public, but gave free opportunity for mismanagement by bank officials. As far as records go the condition of banks in 1815, 1820, and 1829 was as follows in millions of dollars : — 1815 1820 Nov. i, 1829 Year State banks State banks U.S. Bank Total State banks U.S. Bank Total Number . Capital. . . . 208 82. 307 ro2.l 35-0 137-1 329 1 10. 1 35.0 145- 1 Notes in circulation 4S.S to 100. 40.6 4.2 44.8 48.2 13.0 61.3 Deposit . . Specie . . Loans ... 17- 150. 31.2 16.6 4-7 3. 1 .. 31-4 35-9 19.8 40.7 14.9 1370 14.7 7' 40.6 55-5 22.1 177.6 The character of the local institutions varied greatly, depend- ing upon the available amount of surplus capital in different sections and the degree of past commercial experience of the communities in which they were established. Each State was working out for itself a system which presented with some degree of accuracy the current stage of economic thought and industrial development. No account of this can be given here, but in order to understand the contest which Jackson later waged against the United States Bank and the financial entanglements of 1837 a few aspects of local banking must be noticed. The two principal defects in local banking were the opportunities for over-issue of notes and the making of loans on improper security. Of note issues, substantially three systems were tried in different parts of the country: (i) issues based only upon the general assets of a particular bank; (2) issues protected by a general safety fund; and (3) issues based upon the credit and faith of the States. In New luigland circulation was generally based upon assets; §69] Local Banks, 1815-1830. 155 as early as 1809 Massachusetts laid a penalty of 2 per cent, a month on banks which failed to redeem their notes on demand, and in 1829 passed an act providing that -all banks thereafter incorporated should be restricted in their note circulation to one and a fourth, times the capital. In New England there was also developed what was known as the Suffolk system of redemption, under which the notes of New England banks uniformly circulated at par and were generally held in good repute._ By this plan all the large city banks had to stand ready at all times to redeem, and the country banks in New England were compelled to establish redemption agencies in Boston ; the Suffolk Bank in Boston was charged with the duty of bringing any delinquent to terms by collect- ing its notes as fast as they made their appearance in Boston and returning them to the place of issue for payment in specie. In New York the system of banking* on general assets was supplemented by the safety-fund system introduced in 1829, under which each bank was required to pay annually to the treasurer of the State a sum equal to one-half of one per cent, of its capital stopk until the payments should amount to 3 per cent., the fund to be used for the redemption of the notes of any failed bank. These precautions were the exception ; Southern and Western States were not so careful to prevent over-issues, and many country banks established in remote places succumbed to the temptation. All banks indeed throughout the country issued notes of ^5, and many those of a lower denomination. Failures of banks were common and bill holders and depositors suffered much. As the United States Bank with its branches covered a wide range of terri- tory, it naturally had frequent occasion to discriminate against suspicious issues, and thus not only brought down the vio- lent opposition of reckless financial adventurers but gave cause for complaint by banks which were honestly endeavoring to satisfy the great demand for loans in regions poorly provided with capital. 156 Reorganization after War. [§70 70. United States Bank, 1823-1829. The history of the United States Bank from 1823 to 1829 was on the whole uneventful. Cheves was succeeded as President in January, 1823, by Nicholas Biddle of Philadelphia, who was elected to represent " a young and progressive policy" as against an " old and conservative policy." His aim was to increase the circulation and yet avoid the dangers which nearly wrecked the bank between 1817 and 1819. This he accom- plished through the freer use of domestic bills of exchange and the introduction of branch drafts. Under the charter provision only the president and the cashier of the parent bank could affix signatures to bills of branches. This restric- tion practically barred branch issues, as the officers could not sign more than 1500 notes a day, and it was calculated that on this basis four years would be required to furnish the volume needed. The bank, therefore, repeatedly endeav- ored to secure congre'ssional authority to permit the offi- cers of the branch banks to sign notes, but the efforts failed on the ground that a variety of signatures meant a variety of notes, causing an increase in the evils of irresponsible and inflated circulation which the establishment of the bank wds in part intended to remedy. The branch draft devised by Biddle was obviously a method for doing the same thing by the issue of drafts for even sums of ^5, ^10, or S20, drawn by a branch upon the parent bank, payable to an officer of a bank and upon endorsement payable to bearer, thus acquiring some of the characteristics of circulation bank-notes. The inflation in circulation which resulted from Biddle's expansive policy is seen in the following table of yearly average circulation of the United States Bank : — Year Circulation Year Circulation 1S23 1824 1825 1S26 1827 [828 ?4,487,ooo q,7gi,ooo 8,825,000 Ot6.lf;,oon „,7S.,,,..». n,nl,7,n,«, 1829 18-50 1^3 5 .S.A4 $13,102,000 15,067,000 ■ 9,0.35.0°° iQ,q8g,ooo 18,636,000 16,71)0,000 § 7i] Constitutionality of the Bank. 157 As to. the bank's relations to the treasury department, there was little criticism after 1819 until Jackson's term as president. In the annual report for 1828 Secretary Rush made special reference to the great service of the bank ; the ^97,000,000 received in the treasury during the four years of Adams' administration had been applied to the various objects of expenditure without embarrassment or delay, and the credit for this result was largely ascribed to the bank. " In faithful obedience to the provisions of its charter, and aided by its branches, the bank had afforded the necessary facilities for transferring the public moneys from place to place." 71. Constitutionality of the Bank. Such scruples as statesmen may have had over the constitu- tionality of a bank chartered by the federal government were soon rendered purposeless by a decision of the Supreme Court. In 18 1 8 the legislature of Maryland imposed a stamp duty on the circulating notes of all banks or branches thereof located in the State and not chartered by the legislature. The Maryland branch of the United States Bank refused to pay this tax, and the State court sustained a suit against the cashier, McCulloch ; therefore the case was carried to the United States Supreme Court, and decided in 1819 in the famous case of McCulloch v. Maryland. The opinion written by Chief- Justice Marshall is in harmony with the long line of decisions through which he elaborated the fundamental powers of the federal government. Against the constitution- ality of the bank it had in general been argued that the power of Congress to incorporate a bank is not among those enumer- ated in the Constitution ; that the inclusion of such a power had been expressly rejected by the convention which framed the Constitution, and that the enumerated powers could be carried into exercise without a bank. To the argu- ment that a bank might facilitate the collection of taxes, and be justified under the general powers of Congress on the ground of fiscal convenience, the reply was made that the 158 Reorganization after War. [§71 Constitution allows only the means which are necessary, and not merely those which are convenient for effecting the enu- merated powers. Even the merit of convenience was not granted by opposing critics, who declared that the local or State banks in existence were entirely competent to meet all the needs of the government in the collection of revenue.' Marshall in his decision declared that the United States Bank was an instrument which was necessary and proper for carrying on the fiscal operations of the government. The sword and the purse, all the external relations, and no incon- siderable portion of the industry of the nation, are intrusted to the government; having such ample powers, on the due execution of which the happiness and prosperity of the nation so vitally depend, it must also be intrusted with ample means for their execution. "Throughout this vast republic, from the St. Croix to the Gulf of Mexico, from the Atlantic to the Pacific, revenue is to be collected and ex- pended, armies are to be marched and supported. The exigencies of the nation may require that the treasure raised in the North should be transported to the South, that raised in the East conveyed to the West, or that this order should be reversed. Is that construction of the Constitution to be preferred which would render these operations difficult, hazardous, and expensive? " The Constitution, said Marshall, did not intend to create a dependence of the government of the Union on those of the States for the execution of the great powers assigned to it. The choice of means implies the right to choose a national bank in preference to State banks, and Congress alone can make the election. The branches of the bank proceeding from the same stock are equally constitutional. With the parent bank the court was equally explicit in its conviction that a State could not tax the bank or one of its branches. "If the State may tax one instrument employed by the government in the execution of its powers, they may 1 Story, Com militaries, Bk. Ill,, ch. 2J. § 7i] Constitutionality of the Bank. 159 tax any and every other instrument. They may tax the mail ; they may tax the mint; they may tax patent rights; they may tax the papers of the custom-house ; they may tax judicial process ; they may tax all the means employed by the government to an excess which would defeat all the ends of government." For this reason the law passed by the legislature of Maryland imposing a tax on the' Bank of the United States was declared unconstitutional. This opinion did not preclude State taxation of real property of the bank within the State, nor the taxation of securities, held by citizens of Maryland, in common with other property of the same description throughout the State.* Interpreters of the Constitution belonging to the school of strict con- struction also note that in this case the court confined the authority of Congress to the establishment of a bank as a means of exercising the fiscal functions of the government, and that consequently the establishment of national banks, as in our present system, for the purpose of providing a currency, is an altogether different question and must be justified on other grounds.^ An effort to tax the United States Bank was also made in Ohio; the State imposed a tax of ^50,000 on each of the two branches established at Cincinnati and Chillicothe, to go into effect September 15, 1819. The branches continued busi- ness, refused payment, and the local sheriff in behalf of the State seized ^98,000 in money ; the bank through the United States Circuit Court secured the arrest of the State ofiicials involved, and on appeal the dispute was carried to the Supreme Court in the case known as Osborn et al v. United States Bank (1824). In the opinion then delivered Chief- Justice Marshall was still more explicit in resting the validity of his decision in the case of McCulloch v. The State of Maryland, on the principle that the bank was a public corporation created for public and national purposes. If the bank were founded 1 Wheaton's ^s^w*, pp. 316-437 ; Marshall's Writings, pp. 160-187. ^ Tucker, Constitution of the U. S., i : 516-518. i6o Reorganization after War. [§72 upon contract between individuals, having private trade and private profit for its great and principal object, it certainly would be subject to the taxing power of the State, as any individual would be ; and the casual circumstance of its being employed by the government in the transaction of its fiscal affairs would not exempt its private business from the operation of the taxing power. It was denied, however, that the bank was founded for any such limited private purpose, and the court enlarged upon the services rendered to the government. 72. Issues of Banks Owned by States. Another interesting constitutional question arose during the period under review ; viz., the constitutionality of bills issued by banks established in the name of a State. Institutions owned and managed by States were organized in the South and Southwest : were not the notes then issued, depending upon the faith of State governments, practically bills of credit expressly forbidden to States by the Constitution ? This ques- tion came before the Supreme Court in 1824 in the case of Bank of the United States v. The Planters' Bank of Georgia, and in 1829 in Bank of the Commonwealth of Kentucky v. Wister et al. In these cases the local banks of Georgia and Kentucky, in which the State governments had invested, endeavored to shield themselves behind the Eleventh Amend- ment, and entered a plea of non-suability of a sovereign State. The force of this plea was admitted by the Supreme Court, provided the State as a sovereign was the sole owner of the bank-notes issued, but if this ground were taken the court in the latter case held that the notes issued by the bank would ■ be bills of credit, and contrary to the provisions of the Con- stitution of the United States. The next year (1830), in the case of Craig v. The State of Missouri (4 Peters, 140), the Supreme Court in an opinion delivered by Marshall declared that certificates issued by State loan officers and receivable for taxes and salaries were unconstitutional. Decisions of this character helped to excite popular resentment in the South §73] Tariff of i8 1 6. i6i toward the United States Bank, which though a private insti- tution came to be regarded as a federal bank, to which was granted the privilege of note issue denied to a local bank even though clothed with the power of State sovereignty. 73. Tariff of 1816. In i8i6 the customs revenue of the government was enor- mous, not only passing far beyond any previous returns, but standing at a figure not again reached until 1850. The imports, valued in 18 14 at less than ^13,000,000, rose to $147,000,000 in 1 816. "The English manufacturers, to whose merchandise after years of commercial war an ample market finally opened, rushed as if to the attack of a fortress." ^ An increase in customs duties resulted beyond all anticipation; instead of ;? 13,000,000 for 181 6, as previously estimated by Dallas, $36,000,000 were turned into the treasury. Signs were early apparent of an importation overwhelming and for manufactures possibly ruinous. In 181 5, upon sub- mitting the treaty of peace, Madison called attention to the unparalleled • development of manufactures, and " anxiously recommended this source of national independence and wealth to the prompt and constant guardianship of Congress." A step further was taken when in his annual message in Decem- ber, 1815, he affirmed the necessity of protection to enter- prising citizens " whose interests are now at stake." Dallas was also promptly called upon to prepare a bill, which he subsequently submitted in an elaborate report, February 12, 181 6, stating the principles upon which the measure was framed. Not only was revenue to be secured and its collec- tion rendered equal and certain, but the interests of figricult- ure, manufactures, trade, and navigation must be conciliated. Articles of foreign importation were arranged by Dallas in three classes according to the degree of dependence upon foreign countries : in the first class were commodities which could be manufactured in sufficient supply at home, on which 1 Rabbeno, American Commercial Policy, p. 153. 1 62 Reorganization after War. [§73 it was proposed to place duties high enough to shut out foreign competition ; in the second, articles partially supplied at home, which were to be treated to less protection ; and, in the third, articles pot produced at home, and consequently subject purely to fiscal considerations. A general tariff bill was introduced March 12, 1816, and enacted April 2 7 ; in effect it fell slightly short of the rates recommended by Dallas. Both the debate upon this measure and the provisions of the act are of especial importance in fiscal history. The new textile industries were threatened by English competition ; hence a duty on woollen and cotton of 25 percent, until June 30, 18 19, and after that date of 20 percent. ; ■with respect to cottons it was further provided that all cotton cloths, the original cost of which was less than 25 cts. per square yard, should be deemed to have cost that sum, and pay duties accordingly. This was the introduction of the minimum prin- ciple, and its immediate object was the exclusion of coarse, low-priced cotton fabrics from the East Indies. The act also imposed a 30 percent, ad valorem rate on certain other goods, as hats, cabinet wares, manufactured wood, carriages, leather and its manufactures, and paper. A specific duty of 3 cts. a pound was laid upon sugar. So great were the changes in rates that it is often asserted that the tariff of 181 6 is the beginning in the United States of the distinct application of the protective principle to domestic industry by means of customs duties. Even if this be not strictly true, the change in policy was so marked that this tariff is properly regarded as a turning-point in economic legislation. Duties in the early tariffs may have incidentally afforded protection; but in 1816 protection was adopted as a fundamental basis of the fiscal system and revenue was subor- dinated to industrial needs. A comparison of tariff rates on the most important commodities as adopted in the first tariff of 1789, the rates prevailing just before the War of 1812, the war rates, and those enacted in i8i6, shows the progress toward restriction : — §73] Tariff of 1816. 163 1789 Acts of 1S04, 1807, 1S08 Acts of 1S12 to 1816 Act of April 27, 1816 Cotton maniiractiires Glass manufactures . ■ Rolled or hammered iron Leather . . . • Molasses ..... Sugar, brown . . Boots, men's leather Cabinet ware . . Candles, tallow Carriages . . Earthenware . . Fish, dried . . . Hats Hemp, manufactured Linen Nails ..... Paper, writing . ■ Salt .... free 10 per cent. 7J per cent. 7I per cent. 2I cts. gal. 1 ct. lb. 50 cts. pair 7^ per cent. 2 QlS. lb. ig per cent. 10 per cent. 50 cts. quintal 7i per cent. .60 cwt. 5 per cent. I ct. lb. 7^ per cent. . 10 cts. bushel ^7^ PC cent. 22^ per cent. 17^ per cent. i7i per cent. 5 cts. gal. 2^ cts. lb. 75 cts. pair 15 per cent. 2 cts. lb. 22^ per cent. 17^ per cent. 50 cts. quintal 17^ per cent. $1.00 cwt. 15 per cent. 2 cts. lb. 15 per cent, free 35 percent. 45 per cent. 35 per cent. 35 per cent. 10 cts. gal. 5 cts. lb- S1.50 pair 30 per cent. 4 cts. lb. 45 per cent. 35 per cent. $i.oQ quintal 35 per cent. J2.00 cwi. 30 per cent. 4 cts. lb. 30 per cent. 20 cts. bushel I 25 per cent. 20 per cent. 30 per cent. 30 per cent. 5 cts, gal. 3 cts lb. gi. 50 pair 30 per cent. 3 cts. lb. 30 per cent. 20 per cent. $1.00 quintal, 30 per cent. S1.50 cwt. 35 per cent. 3 cts. lb. 30 per cent. 20 cts. bushel The debate over the tariff bill of i8i6 was the beginning of the discussion as to the relative advantages of a definite policy of free trade or protection, a discussion which has lasted to the present time. On the whole opposition to increased restriction was weak in 1816 because there was an unquestioned emer- gency; the distress of the textile industry was obvious and silenced objections which would otherwise have been more insistent. The tariff question, possibly for the last time, was treated in a broad and rational spirit ; support for the bill came from all parts of the country. The vote in the House of Representatives by sections was as follows : — In favor Opposed New England Middle States . West (Ohio) . . . South and Southwest 17 44 4 23 10 10 34 Total 83 54 Even in South Carolina the vote in favor of the bill was 4 to 3. The time had not yet arrived for the enumeration of the extreme doctrines which were subsequently formulated by protectionists on the one hand and by free-traders on the other. The policy 164 Reorganization after War. [§73 of " let alone " was recommended by a few, but the champions of the merchants and of commerce dwelt chiefly upon the unjust discriminations of tariffs, the evil social effects of manu- facturing, and contrasted the delights of bucolic life ; such radical opposition as Randolph's represented the individualism of a free lance rather than the convictions of any well-defined class. There was, however, plenty of discussion over the scale of rates, as indicating the measure of protection which Con- gress was willing to grant. New England, whose chief inter- ests were still commercial, criticised rather than antagonized, and even Calhoun, who was not yet consecrated to the sectional profit of the agricultural South, championed the interests of manufactures as a part of the security of the country. " Nei- ther agriculture, manufactures, nor commerce, taken separately, is the cause of wealth ; it flows from the three combined and cannot exist without each." The importance of the tariff question as it developed during the" next fifteen years, from 1818 until the passage of the compromise tariff in 1833, justifies its consideration in a separate chapter ; but since the revenues were fairly con- stant after 182 1, in spite of frequent claanges in rates of duty, and as the several tariff measures ^ere founded on other con- siderations than those of meeting the needs of the treasury, it is possible to continue here with advantage a general sketch of the state of the treasury, the receipts, expenditures, and public indebtedness from 181 7 until 1834 when the debt was extinguished. The administration of the treasury department during the terms of Monroe and John Quincy Adams was in competent hands. William H. Crawford succeeded Dallas as secretary of the treasury in March, 1816, and held office until 1825. He is a good illustration of the political statesman managing the affairs of finance ; his experience in public life had been long and varied ; he had been senator from Georgia, minister to France, and secretary of war; in 18 16 he was talked of for the presidency, but stepped aside for Monroe, thus gaining, it §74] Financial Embarrassments. 165 was supposed, a right to the succession. He was a conserva- tive Democrat, of the Virginian type as opposed to the more radical Westerners ; he had been a stanch supporter of the First United States Bank, and in 1816 labored earnestly for the establishment of its succession. Though not a great man, he gave careful attention to the duties of his office, particu- larly during the first part of his administration when currency disorders were so grave, and left behind him an interesting series of reports. In March, 1825, Richard Rush of Penn- sylvania succeeded Crawford ; he had been long engaged in public affairs, and in Madison's administration had received valuable training as comptroller of the treasury. Rush wrote much, and, being an ardent protectionist, embodied in his annual reports earnest disquisitions in favor of restrictive tariffs. He was also an early advocate of the warehousing system. During this period improvements were made in the collection and publication of commercial statistics, which were greatly needed for understanding the relation of tariff duties to trade. The first commerce and navigation report appeared in 182 1. 74. Financial Embarrassments, 1816-1821. The first few years of this period were exceptionally per- plexing to the treasury because of the violent fluctuations in the revenue. On January i, 1816, the total indebtedness of the United States amounted to ^127,334,000. The outstand- ing treasury notes were speedily funded into stock, and as the abundant revenues of 1816 justified the policy of rapid ex- tinction of debt, Congress ordered under the act of March 3, 1 81 7, that from the proceeds of customs, tonnage, internal revenue duties, and sales of public lands, ^10,000,000 should be annually appropriated to the sinking fund. As revenues were still large in 181 7, ^9,000,000 additional were appropri- ated to the sinking fund for that year; and it was further provided that any annual surplus income beyond ^2,000,000 should be devoted to the purchase of government securities. Too much faith, however, had been placed in the future ; the 1 66 Reorganization after War. [§74 years 181 6 and 181 7 were unusual in their yield, and the wonderful prosperity did not continue. Excessive importations were checked as trade returned to its usual channels, and the normal state of the budget began to be apparent. The cus- toms receipts grew smaller ; but unfortunately the falling off did not occur until after the internal revenue duties had been repealed. Deficits then occurred ; and the years iSiSto 1821 proved to be a period of perplexity and discouragement in the administration of the finances. The difficulties were also aggravated by the bad management of the bank to which reference has been made. The year 181 9 was marked by a crisis, the first of those in- dustrial and commercial storms which have since recurred at fairly regular intervals in our history. Its causes were com- plex : in part the inability of the manufacturing industries to recover a stable footing after the abnormal growth occasioned by the embargo and the war, and in part a spirit of specula- tion developed by the several years of rapid commercial ex- pansion and bad banking. Distress was severe throughout the country ; many laborers were thrown out of employment ; prices of exportable articles fell, and, in general, a readjust- ment of values was forced upon the country. Contraction of credits by the banks in their endeavor to obtain a specie basis in 18 1 7 also contributed to diminish the credit facilities which the banks could afford to importers ; the State banks reduced their note issues from ^100,000,000 in 1817 to $45,000,000 in 18 19. The condition of the treasury department speed- ily became grave, and in the annual report of December, 1819, Crawford announced a deficit and demanded either a reduc- tion in expenditures or an increase in revenue : in any event a loan was necessary to tide over immediate embarrassments, and the secretary even ventured to suggest a small temporary issue of non-interest- bearing treasury notes. In .April, 1820, the House committee on ways and means, in a report on a loan bill, effectively set forth the needed remedies ; while they hesitated to recommend a loan, they believed that powerful § 74J Financial Embarrassments. 1 67 reasons existed working against a restoration of internal revenue and direct taxation in a period of profound tranquillity. Econ- omy and retrenchment ingovernment expenditures were needed, especially in view of the depression of commerce and naviga- tion, the depreciation in the value of exports and of property of every description, and serious embarrassments in all branches of industry, which compelled economy and retrench- ment in the expenditures of every citizen. The excess of ex- penditures over revenue was ascribed principally to the heavy payments in the redemption of the public debt ; ^32,000,000 of indebtedness had been redeemed since January i, 181 7. To tide over the difficulty, a loan of ^3,000,000 was author- ized by the act of May 15, 1820; two-thirds of this loan was redeemable at the pleasure of the government, and bore in- terest at 6 per cent. ; the remainder ran for twelve years and bore 5 per cent, interest. In spite of a reduction in ordinary expenditures the situa- tion in 182 r was still more grave. This was in part caused by the fact that several millions of the public debt were due in that year. Another loan of $5,000,000 running for four- teen years at 5 per cent, was authorized March 3, and as there was at the moment a large amount of capital in the hands of owners who hesitated to invest in private enterprises, it was readily taken at a premium of from 5.1 to 8 per cent. Commerce and industry then began to revive, and there was no further necessity of resorting to deficit loans. The experience of the years 1818 to 1822 affords another illustration of the great difficulty of adjusting revenue to ex- penditures in a new and rapidly expanding nation, especially a nation which relied for its revenue chiefly on import duties. Changes in political or commercial relations result in exces- sive fluctuations of revenue; thus in 1808 the imports, under restricting legislation and other causes, fell off by over |8o,ooo,ooo, while in 1816, in the transition from war to peace, imports increased by ^134,000,000 and customs duties by nearly ^30,000,000 in a single year. So too from 1818 to 1 68 Reorganization after War. [§75 1822 the variations due to commercial causes were almost as sudden as those incident to war; imports diminished from over gi2i,ooo,ooo in 1818 to about ;j!87,ooo,ooo in 1819, and in 182 1 to about one-half what they had been three years before. In two years of peace, free commerce, and the full operation of the United States Bank, the revenue from import duties shrank more than one third. 75. Receipts and Expenditures, 1816-1833. Beginning with 1822 the treasury settled down to a long term of prosperity. With the exception of 1824, when an unusual payment was made on account of the Spanish claims, an annual surplus was turned in until the difficulties of the panic of 1837 disturbed commerce and finance. The receipts from customs were fairly constant in volume, and this, togetlier with the steady growth in receipts from sales of public lands, wiped out the debt in 1835. The ordinary receipts of the government r8i6 to 1833 were as follows : — Year Customs Public lands Miscel- laneous Total i8r6 $36,307,000 S 1,718,000 $9,652,000 $47.677>«x) 1817 26,283,000 i,ggi,ooo 5,825,000 33.099.000 21,585,000 1818 17,176,000 2,606,000 1,803,000 1819 20,283,000 3,274,000 1,146,000 24,603,000 1820 15,005,000 1,635,000 1,000,000 17,840,000 1821 13,004,000 1,212,000 157,000 I4,573,ooo 24,844,000 iSti 24,224,000 3,210,000 1,092,000 38,526,000 1832 28,465,000 2,623,000 779,000 31,867,000 33.948.000 1833 29,032,000 3,967.000 946,000 The large figures under '■ Miscellaneous," 1816-1820, are due to the inclusion of the delayed internal and direct taxes, as stated in the table, page 140; and in 1827 to receipts § 75] Receipts and Expenditures. 169 from Great Britain on account of property seized during the War of 1812, amounting to ^1,205,000. After 1 82 1 expenditures for the military and naval establish- ments varied little from year to year ; while not brought down to the level which prevailed before the war, the per capita burden was on the whole no greater. Pensions now for the first time became an important item in the budget ; by the act of November 18, 1818, pensions were granted to all Revolu- tionary soldiers on the basis of service and poverty, discarding the previous qualification of disability. Fraudulent claims on a large scale followed, which led to an amendment of the law by requiring more rigid examination of an applicant's material welfare. Some beginning was made in appropriations for internal improvements, a topic which will be subsequently treated. The great decrease in total expenditures as seen in the following table was due to the reduction and final elimina- tion of interest charges on the public debt. Expenditures by years 1816 to 1833 were as follows : — War Navy Pensions Interest on debt Miscella- neous* Total iSt6 $16,012,000 13,908,000 $189,000 $7,823,000 $3,264,000 $31,196,000 1817 8,004,000 3,314,000 297,00a 4,536,000 3,838,000 19,990,000 1818 5,622,000 2,953,000 890,000 6,2og,ooo 4,341,000 20,017,000 1819 6,506,000 3,847,000 2,415,000 5,211,000 3,530,000 31,511,000 1820 2,630,000 4,387,000 3,208,000 5.151,000 2,907,000 18,285,000 1821 4,461,000 3,319,000 242,000 5, 126,000 2,700,000 15,849,000 1822 3, 1 [1,000 2,224,000 1,948,000 5,172,000 2,542,000 14,999,000 1823 3,096,000 2,503,000 1 ,780,000 4,922,000 2,402,000 14,706,000 1824 3,340,000 2,904,000 1,499,000 4,943,000 7,585,000 20,273,000 1825. 3,659,000 3,049,000 1,308,000 4,366,000 3,472,000 15,856,000 1826 3,943,000 4,218,000 1,556,000 3,975,000 3,343,000 17,037,000 1827 3,948,000 4,263,000 976,000 3,486,000 3,463,000 16,139,000 1S2S 4,145,000 3,giS,ooo 850,000 3,098,000 4,381,000 16,394,000 1829 4,724,000 3,308,000 949,000 2,542,000 3,658,000 15,183,000 1830 4,767,000 3,239,000 1,363,000 1, 912,000 3,859,000 15,141,000 183 1 4,841,000 3,856,000 1,170,000 ii373,ooo 3,995,000 15.237.000 1832 5,446,000 3,956,000 1,184,000 772,000 4,929,000 17,288,000 1833 6,704,000 3,goi,ooo 4,589,000 303,000 6,518,000 23.017,000 * Including Indians. A comparison of the receipts with expenditures and the resulting changes in the debt give the following table in millions of dollars : — 170 Reorganization after War. [.%76 Receipts ' Year Expendi- tures Surplus Deficit Taxes Other Totol 1816 45-7 2.0 47-7 31.2 16.5 1817 30.7 2-3 330 19.9 I3-I 1818 18.3 3-2 21.5 20.0 1-5 1819 20.6 4.0 24.6 21.5 31 1820 15. 1 2-7 17.8 182 •4 182 1 13.0 '•5 145 .5.8 '■3 182Z 17.7 2-5 20.2 14.9 5-J 1823 ig.i 1.4 20.5 14.7 5.8 1824 17.9 1.4 19-3 20.2 •9 1825 20.I 1-7 21.8 ■5.8 6.0 1826 23-3 ■9 25-2 17.0 8.2 1S27 19.7 3-2 22.9 16. 1 6.8 1828 232 1-5 .24-7 16.3 8.4 1829 22.6 2.2 24.8 15. 1 9-7 1830 21.9 2.9 24.8 iS-i 9-7 1831 24.2 4-3 . 31-8 15.2 13-3 1832 28.4 3-4 17.2 14.6 1833 Z9.0 4.9 33.9 23.0 10.9 76. DifBculties in Management of the Funded Debt. After 1822 the principal difficulty in managing the debt was due to surpluses which constantly accrued and could not be conveniently used in liquidation of the public debt except by the purchase of government securities bought at a premium in the open market. As the war loans for 1812 to 1816 ran for twelve years, there was little opportunity for free application of surplus revenue to debt extinguishment. In 1826 1 19,000,000 became due; in 1827 another large block fell in, — each much more than the sinking fund could discharge; in 1829 and 1830, however, no part of the public debt was to fall due. Policy suggested that the excess of debt which could not be discharged in 1826 and 1827 should be thrown in equal proportions upon those years in which nothing was payable. Three attempts consequently were made to refund the debt under provisions by which annual payments might be made and the interest charge lowered. None of these were successful because of the low rate of interest offered, the brief period before redemption, and the growing activity in com- mercial and manufacturing operations which afforded induce- §76] The Funded Debt. 171 ments to the investment of capital. Under the act of May 26, 1824, conversions were made into stock at 4^ per cent, inter- est; ^4,454,000 redeemable in eight or nine years, and JS,ooo,ooo redeemable any time after 1831. Other slight con- versions, ?i, 539,000, were made mider the act of March 3, 1825. So favorable were the finances that after 1825, in spite of the handicap incident to fixed loans, the debt was rapidly ' paid off. In reorganizing the finances at the close of the war an important change was made in the arrangement of the sinking fund. When the annual payment was increased to ^10,000,000 in 1 81 7 there stood on the books of the treasury to the credit of the commissioners of the sinking fund nearly ;^34,ooo,ooo stock of fourteen different descriptions and bearing seven differ- ent rates of interest ; interest as it accrued was paid into the fund with no other effect than of adding to the labors of those who wished to understand the accounts of the government. It seemed best to simplify the operations of the fund, and therefore it was ordered that all certificates of public debt when redeemed should be destroyed. " In the redemp- tion plan of 1817," says Ross, "the sinking fund reaches almost the extreme of simplicity. It is true the payment on behalf of the public debt still went to a separate account, and was payable in theory to a special board. But the cun- ning and complicated apparatus of Hamilton and the English financiers had been done away with. There was no fixed payment on account of the principal of the debt, no invio- lable appropriation, no sinking fund composed of specific items of revenue, no contract with the creditors, no automatic purchasing machinery, no borrowing on behalf of the fund, no hoarding of paid-off debt, and no payment of interest thereon." ^ 1 Ross, Pub. of Amer. Econ. Assn., vol. 7, p. 384. CHAPTER VIII. TARIFF LEGISLATION, 1818-1833. 77. References. Bibliographies : Channing and Hart, 364, Z7°-'iT^ '• ^^- MacDonald, Select Documents, 284 (1833). Tariff: (i) Sources, American State Papers, Finance III, 234-240 (Secretary Crawford, Jan 20, 1818), 440, 526, 563, 582, 594-660 (me- morials, etc., 1820-1821) ; IV, 467, 482 (memorials, 1824) ; V, 656, et seq. (memorials, 1827-1828), 778-845 (report of Mallary, Jan. 31, 1828) ; Fi- nance Reports, \\,Z2'^ (Crawford, 1822), 319-326 (Rush, 1825), 361-365 (Rush, 1826), 396-411 (Rush, 1827); III, 232 (McLane, 1831), 289-293 (McLane, 1832) ; Annals of Congress, i6th Cong., 2d Sess. (1820) ; i8th Cong., 1st Sess., Part II (1824); Register of Debates, 20th Cong., ist Sess. (1828); 22d Cong., 2d Sess. (1833); or Benton's Abridgment, VI, 601-651 (1820); VII, 568 et seq.; VIII, 9-37 (1824); IX, 589 et seq.; X, 54-118 (1828); XI, 44-107 et seq. (1832); XII, 81-181 (1833); Mes- sages and Papers, II, 106, 191 (Monroe) ; 413 (Adams) ; 449, 523, 597, ([ackson) ; Statutes, III, 460, 461 (r8i8) ; IV, 25 (1825) ; 270 (1828) ; 403, 413 {1830) ; 583, 629 (1833) ; E. Young, Customs Tariff Legislation, xli-1, (1824), 1-lxviii (1828), Ixxii (1832), Ixxxiii (1833); W. MacDonald, Select Documents, 231-237 (protests of S. C. and Ga., 182S) ; II. Clay, Speeches (ed. 1857) I, 218-237 (1820), 254-294 (1824), 416-428, 437-486 (1832), 536- 569 (1833); H. Clay in American Orations, III, 338-373 (1832); J. Madi- son, Letters, III, 430; W, 232; J. C. Calhoun, Works (ed. 1853); II, 163-172; D. Webster, Works, III, 94-149 (1824), 22S-237 (1828); T. H. Benton, Thirty Years in the U. S. Senate, I, 95-102 (1S28), 265-275 (1832), 297-346 (1833) ; Report of Committee of Citizens of Boston (1828) ; A. Gallatin, Free Trade Memorial, in State Papers and Speeches (Taussig ed.), 108-210 (1831). (ii) Special: BoUes, II, 370-433; F. \V. Taussig, Tariff History, 19-24, 31-36,40-45, 50-67,68-112 (additional references in foot-notes); O.L.Elliott, The Tariff Contrm'crsy, 215-26S; "U. Rab- beno, Atnerican Commercial Policy, 146-183; D. F. Houston, Stiu/v of Nullification in S. C. (1896), see " Tariff " in index ; W. M. Grosvenor, Does Protection Protect? 125-131, 141-145, i76-::oi ; S. B. Harding, Miiiimum Principle in the Tariff of rS:?S, in Annals Amer. Acad. Pol. Sci., VI, 100-114; H. P. Winston, Tariff and the Constitution, m Journal »/ /"oW. .£««., V, 40-70 (valuable references), (iii) General: W. G. Sumner, /(!f/i\ro«, 194-206 (1816-1828); 207-223, 2cSi-29i (nullification); 172 §78] Struggle for Increased Protection. 173 C. Schurz, Henry Clay, I, 213-221 (1824); 356-366; II, 1-22 (nullifica- tion) ; H. C. Lodge, Webster, 156-166 (position in 1828) ; H. von Hoist, Calhoun, 66-78 (nullification) ; H. von Hoist, Constitutional History of the U. S., I, 402-408; J. Parton, Life of fackson, III, 34-36 (1824), 433 et seq. (nullification) ; J. G. Blaine, Twenty Years in Congress, I, 189-192 ; H. Adams, Life of Gallatin, 640-642 (1832); McMaster, IV, 510-521 (1820); V, 229-267 (1820-1828); Schouler, III, 420-426 (1828); IV, 54- J09 (1833). Customs Administration: Finance Reports, III, ii-[6 (Ingham, 1829), 91-94 (1830) ; Statutes, I, 627 ; III, 433; IV, 270, 409 ; J. U. Goss, History of Tariff Legislation (Stud. Columbia Col., 1891), 27-47; BoUes, II, 478-499- 78. Struggle for Increased Protection ; Tariff of 1824. The principal financial question in the decade 1820-1830 relates to the frequent changes in the tariff, vfhich finally reached an average of duties entirely unanticipated and dis- turbing in its results. The framing of the successive schedules, however, was hardly a fiscal process ; any full treatment of tariff history during this period would require not only careful inquiry into the economic development of the country, but also a study of the growing sectional antagonism between the North and South and of underlying political theories. The tariff act of 181 6 had hardly gone into effect before it was regarded as incomplete ; for while protection had been granted to the textile industries, and especially to cotton manufactures, no acceptable provision had been made for the iron interest. American iron producers suffered competition on the one side from England, whose pig and rolled iron were manufactured at a lower cost of production on account of the almost universal use of coke ; and on the other from the charcoal iron of Sweden and Russia, where forests were extensive and labor was cheap. By a special tariff act April 20, 18 18, the duties on iron were raised, and at the same time the protective principle was further recognized by postponing the reduction of the duties on cotton and woollens until 1826. Influenced by the industrial and financial distress of 18 19, which caused unfavorable treasury balances. Secretary Crawford 174 TarifF Legislation, 1818-1833. [§78 recommended in successive reports a change in the tariff for the purpose of increasing the revenue, and he distinctly voiced a protective note : " It is beUeved that the present is a favorable moment for affording effective protection to that increasing and important interest [i.e., cotton, woollen, and iron manufactures] if it can be done consistently with the general interest of the nation." It was urged that higher duties would bring foreign capital and labor to the United States, and incorporate them into the domestic resources of the Union. Manufacturers also called for more generous protection because of the fall of prices which look place with the resumption of specie payments, and also to meet the rush of imports from England at the close of the Continental Wars. In spite of this open encouragement by the administration the attempt in 1820 to raise duties was unsuccessful ; the bill passed the House but was defeated in the Senate by one vote. The administration continued its recom- mendations for increase of duties, and this question along with that of internal improvements began to affect national parties and presidential campaigns. In 1824 a general revision was entered upon ; further protection was granted to the manu- facturers of wool, iron, hemp, lead, and glass ; and duties were raised on silk, linens, cutlery, and spices. A specific duty was imposed upon raw wool, and wool-growers for the first time became an important factor in the framing of American tariffs. The principle of minimum value was extended from cotton to woollen goods ; hemp manufactures, hitherto free, were taxed 25 per cent. ; and on cotton goods the minimum valuation was raised so as to protect certain finer grades of fabric. The clashing of sectional interests was clearly apparent in the debate upon this measure. In general the bill was supported by a combination of the Western and Middle States, and opposed both by the planting interests of the South and by commercial interests in the East. By sections the vote in the House of Representatives was as follows : — §78] Struggle for Increased Protection. 175 In favor Opposed New England Middle States West South ... 6= 18 I 13 23 IS 47 7 Southwest (Tennessee and Kentucky) Total 107 92 Iron, wool, hemp, glass, and lead were allied against com- merce. Kentucky desired protection for its dew-rotted hemp, which suffered from the competition of the water-rotted hemp of Russia ; the Middle States and Ohio desired a higher tax on wool ; Pennsylvania was firm for additional duties on iron. In New England the States of Maine, New Hampshire, and Massachusetts gave but 3 votes in favor to 22 in opposition. Webster at this time represented a commercial district of Boston, and his speeches well illustrate the attitude of the navigating and importing interests of a section of New England. A few years earlier, in 1820, in a speech at Faneuil Hall before a public meeting called to protest against an increase of duties, he declared, " I feel no desire to push capital into extensive manufactures faster than the general progress of our wealth and population propels it. I am not in haste to see Shefifields and Birminghams in America. It is the true policy of govern- ment to suffer the different pursuits of society to take their own course, and not to give excessive bounties or encouragements to one over another." And in 1824 his speech in Congress in favor of freedom of trade was exhaustive, and proved to be a troublesome stumbling-block when New England later changed to the protective principle. Owing to the protest of such leaders the act of 1824 fell far short of the protection proposed in the bill originally introduced. The woollen manu- facturers complained of the inconsistent treatment of their staple ; for the duty on raw wool had been increased more than that on the finished product, and the sheep flocks in the United States could not supply more than one-half of the wool 176 Tariff Legislation, 1818-1833. [§79 needed. The duty on imported woollens, the cost of which exceeded 35}^ cents per yard, was raised from 25 to 33^ per cent. ; the tax on raw wool was increased from a level ad valorem rate of i S per cent, to a progressively increasing duty of 30 per cent, on all wool costing over 10 cents per pound, and, this, it was estimated, destroyed at least 5 per cent, of the new duty on cloth. There is thus early seen an illustration of the difficulty — absolutely insoluble — of adjusting the interests of wool-growers and cloth manufacturers to their common satisfaction. Wool manufacturers complained also of the duties on the raw materials entering into their business, such as olive oil and castile soap, and when they looked abroad they saw new evils to contend with. England had reduced her duty on raw wool, giving to manufacturers of that country an advantage in foreign competition which they had not hitherto enjoyed. The old abuse of undervaluation of imports was grovring more serious, so that the schedule of -ad valorem duties did not give the degree of protection which might have been expected. A large part, some say four-fifths, of the wool manufactures were imported by and on account of foreigners, a practice which afforded opportunity for extremely low valua- tions. The industrial crisis of 1825 in England also served to throw upon the American market a large amount of goods to be sold at bankrupt prices, and embarrassment was occa- sioned by over-expansion of industry after the long period of depression, which in many instances led to a ruinous domestic competition. 79. TariflF of 1828. From 1824 there was unceasing agitation of the tariff, headed by the woollen manufacturers, who insisted upon higher duties. Massachusetts now took a prominent part in the discussion, and Webster's constituents imposed upon him the awkward duty of presenting to the House of Representatives resolutions passed by the legislature asking for further protection to woollens. In §79] Tariff of 1828. 177 January, 1827, the so-called Mallary bill was reported in harmony with these demands ; it aimed particularly at a full establishment of the minimum principle ; but, though it passed the House, it was lost in the Senate by the casting vote of the vice-president, Calhoun. The failure of the Mallary bill led to an important development in the contest for higher duties, in spite of the fact that business had regained its courage after the slight depression of 1825-1826, and that prosperity at the moment seemed wide-spread. The cotton industry had be- come more thoroughly established during this period-; a be- ginning had been made in the exportation of cotton goods ; and the cotton manufacturers were not eager for a revision of the tariff. The experience of seventy years has shown that claims for assistance from government cannot stand isolated upon their special merits, but that the demand of one interest starts up appeals from all. The agitation by the woollen in- dustry consequently led to a general campaign for increased protection; in 1827 a-convention of the friends of protection was held in Harrisburg, and a scheme for a thorough-going protective policy was set forth in a memorial to Congress and in an address to the people. The enlargement of the plan of attack so as to include the whole circle of manufacturing interests led to unforeseen political complications and intrigues, which in turn resulted in a tariff act, approved as a whole by few if any of the intelli- gent advocates of the protective principle, and calculated to excite the intensest irritation on the part of sections and in- terests not directly benefited. Clay, Adams, and Jackson were all candidates for the presidency, and the tariff question was raised to such prominence in the contest that it became necessary for each to make a public statement of his position. As far as the record went there was httle to choose ; they were all protectionists ; Clay and Adams were advocates and propa- gandists, and even Jackson in 1 8 24, in a letter much talked about, had frankly stated his approval of " adequate and fair protection." He rang the changes on the home market idea and concluded 178 Tariff Legislation, 1818-1833- [§79 that " it is time we should become a little more Americanized, and, instead of feeding the paupers and laborers of Europe, feed our own, or else in a short time by continuing our present policy we shall all be paupers ourselves." Jackson's friends apparently, however, thought it wise in 1828 to be more wary, and so clinch Jackson's election to the presidency ; it would not do to alienate a possible following in the North, while in the Southern States with the growing hostility to pro- tection no candidate openly avowing the newer protection as the guide of his political life could hope for success. Recourse was consequently had to political strategy, which it was hoped would prevent legislation and sufficiently befog public opinion to make it easy for Jackson's friends to win support both North and South. The details of this intrigue are well worth recounting, for they illustrate the willingness of politicians during the second quarter of the century to sacrifice clear-cut conviction to political expediency. At the time no satisfactory explanation was given for the astonishing law of 1828, but later Calhoun publicly stated the facts as he understood them. The House committee on manufactures was so organized as to give control to the friends of Van Buren, who were supporting Jackson in the Middle and Western States. The plot was to report a bill protective in character but carrying such high duties on raw materials that it would be extremely burden- some to the manufacturers of New England ; the dissatisfied elements were then expected to join with the South, which was opposed to protection in any form, and their combined effort could prevent the passage of any bill. Thus the prestige of Adams and Clay would be weakened and Jackson would not be committed. McDuffie on a later occasion confessed as to his motives in regard to the measure, " We saw that this system of protection was about to assume gigantic proportions and to devour the substance of the country, and we decided to put such ingredients in the chalice as would poison the monster and commend it to his own lips." §79] TarifFof 1828. 179 The first part of the program was successfully carried out ; the Committee's bill recommended an increase not only on hammered and bar iron, but also on pig and rolled iron, con- cerning which even the Harrisburg protectionist convention had made no request. The duty on hemp, which was in- creased nominally in behalf of the Kentucky product, naturally added to the expense of rope-makers, shipbuilders, and ship- owners, and the duty on wool was changed to a mixed specific and ad valorem duty, in order to make effective the taxation of the coarse and cheaper varieties of wool in the production of which American farmers took little interest. On coarse woollen goods, used largely by the slaves in the South, low duties were continued, but, what was more objectionable, the minimum valuation for the first time was applied to woollens. The Harrisburg convention recommended that all woollen goods between 40 cents and ^2.50 a yard be valued at the higher sum ; the committee, however, inserted a minimum point at ;?i.oo; recommended doubling the duty on molasses, and struck out the customary drawback on exported rum which had been distilled from imported molasses. These provisions were obviously oppressive to many established in- dustries in the North and Pennsylvania, and it was supposed that the burdens were made so heavy that a revolt would follow. The plans miscarried ; the bill was indeed made odious, but so strong was the protective sentiment that the measure found acceptance in each branch of Congress. Its predominating note was protection to the woollen manufacturers, and the meas- ure is frequently referred to as the " Woollen Tariff." Raw wool also received further protection; under the act of 1824 it was taxed 30 per cent, ad valorem, while under this bill it was subject both to an ad valorem duty of 40 per cent, and to a specific duty of 4 cents a pound, — the first compound duty in the tariffs of the United ' States. With some exceptions all woollen cloths paid 45 per cent, ad valorem ; all cloths costing not to exceed 50 cents were valued at that sum, cloths costing i8o Tariff Legislation, 1 818-1833. [§79 50 cents to i^i.oo were valued at ^i.oo, those costing ;^i.oo up to ^2.50 were valued at $2.50, those between ^2.50 and I4.00 as if worth ^14.00, and those exceeding ;?4.oo in value were taxed 50 per cent, ad valorem. We have in this complicated schedule practically an extension of the minimum principle first applied to cottons in 1816. The insertion of a minimum at ;^i.oo was regarded by many protectionists as a traitorous blow at their system ; it offered a great temptation to undervalue goods which cost above the ^i.oo limit so as to secure the ad- vantages of the lower rate, and the results quickly showed themselves in fraudulent undervaluations. In spite of the forcibly expressed disappointment of woollen manufacturers at that time the act of 1828 in later years came to hold a proud position in the hearts of protectionists. The tariff act of 1828 represented the high-water mark of protective legislation before the Civil War; it was generally condemned, and derisively termed the " Black Tariff " and the "Tariff of Abominations." It also led to important political results in the development of nullification in South Carolina. As in 1824, so in 1828, the votes on the tariff do not throw much light on party opinion ; support was sectional as well as factional, as is seen in the following distribution of the votes in the House of Representatives : — In favor Opposed New England Middle States West 16 57 17 3 12 23 11 I 5° 9 South ....". Southwest (Tennessee and Kentucky) Total 105 94 From the South there was strong opposition to the tariff, and yet in the Senate Benton of Missouri and R. M. Johnson of Kentucky voted in its favor. It also received the support of the Northern Democrats, Van Buren, Buchanan, and Silas § 8o] Intense Opposition to the Tariff. 1 8 1 Wright. In the House the entire delegation of Kentucky, Clay's State, voted in favor, while Jackson's State, Tennessee, was unanimously against it. Massachusetts, which had vigor- ously engaged in manufacturing under the stimulus of the tariff of 1824, was now divided : its delegation in the House of Rep- resentatives voted almost solidly against it, while Webster in the Senate made a powerful speech in its support, and confessed his conversion to the protective doctrine under stress of circum- stances; since New England had accepted the act of 1824, and had entered upon manufactures with an earnest purpose, the nation was bound to fulfil the hopes which had been extended. 80. Intense Opposition to the Tariff. The act of 1828 rekindled in the Southern States an oppo- sition to the protective policy. A contest was inevitable, for the industrial interests of the South and the rest of the country were profoundly different. The South with its natural advan- tages for the growing of cotton, rice, and tobacco, and with abundant rude slave labor, was devoted solely to the produc- tion of a few staple agricultural commodities, and witnessed with indifference if not with impatience the building up of diversified industries and manufacturing cities. Indifference and impatience were converted into open hostility as soon as it was felt that this development was at the expense of its own profit. By her natural resources the South was equipped for a magnificent development of manufactures. The two great raw materials cotton and iron belonged to her inheritance ; she had abundant water-power and fuel; but the institution of slavery necessarily restricted the productive genius of the South and forced her industries into grooves from which there then seemed no escape. The interest of the South obviously lay in free trade with England, which was its principal cus- tomer for cotton, hemp, and tobacco ; and it was ingeniously reasoned that a tax on imports was in incidence a tax on exports. 1 82 Tariff Legislation, i8i 8-1833. [§80 Politically the act of 1828 gave strength to the develop- ment of the nullification doctrine, or the right of an individual State to declare a federal law null and void within State limits. As early as 1825 the legislature of South Carolina had adopted resolutions declaring that protective duties were unconstitu- tional; in 1827 the destructive policy of nullification was proposed at a public dinner in that State ; and after the passage of the law of 1828 tariff meetings were held in the more important towns of that State, and threats made that South Carolina would separate from the Union unless the new tariff laws were repealed. Calhoun then renounced without reservation the national views which had governed his vote in 1816 and as leader of the movement declared that the tariff act was unconstitutional and must be destroyed. Great were the hopes entertained that Jackson, a Southern planter and slaveholder, would feel sympathy with this anti-tariff protest ; South Carolina earnestly supported him for the presidency, and for a time after the first burst of indignation awaited his declarations in hopeful anticipation. Jackson proved to be lukewarm, and it was even suspected that he cared little to reduce the tariff but was rather in favor of distributing the surplus. Unsuccessful attempts were made to reduce the duties on woollens, cottons, iron, hemp, flax, molasses, and indigo to the rates existing previous to 1824. The most that could be accomplished was the reduc- tion of the duties on salt, molasses, coffee, and tea. May 20 and 29, 1830 ; but the lowering of rates on articles in which domestic manufacturers were not interested could hardly be regarded as a weakening of the protective policy. The pro- tectionists moreover added to their triumphs by the pas- sage of a bill providing that custom-house appraisals be made more stringent and effective. The high-tariff party was, however, in perplexity because impost duties were still so productive that the revenue ran into surpluses with the prospect of a speedy extinction of the debt. Hence Clay in 1830 introduced a resolution into the Senate providing that §8i] TarifFof 1832. 183 duties upon articles imported from foreign countries and not coming in competition with the industries of the United States ought to be forthwith abolished, except the duties on wines and silks; and that those ought to be reduced. In 1831 representative national meetings of the advocates of protec- tion and of free trade were held, — the former in New York and the latter in the protectionist stronghold, Philadelphia. Each appealed to the people and to Congress in memorials which summarized the representative arguments of the day. 81. Tariff of 1832. The "abominations" of the tariff of 1828 were recognized by many Northern manufacturers, and the demands for a modi- fication of the tariff were not confined to the South nor to the supporters of free-trade doctrines, yet Clay stood forth to champion without essential abatement his perfected theory of the " American System." When John Quincy Adams, now a representative in the House, suggested the possible advantage of a conciliatory policy. Clay declared that the contest was in a large measure imaginary, and relying upon his power of argument he reintroduced in the Senate, Jan- uary 9, 1832, his resolutions of 1830; and in speeches on four different days he elaborated a defence of the American System. The issue was made specific by the introduction into the House of several tariff propositions. First there was the re- port of the committee on ways and means, of which George McDufEe was chairman, which may be regarded as representa- tive of the demands of South Carolina ; it recommended that duties be lowered to a general ad valorem duty of 12^ per cent, on all merchandise excepting on goods already free, or on which the duties were less than 121^ per cent. Specific duties were assailed by the committee on two grounds : first that they exacted the same money duty on articles of varying value ; and secondly because a lowering of the cost of manufacture under a specific duty always meant an increase in the rate. 184 Tariff Legislation, 1818-1833- [§ 81 In this report also reappears the argument that duties on goods imported were practically paid by the producers, since the exports paid for the imports. Inasmuch as the exports were chiefly cotton, rice, and tobacco, it followed from this view that the burden of import duties rested on the South. A minority report signed by two members of this committee was chiefly devoted to the effect of the tariff on prices. A rival report submitted April 27, 1832, by Louis McLane, secretary of the treasury, may be regarded as the program of the administration ; it proposed to reduce the average rate of duty from 44 to 27 per cent., to reduce the duty on wool to 5 per cent, and on woollens to 20 per cent., and to abolish the minimum system on woollens except as to the lowest qualities. Neither of the two propositions could rally a sufficient support, and John Quincy Adams, as chairman of the committee On manufactures, was invited to draw up a bill. Much against his will he complied in a systematic report, dealing with the whole question both from history and economic argument ; and finally he submitted a scheme of protection with an elimination of the more exasperating features of the tariff of 1828. In the end, out of this maze of conflicting opinions, emerged the tariff act of July 14, 1832, closely based on Adams's report. In substance the act abolished the sys- tem of minimum valuation ; reduced the duties on hemp and iron, and admitted free flax and wool worth less than 8 cents a pound. As Taussig observes, "The protective sys- tem was put back in the main to where it had been in 1824. The result was to clear the tariff of the excrescences which had grown on it in 1828, and to put it in a form in which the protectionists could advocate its permanent retention." Cer- tainly the reduction of duties was not based on any theory of free trade. Revenue was still to be derived chiefly from articles requiring protection, and so far forth Clay's fundamental principle was endorsed ; indeed, the tax on woollens was raised, and for the first time woollen yarn was taxed. The §82] Nullification; Compromise Tariff. 185 philosophy of protection was also clearly enunciated in all its sections, and the spirit of nullification was aroused if anything to a higher pitch. By geographical divisions the vote in the House on the tariff of 1832 was as follows : — In favor Opposed New England States Middle States West . . South ... Southwest . . . 17 18 18 ■7 18 27 3 Total 132 65 The vote in the South as a whole was equally divided, owing to the strong support which the measure received in Virginia and North Carolina ; in South Carolina and Georgia the op- position was great. 82. Nullification ; Compromise Tariff. After Jackson attained the presidency he was guarded in his deliverances in regard to the tariff; in his successive an- nual messages he suggested certain changes, but he did not protest against the tariff of 1828 as many of his Southern sup- porters expected, nor did he defeat the tariff measure of 1832. After his second election in 1832 he dwelt more earnestly upon the necessity of a revision ; but South Carolina did not wait for legislation, and on November 24, the very month of the elec- tion, passed a nullification ordinance providing "that the tariff law of 1828, and the amendment to the same of 1832, are null and void and no law, nor binding upon this State, its officers and citizens." It was also declared that no collection of the duties enjoined by that law should be permitted in the State of South Carolina after February i, 1833 ; neither should an appeal from a South Carolina court to a Federal court be allowed in any case arising from this legislation ; and all offi- 1 86 Tariff Legislation, 1 818-1833. [§82 cers and jurors were to take an oath to abide by this provis- ion ; goods seized by custom-house officers could be replevined by State officers. This summary action of South Carolina was quickly met by Jackson's ringing proclamation under date of December lo, 1832 ; Governor Hayne issued a proclamation in return, and Calhoun, in order to be free in his action, resigned the vice- presidency and was immediately elected senator. Although Jackson was decisive in his rebuke of nullification he showed a conciliatory spirit, and Secretary McLane submitted recom- mendations which were made the basis of a congressional measure known as the Verplanck Bill, and reported by the committee on ways and means, December 27. The pro- posed measure was sweeping in its provisions, and to protec- tionists appeared to be a radical change of policy endangering the manufacturing system as a whole. In the first place it proposed to reduce the annual revenue from ^27,000,000 to ?i 5,000,000; secondly, and more serious, duties were to be reduced at once, without giving to the manufacturers ade- quate time to adjust themselves. No doubt this bill would have satisfied the extremists of South Carolina, but to the supporters of the American system it signified an industrial disaster. In this emergency Clay appeared with a new bill known in history as the compromise tariff of 1833 ; at bottom it recognized the principle of a horizontal rate which the nullifiers of the South regarded as essential to revision, but it was to be so gradual in its effects as to give manufacturers time to adjust their business to the change. Although the political necessity of a settlement along lines of concession was generally recognized, the measure was not easily passed. New England and the Middle States were committed too far to protection to be willing to yield, and the West divided about evenly. By sections the vote in the House was as follows : — § 8z] Nullification; Compromise Tariff. 187 In favor Opposed New England . . . Middle Stales . . . West South and Southwest 10 24 10 75 28 2 Total .... 119 85 The act provided for a general reduction of all duties ex- ceeding 20 per cent.; between 1834 and 1842 duties were to be reduced by a biennial excision of one-tenth per cent, of the excess percentage above 20 per cent. ; and then in January and July, 1842, the remaining excess was to be struck off. The law also enlarged the free list ; but on the other hand the tariff party by strenuous insistence provided for home valuation of goods imported after 1842, and secured the abohtion after 1842 of the credit system for payment of duties. Clay's motives in fathering the act of 1833 are complex and perhaps not wholly consistent ; perhaps he realized that the opposition majority in the next Congress would probably over- throw the protective system, and that if there were to be a change it should be gradual instead of summary in its action, and consequently less injurious to capital which had been recently invested. He probably wished to prevent a serious break with South Carolina, which might give Jackson an op- portunity to wield military power. Perhaps also, as has been suggested, he had no expectation that the uniform 20 per cent, rate would ever go into effect. The position of other statesmen on this measure is deserv- ing of passing comment. Webster strictly opposed this tariff, holding that the essence of the protective principle lay in discrimination between various classes of imports which would be made inoperative by accepting a horizontal regulation. Again, Webster held that it was not only unwise but uncon- stitutional for Congress to bind itself for a term of years ; but, i88 Tariff Legislation, 1818- 183 3. [§82 more than all, he was controlled by his hostility to the States- rights philosophy. He would not yield to the South while nullification was rampant ; any compromise seemed to him a reflection upon the true constitutional principles of unity and sovereignty which he so valiantly upheld. To Calhoun the measure was acceptable, partly because he was persuaded of the futility of longer carrying on the struggle against Jack- son, and partly because the bill contained at bottom the principle for which the South was contending. The tariff of 1833 is of particular interest since it contem- plated a gradual reduction of duties which might give time to the capital and labor of the country to adjust themselves to the change ; even the first modification was not to go into effect until nine months after the passage of the act. Fiscal experts, however, have generally been sceptical over horizontal reductions of tariff duties, inasmuch as it is impossible to foresee what will be the incidence of taxation when rates are cut uniformly on commodities varying in their supply and use. A 30 per cent, rate, for example, may be prohibitory ; while a reduction to a 20 per cent, rate may allow foreign goods to compete freely with the domestic product. It is difficult to estimate the merits of the compromise tariff act as a producer of revenue, since it never went into complete effect. The disturbances to commerce, banking, and general business extending from 1834 to 1838 were so violent and due to so many causes that it is impossible to disentangle the influence of the tariff. The compromise tarifif has one unique interest in legisla- tion because it is one of the few measures designed to limit the freedom of future Congresses over the revenue. The act was repeatedly referred to as an inviolable promise, and Calhoun for example maintained this so earnestly that he was unwilling later to abolish the admittedly unequal and odious salt tax, for fear that any change whatever would in the future give the manufacturing interests an excuse to reopen the whole tariff controversy. The average rates of 83] Customs Administration. 189 duty on dutiable goods beginning with 1821, the first year in which statistics permit such comparison, were as follows : — Year Per cent. Year Per cent. 1821 35-6 1832 ii-S" 1S22 31-7 1833 31.93 1823 32-7 1834 32.6 1824 37-5' 183s 36.0 1825 37-1 1836 31-6 1826 34.5 1837 25-3 1827 41-3 1838 37-8 J828 39-3' 1839 29.9 1829 44-3 1840 30.4 1830 48.8 1841 32.2 1831 40.8 1842 23.1 1 TarifE increase. 2 TarifE revision. 3 Compromise tariff. 83. Problems of Customs Administration. The tariff act of 1833 planned important changes in the administrative collection of customs duties. The difficulty in securing a fair valuation of the goods imported was increasing year by year, and became more serious as soon as ad valorem rates instead of specific duties constituted a considerable part of the tariff schedules. Before 1816 the value of goods was sworn to by the person making the entry, on the basis of an accompanying invoice, but when protection was accepted in earnest the need of accurate valuations was more acutely felt; authority was consequently given in 181 8 to the secretary of the treasury to make an appraisement of the goods in case there were a suspicion of a fraudulent valuation. Dishonest returns might be effected by false measurements ; or by returning the average for the actual cost of goods in a mixed package ; or by intentional undervaluations. Another irregularity, not necessarily dishonest, came from consignments of goods by foreign manufacturers to agents in America with invoices based upon manufacturers' costs but decidedly lower than the valuation placed upon similar goods purchased by Americans in foreign markets ; the home manufacturer was thus placed at a disadvantage as compared with his foreign rival. 190 Tariff Legislation, 1818-1833- [§83 An aggravated form of this practice was developed in the so-called auction system, by means of which the surplus hold- ings of English manufacturers accumulated during the long war with France were consigned and dumped on the American market at ruinous prices. This system not only led to State legislation for the control and even suppression of auctions, but had much to do with intensifying the protective sentiment of that period. In the hope of reducing these evils a law was therefore enacted in 1823 substituting for the words "actual cost," in the oath required of the importer, the phrase "just and true valuation of the goods at their fair market value " ; this change did not remove reasons for complaint, and later the discretionary power of the treasury department in ordering an appraisement was made mandatory in all cases where ad valorem rates were levied. A further mark of dissatisfaction is the provision in the compromise tariff of 1833 that a home valuation of goods imported be adopted after June 30, 1842. The clause was inserted in order to include freight as a part of the cost, and thus to increase the protection. Owing to political changes caused later by Tyler's erratic administration, the principle was not given a trial, and later during the free-trade period inaugurated in 1846 it was so sharply criticised that the proposition was allowed to drop. The chief objection made to home valuation was that it would inevitably cause differ- ent valuations of the same goods at different ports, thus vio- lating the spirit and the letter of the Constitution, which declares that "all duties, imposts, and excises shall be uni- form throughout the United States," and that "no prefer- ence shall be given by any regulation of commerce or revenue to the ports of one State over those of another." With less reason it was held that the practice would gi\-e special oppor- tunities for fraud, since importers by fictitious or speculative transactions might control the market value at their respective ports, and thus fix the basis of the duties to be paid. Another and a permanent change incorporated into the § 84J Analysis of Tariff Reasoning. 191 compromise tariff was the abolition of credits to importers. Tlie losses to the government under the generous system of granting credits secured by bonds had been less than might have been expected; of ^781,000,000 secured in duties in the period, 1 789-1830, the loss was less than ^6,000,000. Nevertheless there was possibility of large loss ; and it was unbusiness-like and inconsistent with sound administration for the government indirectly to loan capital to a particular mer- cantile interest. A still more serious defect from a fiscal point of view was that the credit system interfered with a proper adjustment of expenditures to revenue ; it made it well-nigh impossible to estimate with any degree of prompti- tude the effect of a new tariff or to take immediate advantage of a commercial revival and increased imports. After 1842, therefore, credits were abolished, and the change to cash pay- ments was intended somewhat to stiffen the protective system and to compensate for the lower rates which the compromise tariff of 1833 prescribed after 1842. 84. Analysis of Tariff Reasoning. From the enactment of the compromise act of 1833 until i86t the only warnJ contest over the tariff was that in 1846. Before leaving the subject it is worth while briefly to state some of the arguments which had been developed in favor and in opposition to protection of industry by the government. In the early debates on this subject what may be termed the "national independence" argument was a favorite and was forcibly used in popular appeals to patriotic constituents. It was held disgraceful that the United States should depend upon foreign nations for any articles of consumption ; that independence in industry must go hand in hand with inde- pendence in political life. Europe in those days was much farther off than it is to-day ; and the inconvenience of obtain- ing supplies was incomparably greater than at the present time. Even Hamilton was somewhat influenced by the argument ; President Washington set it forth in his inaugural address in 192 Tariff Legislation, 1818-1833- [§84 1789, when he advised his countrymen "to promote such manufactures as tend to render them independent of others for essentials, particularly military supplies," and again more definitely in the annual address in 1 796 ; even if commodi- ties should by a tariff cost more in time of peace, the security and independence thence arising would prove an ample com- pensation. Succeeding presidents referred to this advantage with equal approbation, as for example Madison in the annual messages of 1810 and 181 5 and Monroe in those of 1817 and 1823; while Clay in 1820 endeavored to attract support for the American system by contemptuously referring to the United States as an English colony of commercial slaves. The argument for the creation of a home market to con- sume the surplus products of the farmers was early advanced, as by Hamilton in his great report on manufactures ; and later by President Madison in 1815 and President Monroe in 181 7. Mathew Carey by practical illustration pointed out the great advantages which agriculture had derived from the vicinity of manufactures at Harmony, Providence, and Pitts- burgh. Finally the argument was presented in a more precise form: when the peace of 1815 changed the course of trade it was urged that Europe could no longer consume the surplus agricultural produce of the United States, for the American powers of production were increasing in a ratio four times greater than the foreign power of consumption ; and, even if foreign nations could consume the surplus products of the United States, they would prefer adherence to their own re- strictive laws ; therefore the United States must create a home market. Even Jackson preached this doctrine : " Draw from agriculture the superabundant labor ; employ it in mechanism and manufactures, — thereby creating a home market for your breadstuffs and distributing labor to the most profitable account and benefit to the country." Of later growth was the argument that a protective tariff cheapens prices. Hamilton considered this argument, and admitted that the immediate effect of protective duties may §84.] Analysis of Tariff Reasoning. 193 be an increase in price, but " it is universally true that the contrary is the ultimate effect with every successful manu- facture." The argument, however, was never made promi- nent until a quarter of a century later. Matthew Carey, in 1824, asserted that the United States saved more in one year in the cheapness and quality of commodities, particularly of cotton goods, than was lost in the time spent in maturing their manufactures. Similar ideas were expressed by Presi- dent John Quincy Adams in his annual message in 1828, and the argument was especially developed by the " Friends of Domestic Industry" in their statement of 1831 : on some commodities, to be sure, the prices had been increased, but by no means to the extent of the duty, and on many articles of domestic use the tariff had reduced prices to the foreign standard. Clay placed great stress upon this consideration, claiming that the tariff of 1824 had lessened the price of j)rotected commodities, and putting forth the doctrine that "the duty never becomes an integral part of the price, except in the instances where the demand and supply remain after the duty is imposed practically what they were before, or the demand is increased and the supply remains stationary." ^ The advocates of free trade on their part met this argument with the assertion that prices were naturally falling, owing to the introduction of labor-saving machinery, and attention was directed to the fact that raw materials entering into manu- factures were falling in price while gold and silver were appreciating in value. The protectionists also laid stress upon the protective sys- tems of Europe and asserted that the United States must be governed by the policy of foreign competing nations. Clay emphatically insisted in 1820, in 1824, and in 1832 that the question of protectionism must be decided in the face of the fact that European nations maintained restrictive systems. " I too, am a friend to free trade, but it must be free trade of perfect reciprocity." The maxim of free trade is " truth 1 Works, vol. ii, p. 401. Colton's Life, vol. ii, p. 240. 13 194 Tariff Legislation, 1 818-1833. [§84 in the books of European political economy. It is error in the practical code of every European State." In 1824 he declared that " if all nations would modify their policy axioms perhaps it would be better for the common good of the whole," and again in 1832 he complained that other nations would not break down their bars. The "young industries" argument was also made much of; in the earlier development of the protectionist system it was not supposed that the policy would necessarily be perma- nent. " No one," said Clay in 1840, " in the commencement of the protective policy, ever supposed that it was to be per- petual. We hoped and believed that temporary protection extended to our infant manufactures would bring them up, and enable them to withstand competition with those of Europe." In like manner at a later period Henry C. Carey, who did more than any other writer clearly to formulate the protection- ist reasoning, stated that restrictive duties were but a means to an end ; protection was needed to attain ultimate free trade. At first the arguments against the protective principle were general and based on the idea that manufacturing industry was not so innocent an occupation as agriculture. It was argued that labor and capital would be forced into new and reluctant employments for which this country lacked skill and ingenuity, that the manufacturing system was adverse to the genius of the American government by its tendency to accu- mulation of large capital and corruption of public morals. In • 1822 John Taylor of Virginia published " Tyranny Unmasked," devoted to the argument that the system of protective duties would end in tyranny and monarchy. Somewhat allied to this plea was the contention of Calhoun, who in the oft-quoted speech of 181 6 noted that the most serious objection which he could discover in manufactures was the dependence it caused among the employed ; and later he repeatedly dwelt upon the bad effect upon politics and morals caused by the struggles for legislative favor. There was " less patriotism and purity, and more faction, selfishness, and corruption." §84] Analysis of Tariff Reasoning. 195 A purely economic objection was that advanced by Southern opponents of the tariff, beginning with about 1830, in the de- velopment of the theory that import duties are in effect direct taxes upon exports; the South was taught that a protective tariff was a system of taxation practically levied upon the pro- ductions of cotton, rice, and tobacco, which formed the bulk of the exports. This theory is based upon the principle that exports pay for the imports, and that consequently whatever increases the price of imported articles must increase the amount of exports needed to pay for a given quantity of goods. The consideration of this argument in its various refinements cannot be undertaken here, its chief interest in this connection lying in the fact that the general political reasoning of the South in regard to the powers of the federal government was in this case reinforced by economic logic of a convincing character. '■• A standing objection to the protective system was its un- constitutionality. After the adoption of the first tariff in 1789 it was not much urged until 1820; but after that date, with growing sectionalism developed by the slavery question, with suspicions aroused by the successive federalizing decisions of the Supreme Court, and provoked by the definite propaganda of the American system by Clay and John Quincy Adams, the constitutional objection was dwelt upon at length ; it appears freely in the tariff discussion of 1824, and in 1828 the anti- tariff men tried to secure a definite issue to bring before the courts by incorporating into the tariff act of that year the preamble of the act of 1789, which declared without equivo- cation that the protection of domestic manufactures was one of the purposes of the act. The high-tariff party, however, would not admit the amendment, and the nullifiers afterwards claimed that the opponents of protection had denied the opportunity of an obvious and adequate legal remedy through the courts. In the same spirit Professor Sumner writes that Congress " had unquestioned power to lay taxes. How could it be ascertained what the purpose of the majority of 196 Tariff Legislation, 1818-1833- [§ H Congress was, when they voted for a certain tax law? How could the constitutionality of a law be tried when it turned on the question of this purpose, which in the nature of the case was mixed and unavowed." ' In 1831 an attempt was made in South Carolina to test the constitutionality of the tariff in the courts by refusing to satisfy bonds which had been given to secure duties, and by entering a plea of " no consideration " for the taxes levied. The United States District Court, how- ever, declined to hear evidence upon this plea.^ Madison, so often called the father of the Constitution, in a letter of 1827 to Mr. Cabell of Virginia expressed a "con- fident opinion " of the full power of Congress to protect man- ufactures ; the phrase " to regulate trade " he understood to include the power to encourage manufactures, because that had been the use of the phrase among all nations, and partic- ularly in Great Britain, " whose commercial vocabulary is the parent of our own " ; such was the use made of the power to regulate taxes by the States so long as they retained power over foreign trade ; in giving the general regulation of com- merce to the federal government the people supposed that they were giving authority to protect their own industry ; and the exercise of that power by the first Congress seemed to Madison conclusive evidence that they believed that the Con- stitution granted it. 1 Sumner, yacisoH, p. 285, ^ Idici, p, 220. CHAPTER IX. ATTACK UPON THE BANK; THE SURPLUS. 1829-1837. 85. References. Bibliographies: Bogart and Rawles, 33-37; Channing and Hart, 374-375; A. B. 'i^3Xt, Handbook of History, Diplomacy, and Government, 160-162 (internal improvements). Bank : (i) Sources, Messages and Papers, II, 462 (1829) ; 529 (1830), 576-591 (veto, July 10, 1832) ; Clarke and Hall, Documentary History of Bank, 735-777 (report of committee, 1830); T. H. Benton, Thirty Years, I, chs. 56, 60, 63-68, 72, 75, 77 ; W. MacDonald, Select Documents, 261- 268 (veto) ; A. Gallatin, Writings, III, 328-346 ; Documents, etc., in Ameri- can History Leaflets, '^o. 24 (Nov., 1825). (ii) Special: W.G.Sum- ner, History of Banking, 183-224; W. G. Sumner, fackson, 235-249, 259-276,291-296, 337-342; Bolles, II, 334-338 ; H. White, 281-313, or in Sound Curre^tcy, IV, No. 18; R. S. Y^on^, Andrew Jackson and the National Bank, in Eng. Hist. Review, XII, 85-89; C. A. Conant, History of Modern Banking, 302-309 ; J. J. Knox, History of Banking, 62-79. (iii) General: C. Schurz, Clay, I, 351-357, 372-378; H. von Hoist, Constitutional History of the U. S., II, 31-52 ; T. Roosevelt, Benton, 1 14-142. Removal of Deposits : (i) Sources, Messages and Papers, III, 5-19 (cabinet paper, Sept. 18, 1833) ; Finance Reports, III, 337 (Taney on re- moval of deposits), 451 (report, April 15, 1834) ; 602 (list of depositories) ; Benton's Abridgment, XII, 191 et seq. ; W. MacDonald, Select Documents, 289-295 (cabinet paper), 295-303, 317-323 (see bibliographical note) ; Statutes, V, 52 (regulation of deposits); D. Webster, Works, IV; T. H. Benton, Thirty Years, chs. 92-101. (ii) Special : J. B. Phillips, Methods of Keeping the Public Money,m Pub. Michigan Pol, Sci. Assn. (Dec, 1900), 49-66 (references to public documents) ; Bolles, II, 334-339. (iii) Gen- eral : J. V3.-Aoxi, Jackson, III, 499-536 ; H. von Hoist, History of U. S., II, 53-70; W. G. Sumner, /acij(7«, 296-321 ; C. Schurz, Clay, II, 23-51. Coinage: Statutes, IV, 699; V, 136; or Dunbar, 234-236; Report of Monetary Commission, 497 (Act of 1834) ; T. H. Benton, Thirty Years, I, chs. 105, 108; D. K. Watson, History of Coinage, 78-115; J. L. Laugh- lin, History of Bimetallism, 52-74. Intf;rnal Improvements : Sources, Messages and Papers, I, 410, 418 (Jefferson), 584 (veto of Madison, 1817) ; II, 142 (veto of Monroe, 1822), 483-493 (Maysville veto, 1830), 508, 683; III, 118-123; also 197 198 Attack upon the Bank. [§ 86 index, " Internal Improvements " in vol. X. ; American State Papers, Miscellaneous, I, 724 (Gallatin's report, April 12, 1808), gio-916 ; H. Clay, Speeches, II; Benton, Thirty Years, I, 21-27 (1824), 167 (Maysville veto). General: H. von Hoist, Constihitioiial History of U. S., 1, 388-396; H. Adams, Life of Gallatin, 350-352 (also index) ; J. A. Stevens, Gallatin, 298-301 ; C. Schurz, Clay, I, 40-47 ( 1806) ; D. C. Oilman, Monroe, 239- 248; W. G. ?sa'cane.x, Jackson, 191-194. Land : (i) Sources, Messages and Papers, II, 305 (1825), 391 (1827), 600 (1832); Finance Reports, II, 175, 492 (1820); also index, "Public Lands," vols. I, II, III; A. Seyhert, Statistical Annals, 306-308 (statistic;, 1817); T. H. Benton, Thirty Years, I, II (1821), 102-107; A. Gallatin, Writings, I, 297. (ii) Special : A. B. Hart, Disposition of our Public Lands, in Quar.Jour. Econ,, I, 169-183, 251-254; C. F. Emerick, Government Loans to Farmers, in Pol. Sci. Quar., XIV, 444 ; S. Sato, History of the Land Question, m J. H. U. Studies, IV (1886), 121-158; Bellas, II, 545; H. Adams, Finance, 255-260. (iii) General : W. G. Sumner, Jackson, 184-191 ; J. A. Stevens, Gallatin, 245-248. Surplus and Distribution : ( i) Sources, Messages and Papers, II, 451 (1829), 514 (1830) ; III, 56-69 (veto, Dec. 4, 1833), 239-246 (1836), 260 (table) ; Finance Reports, III, 228 (1831), 476 (1834), 643-646 (1835), 686-690 (1836); Statutes, V,.55; or Dunbar, 115; T. H. Benton, Thirty Years, I, 275-279, 362-368, 556-568, 649-658, 702-712; Benton's Abridg- ment, XI, 446, 492 et seq. ; XII, 24, 124; H. Clay, Speeches, II; D. Webster, Works, IV. (ii) Special : E. G. Bourne, History of the Surplus Revenue of 1837, pp. 169 (bibliography). J. J. Knox, U. S. A'otes, 167- 182, 190-192 ; BoUes, II, 547. (iii) General : C. Schurz, Clay, II, 118- 123 ; W. G. SmaasT, Jackson, 325-331 ; T. Roosevelt, Benton, 143-156. 86. Criticism of the Bank. In the Xyto preceding chapters certain phases of fiscal experience extending through Jackson's first presidential term have been considered, as for example the state of the budget and the development of the tariff. The evolution of these branches of administration was but little disturbed by the change from President Adams to President Jackson ; the fate of other financial subjects of importance, as for example the control of government funds, was, howe\-er, profoundly affected at once by Jackson's accession to power, so that it is necessary to return to the beginning of his term of office. Brief mention should be made of Jackson's secretaries. His first secretary of the treasury was S. D. Ingham of Pennsyl- vania, a manufacturer and a member of the House of Rep- §86] Criticism of the Bank. 199 resentatives for many years; he was a devoted worker for Jackson, not above taking part in the " bargain and cor- ruption " cry against Clay. Ingham's qualifications for the treasury are not apparent, but Jackson did not demand a high standard. Ingham fell from grace in the famous Mrs. Eaton affair, and retired in April, 1831. For some months the department was without a secretary. On August 8, 1831, Louis McLane of Delaware was appointed ; he was a man of abihty who had achieved distinction in diplomacy at London ; he was inclined toward federalism and had supported the bank ; and while secretary he assisted in the preparation of the tariff bill known as the Verplanck measure. Opposed to the removal of the deposits from the custody of the United States Bank he was transferred to the department of state, May, 1833, when William J. Duane took his place. Duane, as will be seen, was quickly followed by Taney, who in turn gave way, June 27, 1834, to Levi Woodbury of New Hamp- shire ; the latter held office throughout the remainder of Jackson's administration and that of Van Buren. Underneath the apparent great prosperity of the bank of the United States there were, as has been indicated, forces ready to be aroused into hostility. The conflict between the bank and some of the States in their effort to tax branches of the bank left memories which boded no good ; and the check which the bank exercised over inflated note issues of local institutions, while recognized as one of the fundamental reasons for the establishment of the bank in 1816, made lasting enemies. There was still a deeper agency at work which led to the final overthrow of the bank, — the revival of Jeffersonian democracy, which was displayed in many interest- ing ways about the year 1830: monopolies must be put down and it was held high time for a return to the simpler principles of the fathers of political democracy. Into the various mani- festations of this movement it is impossible here to enter, but this phase of public opinion needs to be reckoned with, in order to account for the rapid downfall of the bank which, as 200 Attack upon the Bank. [§ 86 a financial institution, had been on the whole wisely managed since 1819. Open hostility to the bank, as first disclosed in 1829, was apparently prompted by local intrigues in the hope of making political capital; in June, 1829, Senator Woodbury of New Hampshire brought complaints against Jeremiah Mason, manager of the Portsmouth branch, alleging that Mason was not altogether civil in his manners, and was partial to anti- Jackson men in making loans and collections. It is doubtful if this incident had much real significance ; Jackson's election was really due to the rising tide of democracy and especially the democracy of the West and pioneer settlements ; and his position towards the bank was indicated in his first message to Congress, December, 1829, in which he affirmed that both the constitutionality and the expediency of the law creating the bank were questionable, and accused the bank of not establishing a uniform and sound currency. In its place he would have a bank, as a branch of the treasury department, based upon public and private deposits without power to make loans or to purchase property. A bank of this character would not be able to operate on the hopes, fears, or interests of large masses of the community, and would thus be shorn of the influence which piade the present bank formidable. The president's reference to the bank was made the basis of inquiry in both Houses of Congress. The House Committee in its report of April 13, 1830, favorably discussed the bank from three points of view : first, its constitutionality ; second, its expediency ; and, third, — in accordance with the vague suggestion made by Jackson in his message, — the wisdom of founding a different institution upon the credit and revenues of the government. The argument in favor of the expediency of the bank was practically a currency argument ; it set forth that the dispute was not between an issue of paper currency and metallic currency, but between a national paper currency and a local paper currency. Since Congress had no constitu- tional power to forbid the issue of paper money by State §87] Unsuccessful Effort to Recharter. 201 banks, local bank-notes would circulate, and it was not worth while to discuss the superior advantages of a specie currency. The question therefore arose : Is it not better to have a staple currency which by virtue of its uniformity of value will prevent local bank-notes from circulating far from the place of issue ? And the committee was convinced that the United States Bank by its notes did actually furnish such a circulating medium, more satisfactory even than specie. If the current medium were confined to specie, a planter in Louisiana who wished to purchase merchandise in Philadelphia would be obliged to pay i per cent, for a bill of exchange on Louisi- ana, covering the transportation and insurance of the specie, — an expense of which one-half was saved through the issue of drafts. Again, the bank was shown to have performed with most scrupulous punctuality its stipulation to transfer free of expense the funds of the government to any point where they might be wanted. The committee had no sympathy with a bank resting on the credit and revenues of the government as suggested by Jack- son ; only the discretion and prudence of the government could then be relied upon to limit excessive issues of bills, and this frail dependence would not prevent inflated issues comparable to the paper money of the Revolution. Such a fiscal insti- tution would surely get into politics ; it would lead to a corrupt use of political patronage ; all holders of government notes would be government debtors; political parties would be divided upon the question of adopting a strict or a liberal policy toward these debtors ; and there would be every tempta- tion to rely upon issues of the bank rather than upon taxation to supply the government treasury. The Senate report was equally favorable to the bank, and bank stock, which had fallen from 125 to 116, rose to 130. 87. Unsuccessful Effort to Recharter. The real war upon the bank was yet to begin. In 1831 Senator Benton introduced a resolution against rechartering 202 Attack upon the Bank. [§ 87 the bank. He took logical and effective ground by demand- ing the use of gold currency in place of bank-notes, and his steady attack along this line year after year gained for him the title of "Old Bullion." His denunciation of branch drafts, as expressed in a speech delivered in 1832, was comprehensive : the currency of the bank was not signed by the president of the bank ; the notes were not issued under the corporation seal ; they were not drawn in the name of the corporation ; they were not subject to the double limitation of time and amount as in case of credit ; they were not limited to the minimum size of five dollars ; they were not subject to the supervision of the secretary of the treasury ; they were not subject to the prohibition against suspending specie payment ; they were not subject to the penalty of double interest for delayed pay- ment ; they were not payable at the place where issued ; they were not payable at other branches ; they were transferable not by delivery but by endorsement ; they were not receivable in payment of public dues ; the directors were not liable for excessive issues, and finally the holder had no right to sue at the branch which issued the order ; he could only go to Philadelphia and sue the director there ; a right about equiva- lent to the privilege of going to Mecca to sue the successors of Mahomet for the bones of the Prophet. Charges of this character were too academic to attract much popular attention, but Jackson's pertinacity and downright positiveness that the bank was unsound made an impression upon the politicians and the people. The unseasonable activ- ity of the bank in its own behalf in every possible direction, in the press, in pamphlets, and in political campaigns, also aroused suspicion as to whether it might not be well for the people to bestir themselves and at least to inquire into the question. In January, 1832, a petition for recharter was in- troduced in Congress and was favorably reported upon by committees in the Senate and in the House. The opponents of the Hank promptly attempted to counteract any favorable impression whicli this endorsement might give by securing once §88] Removal of the Deposits. 203 more the appointment in the House of a special committee to investigate the bank. Three reports were the result : though the majority was now adverse, accusing the bank of practising usury, of the issue of branch drafts, of making gifts to roads and canals, and of building houses to rent or sell, most of the charges were regarded by the House as inconse- quential, and the bill for rechartering was passed, receiving, as might have been expected, the veto of the president (July 10, 1832). Jackson's message presented with force and earnest conviction the dangers of a money monopoly : " Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? The president of the bank has told us that most of the State banks exist by its forbearance. Should its influence become concentred, as it may under the operation of such an act as this, in the hands of a self-elected directory, whose interests are identified with those of the foreign stockholders, will there not be cause to tremble for the purity of our elections in peace, and for the independence of our country in war?" If it were wise, he continued, to establish such a monopoly, the government ought to receive a fair equivalent ; the value of the monopoly was estimated as at least ^17,000,000, which under the terms of the bill it was proposed to barter away for ^3,000,000. Although Congress was unable to pass the measure over the president's veto, it rejected Jackson's other recommendation made a few months later that the government should sell all its bank stock, in order to disconnect itself from corporations and all business pursuits which might properly be regarded as . belonging to individuals. 88. Removal of the Deposits. To understand the next incident in the contest between Jackson and the bank demands a reference to the statutory relations of the government and the bank. Section 16 of the Bank Act of 1816 provided "that the deposits of the money of the United States shall be made in said bank or branches 204 Attack upon the Bank. [§ 88 thereof, unless the secretary of the treasury shall at any time otherwise order and direct ; in which case the secretary of the treasury shall immediately lay before Congress, if in session, and if not, immediately after the commencement of the next session, the reasons of such order or direction." In accord- ance with this provision most of the funds of the government had been deposited with the bank, and until Jackson stirred up trouble no one had suggested a different policy. The question of general control of the government over the bank was first distinctly raised in a correspondence in 1829 between Biddle and Ingham, secretary of the treasury, who simply reflected Jackson's views. Biddle met the criticism squarely ; he not only denied the power of the secretary of the treasury to exercise any supervision over the choice of officers of the bank or their political opinions, but he also maintained that the bank was responsible only to Congress, and was carefully shielded by its charter from executive con- trol. To this Ingham replied that the bank was organized for national purposes and for the common benefit of all. Apparently the controversy did not have aYiy immediate prac- tical significance, and for the time being this phase of the subject dropped from sight. In December, 1832, Jackson, spurred on to further activity by his re-election, which he properly regarded as a popular endorsement of his position, called attention to certain trans- actions of the bank in dealing in government stock, as contrary to its charter, and suggested that possibly the funds of the government were not safe, and that at least an investigation should be made. Another inquiry was thereupon ordered ; not only did the majority of the committee on ways and means report that the funds were secure, but a special agent of the treasury came to the same conclusion. A minority of the committee sided with Jackson, made a slighting ref- erence to some of the assets of the bank, and brought to view once more the evil practice of the Western branches of the bank in issuing accommodation bills. The House adopted § 88] Removal of the Deposits. 205 the majority report on March 2, 1833, by a vote of 109 to 46. An unfortunate incident for the bank occurred at this junct- ure : the treasury drew through the bank for nearly a million dollars on account of a payment due from France under the treaty of July 4, 1831; the French treasury for political rea- sons in turn protested the draft, and the bank was involved in a troublesome settlement of the account. To Jackson this was another proof of the insolvency of the bank, and when Biddle, in the interest of maintaining an easy money market, advised in 1832 against the immediate paying off a large por- tion of the 3 per cent, debt largely held by foreigners, and agreed to continue the account of treasury funds which was available for this purpose as a deposit account at interest, Jackson was more than ever convinced that the bank coun- selled delay because it had spent the government's money. The president's remarks are thus quoted : " I tell you, sir, she 's broke. Mr. Biddle is a proud man and he never would have come on to Washington to ask me for a postponement if the bank had had the money. Never, sir. The bank 's broke, and Biddle knows it." The president, therefore, was little influenced by the vote of confidence in the bank by the House, and determined at all hazards to break off all relations between the bank and the government. Before Jackson could carry out his plan of removal of the deposits he was obliged to run amuck of his own official ad- visers. McLane, who succeeded Ingham as secretary of the treasury, objected to removal except under authority of Con- gress, and gave way, June i, 1833, to William J. Duane. Duane was also indisposed to act, and, though earnestly be- sought, refused to issue the order. Jackson persisted, and was fortunate in receiving able support and counsel from Taney, his attorney-general. Strengthened by the argument of Taney, Jackson in a cabinet meeting held in September, 1833, justi- fied his position and explained at length his theory of the re- lations of the government to the public purse. According to 2o6 Attack upon the Bank. [§ 88 the president the duty of superintending the operation of the executive departments of the government had been placed upon him by the Constitution and the suffrages of the Ameri- can people ; he was responsible for the performance of duty by the heads of departments ; far be it from him, however, to expect or require that any member of the cabinet should, at his request, order, or dictation, do any act which he believed un- lawful or which in his conscience he condemned. The presi- dent begged his cabinet to consider the proposed measure as his own, in the support of which he would require no one of them to make a sacrifice of opinion or principle. A measure so important to the American people could not be commenced too soon, and he therefore named October i as a period proper for the change of the deposits, or sooner, provided the necessary arrangements with the State banks could be made. Duane's obstinacy increased ; he not only declined to issue the required order, but refused to resign. He was therefore dismissed September 23, and Taney, who had been the author of the elaborate paper which Jackson had presented at the cabinet meeting just referred to, was appointed to do the deed. Taney loyally accepted the responsibility, and on September 26 issued the order directing the deposit of public moneys henceforth in certain State banks. Strictly there was no direct removal of funds to other iiistitutions, — the amount on deposit with the bank being quickly exhausted through drafts for the ordinary expenditures of the government. Jackson's exposition of executive powers did not pass un- challenged ; the opposition urged that the treasury depart- ment was an executive department with distinct duties from those devolved upon the president, and that Congress had designedly given a separate and individual power to the secretary in order to keep asunder the purse and the sword. More specifically it was argued that the president's powers in regard to the bank were limited by the charter of the bank to two : the appointment of the government directors, and the issuance of the writ scire facias whenever he believed § 88] Removal of the Deposits. 207 the charter to have been violated. All other powers by the statute of 181 6 were delegated to others; the weekly state- ments of the condition of the bank were made to the secre- tary of the treasury, and not to the president ; and if any further regulations were necessary the appointment of a com- mittee of investigation could be authorized. Another argument was that no money could be drawn from the treasury except under authority of appropriations made by law, and that the removal of the deposits without con- gressional authority contravened this clause. In reply Benton argued that the bank charter provided that the bank should' give the necessary facilities for transferring public funds. The secretary had signed transfer drafts to the amount of two millions and a quarter ; and his legal right to withdraw funds by this prdcess was as unquestionable as his right to remove the deposits under another clause. " The transfer is made by draft" said Benton ; " a payment out of- the treasury is made upon a warrant; and the difference between a transfer draft and a treasury warrant was a thing necessary to be known by every man who aspired to the ofifice of illuminating a nation or even of understanding what he is talking about." John Quincy Adams, then in Congress, took middle ground, assert- ing that the secretary of the treasury simply had power to decide whether the deposits should be made in the bank, but that when once made he could not withdraw them except in - accordance with appropriations made by law ; the right to withdraw by ordinary payment until the deposit was exhausted was not, however, denied. Taney's reasons for removal were stated at length in a document presented to the Senate, December 3, 1833 ; the weakness of this argument is that it is pohtical rather than fiscal; he said that the charter of the bank was to expire in 1836, and as there were strong arguments against the wisdom of recharter, and the people in the presidential elec- tion of 1832 had endorsed Jackson's policy, there was no reason to suppose that future legislative action would be more 2o8 Attack upon the Bank. [§ 88 favorable to the bank ; it was consequently unwise to per- mit the deposits to remain until the close of the corporate existence of the bank. The funds must be removed some- time, and in view of the bank's determined attitude of hos- tility to the government it was the part of wisdom to act promptly. With the prolonged and bitter contest between the presi- dent and his friends and the majority in the Senate, with the Senate's censure of the president and the effort to expunge the resolution from its journal, we are not here concerned. The bank was unsuccessful in its endeavor to secure a renewal of its corporate powers under a federal charter, and its in- terest as a fiscal institution of national importance ceased with 1836. In regard to the real merits of the question of re- charter there is much to be said on each side. The strictly economic or fiscal elements of the controversy, however, are thrown in the background by the political character given to the contest. Jackson was undoubtedly driven to an aggressive policy by the fact that Clay forced his political followers to make the support of the bank a test of party loyalty in the election of 1832. The poHtical methods used by Clay gave color to the charge that the bank was in truth a mon- ster; President Biddle's memorial in 1832 asking for a re- newal was ill worded ; the tactics of the bank to secure a favorable consideration were calculated to arouse suspicion in the mind of a man like Jackson, who always prided himself on standing up for the rights of the plain people. Suspicion of the motives of the bank was certainly justified when it became known that between January, 1831, and May, 1832, the loans of the bank had been extended from :?;42,ooo,ooo to ^70,000,000. As in 181 1, much was made of the fact that a considerable portion of the stock was owned b\ foreigners, and that the stock held in this country was in the control of a few citizens, chiefly of the richest class ; that such a monopoly privilege ought not to be sold cheaply, and if sold at all, in the words of Jackson, it should " not be bestowed on the subjects § 89] The Pet Banks. 209 of a foreign government nor upon a designated and favored class of men in our own country." Clay was to a large degree responsible for the final issue, since, before the controversy became acute, intimations were made to Biddle that upon certain changes in the charter the renewal might be accepted by the president. Clay, however, counselled against modifications, and made the grave error of supposing that he could carry the presiden- tial campaign in 1832 on this issue. Three elements of op- position were too strong for him : a personal following who wished to endorse Jackson, irrespective of any opinion on the bank question ; a large party honestly opposed to a great centralized moneyed institution as dangerous to freedom ; and a smaller but earnest body who opposed all bank-note issues of every sort. Of the strength of this opposition Clay was apparently not well advised ; for the popular verdict in the election of 1832 was overwhelmingly in Jackson's favor, the latter receiving 219 electoral votes to 49 for Clay. 89. The Pet Banks. The selection of State banks to hold the funds of the government was made with care, although there were many heated charges that the choice was made solely on political grounds ; Jackson's " pets " became one of the catch-words of party campaigning. The conditions imposed upon the banks as a protection to the government were fairly stringent ; collateral could be called for, if the secretary of the treasury deemed advisable, and must be given if the deposits exceeded one-half a bank's capital ; weekly returns of the condition of the bank were required, and the bank must be open to exami- nation at any time. Economical arrangements were also made as to the transfer of public moneys from one place to another, and for the sale of bills of exchange on London in the final settlement of the public indebtedness held abroad. The whole matter carefully defining the authority of the government and the obligations of the banks was finally covered by the act of 14 2IO Attack upon the Bank. [§9° June 23, 1836, "regulating the deposits of public money." It was then laid down that any bank employed as a depository should credit as specie all sums deposited to the credit of the United States, and that no bank should be selected which did not redeem its notes in specie or which issued any note of a denomination less than five dollars. It was further provided that, if the deposit exceeded a fourth part of the bank's capital for at least three months, the bank should pay 2 per cent, interest on the excess deposit. Apparently the interests of the government were well safeguarded. The number of banks with the deposits to the credit of the " treasurer " and " other oflficers " at successive dates was as follows : — Date Number of banks Amounts January i, 1835 December i, 1835 November i, 1836 29 33 89 $10,323,000 24,724,000 49,378,000 90. Change in Coinage Ratio. The attack made by Jackson upon the Second United States Bank and its notes issues, together with the demands of Benton for a larger use of specie and especially of gold, might, even if there had been no other forces at work, have thrust the question of metallic currency into prominence. For several years after the establishment of the mint in 1792 foreign coins remained legal tender, and the Spanish dollar and its divisions continued to form the bulk of the metallic circuhtion. After 18 13 the great increase in paper circulation in the form of bank-notes tended to displace all forms of metal. The coinage at the mint was small ; the ratio of 15 to i, established in 179^ under the advice of Hamilton, proved to be an undervaluation of gold as established in the world's market and consequently no gold was brought to the mint ; this led to an entire discon- § 9°] Change in Coinage Ratio. 211 tinuance of the coinage of gold eagles during the period 1805-1837, and in fact the only gold coinage between 1804 and 1834 was about nine million dollars in the form of half-eagles and a small amount of quarter-eagles at irregular intervals. The mint valuation of gold proved to be so low that even the smaller coins were rapidly exported. In the first ten years of the mint's operations a little over a million silver dollars were coined, but these too disappeared from circula- tion ; upon inquiry it was learned that they were exchanged for Spanish dollars and left the country. The American dollar, though lighter than the Spanish, was brighter and more serviceable for certain kinds of foreign trade, and was there- fore sought for by dealers, while Americans were desirous of taking the Spanish dollar because of its greater weight. President Jefferson consequently in 1806 ordered the discon- tinuance of the coinage of the silver dollar. The embarrassments thus occasioned by the lack of an uni- form domestic monetary medium were repeatedly brought to the attention of Congress, and various plans of remedy were proposed. A Senate committee in 1819 suggested the ex- pediency of forbidding the export of domestic coins. Craw- ford, secretary of the treasury, proposed a change in the ratio of i to 15.75, and in 1823 made a further suggestion in favor of I to 16. Secretary Ingham in 1830 advised a single standard of silver; a Senate committee in the same year recommended a ratio of i to 15.9; and the House in the course of four years enriched monetary literature with four reports. The outcome of all this deliberation was the coinage act of June 28, 1834 (slightly amended in 1837), by which the weight of the gold dollar was reduced from 2 7 grains to 25 A grains nine-tenths fine, thus establishing a ratio of ap- proximately I to 16. This ratio in turn proved to be an undervaluation of silver and led to the withdrawal of silver dollars, so that after 1840 this coin was rarely seen in circula- tion and even the fractional coins tended to disappear. The absence of silver was a serious disadvantage to retail trade, 212 Attack upon the Bank. [§91 and probably had much to do with supporting a demand for a larger supply of bank money. To keep the smaller coins in circulation the weight of the pieces less than one dollar was reduced in 1853, and they were converted into subsidiary coins. 91. Internal Improvements. The question of federal aid for internal improvements as- sumed new importance during the administration of President Jackson. Ever since the first proposal of such expenditures about the beginning of the century there were grave misgivings on the part of many, due to constitutional objections, and this resulted in an uncertain policy. There were two questions involved : the respect which the national government owed a State, and the right of Congress to make direct appropriations in favor of internal improvements. The former question bore on the relations of a federal government to States, a tender subject during the period when States still imagined that they were clothed with some of the regalia of sovereignty; the second question was simply one aspect of the meaning of the " general welfare " clause of the Constitution, an enigma which never failed to provoke dispute. The first federal grants for roads were prompted by the need of better means of communication in the territories; here the first doubt referred to was obviously not involved ; the territories could not legislate for themselves, they were under the guardianship of Congress. From the time there- fore that Congress made a small grant of land to a private individual in 1 796 for the opening up of a road from Wheeling to Maysville, Kentucky, no objection was made to the con- stitutionality of such appropriations ; as Benton observed in 1824, members of all political schools voted for such appro- priations, "the strict constructionists generally inquiring if the road was limited to the territory, and voting for the bill if it was.'' A second stream of expenditure originated in the legislation authorizing the admission of the State of Ohio, April 30, 1802, §91 J Internal Improvements. 213 which provided that one-twentieth of the proceeds of the sales of public lands lying within Ohio, which might be sold by Congress, should be applied to the building of public roads from the navigable waters emptying into the Atlantic to the Ohio River, with the consent of the several States through which the road should pass; this 5 per cent, was then divided into two parts, three-fifths for the making of roads within the State and two-fifths for roads leading to the State : and here was the origin of the 2 per cent, and 3 per cent, funds established at the admission of many of the common- wealths. In many cases Congress by subsequent legislation transferred its share of the fund to the State on condition that the money be expended for internal improvements, — an obli- gation unfortunately not always kept. By an act of May i, 1802, the secretary of the treasury was granted I6000 to open such roads in the Northwest Territory as would best serve to promote the sale of public lands. The most important step was taken in 1806, when (March 29) Congress entered upon the laying out of a road from the head-waters of the Potomac through Pennsylvania and Virginia to the State of Ohio in accordance with the conditions of the act of 1802 under which Ohio became a State. This was the inauguration of a great public work, and appropriations were made in succeeding years with hardly an objection; the act of 1802 was inter- preted as a compact which placed appropriations for the Cumberland Road upon a different footing from other projects, and under this theory about ^2,500,000 were expended on the work during the first quarter of the century. Other improve- ments were early undertaken, less ambitious, however, in their development, as roads from the Mississippi River to the Ohio and roads in the Indian country of the Southwest. Justifi- cation for these expenditures was easily found in military necessity. Side by side with these small legislative undertakings was the discussion of the expediency of federal aid on a much more liberal scale. Jefferson in his second inaugural address, 1805, 214 Attack upon the Bank. [§91 declared that any surplus of revenue might well " be applied in time of peace to rivers, canals, roads, arts, manufactures, education, and other great objects within each State." In 1806 he justified even more emphatically a national system on the ground that the interests of the States would be identi- fied and their union cemented by new and indissoluble ties; suggesting, however, that a constitutional amendment might be necessary. Gallatin, ever anxious to reduce the debt, at first did not encourage the application of revenue to such improvements; but the surplus of 1807 set his imagination at work, and in a special report of that year he suggested a general scheme, and intimated that three or four million dollars might be available. Commercial disturbances occasioned by the European wars and the embargo put to flight any such extravagant hopes. In 18 16 Calhoun secured the appointment of a committee to inquire into the expediency of setting apart the bonus and profits from the bank of the United States as a fund for inter- nal improvement ; but the bill passed at the next session to carry out this plan was vetoed by Madison on constitutional grounds. Monroe likewise, though friendly to federal aid, was troubled by constitutional scruples, and in 1822 vetoed a bill appropriating money for the erection of toll-gates upon the Cumberland Road; this opposition, however, did not extend to appropriations for the repair of this road, or even to grants of aid to enterprises which were initiated under State authority. The stricter constructionists realized that their position was unpopular, and in the hope of finding a way out of the labyrinth Senator Van Buren in 1824 pro- posed a constitutional amendment giving Congress the power to construct roads and canals, and recommended that money appropriated be apportioned among the States according to population. Clay in the meantime was enlarging his reputa- tion by eager championship of generous expenditures for internal improvement, and aroused a patriotic interest in his appeals for national arteries of communication as a means of §9'] Internal Improvements. 215 military defence, for lack of which millions of dollars and precious blood had been lost on the Northwest frontier. President John Quincy Adams was equally devoted to the cause, and beginning with his presidency in 1825 appropria- tions for surveys and construction of roads and canals were increased, and even railroads were planned for. The pros- pect of an overflowing treasury within a few years naturally stimulated projects for expenditures. Committees and engi- neers planned works the probable cost of which it was estimated in 1830 would amount to ^96,000,000. A halt was made when Jackson became president ; while senator five years before he had repeatedly voted in favor of internal improvement bills, as for surveys, roads in Florida, Arkansas, and in Missouri, already a State, and for subscrip- tions to at least two canal companies. Between 1825 and 1829 Jackson's political convictions underwent a change which brought him into closer harmony with the stricter constructionists ; the change, however, was due to a sincere belief that democratic government was threatened by great moneyed interests rather than to fine-spun interpretations of the Constitution. On May 27, 1830, Jackson returned a bill appropriating money for the Maysville Road, basing his objec- tion specifically in this case upon the purely local character of the work projected, which was entirely within the limits of one State. He was not then ready to express an opinion as to whether he would veto a bill appropriating money for con- struction of works which were national in character, but he did not consider it expedient for the national government at that time to embark in a general system ; like Madison and Monroe he testified to the benefits of internal improvement but wished an amendment to the Constitution enlarging the powers of the government. Jackson followed this veto with another within a few days, returning a bill for a subsaription to stock in the Washington Turnpike Company, and at the end of the session pocketed a general bill for improve- ment of harbors and the construction of light-houses on the 2i6 Attack upon the Bank. [§92 ground that it contained items of local character. Jackson put his criticism on more popular ground a year later when he animadverted against the system of federal subscriptions to private incorporated enterprises because the power of the government over the stockholders would be dangerous to the liberties of the people and the relationship thus established would be used to influence elections. Jackson's opposition put an end for a time to further appropriations for internal im- provements under separate bills, excepting expenditures for the improvement of harbors and the removal of obstructions in navigable rivers for the security of foreign commerce. Some appropriations, however, were got through by putting them in the form of riders so as to escape a veto. Expenditures for roads and canals, 1802— 1835, were as follows, arranged by five-year periods : — 1802-1805 $S,ooo 1806-1810 . . 94,000 1811-1815 . 364,000 1816-1820 1,475,000 1821-1825 635,000 1826-1830 .... ... ... . 2,737,000 1831-1835 ... . 4,210,000 92. Sales of Public Lands. At the close of the Revolutionary War the federal govern- ment came into possession of an enormous domain by the cessions of claims by Eastern States to Western lands. In its early phases the subject hardly enters into a financial history, because the hope which Washington and Jefferson confidently held, that the sale of land would extinguish the debt, proved a mistake. From 1785 to 1800 only a little cash was received, and but a small quantity of bonds. In 1800 a radical change was made in the land policy by creating many- land-offices and by selling on credit, the time for payment being extended over a period of four years. The credit system led to incomplete payments with vexatious readjust- ments, and many pioneers, encouraged by the easy terms §93] Surplus Revenue. 217 offered by the government, later found it extremely difficult to extinguish their indebtedness. Sales by the government were made more rapidly, but, on the other hand, many for- feitures took place, and in 1820 land buyers owed the gov- ernment over ^21,000,000. Petitions were presented to Congress year by year to relieve settlers who defaulted pay- ments. Finally in 1820, after the panic of 1819 had brought the evils to a crisis, the credit system was abohshed ; but, as a partial compensation for a less liberal policy as to credits, the normal price of the land was reduced to ^1.25 per acre. Between 18 10 and 1830 the annual proceeds from the sale of land ranged between one and two million dollars ; but beginning with 1830 there was a considerable increase, until in 1834 the receipts were nearly $15,000,000 ; in 1835, $14,757,600; in 1836, $24,877,179 ; in [837, $6,776,236. In 1836 for the first and last time the revenue from this source exceeded that from customs. Since these proceeds were not required for the necessary expenditures of the government various proposals were made for cutting off this element of revenue ; one plan was to give the new Western States all the land within their respective borders, thus disregarding the conditions of use for common benefit made by the original States ; others were un- willing to go so far but favored the distribution of a part of the proceeds of the sales to the newer States. Political and sec- tional interests were involved ; the West naturally desired a liberal policy of sale or grant of land ; and such a policy like- wise fell in with the interests of the high-tariff party of the East, who feared that if the revenue became excessive the tariff must be lowered. Before any plan could be drafted to prevent the accumulation of funds the country had to face a larger question, the disposition of the surplus. 93. Surplus Revenue. The possibility of a surplus revenue had been suggested early in the history of our government, Jefferson, in his inaugural address in 1805, foresaw that a policy of economy 2 1 8 Attack upon the Bank. [§ 93 coupled with national prosperity might lead to an overflowing treasury, and, as already observed, advocated a constitutional amendment clearly authorizing the use of government funds for internal improvements, arts, and education. Though delayed by the War of 1812 the prophecy of 1805 became a reality in less than thirty years. The question of a surplus as a subject for legislation did not come up again until after the depression of 1819— 1823; but in 1826, when the ex- tinction of the debt appeared to be near, a bill was intro- duced into the Senate providing that five million dollars be taken annually for four years from the sinking fund, and be distributed among the different States, in aid of internal improvements and education. The bill went no farther than to occasion a brief debate in which it was pointed out that the chief object of such a measure was to perpetuate a pro- tective system ; and Jackson in his first message in 1829 seemed to take that view, for he recommended an appor- tionment of surplus funds among the several States inasmuch as no satisfactory adjustment of the tariff appeared possible. Jackson soon repented of this suggestion and advised a reduc- tion of the tariff duties; and then in 1832 held that the lands should not be made a source of revenue, but sold at nominal cost to settlers. He argued that as the " adventurous and hardy population of the West " did not receive their propor- tionate share of enjoyments from expenditures by the govern- ment, and as the real value of the land was due to their labor, they should be treated with special consideration. In 1 83 1 the Legislature of Pennsylvania, true to its protec- tionist interests, passed a resolution in favor of distribution ; and in 1832 Clay brought the question once more before Congress by proposing that the revenue from lands be appor- tioned among the several States. The measure was vetoed, and in 1834 a slight disturbance in business made it expe- dient not to attempt to deplete the treasury. A reduction in tariff duties, however, was no longer an available remedy, because the compromise tariff, enacted only after a long and §94] Distribution of the Surplus. 219 bitter struggle, was held in special regard as a settlement alnaost sacred in character and not lightly to be touched. 94. Distribution of the Surplus. In January, 1835, the national debt was paid off; the exist- ence of a surplus was an assured fact, and a committee of the Senate estimated that it would amount to nine millions each year for the next eight years. What was to be done with it? Everybody knew that the surplus excited wild speculation, and many people were sure that the money thus drawn from the great commercial centres and stored in remote banks was loaned to the profit of those who proved their loyalty to the administration. Clay renewed his proposition, and introduced a bill authorizing that ro per cent, of the net proceeds of the land sales should be left in the treasury and that the residue be distributed. The obvious objection to the distribution of the proceeds of land sales was that the public lands had been originally ceded to the federal government for the specific pur- pose of paying the debt created by the Revolutionary War ; and that as an integral part of the national income it could not be alienated to any State in particular. Moreover, the Consti- tution required that all revenue should be appropriated (^ cer- tain definite objects concerned with defence, protection, or the general welfare of the United States ; distribution to the States would not be such an appropriation, and the bill specified no constitutional purpose to which the money must finally be ap- phed by the States ; nor could there be such a limitation, since Congress had no power to compel the States to apply the money to any specific object. Apart from Jegal objec- tions, other arguments lay against Clay's measure : some people wished to have the money spent by the national government on fortifications, as a specially fit use of a fund which had accrued from the sale of the national domain ; the most valuable inheritance thaj: any nation ever possessed ought, it was said, to be reinvested in permanent works for the common benefit and security of the whole country. 220 Attack upon the Bank. [§94 Secretary Woodbury in 1834 even suggested that the govern- ment make "a temporary investment in some stocks sound and salable." A distribution scheme pure and simple could not pass Congress, and so the basis of legislation was changed ; the bill of 1836 proposed that the States be made the depositories of the surplus, which should be subject to the demands of the treasury. The constitutional objections to a regular distribu- tion bill being thus removed, or rather obscured, the bill was passed June 23, 1836 ; it provided that the money in the treasury January i, 1837, reserving the sum of ^5,000,000, should be deposited with the several States in proportion to their respective representation in the Senate and House. In return for the deposits the secretary of the treasury received certificates which set forth the obligations of the States to pay the amount expressed to the United States or their assigns, and he was given power to sell or assign these certificates whenever necessary for want of other money in the treasury ; and it was further provided that these certificates should bear an interest of 5 _ per cent, from the time of their sale or assignment, redeemable at the pleasure of the States. When January i came around it was found that under the terms of the act about ^37, 000, 000 would be available for deposit; as will be seen, owing to financial difficulties in 1837, the government was unable to transfer the whole of this sum ; in all about ^28,000,000 was paid over. As Edward G. Bourne, the historian of the surplus, observes, the act was a makeshift : it was not wholly satisfactory to the Whigs, who wanted unqualified distribution ; some of the States of the free-trade South received their shares with protest, and only because if they refused, the North would get them ; others regarded the money as but a slight alleviation of the iniquitous exactions of the tariff and yet not to be despised ; while the administration saw no other priictical way out of the dilemma. In spite of the statutory provisions relating to the deposit of funds, and the fact that Secretary Woodbury in his report for §94] Distribution of the Surplus. 221 1836 referred to the disposition of the funds as temporary and discussed anew the investment of surplus funds, everybody understood that it was an outright gift ; and to this day not a dollar has been called for. The idea of a douceur was so deeply rooted that it was subsequently claimed that the govern- ment could not withhold the final instalment, which was un- paid owing to the embarrassments arising in 1837; the act was alleged to have created a contract between the na- tional government and the States, by which the ^37,000,000 belonged to the States the moment the act was passed. Benton forcibly described the measure : " It is in name a deposit; in form a loan; in essential design a distribution. All this verbiage about a deposit is nothing but the device and contrivance of those who have been for years endeavoring to distribute the revenues, sometimes by the land bill, sometimes by direct propositions, and sometimes by proposed amend- ments to the Constitution." Clay told his constituents in Kentucky that he did not believe that a single member of either House believed that a single dollar would be recalled ; Calhoun in 1841 said that he still regarded it as simply a deposit, but he thought it should never be withdrawn ex- cept in case of war. Governor Seward in his message of 1 841 stated that it was well understood by Congress that the form of a deposit was adopted to save the bill from the veto of the federal executive. Notwithstanding these opinions the treasury has carried on its books the sum deposited as part of its cash balance, and to this day the money thus deposited stands on the books of the treasury as unavailable funds, 128,101,644. In 1883 the State of Virginia made a claim upon the secre- tary of the treasury for the deposit of the fourth instalment, and appealed to the Supreme Court of the United States for a mandamus to compel the secretary of the treasury to deposit with the State an amount equal to the fourth instalment, namely ^732,809. The court, however, held that the act of June 23, 1836, created no debt or legal obligation on the part 2 22 Attack upon the Bank. [§94 of the government, but only made the States the depositories temporarily of a portion of the public revenue not needed, as it was then supposed, for the purposes of the United States. The uses made of the funds distributed were various. Massachusetts distributed them among the towns : Boston used the money for current expenses ; Salem built a town hall ; Groton repaired a broken bridge. The State of Maine made a per capita distribution ; some States used the money for internal improvements, while a few saved it and use its income to-day for educational and other purposes. CHAPTER X. PANIC OF 1837 AND RESTORATION OF CREDIT. 95. References. Bibliographies: Bogart and Rawles, 39-42; Channing and Hart, 3«i-383- Specie Circular: W. MacDonald, Select Documents, 327-329; or Dunbar, 270-271 ; or Messages and Papers, X, 104; Benton's Abridgment, XIII, 57-67, 92-99, 162-igo, 331-333 ; Finance Reports, III, 764; IV, 38- 49; T. H. Benton, Thirty Years, I, 676-678; BoUes, II, 348-350. Panic of 1837 : Messages and Papers, III, 324-346 (special message, Sept. 4, 1837) ; Finance Reports, IV, 28-31, 233 ; Statutes, V, 201 (sus- pension of revenue deposits), 206 (relief of deposit banks) ; or Dunbar, 118-120; T. H. Benton, ThirtyYears, 11,9-67; A. Gallatin, Writings, III, 390-406 ; H. von Hoist, Constitutional History of U. S., II, 173-216 (references in foot-notes) ; BoUes, II, 346-352 ; C. A. Conant, History of Modern Banking, 479-485 ; W. G. Sumner, History of American Cur- rency, 132-161 ; J. B. Phillips, Methods of Keeping the Public Money {Pub. Mich. Polit. Sci. Assn.), 71-83; E. M. Shepard, Van Buren, 242-277; C. Schurz, Clay, II, 113-127; T. Roosevelt, Benton, 189-208; J. A. Stevens, Gallatin, 280-286 ; Schouler, IV, 257-279. Treasury Notes and Loans: Statutes, V, 201, 614; or Dunbar, 1 18-132; Benton's Abridgment, XIII, 351-367, 479-520, 661-679; D. Webster, Works, IV, 324-370; Bayley, 361-364; De Knight, 62-68; J. J. Knox, United States Notes, 40-62. Independent Treasury: Finance Reports, IV, 10-15 (Woodbury, Sept. 5, 1835), 192-198, 362-364 (1840), 444 (1841) ; Benton's Abridgment, XIII, 374 et seq. ; Statutes, V, 385 (Act of 1840), 439 (repeal, 1841); T. H. Benton, Thirty Years, II, 124, 219-228; D. Webster, Works, IV, 402-499 ; D. Kinley, Independent Treasury System, 23-39 ; J. B. Phillips, Methods of Keeping the Public Money, 103-111; E. M. Shepard, Van Btiren, 278-299; C. Schurz, Clay, II, 136-151, 202-210 (Tyler). Tariff of 1842: Finance Reports, IV, 464-469; Messages and Papers, IV, 180, 183 (vetoes) ; Benton's Abridgment, XIV ; Statutes, V, 548 ; T. H. Benton, Thirty Years, II, 307-317, 410-417 ; J. C. Calhoun, Works, IV, 199-200; E. Young, Customs Tariff Legislation, Ixxxix; H. von Hoist, Constitutional History of the U. S., Ill, 451-464 ; BoUes, II, 434- 448; F. W. Taussig, Tariff History, 112-114; C. Schurz, Clay, II, 198- 227 (general politics) ; Schouler, IV, 406-412. Struggle for Bank: Messages and Papers, IV, 63-68 (veto, Aug. 16, 1841) ; 68-72 (veto, Sept. 9, 1841) ; Finance Reports, IV, 445-447 (1841) ; Benton's Abridgment, XIV, 309-324, 348-384; T. H. Benton, Thirty 223 2 24 Panic and Restoration of Credit. [§96 Years, II, 317-356, 376-394 j E. C. Mason, TAf Veto Power (Harvard Hist. Monographs, No. i), 76, 145; Belles, II, 353; T. Roosevelt, Ben- ton, 239-259 ; Schouler, IV, 384-392. Expenditures: Finance Reports, IV, 186 (1838), 239-242 (1839); Benton's Abridgment, XIV, 128-133; T. H. Benton, Thirty Years, II, 198-202; BoUes, II, 539-589; Schouler, IV, 327. Repudiation : W. A. Scott, Repudiation of State Debts (bibliography), W. G. Sumner, History of American Currency, 162; C. Schurz, Clay, II, 211; Schouler, IV, 419-420. 96. Speculative Prosperity. The extraordinary plethora of the treasury at the time of the distribution act of 1836 seemed based upon the general pros- perity of the nation ; in order, therefore, to understand the significance of the panic of 1837 and the relations of the more important fiscal events of this period it is necessary to consider certain points connected with the general economic develop- ment of the country since 1820. It was a period of international peace and an era of great territorial and business expansion, leading as usually happens to an undue extension of credit and speculation. Banking disorders were for a time at least not serious, and manufacturing had recovered from the depression succeeding the War of 18 12. There was little to distract or disturb the normal course of material enterprise. Each suc- ceeding presidential message naturally referred to the continued prosperity of the country. The central point in this development was land settlement comphcated by land buying for future sale. The construction of the Erie Canal from 1817 to 1825 opened up the land all along the great lakes; between 1820 and 1840, Ohio increased in population from 581,295 to 1,519,467; Indiana from 147,178 to 685,866; Illinois from 55,162 to 476,183; and Michigan from 8,765 to 212,267. 1'lie fertile soil disclosed in these Western prairies compared with the rigors of agricult- ural life on the Atlantic seaboard excited the imagination and naturally led to exaggerated hopes. The Erie Canal was but one of many highways to the in- terior; canals penetrated far up to the foot-hills of the §96] Speculative Prosperity. 225 AUeghanies ; the Cumberland Road was carrying thousands of emigrants; railroad construction began in 1830. It was an age of internal improvements and the possibilities of the future seemed unlimited. The too generous credit system of the government toward land purchasers, which has been already descriljed, stimulated still further the feeling that the success of the future would make up for any imperfection in present achievement. As the market value of land frequently rose to much above the government selling-price there was an eager contest on the part of those who could borrow money, to buy for speedy sale at an advanced price or to hold the land for a future profit. Borrowers found ready accommodation at local banks, and with the loans thus secured made their pur- chases from the land receiver; the purchase-money in many instances was thereupon re- deposited by the government in the bank whence it came, where it once more served as a loan to another or even to the same land speculator. These local banks and the government surplus thus became involved in a common network of credits ; banks were established to meet this temporary demand, so that the lender leaned upon the borrower. The administrative hostility to the United States Bank and the hope of securing government deposits also gave impetus to the development of local banks. The bank expansion which took place under this stimulus is seen in the following table (amounts in millions of dollars) : Year Number of banks Capital Circulation Loans 1829 329 110.2 48.2 137-0 1S34 506 200,0 94.8 324-1 J835 704 23>-z 103.7 3652 1836 713 251-9 140.3 457-5 1837 788 290.8 149.2 525.1 1838 829 317-6 116.1 485.6 1839 840 327-1 135-2 492.3 1840 901 358.4 107.0 462.9 1841 784 3'3-6 107.3 386.5 1842 692 260.2 83-7 324.0 1843 691 228.9 58.6 254-5 1844 696 210.9 75.2 264-9 1S45 707 206.0 89.6 288.6 15 226 Panic and Restoration of Credit. [§96 Land speculation was also helped by the fact that the government was no longer a borrower from the public after the payment of the public debt, either for long or temporary loans ; hence a considerable amount of capital was set free for reinvestment ; furthermore the surplus funds of the government deposited in local banks encouraged these institutions to make loans out of proportion to actual assets. Between 1830 and 1837 the imports of merchandise exceeded the exports by 11140,000,000 ; and, instead of demanding the payment of this balance in specie, foreigners left substantially the whole amount invested in the United States, a fact evidenced by an excess of imports of specie over exports amounting to ^44,700,000. "The foreigners," says Shepard in his "Van Buren," "there- fore took pay for their goods not only in our raw materials, but in part also in our investments, or rather our speculations, and sent these vast quantities of money besides. So our good fort- une fired the imaginations of even the dull Europeans. They helped to feed and clothe us that we might experiment with Aladdin's lamp." Foreigners invested in the new railroad in- dustry and more particularly in the bonds issued by States and municipalities. This credit expansion was made the more easy because of improvements in communication between Europe and America. It is also probable that American capital was withdrawn from agriculture and directed into more speculative enterprises ; the value of flour and grain imported into the United States as a rule was insignificant, while that exported after 1830 was on the average about six million dollars an- nually; in 1837, however, the exports of grain fell off nearly a million dollars while the imports of grain were increased more than four and a half million dollars. Speculation was not confined to A\'estern lands ; there was equal recklessness over cotton plantations in the Southwest, particularly in Mississippi and Louisiana, and in the real estate of the cities which controlled the cotton trade ; the demand for the raw staple was greatly increased by the growth of manufactures of cotton goods in this country and by favorable §97] The Specie Circular. 227 conditions in England. The result was a rapid advance in the price of cotton, and also in the cotton crop which in Tennessee, Alabama, Mississippi, Arkansas, Louisiana, and Florida increased from 536,000 bales in 1833 to 916,000 bales in 1837. In 1833 the price of cotton ranged between iij^ and i^j4 cents a pound; in 1834 between 11^ and 13^; in 1835 between 14 and 20. Southern cities looked forward to a continuance of the great prosperity ; at Mobile for example the assessed valuation of real estate increased from ?4,ooo,ooo in 1834 to ^27,000,000 in 1837, although the number of polls assessed in the latter year was less than in the former. 97. The Specie Circular. On July II, 1836, the treasury department issued what is terjned the specie circular, an order that agents for the sale of public lands should take in payment only specie, and no longer receive the notes issued by banks. As the whole ques- tion of the character of moneys receivable by the United States for duties and other obligations became a subject of debate in 1837 this is a fitting place to review the previous policy of the government as to the medium which could lawfully be tendered for taxes owed and for lands bought. One of the earliest acts passed by the first Congress was that of July 31, 1789, ex- pressly requiring all duties to be paid in gold and silver only- Hamilton gave a liberal construction to this act, and by a circular of September 22, 1789, ordered that the notes of the Bank of North America and the Bank of New York, payable either on demand or within thirty days, should be received in payment of duties as equivalent to gold or silver. This action was defended in a report of April 22, 1790, on the ground that the law had for its object the exclusion of payments in paper emissions of the several State banks ; it was not intended to hinder the treasury from making such arrangements as its exi- gencies might dictate ; it was not to prevent if necessary an anticipation of the duties by treasury drafts at the several 228 Panic and Restoration of Credit. [§97 custom houses, nor to prevent the receipt of the notes of a public bank issued on a specie fund. The charter of the First United States Bank, 1791, expressly provided that the notes of that institution should be so receivable. In regard to payments for public lands a statute of i 796 re quired jbat lands be paid for in " money " ; the act of MafcTT 3, 1797, added "evidences of the pub]ic-^bt " ; under the act of May 10, 1800, specie or -eviSences of the public debt were required; and in 18 12 treasury notes were made acceptable. By a joint resolution approved April 30, 18 16, which was still in govern- ance in 1836, it was provided that all duties, taxes, debts, or sums of money accruing or becoming payable to the United States should be collected and paid in the legal currency of the United States, or treasury notes, or notes of the Bank of the United StaieS, or in notes of banks which are payable and paid on demand in the legal currency of the United States. In a treasury circular of April 6, 1835, all collecting and receiving officers were instructed not to receive any bank-notes in denominations of less than five dollars, and intimation was given that the restriction would soon be extended to denomi- nations of less than ten dollars, and that banks which continued the circulation of such notes would not be selected for fiscal agents. Again in an act of April 14, 1836, it was ordered that the United States government should not pay out any bank- note of any denomination unless the same were payable on demand in gold or silver coin at the place where issued, "and which shall not be equivalent to specie at the place where of- fered, and convertible into gold or silver upon the spot, at the will of the holder." It will thus be seen that the action of the treasury department was not precipitate ; its policy for at least a year had been toward restricting the \'olume of bank-notes and increasing the circulation of specie. In issuing the specie circular of" July '11, 1836, Secretary Woodbury declared that the order had forits object the repression of alleged frauds, the lessening of opportunities on the part of speculators to secure a monopoly of public lands to the injury of actual §98] Panic of 1 837- 229 settlers in the new States, and the discouragement of the extension of bank issues and bank credits ; he also briefly- referred to the need of protection to the treasury. The lively opposition to the circular came in part from speculators and in part from people who desired to buy for actual settlement but who could borrow only notes of non- specie paying banks and hence could get no land ; on the other hand the measure helped speculators, since they were the only ones who could obtain specie, and because the new limitation of sales of public lands practically restricted the available supply to that already bought. The opposition, however, was so great that oh the assembling of Congress both Houses passed a bill to annul the circular ; the bill was delayed imtil the end of the session, and as the president did not sign it there was no opportunity to pass it over his veto which bore the date of March 3, 1837, 11.45 p- **■ 98. Panic of 1837 ; Suspension of Specie Payments. The check placed upon land speculation by the issue of the specie circular cramped the operations of Western banks and the Eastern institutions which were closely connected with them ; coming, moreover, at the period when the distribution of the surplus was to begin, the specie circular was tangled up with a complicated credit system, and immediately brought on the inevitable crash. The first of the four instalments for de- posit with the States was called January i, 1837, and as the amount was based on the representation of the several States in Congress it practically meant the transfer of ;?9,ooo,ooo from one section to another, for a large part of the government deposits at that time were in banks in the less populous States. To bring about these readjustments required a contraction of loans in some sections in order to release the government funds, as Schurz in his life of Clay describes the situation : " Millions upon millions of dollars went on their travels North and South, East and West, being mere freight for the time be- ing, while the business from which the money was withdrawn 230 Panic and Restoration of Credit. [§98 gasped for breath in its struggle witli a fearfully stringent money market." The first instalment was practically all paid ; the second instalment, called April i, was coming in when on May 10, 1837, the banks of New York suspended specie pay- ments, and on the next day they were followed by the banks in the other large Northern cities. This suspension temporarily involved the government, since its funds were in the custody of the banks. The panic which overtook this country was by no means due wholly to mistakes in the country itself. In November, 1836, the failure of two banks in Ireland and Manchester was felt on the London Stock Exchange ; the three large business houses known as the three W's, — Wilkes, Wilde, and Wiggin,— which had closest relations in the granting of credit to America, were in particular affected. Since the imports of the United States at this time largely exceeded the exports the balance was met not by settlements in specie, but by the sale of Amer- ican securities of one sort or another and by the securing of credits abroad. When the shock was first felt in London English creditors found it necessary to call in their loans. The financial depression brought on an immediate fall in the price of cotton, and the banks in New Orleans which had made large loans on cotton as security had to contract their credits, and these difficulties in turn were reflected in New York. Another important contributory factor leading to trouble was the failure of the American crops in the years 1835 and 1837, unfortunately continued in 1838. This lessened the purchasing power of the farmers and crippled the merchants. It is the old story : in the confidence of getting in their payments from the country large importers had given time notes to settle for the balance of trade, thus swelling the volume of commercial paper and over-stimulating the growth of credit institutions. High protectionists have also placed emphasis upon the lowering of duties by the tariff of 1833 as the cause of the subsequent disasters. §99] Distress of the Treasury. 231 All of the causes, however, of this diseased state of com- merce and business were not clearly seen at the time ; people then and since have thought the whole trouble was the in- sistence of the government in demanding payment for public lands in a currency which would hold its value. At a meeting held in New York March, 1837, to consider the situation, Webster publicly expressed this opinion. It was hoped that the new president, Van Buren, might be induced to rescind the specie circular, and immediately after the delivery of Web- ster's speech a committee was appointed to go to Washington to labor with the president. The committee had a dismal tale to tell : the value of real estate in New York had in six months depreciated more than ^^40,000,000 ; in two months there had been more than 250 failures; there had been a de- cline of ^20,000,000 in the value of the stocks of railroads and canals which centred in New York ; the value of merchandise in warehouses had fallen 30 per cent. ; and within a few weeks 20,000 persons had been discharged by their employers. The president was civil ; or, as Benton expresses it, treated the gentlemen with exquisite politeness and promised them an early answer. His answer proved to be a refusal to alter the policy, and at this time no human power could possibly have averted the storm. The question was not of selling govern- ment land but of realizing at any sacrifice on land security in a time of depression of the deadest kind. In the midst of this confusion the third instalment of the surplus was due July r, 1837 ; the government could do nothing more than to pay to the States the notes received from the banks irrespective of their quality; and the fourth instalment, due October i, was never paid. 99. Distress of the Treasury. Further details of the general crisis of 1837 must here be omitted, but the student of finance is particularly interested in the measure which the government took to protect its funds. President Van Buren would not yield to a demand to rescind the specie circular, on the ground that the voters of the 232 Panic and Restoration of Credit. [§99 country in electing him president liad passed approvingly on Jackson's hard-money policy ; he placed the responsibility on Congress, and called an extra session on September 4 to de- vise relief for the treasury. The elaborate message which Van Buren sent in reviewed the situation, briefly advised tem- porary measures of relief, and devoted chief attention to the necessity of establishing an independent treasury system through which the government might in the. future care for its own funds. The existing disturbance was attributed to over- action in all departments of business. Stress was laid upon the enormous and rapid increase in banking capital and paper circulation between 1834 and 1836; the extension of credits to traders in the interior ; the large investment in unproduc- tive lands; the expenditure of immense sums in improve- ments which had proved to be ruinously improvident; and the rapid growth of luxurious habits. For immediate relief he proposed a temporary issue of treasury notes, and the withholding of the payment of the fourth instalment of the surplus, due in October. Upon these latter recommendations Congress acted promptly and favorably ; and authority was given October 1 2 for the issue of treasury notes not exceed- ing ^10,000,000. P"or business men there was also a little comfort ; importers were given more time to pay their duty bonds ; and the secretary of the treasury was authorized to withdraw public moneys from the deposit banks in a manner as gradual and convenient to these institutions as might be consistent with the pecuniary wants of the government ; no further interest was to be demanded on the deposits, and de- faulting banks might give bonds to pay in instalments the moneys due the United States. On January i, 1840, §896,000 was still due the government by the banks. Commercial distress was deep-seated and recovery was slow ; not until the latter half of 1838 did banks generally re- sume specie payments ; even then some of the banks were unable to live up to their professions, — tlie banks of Phila- delphia for example suspended again October 9, 1839, ^""^ §99] Distress of the Treasury. 233 did not resume effectively until March, 1842 ; in this vacil- lating and discouraging policy they were followed by many others, particularly in Rhode Island, New Jersey, and the South and West. The circulation was contracted from ^149,- 000,000 in 1837 to ^83,000,000 in 1842; this of itself low- ered prices, deprived some section? of a circulating medium, and contributed to commercial distress. These misfortunes blighted the revenues of the government ; imports declined from 2190,000,000 in 1836 to ^141, 000,000 in 1837 and ^113,000,000 in 1838; customs duties fell off and the reve- nues from sales of public lands shrank to their earlier figures ; as is shown in the table, page 246. Unfortunately during this period of distress the treasury had to meet increased expenditures ; the extraordinary gain in the revenue during the years 1835 and 1836, together with the extinction of the debt, tempted Congress to large outlays, from some of which the government could not immediately retreat. The construction of public works, the more zealous extinction of Indian titles, plans for a speedy removal of the aborigines beyond the Mississippi, improvements of the Dis- trict of Columbia, and, above all, the expenses in the Florida War, raised expenditures of the government in 1837 and 1838 to about double what they were in 1834 and 1835. The diffi- culties were aggravated by extravagance and corruption in ad- ministrative departments in which high officials were involved. The result of all this was a series of annual deficits : — Year Deficit Surplus 1837 1838 1839 1840 1841 1842 1843' $12,300,000 7,500,000 4,goo,ooo q ,600,000 5,200,000 3,400,000 $4,600,000 Total $42,900,000 $4,600,000 ^ Half year. 234 Panic and Restoration of Credit. [§ loo 100. Issue of Treasury Notes and Loans. As has been stated, Congress on October 12, 1837, in order to meet the immediate strain, issued treasury notes; the bills authorized were limited to denominations of not less than ^50; they were redeemable in one year, bore interest and were receivable in payment of all debts to the United States including payment for land. The expectation that a further issue would not be necessary was disappointed ; and Congress, ever hoping that long-term bonds would not be needed, yielded to a. policy of reissues, from which it did not free itself until 1844. Between 1837 and 1843 treasury notes were issued under eight different acts, amounting to $47,002,- 900, of which about one-third represents reissues. All of the notes were issued at par, and bore interest varying from one mill per cent, to 6 per cent. ; the limitation of denomina- tions to $50 or over was continued in subsequent acts. There was strong opposition to this policy, on the ground that the supply of monetary medium was inadequate to the needs of commerce ; on the other hand Benton, true to his hard-money convictions, endeavored to make the lowest denomination ^100 instead of ^50. In the issue of 1843 a much controverted change in the policy of redemption was introduced by the treasury department ; it was announced that the one-year notes would be purchased by the treasury at par on presentation, at any time before the expiration of their term, but the House committee on ways and means, which was instructed to report upon this question, held that the system made the notes prac- tically demand notes and was contrary to the Constitution.^ When the Whigs gained control in 1S41 the policy of issuing treasury notes was supplemented by three acts for long-term loans ; although no one of these was highly impor- tant in itself as a fiscal measure, they contain points of perma- nent financial interest. The first of these acts, July 21, 1841, 1 Report No. 379, 28th Cong., ist Session, House of Representatives, § loij Independent Treasury. 235 was designed to fund outstanding treasury notes, and to meet current needs of the treasury. The loan had only three years to run, and the law prohibited the sale of stock at less than par; although the rates of interest offered were 5% to 6 per cent., capital was not attracted ; of the ^i 2,000,000 author- ized ^5,672,976, or less than half, was issued. An attempt to permit the sale of stock at the highest price (which might be less than par) also failed, as this was regarded as a reflec- tion upon the dignity of the government. The two later loans of April 15, 1842, and March 3, 1843, were more liberal both as to interest and term of maturity ; the stock could be sold at less than par after it had been advertised a reasonable time ; and the periods of redemption were extended to 20 and 10 years respectively; of the loan of 1842, ;?8,343,ooo was sold at from 97}^ to par, and of the loan of 1843, 17,004,000 was marketed at a premium. In neither case, however, was the yield satisfactory ; capital was other- wise engaged at that period, and American financial policy did not as yet command general confidence ; coupled with the tardy recovery from the disaster of 1837 was the widespread suspicion caused by repudiation on the part of many States and cities. 101. Independent Treasury. The plan which Van Buren proposed in his message of September, 1837, for the care of the public moneys by public officers was by no means new ; it is said that Jefferson once suggested to Dallas some such plan ; Gouge, an office-holder at Washington, a writer on money and banking, is also one of the sponsors for the system; and as early as 1834 a bill on somewhat similar lines had been briefly considered in Con- gress. In the message of September, Van Buren argued at length that it was not designed by the Constitution that the government should assume the rnanagement of domestic or private exchange any more than it should provide for the transportation of merchandise ; that the previous experiments in the employment of local banks for the care of government 236 Panic and Restoration of Credit. [§ loi funds had proved unsatisfactory; that the early practice of employing banks was a measure of emergency rather than of sound policy ; that the emergency no longer existed, for instead of a load of national debt there was a large surplus which the government should adequately protect. Moreover, the use of government funds by banks led to pernicious results in the expansion of credit, rashness of enterprise, and specu- lation ; the remedy, therefore, was that the government should take care of its own funds, and return to the practice of requiring the payment of all dues in specie with no exception whatever in favor of bills of specie-paying banks. A bill was introduced into the Senate, September 14, 1837, for the establishment of an independent treasury, but it ap- peared without any prohibition on the treasury to receive the bills of specie-paying banks. The president openly objected, and Calhoun also announced that he could not support the bill unless the principle of specie payment was included ; he moved and secured in the Senate an amendment which was afterwards known as the specie clause ; in this form the bill passed the Senate 26 to 20, but failed in the House 120 to 106. In the regular session of 1837-1838 the measure was reintroduced, and, although the specie clause was stricken out in the Senate before passage by that body, the amended bill could not command a majority in the lower house. A third time at the next session 1838-1839, the same bill was brought forward without the specie clause, and for a third time failed. The election in 1838, however, changed the character of the twenty-sixth Congress and resulted in the election of a major- ity in favor of the independent treasury, so that the bill was passed and approved by the president July 4, 1840. A com- promise was accepted as to payments in specie, by providing that until June 30, 1843, a part of all sums due to the United States might be paid in other than legal currency ; after that date only gold or silver was to be receivable. The arguments against the measure during the prolonged discussions in Van Buren's administration were not especially §102] Tariff of r84-2. 237 illuminating ; political rather than fiscal and commercial con- siderations were prominent ; great stress was laid upon the danger of a government bank, managed by the treasury department, acting under the commands of the president of the United States. " Public funds," said Clay, " would be un- safe in the hands of public officers ; the perilous union of the purse and the sword so justly dreaded by our British and Revolutionary ancestors would become absolute and complete ; it might indeed be that the Senate of the United States would be obliged humbly to implore some future president to grant it m(5ney to pay the wages of its own doorkeeper." It was also urged that the sub-treasury system would subvert all the State banks ; would embarrass business by withdrawing from circu- lation large sums of money ; and the proposed substitution of a purely metallic currency would reduce all property in value by two-thirds. Clay denounced the policy as a selfish solici- tude for the government and an evidence of a cold and heart- less insensibility to the sufferings of a bleeding people ! A widespread feeling of indignation descended on the administra- tion because it did not propose to encourage local banking institutions by the deposit of government funds; and the friends of a United States Bank once more championed its cause. 102. Tariff of 1842. The serious decrease of the revenue of the government caused by the panic of 1837 provided a favorable opportunity for the protectionists ; it could be urged that the tariff duties were not only too low to afford adequate protection to busi- ness, but that they would not produce enough to support a treasury so embarrassed that it was compelled repeatedly to find relief in the issue of treasury notes. The claim was the more convincing in 1840 because under the provisions of the compromise tariff further reductions were to take place. Nevertheless it was deemed expedient by the Whig political managers not to .force the question of the tariff too promi- nently before the people in the presidential campaign of 1840 ; 238 Panic and Restoration of Credit. [§ 102 and so Harrison, of some military repute, was selected by the Whigs, instead of Clay, the logical candidate. Harrison was elected and the Whigs were ready with a program both as to a bank and the tariff. If Harrison had lived constructive legislation would have t)een quickly effected ; Harrison died within a month, and was succeeded by Tyler, who had been taken by the Whigs as candidate for vice-president without careful consideration of his views on economic questions, 'lyler was enough of a Whig to favor tariff duties, but obstinately stood aloof from his party in the settlement of details. Notwithstanding the inadequacy of revenues for current expenditures, the Whigs were willing to sacrifice the income from sales of public lands by distribution to the States, a policy which would fortify the future contention of protection- ists that high duties were needed to keep the treasury supplied, and which found many friends among those who wanted the States to engage in costly internal improvements. This did not satisfy Tyler ; and in order to secure the president's ap- proval of the distribution act in 1841 the party leaders were forced to include in the law a proviso that if at any time the duties under the compromise tariff were raised the distribu- tion of revenue should be suspended. In this way the non- tariff party hoped to tie down its opponents by an automatic check. Such a restriction was highly objectionable to the Whigs under Clay's leadership, and in two tariff bills passed by Congress in 1842 the proviso for suspending distribution was practically disregarded. Tyler promptly interposed his vetoes ; and not until a third bill was framed, with the former provisos as to land distribution left undisturbed, could the new tariff obtain the president's approval ; this was brought about August 3, 1842. The tariff act of 1842 was highly protective; duties were increased, but not uniformly, to the level of the tariff of 1832 ; the average on dutiable articles was 23.1 per cent, in 1842, 35. 7 per cent, in 1843, 35.1 per cent, in 1844, and 32.5 I03] Struggle for a New Bank. 239 per cent, in 1845. Specific duties wherever practicable were laid, and special consideration was given to iron ; on some individual commodities the rates were extremely high, as is seen in the following list, the second column showing the ad valorem incidence of taxation based on prices prevailing in 1844 : — Commodity Specific duty Ad valorem per cent. Cotton bagging Railroad iron . . . Pig iron Rolled or hammered iron . Cut nails . . . / . Window glass . . . Refined sugar Molasses Salt . . 4 cts. per sq. yd. $25 per ton gg per ton 2 5^ cts. per lb. 3 cts. per lb. 2 to 6 cts. per sq. yd. 6 cts. per lb. ^% mills per lb. 8 cts. per bushel 53 77 72 51 43 62 to 165 .100 51 61 A change was made in the method of collecting customs duties as had been earlier contemplated in the act of 1833 ; hitherto credit had been granted to importers upon the giving of bonds for the payment of duties within a certain period. When capital was scarce and commercial industry not highly organized, as in the early part of the century, it was necessary for the government to be liberal in its treatment of importers ; with the increase of government receipts, and the growing possi- bilities of loss through fraud or incapacity of officials, the con- viction gained ground that the government should do business on a cash basis. The application of this principle to the pay- ment of customs duties was heartily supported by protectionists, because of the added burden which would be placed upon the importing interest. The merchants opposed the change and in 1846 secured a modification through the establishment of a warehouse system. 103. Struggle for a New Bank. The new system of an independent treasury was not destined to enjoy a long existence ; as soon as the Whigs gained power they repealed the independent treasury law, August 13, 1841, 240 Panic and Restoration of Credit. [§ 103 and it is probable that if Harrison had lived a third United States Bank would have been established. Tyler, really a States- rights Democrat, and not in harmony with his party, in this as on the tariff proved a stumbling-block to constructive legislation. The opposition complained that undue haste was shown in the repeal : Benton asserted that experience though brief had proved the sub-treasury system to be the safest mode yet devised for collecting the revenues, since nothing but gold and silver were received ; and that it was the cheap- est way of keeping the moneys, as the salaries of the receivers were less than the cost of employing banks. The Whigs, however, were prompt to gather the fruits .of victory, and the new system was summarily set aside. It was not an easy matter to provide a substitute ; Clay and some other of the leading Whigs knew very well what they wanted, — a bank, — but the difficulty was to arrange a plan which would meet the objections of Tyler, who was known to be strict in his interpretation of congressional powers as granted by the Constitution. In the hope of preventing any future embarrassment from this source Ewing, the secretary of the treasury, was called upon to propose a plan, and it was supposed that a measure framed by him would meet with the approval of the president. Ewing recommended the estab- lishment of a fiscal bank, with a capital of $30,000,000, to be incorporated in the District of Columbia ; branches to be established in different States, but only with the assent of the States concerned. Tyler had objected to the title of bank, and also questioned the right of Congress to grant charters to banking corporations without the permission of the States. This latter restriction, however, was particularly objectionable to Clay, and during the debate an amendment was inserted that such agreement should be assumed unless dissent were ex- pressed by the legislature of the State concerned at its next session. The contest which now took place between the president and the Whig majority of Congress, from this time on through the remainder of Tyler's administration, is of little § I03] Struggle for a New Bank. 241 interest to the student of finance. On the one hand, the president showed indecision and proved obstinate on what would appear to be minor points ; while on the other hand, Clay and his immediate followers appeared to care more about discrediting Tyler than about getting a practical bank. A bill was passed along the line of Clay's amendments, and on August 16, 1841, was vetoed by the president on four grounds: (i) the bill provides for the creation of a bank to operate over the whole Union, and is therefore unconstitu- ■ tional; (2) it is a bank of discount, and for the same reason unconstitutional; (3) it is not limited, as it properly should be, to the power of dealing in exchange ; (4) the assent of the States is not sufficiently secured. In spite of the party animosities aroused by this veto which the Clay Whigs called treachery, a second attempt was made to incorporate a bank- ing institution, and on this occasion it was announced that the president's scruples would be recognized. The bank was to be styled the "Fiscal Corporation of the United States." By this time, however, it was impossible to please the president. Lyon G. Tyler thus explains and defends his father's position : "The Fiscal Corporation had, in fact, scarcely more than a point of resemblance to the idea prominent in the president's mind. It pretended to deal exclusively in exchanges, but it justified, in fact, the most obnoxious system of discounts, by prescribing no limit to the premium in the purchase of bills, or to the time the bills might run, or to their renewability. It rested on no actual exchange basis ; and the drawer in one place might become the acceptor in another, and vue versa. A bill drawn at Philadelphia on Camden, New Jersey, at New York on a border town in New Jersey, at Cincinnati on New- port in Kentucky, might, for anything in the bill to restrain it, become a mere matter of local accommodation. The bill copied certain essential features from Clay's edition of the Fiscal Bank bill. The secretary's project permitted discount- ing in the District, and on principle there was no objection to this. But Clay's bill, which publicly challenged the issue ■ 16 242 Panic and Restoration of Credit. [§ 103 of power, interdicted all discounting in the District, and forced it upon the States. So the Fiscal Corporation." * The second bill, on September 9, was vetoed like the first, and for substantially the same reasons. Benton disposed of it by declaring that it would be better to " call this corporosity the Meal Tub Bank. A cattish name would certainly suit it in one particular; for, like a cat, it has many lives. This bank has been killed several times, but here it is still, scratch- ing, biting, and clawing. Jackson killed it in 1832 ; Tyler killed it last week. But this is only a beginning ; seven times more the Fates must cut the threads of its hydra life before it will yield up the ghost." Tyler in his annual message, December, 1841, next brought forward a plan of his own. He recommended a Board of Control with agencies at prominent commercial points for the safe-keeping and disbursement of the public moneys; and a substitution at the option of the public creditor, of treasury notes in lieu of gold and silver, provided that the issue of notes be limited to $15,000,000 unless by express sanction of Congress. The deposit of specie to a limited amount was to be permitted in exchange for certificates of deposits ; and the institution was to have power to purchase and sell domestic bills and drafts. The plan as a whole was termed the Ex- chequer Bank. According to Lyon G. Tyler the measure had three principal objects in view : The safe-keeping of the gov- ernment moneys ; the furnishing a paper circulation, always equivalent to gold and silver and of universal credit ; and a provision for supplying to some extent the means of a cheap and safe exchange in the commerce between the several States ; and he then expounds the president's plan : "The measure avoided extremes on both sides. It did not attempt to collect a capi- tal by means of private subscription for the general purposes of loans and discounts, and therefore did not propose to per- form the ordinary functions of a bank. On the other hand, it did not confine the currency exclusively to a specie currency, ' Letters and Times of the Tylers, vol. ii, p. 87. § I04] State Repudiation. 243 as the independent treasury did, or make no attempt to furnish the country with faciUties of exchange. A board of control in the city of .Washington and agencies in the States comprised the essential features of the system. The charge of the union of the ' sword and purse,' which had been brought against the independent treasury, was avoided by several very ingenious provisions. The president was forbidden to touch a dollar of the public money, by his own authority, or change its custody. The secretary of the treasury only could do so, to meet the occasion of the public service or by a public official act. . . . And finally, under rigorous provisions against discounting, operations in exchange were permitted to give life to the currency and facilities to the public. But the sovereignty of the States was especially considered in that section which forbade the agencies to transact any business of a private character against the laws of the States." ^ This plan received the unqualified endorsement of Webster, who declared that " if the Whig Congress will take the meas- ure and give it a fair trial for three years it will be admitted by the whole American people to have proved the most bene- ficial institution ever established, the Constitution only ex- cepted." Congress, however, was under the sway of political passions, and the bill was defeated almost as quickly as introduced. No further attempt was made in constructive legislation until the Democrats returned to power; in the meantime State banks were once more employed as deposi- tories, and whenever practicable collateral security was de- manded for the deposits held by the banks. 104. State Repudiation. The discredit of federal finance during the years 183 7-1 844 was sharpened by the financial collapse of several of the State governments. Encouraged by the expansion of industry and commercial enterprise which was witnessed in this country during the first half of the century, many States, particularly 1 Letters and Times of the Tylers, vol. ii, pp. 132-133. 244 Panic and Restoration of Credit. [§ 104 in the North, borrowed money to invest in internal improve- ments, such as railroads and canals, which would aid in de- veloping their resources ; in the South, and in a less degree the West, States borrowed largely in order to engage in State banking schemes, and in the West States borrowed for com- mercial enterprises. These undertakings in many cases proved either unremunerative or too expensive for the State to carry ; and in some of the newer commonwealths particularly there was not an honest determination, even where there was the ability, to meet the maturing obligations of interest and prin- cipal. Mississippi for example in 1838 invested §5,000,000 in a banking institution which through a combination of bad man- agement and general business confusion ran through its assets ; the governor of Mississippi, taking advantage of irregularities in the issue of the bonds by the legislature, recommended that they be repudiated, and on this issue a repudiative legis- lature was elected and endorsed the executive. Florida also sold territorial bonds for investment in a bank, and when the inability of this institution to pay interest became apparent it also disclaimed its obligations for technical reasons. In several of the Northern States — Pennsylvania, Maryland, Michigan, Indiana, and Illinois — the financial strains were great, and fears for a time were expressed that State honor might be stained. The evils were intensified by the fact that foreigners had invested liberally in the securities which were now disowned, and it was extremely difficult for this class of investors to understand either their own legal rights or the constitutional position of the States repudiating or delaying. It could hardly be expected that they would discriminate be- tween States, or would consider them as equal sovereigns in a federal union, not to be reached by the ordinary processes of law. They were consequently dismayed and angered to find that the national government hail no power over the defaulting members. Originally, under Art. ^ Sect, i, of the Constitu- tion, the judicial power of the United States was given power § 104] State Repudiation. 245 in controversies between a State and citizens of another State, or between a State or the citizens thereof and foreign States, citizens, or subjects. In 1793, when the State of Georgia was brought into court by a citizen of another State, an agitation was promptly begun for an amendment of the Constitution in order to maintain the dignity of sovereign States. The result was the Eleventh Amendment, which reads, "The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another State, or by citizens or subjects of any foreign State." In view of another clause in the Constitution, which forbids States to violate contracts into which they have entered, the position of constitutional law towards State contracts is ex- tremely unsatisfactory. The State is forbidden to commit a wrong, but if it commit one no remedy is afforded. Not only did foreigners regard this situation as absurd and unjust, but many Americans shared in this opinion. It was conse- quently proposed in a report submitted to Congress in March, 1843, that the federal government should assume the debts of the States ; it was plausibly argued that the greater part of the indebtedness had been contracted in aid of public works which were " calculated to strengthen the bonds of union, multiply the avenues of commerce, and augment the defences against foreign aggression." Although the measure was supported by high authority both from the standpoint of justice and of ex- pediency, it was defeated. To this day the individual creditor is helpless except in certain cases where he may be able to bring suit against State ofiScials. A few States, to their credit, have provided in their own law remedies against themselves in cases of repudiation. But because of open repudiation by some of the States, temporary difficulties of others, coupled with the insolvency of many large enterprises in which foreign- ers had invested, American credit about 1840 suffered greatly. It almost became a by-word of reproach during the next dec- ade, and it was exceedingly fortunate that during this period 246 Panic and Restoration of Credit. [§ 105 the country was so prosperous that it was not obliged to in- vite new supplies of foreign capital. 105. Receipts and Expenditures, 1834-1846. The effect of the tariff of 1842 was at first disappointing from a revenue standpoint ; in the second year there was an improvement ; and in 1844 the yield amounted to ^26,000,000, a sum greater than had been received from this source in any one year since 1833. By years the ordinary receipts from all sources from 1834 to 1846 were as follows : — Year Customs Public lands Miscellaneous Total ■834 $16,214,000 $4,857,000 $720,000 $21,791,000 ■83s 19,391,000 i4,757i°oo 1,282,000 35,430,000 1836 23,409,000 24,877,000 2,540,000 50,826,000 ■837 11,169,000 6,776,000 7,009,000 24,954,000 1838 16,158,000 3,730,000 6,414,000 26,302,000 ■839 23^137,000 7,361,000 984,000 31,482,000 1840 13,499.0°° 3,411,000 2,570,000 19,480,000 1841 14,487,000 1,365,000 1,008,000 x6.86o,oco 1842 18,187,000 1.335.°°° 454,000 19,976,000 8,231,000' ■843' 7,046,000^ 898,000' 287,000' 1844 26,183,000 2,059,000 1,078,000 29,320,000 1845 27,528,000 2,077,000 365,000 23,970,000 1846 26,712,000 2,694,000 293,000 29,699,000 * Half year. Expenditures during this period were as follows : ■ Year War Navy Indians Pensions Interest on debt Miscel- laneous Total 1833 $6,704,000 $3,901,000 $1,802,000 $4,589,000 $303,000 $5,716,000 $23,018,000 ■834 5,696,000 3,956,000 1.003,000 3,364,000 202,000 4,404,000 18,627,000 ■835 5,759,000 3,864,000 1,706,000 1,954,000 S7,ooo 4,229,000 3o,aCw,ooo 1836 11,747,000 5,807,000 5,037,000 2,882,000 5.393.000 1S37 13,682,000 6,646,000 4,348,000 2,672,000 9,89j,ooo 37,244,000 1S38 12,897,000 6,131,000 5,504,000 2,156,000 14,000 7,160,000 33,865,000 26,896,000 1839 8,916,000 6,182,000 2,528,000 3,142,000 399,000 5,725,000 7,095,000 6,113,000 2,331,000 2,603,000 174,000 5,995,000 24,314,000 1841 8,801,000 6,001,000 2,514,000 2,388,000 284,000 6,490,000 26,482,000 1842 6,610,000 8,397,000 1,199,000 1,378,000 773,000 6,775,000 25,135.000 ■843' 2,908,000' 3,727,000' 578,000' 839,000' 523,000' 3,joa,ooo' 11,780,000' 1844 5,218,000 6,498,000 1,256,000 2,032,000 1,8^3,000 5,645,000 22,484,000 184s 5,746,000 6,297,000 ■.S39.000 2,400,000 I,040,0,H-. .;.9ii,ooo 22,954,000 10,413,000 6,1S5|Oo° 1,027,000 1,811,000 842,000 [',71 t,ooo 27,261,000 * Half year. INDIANS $10,000000 h 5,000000 I — rT>v^ $15,000000 10,000000 5,000000 NAVY ^n "Tvi ^|\ ^ ^— T^ ^y^ V $5,000000 INTEREST -r-r-ri $5,000000 j-_ PENSIONS $30,000000 I- 25,000000 20,000000 15,000000 10,000000 5,000000 - IS / N^ r^ fS A N MISCELLANEOUS / / ^-^ A r b ^^T^-,— ,— 1 . \ _— . 1 ^ Y\ 1 _ 1836 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 No. III. — ORDINARY EXPENDITURES, 1836-1861. (Continuation of Chart No. 2, different scale.) § 105] Receipts and Expenditures. 247 Reference has already been made to some of the causes re- sponsible for increased expenditures in the years 1837-1838, but in addition the higher level of " miscellaneous " expenditures requires some explanation : the area of territory to receive the enjoyment of civil administration was being rapidly extended on account of the settlements in the West ; new courts were established, and the judiciary was treated with more generosity by an increase in salary ; reductions in the tariff made it neces- sary to increase the compensation of certain officers as an offset for loss of fees ; there was an active construction of light-houses, custom-houses, and branch mints ; and new roads were opened to the territories. A comparison of receipts and expenditures is made in the following table in millions of dollars : — Year Receipts Expendi- tures Surplus De6cit Taxes Other Total ■834 1835 1836 1837 1838 1S39 1840 184. 1S42 ■843" 1844 16.2 19-3 23- 4 ii.i i6.i 23.1 13-4 14.4 iS.t 7.0 26.1 27-5 26.7 i:f 27.4 13.8 10,2 8.3 6.0 2.4 1.8 1.2 3-2 2-4 2.9 21.7 35-4 50.8 24.9 26.3 - 31-4 19.4 16.8 19.9 8.2 293 29.9 29.6 18.6 17-5 30.8 37-2 33-8 26.8 24-3 26.4 25.1 11.7 22.4 22.9 27.2 3-1 17.9 20.0 4.6 6.9 7- 2.4 12.3 7-5 4.9 9.5 S.2 3-5 ' Half year, January i to June 30, 1843. CHAPTER XI. TARIFF, INDEPENDENT TREASURY, AND STATE BANKS. 1846-1860. 106. References. Bibliographies: Bogart and Rawles, 41-42; Channing and Hart, 388-389. Tariff: Messages and Papers, IV, 403-406 (1845), 498-502, 647 (1S46) ; V, 83-85 (1850), 123-126 (1851) ; Finance Reports, V, 4-16 (1845) y VI, 6-14 (1846), 138-142 (1847), 283-291 (1848), 345 (report on warehousing system); 1853-1854, pp. 9-11 ; 1854-1855, pp. 12-16; 1856-1857, pp. 13- 16; Benton's Abridgment, XV, 97-140, 565-631 ; Statutes, IX, 42 (1846), 55 (warehouse act, 1846) ; XI, 192 ; State Papers and Speeches on the Tariff (Taussig ed.), 214-251 (Walker's report); E. Young, Customs Tariff Legiilation, xciii (1846), cvi (1857), cxiv (1S61) ; D. Webster, Works, V, 161-243; Sherman's Speeches, 1-12 (Morrill tariff) ; BoUes, II, 449-461 (1846) ; 478-485 (warehouse system) ; F. W. Taussig, History of the Tariff, 114-154; J. G. Blaine, Twenty Years, I, 192-207; J. F. Rhodes, History of the U. S., Ill, 28-59; Schouler, IV, 515-517. iNDEPiiNDENT TREASURY: Messages and Papers, IV, 406-408 (1845), 502 (1846), 556, 648-649(1848); Finance Reports, V, 17-21 (1846); VI, 6-8, 31-49 (regulations), 129-132 (1847); 1852-1853, pp. 14-15; 1853- 1854, pp. 16; 255-275 (report by Gouge); 1856-1857, pp. 21-23; Benton's Abridgment, XV, 442-450, 631-636; Statutes, IX, 59; or Dunbar, 138; W. MacDonald, Select Documents, 358-365 ; D. Kinley, Independent Treasury, 40-65 ; J. B. Phillips, Methods of Keeping the Public Motuy, 117-130; Bolles, II, 352-358; Bankers' Magazine, IX, 625; X, 609; T. H. Benton, Thirty Years, II, 726. Finances of the Mexican War : Messages and Papers, IV, 524- 529> 553-556; Finance Reports, 1846-1848; Statutes, IX, 118, ^17; Dun- bar, 137, 142-148; Bayley, 364-367, 437; Bolles, II, 590-595; J. J. Knox, United States Notes, 63-69. Crisis OF 1857 : Messages and Papers, 'V,t,2o; Bayley, 36S ; D. Kinley, The Independent Treasury, \'](>-'\%<:>\ W, G.Si\x\m\^x, History of American Currency, 180-187 ; C. A. Conant, History of Modern Banking, 492-497 ; H. von Hoist, Constitutional History of the U. S., 1856-1859, 97-125; J. J. Knox, United States Notes, 70-76 ; Bolles, II, 599-602 ; Schouler, Y, 419-420. 248 §107] Tariff of 1846. 249 State Banking: Messages and Papers, V, 437-441 (1857) ; Finance Reports, 1854-185S, pp. 22-23; 1855-1856, PP 29-3' ; W. G. Sumner, His- tory of Banking in the U. S.; C. A. Conant, History of Modern Banking, 310-347; H. White, 313-398; C. J. Bullock, Monetary History, 82-93; L. C. Root, N. Y. Bank Currency, in Sound Currency, II. No. 5 ; N. E. Bank Currency, ditto, II, No. 13. Expenditures : Messages and Papers, V, 488-490 (1858), 524, 648 (i860); Belles, II, 576-609. 107. Tariff of 1846. The tariff of 1842 would have been more hotly contested had there not been a necessity for additional revenue. By 1844 good times had come again, and the tariff for the first time be- came a distinct party question, agitated in national conventions, set forth in platforms and made a feature in campaigns. Never- theless in the contest of 1844 each of the parties was cautious and even ambiguous. The Democrats asserted that no one branch of industry should be fostered to the detriment of others, a doctrine which no Whig would deny ; while the Whigs declared in favor of a tariff for revenue, discriminating with reference to protection, a doctrine which in the past had found general acceptance among Democrats. The Democratic ticket was aided by the selection of Dallas as candidate for the vice- presidency from protectionist Pennsylvania ; and Polk, the head of the ticket, wrote a letter during the campaign in which he said : " I have heretofore sanctioned such honest discrimat- ing duties as would produce the amount of revenue needed, and at the same time afford reasonable incidental protection merely, and not for revenue." Such hazy utterances helped to obscure the issue and to darken the mind of the average voter as to the real opinions or intentions of the party leaders ; and, although Democratic success was not primarily due to their tariff policy^ when they once more entered into power in 1845 they quickly attacked existing statutes. The financial situation was on the whole favorable for a radical experiment, since there was an excess of receipts in the treasury for 1845 and a further excess seemed likely in 1846. Robert J. Walker, secretary of the 250 Tariff and State Banks, [§•07 treasury appointed by President Polk, was an able man with positive convictions in regard to a revenue policy. He had worked out a theory of import duties which he promptly laid before Congress in December, 1845. ^^'^ system embraced the following principles : — 1. No more money shall be collected than is necessary for the wants of the government economically administered. 2. No duty shall be imposed on any article above the lowest rate which will yield the largest amount of revenue. 3. Below such rate discrimination may be made descending in the scale of duties ; or for imperative reasons the article may be placed in the free list. 4. The maximum duty shall be imposed on luxuries. 5. All minimums and all specific duties shall be abolished and ad valorem duties substituted. 5. The duties shall be so imposed as to operate as equally as possible throughout the Union. Congress accepted nearly all of the plan but in one important particular fell short : no duties were placed on tea and coffee. These taxes had been dropped in 1832, and Congress did not dare in times of prosperity to risk popular disapproval and retax articles of such general use. By this omission an annual yield of $3, 000,000 was lost, and Secretary Walker during the remainder of his term of office did his best to impress upon Congress the need of adopting his recommendation. The vote by geographical sections on this tariff was as follows : — States In favor Opposed New England . . Middle States . . . West and Northwest South and Southwest 9 18 58 '9 44 10 20 Total .... 114 93 Under the tariff act of July 30, 1846, articles of import were divided into various schedules designated by letters of the alphabet as follows : — § 107] Tariff of 1846. 251 (A) Included brandy, spirits, etc., rate ioo%. (B) Included spices, preserved fruits and meats, cigars, snuff, and manufactured tobacco, rate 40 % . (C), (D), (E), and (F) Included the great bulk of commercial products, which were taxed 30%, 25%, and 20% respect- ively. (G) Included books, building stone, diamonds, watches, rate 10%. (H) Included various articles manufactured or in a low state of manufacture and used in existing industries, rate 5 % . (I) Included coffee and tea, iron and copper ore, and a few other commodities, free from duty. Aside from the free-trade basis of the tariff of 1846, or Wallter tariff as it is frequently called, it is remarkable in its brevity, — less than 5000 words, — in its comprehensiveness, and in its condensation. It is also notable as the only tariff practically drafted by the executive. In spite of its free trade intent, protectionist principles appear in some sections ; wool was taxed though a raw material, while coffee and tea were left free. Another feature of this tariff was the change from specific to ad valorem duties; it will be recalled that until 1816 both methods were in use, and there was no insistence upon either to the exclusion of the other ; after 1 8 1 6 the tendency was on the whole toward the substitution of specific duties wherever practi- cable, and by 1846 the reversal was complete. Theoretically the system is ideal ; in practice it admits of grave injustice, and when a Whig secretary of the treasury, William E. Meredith, came into office in 1849 ^^ easily secured testimony in regard to the inequalities of appraisement of goods at different ports and frauds from undervaluation : for example the collector of customs at Boston complained that cord-wood from the prov- inces was entered at Boston at ^1.50 per cord, at Gloucester ^1.25 per cord, and at Portland and Bath I.75 ; and from New York came the story that when three parcels of cotton goods were sent as a test to as many different ports and entered by appraisement without invoices, the result was a difference of 25 per cent, between the highest and the lowest valuation. 252 Tariff and State Banks. [§io8 The method of appraisement of goods was also changed by the act of 1846, and defined more precisely by an emendation of March 3, 1851 ; this provided that the valuation be based on the actual market value or wholesale price at the time of exportation to the United States, and that to this value be added the cost of the packing or covering, the commission of the broker who sold the goods, the export duties if there were any, wharf dues, and the cost of putting goods on board. A further novelty for this country in customs administration was the establishment of a convenient system of government warehouses in which goods might lie with duty unpaid under the custody of the government for a certain length of time. In this way merchandise could be imported, landed, packed, repacked, assorted, and re-exported without so large an outlay of mercantile capital as would be necessary by prepayment of duties. The system quickly justified itself and has continued until the present time. The average rates of duty on dutiable imports under the tariff of 1846 were as follows : — Year Per cent. Year Per cent. 1S46 26. 5 1852 26. 1847 22.5 1853 25- 1848 24. 1854 23-5 1849 23- 1855 23- 1850 25.2 1856 25- 1S51 26. 108. The Independent Treasury Re-established. The second important change carried through by the Demo- crats was the re-establishment of the sub-treasury system. In the long debate which took place few new arguments were added to those heard in the previous discussions of 1837- 40. Again one side insisted that it was unsafe and uncon- stitutional for the government to " keep " its funds in the local banks, and again the otlier side emphasized the services rendered by the banks to the government. The measure as § io8] The Independent Treasury. 253 enacted in August, 1846, was so similar to that of 1840 as not to require further description ; treasury notes, however, were added to gold and silver as receivable for public dues, and provision was made for the supply of vaults and safes in the new treasury building at Washington and at the mints and custom-houses ; New York, Philadelphia, Washington, Charles- town, New Orleans, and St. Louis were the principal centres of deposit ; four receivers-general and two keepers of mints, with the treasurer of the United States, were appointed public custodians. The new system began its career under difficul- ties ; the opposition of the banks had to be faced, and no ap- propriations were voted for some of the offices created by the act. Inadequate provision was made for the care of funds of disbursing officers who were distributed throughout the country, and abuses arose because these officials sometimes kept public moneys or loaned them to their own profit. James Guthrie, who became secretary in 1853, remedied this by increasing the number of depositories and also by ordering that disbursing agents could pay through treasury drafts. The sub-treasury system appears to have been useful from the beginning and deserves credit for some of the success of the financiering during the Mexican War, but to what extent it was responsible for the prosperity of the national finances during the succeeding years it is hard to determine, for several commercial factors turned out favorable to the United States, as for example the heavy imports of specie in 1847 and the large production of gold after the Califomian discoveries in 1848. A careful personal examination of the several sub-treasuries and government depositories was made in 1855 by William M. Gouge ; and he reported that in the twenty-three government depositories there was at the time one-half as much gold and silver as was held by the 1300 banks, and in some of them the safeguards against fire, thieves, and burglars were inferior to those provided by banks ; still the only loss by robbery up to that time had been ^10,000 at Pittsburgh. The accounts of 254 Tariff and State Banks. [§ 108 the depositories he found accurate and uniform according to law, though there was some neglect as to official examination. The transfer of public funds from one place to another under the system was not so successful as had been hoped, because in some sections little specie was in circulation. With due allowance for these short-comings Gouge summed up the ad- vantages of the system as follows : It created a new demand for specie ; it limited the expansion of bank paper money ; it avoided the derangement of business resulting from govern- ment association with banks; it prevented losses to the government ; and it gave to the treasury a constant control of its funds. The advantage of this was seen in the panic of 1857, when the national government was able to meet every liability without embarrassment, while state governments with nominally filled treasuries were unable to pay their debts except in the depreciated currency of banks or by calling upon banks for specie through the redemption of notes, — a strain which simply added to the distress. The real trial of the independent treasury system and its permanent effect on business and commercial crises could not be seen until after the Civil Warj but in 1853 the accumula- tion of surplus funds in the treasury caused apprehension in commercial and financial circles. Relief was at the time afforded by the purchase of silver for new coinage authorized under the act of 1853 and also by the purchase of government stock. Even Secretary Guthrie, a most ardent defender of the independent treasury, or, as he termed it, " the constitutional treasury," admitted that the system might exercise a fatal control over the currency, banks, and trade by causing a strin- gency in the money market whenever receipts exceeded ex- penditures. The problem was simply an added argument for a more careful adjustment of revenue to expenditures. The good effects of the independent treasury system in the earlier part of its history do not necessarily prove its advantage under conditions widely different from those of a half cen- tury ago. If local banking had been wisely carried on during §109] Finances of the Mexican War. 255 the first half of the nineteenth century it is not likely that the government would have undertaken or would have been intrusted with the varied and heavy responsibilities which it now bears. To escape the abuses and the disasters of ill-regu- lated banking the country adopted a system which is inelastic and ill adapted to present conditions, and which does not sufficiently take into account the growth of experience and bkill in banking. 109. Finances of the Mexican War. The Mexican War broke out in May, 1846, and was closed by the peace of February 2, 1848. A short and sharp contest, it caused no serious financial depression, and the debt created was simply and easily met. The expenditures of the war de- partment during the three years April i, 1846, to April i, 1849, were ;?8o,84S,ir6, as compared with ^21,991, 123 in the three previous years ; and the expenditures of the navy department for the period April i, 1846, to October i, 1848, were ;?i8,- 758,900, as compared with 114,007,281 for the two and a half years before the war. These sums make a total excess of ^63,605,621, and were met by loans in the form of treasury notes and government stock. In all a net indebtedness of ;?49,ooo,ooo was created, but owing to the reissue of treasury notes and the conversion of treasury notes into stock the details of the several loans under the acts of July 22, 1846, January 20, 1847, and March 31, 1848, cannot be clearly pre- sented in a narrow space. All of the loans were placed at par and a portion yielded a premium aggregating over a half million dollars. This success may well be compared with the financier- ing of the War of 1 8 1 2, when loans in stock were sold with diffi- culty and at a discount and treasury notes were depreciated. The ease of the treasury was due not so much to a wiser intelligence as to the great increase in the wealth of the country and to the advance in government credit. Under one of the loan acts when subscriptions were invited for ^18,000,000, bids were re- ceived for ;?5 7,7 23,000, almost all above par, and the assign- 256 Tariff and State Banks. [§ no ment was made at rates from one-eighth of one per cent, to 2 per cent, above par. More significant than any other tribute to the credit of the government was the fact that the loan was subscribed for in specie — the first loan negotiated on this basis since the foundation of the government. The comment of the secretary of the treasury in his annual report of 1847 on this fortunate undertaking justifies quoting : " The magnitude of the loan, the fluctuations below par of the previous stock and notes, the untried and to many alarming restraining operation of the constitutional treasury, the heavy expenditures of the war, and the requirement of all the pay- ment from time to time in specie were deemed by many as insuperable obstacles to the negotiation of the whole of the loan at or above par. But under the salutary provisions of the constitutional treasury the credit of the government was in truth enhanced by receiving and disbursing nothing but coin ; thus placing all its transactions upon a basis more sound and entitled to higher credit than when it held no specie, had no money in its own possession, and none even in the banks to pay its creditors but bank paper. Then, it was dependent upon the credit of the banks and was subjected to every fluctuation which affected their credit. Now, it stands upon the basis of specie, so as to be above all suspicion of discredit, whilst by its demand for coin for revenue payments it sustains not only its own credit but renders more safe the credit and currency and business of the whole Union." An error of judgment was made in coupling so high a rate of interest as 6 per cent, with long terms of ten and twelve years before maturity, for on account of business prosperity the bonds quickly went to a premium, and their redemption when the government wished to pay its debts from the surpluses enjoyed in 1850-1856 was a costly operation. 110. Commercial Expansion. The period from 1846 to 1857 was one of great industrial prosperity. Besides the war with Mexico, with its. abnormal § iiij Progress toward Lower Duties. 257 expenditures, business and public finance' were affected by the discovery of gold in California, by the revolutionary disturb- ances on the Continent, by the famine in Ireland, and by the extension of railroads in the West. In 1845 the number of immigrants to this country was 114,000 ; in 1847, 225,000 ; and in each of the five years after 1849 it was more than 350,000. More immigrants, in fact, came between 1845 ^^^ 1855 than in the preceding twenty-five years. The statistics of railroad construction also tell a wonderful story; in 1846 there were about 5000 miles in operation; but after 1848 the annual gain in construction was over 1000 miles until we come to the war period of 1861. The famine in Ireland not only sent out thousands of laborers, it also created a great demand for American wheat and of course increased our purchasing power. An important change was also made in commercial conditions by the reduction and abolition of import duties in England which began in 1842. With the removal of these duties and the rapid extension of manufacturing industries in England there was a great increase in exports (principally cotton and food products) from the United States. The addition of the large territory ceded by Mexico increased importations and hence the revenue, and the extraordinary development in California had a stimulating influence upon the whole nation. The country possessed resources only par- tially developed, yet open to ready conquest through the application of railways and new machinery. It was indeed, as Secretary Walker with glowing optimism repeatedly affirmed in his annual reports, " a new commercial era." 111. Progress tcward Iiovrer Duties. The wonderful revolution which was taking place in com- merce and in history makes it impossible to generalize from this experience as to the effect of import duties upon economic development ; very likely prosperity would have followed under any system of revenue laws. The condition of the treasury grew more and more favorable as soon as the tempo- 17 258 Tariff and State Banks. [§ m rary burdens occasioned by the Mexican War were removed ; between 1846 and 1851 the national debt was increased from ;gi 5,550,000 to ^68,304,000 by war loans, but after the latter year the reduction was continuous until in 1857 the principal was ;g28,7oo,ooo. The receipts passed all expectations; the customs revenue was large ; the new territory on the Pacific drained merchandise from the Atlantic ports, which "left a vacuum to be filled by fresh and larger importations of foreign dutiable goods." Again the sales of public lands yielded a large sum amounting in the three years 185 4-1 85 6 to over ^28,000,000. Although expenditures reached a much higher level than before the Mexican War there was a handsome surplus of receipts over expenditures to be applied to the debt, and it was early seen that as soon as the small debt was extinguished another surplus would arise. The Whig secretaries of the treasury in the Taylor-Fillmore administration, William E. Meredith and Thomas Corwin, true to their party convictions, endeavored to turn this experience to the benefit of the pro- tectionist cause. Their efforts, however, made little impres- sion, and so well satisfied was the country with its revenue system that during the ten years 1846-185 6 the tariff question ceased to be an issue in politics. In the seven party plat- forms of 1848, 1852, and 1856 the only reference to the tariff was in that of the Whigs in 1852, when a mild reference was made to the wisdom of tariff discrimination by specific duties in encouragement of American industries. The atten- tion of Congress during this period went chiefly to the slavery debates of 1847-1850, and to the Kansas-Nebraska Bill of 1854 and its consequences. The country was drifting towards free trade, and there was even suggestion that all tariffs might be repealed and direct taxes and other receipts relied upon. James Guthrie, who became secretary of the treasury under President Pierce in 1855-1857, did not go so far as this, but he continually advised further reductions in the customs duties ; his definite proposal §112] Local Banking, 1837-1861. 259 was that all articles paying duties be divided into two classes, one paying loo per cent, and the other 25 per cent., a group- ing which would entirely remove the possibility of assimilat- ing goods of one class to another in order to secure lower rates ; he also advised that the free list be extended and was an early champion of the admission of raw materials used in manufactures free of duty. The tariff discussion during this period was practically concentrated upon two points : the effect of the tariff upon commerce and its effect upon labor. Walker and Guthrie, Walker in particular, eloquently set forth the necessity of making imports free if the country wished to export its surplus products and supported their contention by a mass of commercial and industrial statistics from the begin- ning of the century. Meredith and Corwin, on the other hand, dwelt upon the need of protection to American work- men who were subject to competition with the pauper or poorly paid labor of Europe, and they advanced equally in- genious tables of statistics to show that it would be far more profitable to sell these goods to a home market of manufacturers and artisans, and thus distribute the costs of transportation to railroads and canal companies at home rather than to foreign steamship companies. 112. Local Banking, 1837-1861. An independent treasury system was really a protest against State banks as well as against a national bank ; although there were signs here and there of a growing conser- vatism in bank management there was much to criticise. The rapid expansion and contraction of circulation which took place between 1837 and 1842 has already been referred to; between the latter date and 1861 the statistical changes in the principal items of the banking business were as follows (amounts in millions of dollars) : — 26o Tariff and State Banks. [§ 112 Year Number of banks Capital Loans Deposits Circulation Specie 1843 691 228.9 254.S IH 58.6 33-5 1844 696 210.9 264.9 84.6 P-i 49-9 184s 707 206.0 288.5 88.0 89.6 44-2 1846 707 196.9 3I2.I 96.9 105.6 42.0 1847 71S 203.1 3IO-3 91.8 105,5 35-' 1848 751 204.8 344-S 103.2 128.5 46.4 1849 782 207.3 332-3 91.2 114-7 43-« 1850 824 217-3 364.2 109.6 131-4 45-4 1851 879 227.8 413-7 129.0 155-2 48.7 1852 1853 75° 207.9 408.9 'il-^ 146.1 47-1 1854 1208 301.4 557- 4 188.2 204-7 59-4 185s 1307 332-2 576-1 190.4 187.0 33-9 1856 1398 343-9 634.2 212.7 "95-7 59.3 1857 1416 370.8 684-5 230-4 214.8 58.3 1858 1422 .194-6 583.2 185.9 '55.2 74-4 l8S9 1476 402.0 657.2 259.6 193-3 '2*-| i860 1562 421.9 691.9 253-8 207.1 83.6 1S61 1601 429.6 696.8 257-2 202.0 87-7 Where the States insisted on proper precautions the banks were good, sound, and commercially serviceable. In Massa- chusetts for example, in the period of commercial embarrass- ment between 1837 and 1844, 32 banks suspended, but the circulation of all but one was redeemed; from 1844 to 1855 only two banks failed, and all the note-holders were paid in full. In New York, where business conditions were not so settled, the results were less fortunate. Under the free bank- ing system inaugurated in 1839 there were nearly 60 failures; but of these one-half were in the first five years. It was dur- ing this period that there was developed in this State the plan of basing issues upon deposits of approved securities, a plan which was subsequently utilized in the establishment of the present national banking system. In the Western States losses by bad banking were greater; in Indiana 51 of the free banks and private institutions failed between 1852 and 1857, with a serious loss to note-holders as well as to other creditors. On the other hand the State bank of Indiana, as well as that of Illinois, was conservatively managed and presents an interesting illustration of the possibihty of sound local banking. A notable example of banking in its worst form may be found in the annals of Michigan ; tricks were $700,000000 $ 600,000000 $500,000000 $400,000000 $ 300,000000 $ 200,000000 $ 100,000000 t 18+0 1845 1850 1355 1860 1863 No. IV. — LOCAL BANK STATISTICS, 1834-1863. §112] Local Banking, 1837— 1861. 261 employed to deceive the official bank commissioners as to the amount of specie on hand ; the same boxes or bags of specie were quickly transferred from one institution to another, to perform a continuous service of reserve. In the words of the commissioners, " gold and silver flew about the country with the celerity of magic ; its sound was heard in the depths of the forest, yet, like the wind, one knew not whence it came or whither it was going." In one instance it was found that the alleged box of specie showed a stratum of gold and silver but all beneath was nails and glass. With the best intentions it was hard to keep in order the Western banks in remote sections or on the frontier. The question of the right of a State to establish under its own control a bank with power of note issue was finally decided by the Supreme Court under the influence of the stricter constructionists, led by Chief- Justice Taney, in favor of the States. The decisive case was that of Briscoe v. The Commonwealth of Kentucky ; when first argued in 1834 two of the seven judges were absent and two of the remaining five were of the opinion that the notes issued by the bank of the Commonwealth were not bills of credit ; hence a decision was withheld. In 1837 the court was complete and an opinion was rendered ; Marshall's opinion was practically overruled, although the court made a sharp distinction between bills is- sued on the credit of a State and those issued by an institution in which the State may have become an exclusive stockholder, without, however, imparting to the bank any of the attributes of sovereignty. Five of the judges who concurred in this opinion, including Taney, were appointees of Jackson ; Justice Story alone in a dissenting opinion maintained the arguments which Marshall had so powerfully elaborated during his long term as chief justice. Later, in the case of Bank of Augusta V. Earle (1839), the court held that the right to issue bank- notes was at common law an occupation open to all men, which the State might restrain if it saw fit, thus implying that the national government had no direct control. 262 Tariff and State Banks. [§ 113 In passing judgment upon the many defects and short- comings of the varied systems of local banking it must be taken into account that any system would probably have broken down, for during the long period from 1815 to i860 there was a reckless spirit of speculative enterprise always eager to find an outlet through the channels of credit. A practical defect in the banking of that period, aside from opportunities for irresponsible operations, was the lack of uni- formity of note security, which resulted in great confusion in the ordinary currency. A country merchant might receive and pay out a thousand kinds of notes, some good, some doubtful, some presumably bad, and this condition grew worse as the circle of business activity was enlarged with the con- struction of railroads. The field of bad currency was thus made wider and a good system of banking had to suffer in public opinion because of competition with banks which had no character to maintain. This defect, as will be seen, was a forcible argument in 1863 in favor of establishing a national system. 113. Tariff of 1857 ; Panic. The need of a reduction of revenue pressed with such urgency that a tariff measure was enacted March 3, 1857, lowering many of the duties and enlarging the free list. The schedules of 1846 were taken as a basis and the following principle was applied : upon articles enumerated in schedules A and B rates were reduced from 100 per cent, and 40 per cent, to 30 per cent. ; on articles in schedule C from 30 per cent, to 24 per cent. ; in schedule D from 25 per cent, to 19 per cent. ; in schedule E from 20 per cent, to 15 per cent. ; in schedule F from 1 5 per cent, to 1 2 per cent. ; in schedule G from 19 per cent, to 8 per cent.; in schedule H from 5 per cent, to 4 per cent. ; and on articles not specifically pro- vided for from 20 per cent, to 15 per cent. In the applica- tion of this principle some exceptions were made; many drugs and dry stuffs, articles used in chemical arts, raw silk, tin, and wood were placed upon the free list or else transferred §"3] Tariff of 1857 ; Panic. 263 to lower rate schedules ; cotton manufactures were favored by leaving the cotton duties nearly as high as established by the tariff of 1846. The average rates of duty on dutiable imports during the next four years was as follows : — Year Per cent. 1858 1859 i860 1S61 20 19 19 18.1 The vote on this measure did not show a sharp party divis- ion. By geographical sections the vote in the House of Representatives was as follows : — States In favor Op-iosed New England . Middle States . . . West and Northwest South and Southwest California . . . 18 24 6^ 2 9 28 33 2 Total 118 72 Hardly had the tariff of 1857 been enacted when a sharp commercial and banking panic came on, which for a period almost paralyzed manufactures; in August, 1857, the Ohio Life Insurance and Trust Company failed with large liabilities to Eastern institutions ; a panic occurred in New York, fol- lowed by a suspension of specie payments. Important rail- roads reaching into undeveloped sections of the West went into bankruptcy, among them the Illinois Central, the New York and Erie, and the Michigan Central. The reason for the crisis of 1857 is still the subject of controversy : one alleged cause is the lowering of tariff duties in 1857 ; and some pro- tectionists trace the collapse to the slow but poisonous work- ings of the tariff of 1846, — the argument being that the 264 Tariff and State Banks. [§113 reduction of duties stimulated importations, which had to be paid for in specie, and that this drain of specie inevitably caused the panic. This point of view is set forth by Mr. Blaine in his " Twenty Years of Congress " -. ^ " The protectionists therefore hold that the boasted prosperity of the country under the tariff of 1846 was abnormal in origin and in character. It depended upon a series of events exceptional at home and even more excep- tional abroad, — events which by the doctrine of proba- bilities would not be repeated for centuries. When peace was restored in Europe, when foreign looms and forges were set going with renewed strength, when Russia resumed her export of wheat, and when at home the output of the gold mines suddenly decreased, the country was thrown into dis- tress, followed by a panic and by long years of depression. The protectionists maintain that from 1846 to 1857 the United States would have enjoyed prosperity under any form of tariff, but that the moment the exceptional conditions in Europe and in America came to' an end the country was plunged headlong into a disaster from which the conservative force of a protective tariff would in large part have saved it." Other forces can be discovered in this period which were destined to bring disaster. There had been an exceedingly rapid industrial development, occasioned by railroad construc- tion out of all proportion to immediate demands and by the stimulus of enormous additions to the monetary medium resulting from the new gold discoveries. Speculation was rampant and credit was once more strained to the utmost. The bank-note circulation which in 1843 ^^^ ?5 8,000,000 amounted in 1857 to ^214,000,000; and loans had increased from ^254,000,000 to ^684,000,000. It is too much to claim that this wide-spread shock was due to the tariff of 1857 which had been in operation but for a few months, or even to the tariff of 1846. To be sure imports had increased and there had been a heavy export of specie to pay for them, but 1 I. 203. §114] Morrill Tariff. . 265 at the same time the production of specie in the United States had been more than enough to cover this demand and to leave a generous amount in the country for domestic needs. It was certainly unfortunate that a reduction of revenue should have been made at a time when, as events proved, the government treasury was about to need special strengthening ; but in con- necting cause and effect it must be borne in mind that com- mercial depressions have for a century returned with an almost mathematical regularity, and that it is hardly reasonable to hold alone responsible a tariff which had apparently brought no disturbance during a period of ten years. 114. MorrUl Tariff. The year 1858 began a new series of treasury deficits and it was soon made clear that another revision of the revenue system was imperative in order to provide adequate supplies. The government was living hand-to-mouth, or as Morrill pithily expressed it, "was obliged to go to bed without its supper " every time the imports of the week fell short a million at the port of New York. Howell Cobb, the Democratic secretary of the treasury, and the Republicans in control of the House of Representatives were both agreed as to the need of the treasury, although they differed as to the method of relief. Secretary Cobb thought that the difficulty could best be met by raising rates in schedules C, D, F, G, and H to 25, 20, 15, 10, and 5 per cent, respectively, and by trans- ferring certain articles from the lower to higher schedules ; he denied the need of reviving the higher schedules of 40 and 100 per cent, in the tariff of 1846 ; and absolutely condemned any proposal of home valuation. No attention was paid to Cobb's recommendation and the country drifted on from one deficit to another. In the four years of Pierce's administration, 1853—57, the national income averaged over ;?68, 000,000 annually; but in 1858 it dropped to $46,500,000; and in the three years 1858-60 deficits accumulated to the amount of 266 Tariff and State Banks. [§"4 i^S 0,000,000. At the same time current appropriations were increased ; and it was repeatedly necessary to resort to the issue of short-term treasury notes and also of bonds. Only a small amount of time-loans was placed on account of the low rate of interest, 5 per cent., which the bond bore, and because of the provision in the law against selling at less than par. In the winter of 1859-60 the Republicans had a plurality in the House of Representatives, and Justin S. Morrill, a Republican member from Vermont, introduced a tariff bill on which much labor had been spent. Morrill was a protectionist by conviction, but realized there was no chance of passing a protectionist measure. His bill was moderate ; in his own words : " No prohibitory duties have been aimed at ; but to place our people upon a level of fair competition with the rest of the world is thought to be no more than reasonable. Most of the highest duties fixed upon have been so fixed more with a view to revenue than protection." The most important change proposed was a return to specific duties on many commodities which were subject to undervaluation and fraud- ulent entry, as illustrated by the following examples : — Commodity 1846 1857 1S61 Carpets, valued $1.25 per sq. yd. . . Tarred cordage Cotton bagging Raw wool, valued i8 to 24 cts. per lb. 30 per cent. 25 percent. 20 per cent. 30 per cent. 24 per cent, ig per cent. 1 5 per cent. 24 percent. 40 cts. per sq. yd. 2} cts. per lb. i4 cts. per !b. 3 cts. per lb. Where ad valorem rates were continued a return was gen- erally made to the duties of 1846. The bill passed the House, May 10, t86o, by a vote of 105 to 64. This success together with the protectionist plank in the Republican national plat- form adopted a few weeks later was undoubtedly a factor which won Pennsylvania from the Democracy and elected Lincoln president in November. The measure passed the § IIS] Receipts and Expenditures. 267 Senate the following winter, after secession had removed many members, and became law March 2, 1861. 115. Receipts and Expenditures, 1846-1861. In following the course of receipts and expenditures sum- marized in the statistical tables of the treasury more than usual caution must be exercised for the period 1846-1861 be- cause of changes in the system of accounts. By years receipts were as follows : — Year Customs Public lands Miscellaneous Total 1846 126,712,000 $2,694,000 $293,000 $29,699,000 1847 23.747.°°° 2,498,000 222,000 36,467,000 184S 31,757.000 3,328,000 543,000 35,628,000 1849 28,346,000 1,688,000 687,000 30,721,000 1850 39,668,000 1,859,000 2,065,000 43,592,000 1851 49,017,000 2,352,000 1,186,000 52,555,000 1852 47.339,000 2,043,000 464,000 49,846,000 1S53 58,931.000 1,667,000 989,000 61,587,000 1854 64,224,000 8,470.000 1, 106,000 73,800,000 1855 53,025,000 11,497,000 828,000 65,350,000 1856 64,022,000 8,917,000 1,117,000 74,056,000 1857 63,875,000 3,829,000 1,261,000 68,965,000 1858 41,789,000 3.513,000 I.3S3.000 46,655,000 1859 49,565,000 1,756,000 1,456,000 52,777,000 i860 53,187,000 1,778,000 1,089,000 56,054,000 1861 39,582,000 870,000 1,024,000 41,476,000 Expenditures were as follows ; Year War Navy Indians Pensions Interest on debt Miscel- laneous Total 1846 $10,413,000 J6,455,ooo $1,027,000 $1,811,000 $842,000 $6,711,000 $27,261,000 'i*i 35,840,000 7,900,000 1,430,000 1,744,000 i,iig,ooo 6,885,000 54,920,000 1848 27,688,000 9,408,000 1,252,000 1,227,000 2.390.000 5,650,000 47,618,000 1S49 14,558,000 9,786,000 1,374,000 1,328,000 3,565,000 12,885,000 43,499,000 1850 9,687,000 7,904,000 1,663,000 1,866,000 3,782,000 16,043,000 40,948,000 ■1851 12,161,000 8,880,000 2,829,000 2,293,000 3,696,000 17,888,000 47,751,000 1852 8,521,000 8,918,000 3,043,000 2,401,000 4,000,000 17,504,000 44,390,000 ■55 14,648,000 13,327,000 2,772,000 1,477,000 2,314,000 24,090,000 58,630,000 16,963,000 14,074,000 2,644,000 1,296,000 1,953,000 31,794,000 68,726,000 '?57 "9,159,000 12,651,000 4,354,000 1,310,000 1,593,000 28,565,000 67,634,000 1858 25,679.000 14,053,000 4,978,000 1,219,000 1,652,000 26,400,000 73,982,000 1859 23,154,000 14,690,000 3,490,000 1,222,000 2,637,000 23.797,000 68,993,000 16,472,000 11,514,000 2,991,000 1, 100,000 3,144,000 27,977,000 63,201,000 23,001,000 12,387,000 2,865,000 1,034,000 4,034,000 23,327,000 66,650,000 268 Tariff and State Banks. [§"5 By the act of March 3, 1849, the expense of collecting cus- toms revenue was charged to miscellaneous expenditures instead of debited to accruing customs revenue. This alone added ;g2,ooo,ooo annually to the expenditures account. Repay- ments to importers on excess collections swell the budget. New expenditures for meeting postal deficiencies, and for defraying the cost of mail services for Congress and the public departments were authorized under the several acts of March 3, 1847, March 3, 1851, and March 3, 1853, and charged up under "Miscellaneous." Miscellaneous expenditures greatly increased through payments to Mexico and liquidations of Mexican claims under the treaty of 1848, amounting between 1849 and 1858 to over ^32,000,000. During this period public improvements, particularly the construction of public buildings and light-houses, were undertaken on a generous scale : the former were necessary in order to provide de- positories for the funds of the government, and the latter were demanded by the vigorous and expanding commerce. Expenditures for the several classes of internal improvements from 1831 to i860 were as follows: — Year Public Rivers Roads Light-houses buildings and liarbors and canals etc. 1831-35 $752,000 $3,058,000 $4,208,000 $>.S35.<»o 1836-40 i.S34,o'» 4,206,000 3,370,000 2.597,000 1841-45 845,000 1,113,000 596,000 1,772,000 1846-50 1,324,000 SS^iOoo 714,000 3, 108,000 >8si-55 4,603,000 2,334,000 939,000 5,562,000 1856-60 10,037,000 1,373,000 2,507,000 7,931,000 Expenditures for rivers, harbors, roads, and canals as here tabulated are included under "War" in the second table on page 267, while expenditures for public buildings and light- houses are to be found under " Miscellaneous." A comparison of income and outgo is made in the following table in millions of dollars : — §iisJ Receipts and Expenditures. 269 Year Receipts Expendi- tures Surplus Deficit Taxes Other Total 1846 1847 1848 1849 1850 ,85. 1852 1853 ■ 8S4 1855 1856 iSS7' 1858 1859 i860 1861 26.7 23-7 31-7 28.3 39-6 49-0 47-3 III S3-0 64.0 63.8 41.7 49-5 53-' 39-5 2.9 2-7 3-9 2.4 3-9 3-S 2-5 2.6 9.6 "•3 10.0 S-i 4.9 3-2 2.9 1-9 35.6 30.7 43-5 49-8 61.S 738 65.3 l8%° 46.6 52.7 56.0 41.4 27.2 54-9 47.6 43-4 40.9 47-7 44-3 47-7 SS-o 58.6 68.7 67.6 73-9 68.9 63.2 66.6 2.4 2.6 ' 4.8 ,1:1 18.8 6.7 S-3 1-3 28.5 12.0 12.7 27-3 16.2 7.2 25.2 Of the secretaries of the treasury after Walker, James Guthrie deserves special mention. No great administrative act is as- sociated with his name ; his reputation rests rather in the traditions of the treasury department and in his official reports which deal with questions now rarely raised in public controversy. He clearly realized the significance of the growth of government business, which is reflected in the preceding tables, and that this demanded a careful revision of departmental methods. This was the more necessary on account of the construction of new custom houses and branch mints, and the re-organization of the treasury depart- ment due to the transfer of the land office and of certain supervisory responsibihties relating to the expenditures of the United States courts, to the interior department established in 1849. Guthrie prescribed new forms of accounting, in- sisted upon a prompt settling of accounts, enlarged the scope of statistical returns, and placed the independent treasury system upon a business basis. New depositories were estab- lished for disbursing officers, and the accounts of officials which were in arrears in March, 1853, to the enormous sum of ;?i32,ooo,ooo were reduced by December, 1855, to 270 Tariff and State Banks. [§115 ;?25,ooo,ooo. Guthrie recognized the dangers of extravagant appropriations, and during the period of treasury prosperity preceding the panic of 1857, exercised a firm control, as far as his power extended, to keep the finances in a sound condition. CHAPTER XII. CIVIL WAR; LEGAL TENDERS. 116. References. Bibliographies; Bogart and Rawles, 43-45; Channing and Hart, 419-420. Financial Situation in 1861 : Statutes, XII, 259 (Act of July 17, 1861); Finance Report, i%(>Q-\?>(>\ ; Bankers' Magazine,'K.Yl (1861-1862), 161-170 (loan of August), 290-293, 509; XVII, 135-150 (loan com- mittee); J. Sherman, Recollections, I, 251-258; J. G. Blaine, Twenty Years, I, 396-408; Belles, III, 20-42; S. W. McCall, Stevens, 139-151. Suspension of Specie Payments : Finance Report, 1862, pp. 7-8 ; W. C. Mitchell, Suspension of Specie Payments, in Jour, of Pol. Econ., VII, 289-326 (exhaustive study); Bolles, III, 34-40, 139-140; A. B. Hart, Chase, 230-234 ; W. G. Sumner, History of American Currency, 194-197 ; W. G. Sumner, History of Banking, 458-461 ; H. White, 150-152. Legal Tender Notes: (i) Sources, .fiKa«« Report, 1861, pp. 17-20 ; 1862, pp. 12-16; 1863, p. 17; Statutes, XII, 345, 532, 709; or Dunbar, 163, 167, 173 ; E. McPherson, History of the Rebellion, 357 ; Sound Cur- rency, III (Jan. 15, 1896), No. 4 (extracts of congressional debates); Bayley, 369-385, 445-457; W. F. de Knight, 77-99; E. G. Spaulding, History of Legal Tender Paper Money (1869; extracts from documents, etc.); C. Sumner, Works, VI, 319-345; J. Sherman, Speeches, 23-32; J. Sherman, Recollections, I, 268-283; J. G. Blaine, Twenty Years, I, 409-437. (ii) Special, W. C. Mitchell, Greenbacks and the Cost of the Civil War, in four. Pol. Econ., V (1897), 117-156 (most thorough study of effects); also in Report of Monetary Commission (1898), 445- 479; H. Adams, Historical Essays, 281-317; J. J.Knox, United Stales Notes, 122-147; Belles, III, 43-86, 130-158; H. White, 149-165; Re- port of Monetary Commission (1898), y^a,\(i, 502-508 (statutes); W. G. Sumner, American Currency, 197-209; J. K. Upton, Money and Poli- tics [\%Zi,), d-j-iio; C. J. 'EvXiozV, Monetary History, g(i-<)^ (references); F. A. Walker, Money, 369-372; H. C. Adams, Public Debts, 145-146, 166 ; J. L. Laughlin, Mill's Political Economy, 358 (fluctuations in value) ; F. P. Powers, Greenbacks in War, in Pol. Sci. Quar., II, 79-90; S. New- comb, Critical Examination of our War Policy (1865) ; A. B. Hart, Chase 245-252 ; S. W. McCall, Stevens, 152-173 ; J. F. Rhodes, History of United States, III, 559-572 (references); IV, 237. 271 272 Civil War; Legal Tenders. [§117 Treasury Notes: Dunbar, 158-196; Bayley, 370-383,445-460; W. F. de Knight, 79-98; W. C. Mitchell, in Jour. Pol. Econ., X (1902), 544-530 (demand notes; valuable references), 550-559 (fractional), 566- 570 (treasury notes) ; R. M. Breckenridge, Demand Notes of 1861, in Sound Currency, V (1898), No. 20 (foot-notes) ; Bolles, III, 5-8, 29-30, 61, 84-85, 114, 126-128, 251. Gold Sales: Statutes, XIII, 132; or Dunbar, 191-193; J. A.Garfield, Works, I, 35-41 ; Bolles, III, 142-147 ; H. White, 174-190; J. K. Upton, Money and Politics, 176-193; A. B. Hart, Chase, 284-289. 117. The Situation in 1860. The result of the elections of November, i860, gave a severe shock to public and private credit ; Southern banks withdrew large amounts of money on deposit in Northern banks; loans were contracted ; and by the middle of the month the panic was complete. The government resorted to another treasury note issue under the act of December 17, i860, but so low was the public credit and so disturbed the public mind that to float the notes at par it was necessary to pay from 10 to 12 per cent, interest on the larger part. With the beginning of the year 1861, although secession was becoming an accom- plished fact, the appointment of John A. Dix as secretary of the treasury in place of Howell Cobb, with other changes in the cabinet, restored some measure of confidence in public credit. More vigorous efforts followed. By the act of Feb- ruary 8, 1 86 1, a 6 per cent, loan was authorized with no re- strictions as to sale at par, and this was reinforced by a new tax measure, the Morrill tariff. Nevertheless, when the new administration of Lincoln entered upon its difficult task on March 4, it found the treasury practically empty, the ad- ministrative departments disorganized, customs receipts almost at a standstill, the debt increasing, and government credit ebbing away. Nor could there be any tiiorough-going plans for the future, because nobody could clearly foresee the turn of political affairs. The unsatisfactory condition of the treasury in i860 is the more striking because the nation in that year was in excellent economic and material condition. The depression of 1857 §117] The Situation in 1 8 6o. 273 was but temporary in its industrial effects ; the development of railroad construction and shipping was speedily resumed ; crops were abundant and prices remunerative. The cotton crop in i860 reached 4,675,770 bales, nearly a million bales more than in any previous year ; great gains had been made in the crops of wheat, corn, and other cereals ; the production of anthracite coal in Pennsylvania was nearly 800,000 tons greater than in any preceding year; the output of pig iron was 913,000 tons, or 130,000 more than the average of the six preceding years ; exports, including the precious metals, had reached the highest point then known, ^400,000,000 (of which ^316,000,000 was domestic merchandise), or ^43,000,000 more than in any other previous year. The consuming powers of the people had never been so high, as was proved in par- ticular by the unprecedented demand for sugar and tea ; there was but little pauperism, and wealth on the whole was evenly distributed. 179,000 immigrants landed in i860, or 58,000 in excess of the preceding year. The tonnage of American shipping was greater than ever before or since, and two-thirds of our imports and exports were carried in vessels having an American register. In this wonderful material expansion and prosperity the Northern States had the advantage. Of the total population of 31,444,321, returned by the census of i860, two-thirds were in the States which remained in the Union in 1861. The value of the real and personal property of the whole country was estimated at ^16,159,000,000, of which ^10,957,000,000 was credited to the northern group, and in the southern share was included ?2, 000,000,000 for slave property. The wealth produced in 1859 was valued at ^3,736,000,000, of which ^2,818,000,000 was in the North. There were a thou- sand million acres of unoccupied public lands north and west of the slave region, a source of potential wealth to the strug- gling government : as Secretary Chase said, " There are other mines than those of gold and silver ; every acre of the fertile soil is a mine, and every acre is open to the fruitful contact of 18 274 Civil War; Legal Tenders. [§ii8 labor by the Homestead Act." The gold-bearing region of the Western States with comparatively insignificant exceptions was still the property of the nation ; and the annual product of gold and silver was nearly $100,000,000. The contribu- tion of Southern ports to the total import duties had been but $7,000,000, or 14 per cent, of the ordinary annual income from customs, and it was estimated that of the imports the South consumed less than half of its proportion according to population. The North was also fortunate in possessing the principal share of the manufacturing industries of the country. 118. Appointment of Chase. The political storm burst on the country with startling rapidity : the South Carolina Ordinance of Secession came December 20, i860; the Southern Confederacy was formed February 4, 1861 ; the civil war began with the firing on Fort Sumter, April 12; and the president called for troops April 15. During the four years of war that followed, one of the most serious concerns of the government was its public finance. For secretary of the treasury President Lincoln chose Salmon P. Chase of Ohio. Chase was a lawyer who had been senator from Ohio and governor of that State, and his long experience in the field of politics made him a rival candi- date to Lincoln in the Repubhcan Convention of i860. His experience in public finance was small and his previous political career had never called for a thorough consideration of the problems of the treasury. The appointment, however, was not very different from the usual practice of successive ad- ministrations which made political leadership the principal reason in selecting a secretary of the treasury. Chase was reluctant to accept the appointment. " I sought to avoid it," he writes, "and would now gladly decline it if I might. I find it impossible to do so, however, without seeming to shirk cares and labor for the common good, which can- not be honorably shunned." A criticism of Chase's appoint- ment or of his administration of the finances must take into full § ii8] Appointment of Chase. 275 account the political traditions which had thus far governed cabinet selections; and it must also be remembered that neither Lincoln nor his cabinet officers appreciated the enor- mous and unprecedented strain which was to be placed, upon the treasury department. Even when the difficulties were realized, everybody supposed that they would be of short duration. To accuse Lincoln of gross error of judgment, or Chase of rash willingness to undertake duties for which he had not complete preparation, is to judge them by events which they could not foresee. Any attempt to estimate the success of Chase as a minister of war finance must also keep in view the legislative personal- ities through whom he had to work. The chairman of the House committee on ways and means, Thaddeus Stevens, was a man of great force, but untrained in matters of taxation and loans, and in disposition dogmatic, arbitrary, and impatient. Although he delegated the preparation of details to Justin S. Morrill, chairman of a sub-committee on taxation, and to Elbridge G. Spaulding, chairman of a sub- committee on loans and currency, he exercised a great influence in the framing of financial policies. Morrill had little opportunity in the early years of the war to exhibit his practical good sense in ques- tions of the development of revenue ; and in the framing of tax bills, where the plain necessity was a large revenue, he was hampered by strong protectionist sympathies. Spaulding's experience had been limited to the treasuryship of the State of New York and the management of a local bank in Buffalo, and there is no evidence that he was competent to deal with great national measures. In the Senate, Fessenden, the chairman of the committee on finance, was an able lawyer, but confessed his inexperience on many subjects with which he had to deal. Since 1845 there had been little to arouse public opinion or to train statesmen in questions of finance. Amid universal prosperity the tariff changes of 1846 and 1857 had not provoked prolonged discussion; and the attention of Congress had been chiefly turned to the question of slavery. 276 Civil War ; Legal Tenders. [§ '19 119. Revenue Measures, July, 1861. When Chase entered upon his work the public debt was $74,985,000, of which about $18,000,000 had been incurred since the beginning of the secession movement. The avail- able funds in the treasury were but $1,716,000; and until Congress met for new legislation Chase was obliged to rely upon previous loan acts, of which the treasury had not yet fully availed itself. The result was not encouraging. Only a small amount of bonds was sold and these at a discount, and the few millions of treasury notes issued were entirely inade- quate. When Congress met in special session, July 4, 1861, Chase was ready to propose financial measures on a more comprehensive scale. He estimated that the sum needed for the next year would not fall far short of $320,000,000 itemized as follows : — Appropriations for former years yet unpaid . . . $20,121,000 " already made for 1862 .... 59,589,000 " required by new exigencies . . . 217,169,000 " to pay treasury notes becoming due 12,640,000 " to pay interest on public debt . . 9,000,000 To provide for the ordinary expenditures, for the interest on the public debt to be created, and for a sinking fund to extinguish the debt. Chase recommended that $80,000,000 be raised by taxation ; the extraordinary expenses were to be met by loans. He urged no great development in the existing tax system ; partly because the possibilities of the tariff act of March, 1861, had not yet been put to satisfactory test, and partly because he did not apprehend that the struggle would continue for more than a few months. He did, however, recommend that duties be levied on tea and coffee, then ad- mitted free, and on sugar which was lightly taxed ; from these sources he thought that $20,000,000 might be derived ; and that a slight increase on the general list of dutiable arti- cles would also add $7,000,000 to a tariff of which the ordi- nary productivity might be estimated at $30,000,000. With §119] Revenue Measures, July, 1861. 277 miscellaneous revenue he counted on a total of ^60,000,000 a year; whether the remaining j20,ooo,ooo should be raised by taxation, and whether by direct taxes or internal revenue duties. Chase was in doubt ; and with deliberately expressed deference he left the selection of the particular sort of taxation to Congress. On the proposed loan of ^240,000,000 Chase suggested a high rate of interest, 7.3 per cent, on short-term treasury notes, or 7 per cent, on long-term bonds, to be sold at not less than par ; for immediate needs he favored an issue of treasury notes in smaller denominations bearing a lower rate of interest. " The greatest care will, however, be requisite to prevent a degradation of such issues into an irredeemable paper currency, than which no more certainly fatal expedient for impoverishing the masses and discrediting the government of any country can well be desired." Congress quickly accepted the secretary's plan and in loan bills of July 17 and August 5, 1861, empowered the secretary to borrow not exceeding ^^250,000,000 in three-year 7.3 per cent, treasury notes or in twenty-year bonds not exceeding 7 per cent. The secretary was also authorized, in lieu of a portion of the above loan, to exchange for coin or pay for salaries or other dues of the United States non-interest-bearing treasury notes not exceed- ing ^50,000,000, of a denomination less than $50 but not less than $^, payable on demand and receivable for all public dues; or notes bearing interest at 3.65 per cent., fundable into treasury notes of denominations over ^50, and payable in one year. Unfortunately Congress did not respond so ener- getically to the recommendations made as to taxation ; a few amendments of the tariff were enacted along the general lines suggested by Chase, but the rates in some instances were less than he desired. A direct tax and an income tax were also imposed, but were not to be effective until after periods of eight and ten months respectively. No more finance legisla- tion was possible until the following winter ; and the admin- istration was left poorly equipped with resources for the contest 2/8 Civil War; Legal Tenders. [§ 120 now entered upon. Abundance of credit had been granted, but the revenue provided was insufficient to maintain this above suspicion and still more insufficient for the daily needs of the treasury. . - 120. Placing the Loan of $150,000,000. In accordance with the provisions of the above-mentioned act the secretary undertook to borrow ;? 15 0,000,000 by the issue of 7.3 per cent, three-year notes. In view of the diffi- culties encountered by the treasury department in placing small loans during the previous winter of 1 860-1 861 this opera- tion might well seem hopeless ; but three changes in con- ditions had occurred which affected the disposition of capital- ists with funds to invest. In the first place a definite policy had been adopted ; loan and tax bills had gone hand in hand ; and, in the light available to the most acute political observers of the time, ample provision had been made for the demands of a contest which it was confidently believed would be over in a few months. Secondly, a more liberal rate of in- terest was authorized, which tended to attract capital deprived by political disturbance of its ordinary commercial use. Thirdly, the spirit of loyalty was being aroused to the recog- nition of the need of financial as well as military support of the government ; business men more intelligently realized the dependence of commercial interests on the stability of the government. Thus it was possible in one operation to bor- row and transfer from the people to the government more wealth than had as yet ever stood as the principal of the public debt. Representatives of the banking institutions of Boston, New York, Philadelphia, after consultation with the secretary, " agreed to unite as associatfes in financial support to the gov- ernment," to subscribe to an immediate loan of ?so,ooo,ooo, and to promise to take two further instalments of $50,000,- 000 each. The securities issued were to be in the form of three-year 7.3 per cent, treasury notes. The task of the § i2o] Placing the Loan of $150,000,000. 279 banks was not an easy one, for the institutions undertaking the negotiations possessed a capital of only ^120,000,000, and their coin assets amounted to only ^63,000,000 ; but it was agreed that the banks should be the medium of popular sub- scriptions through which the burden was to be transferred to private lenders. The inherent difficulty of carrying out the plan was great ; and it was increased by diiferences as to the meaning of the agreement between the government and banks. In order to prevent the removal of a large volume of money from the channels of business, the banks desired that the funds which they loaned to the government should remain in their custody until checked out by the government to meet current disbursements. This meant, of course, that the banks would be permitted to use their notes in the payment of treasury checks. Under the sub- treasury act only coin was receivable by the treasury, but the existing public distrust had caused hoarding, and there was a relatively small amount of specie then available in the country ; hence the transfer of so large a sum as ^150,000,000 in gold was regarded by many experts as impracticable. It was indeed asserted that the act of August 5, 1861 (amending the loan act of July 17), in allow- ing " the secretary of the treasury to deposit any of the moneys obtained on any of the loans now authorized by law, to the credit of the treasurer of the United States, in such solvent specie-paying banks as he may select," was intended to give the secretary elastic powers to receive bank bills or book credit 'in place of coin. James Gallatin, representing some New York banks, declared " that this provision was particu- larly intended to authorize drafts for disbursements against the deposits created by the taking of loans." The secretary, however, strictly construed the sub-treasury bill and insisted that the banks should make their settlements in specie. Another ground of remonstrance by bankers was Chase's free use of his power to issue demand notes ; these notes Were legal tender for the payment of public dues, and if they went largely into circulation the banks would naturally receive less 28o Civil War; Legal Tenders. [§120 gold in their daily business transactions, and thus would be less able to fulfil their loan agreement with the government. Some bankers asserted that the secretary had promised not to use this power. At first the notes were issued with mod- eration, but in November the secretary gave way to what he considered the imperative claims of the treasury and put out notes freely, on the ground that Congress had ordered appropriations beyond those estimated in the summer, and that the revenues from imports did not come up to the esti- mates ; he saw no other relief. In spite of the differences of opinion, banks for a time continued to co-operate with the treasury department in carrying out the original agreement for the purchase of bonds. When Congress met .in December, 1861, the secretary in his regular annual report was obliged to revise the estimates of July, and to ask Congress for further means ; he now estimated that taxation would yield less than was originally expected, and that appropriations would be larger by ^214,000,000. Once more the secretary attempted to apply his principle of a proper balance between taxation and loans without a radical increase in taxes. He recommended a slight increase in customs duties, a readjustment of the direct taxes so that the loyal States should pay all of the ^20,000,000 ; and the imposition of slight internal revenue duties, which, including the income tax, would yield ^30,000,060. The secretary, like many other statesmen, still entertained the hope that the war might be brought to an auspicious termination before midsummer. In connection with a request for authority to make further loans of ^200,000,000 the secretary advanced his first propo- sals for a national banking system. He believed that the time had come when Congress should exercise its authority over the credit circulation of the country. He thought his plan would give the following advantages : { i ) uniformity of circulation, in place of a bank-note circulation dependent on the laws of 34 States and 1600 private corporations; (2) an increased security to the Union, because of a common interest § i2i] Suspension of Specie Payments. 281 created by the disposition of national securities as a basis of circulation; (3) the safest currency the country had ever enjoyed. Little emphasis was laid on the special demand for United States stock as a basis of bank circulation, but this advantage evidently was a strong reason for making the recom- mendation. Chase did not refer to the recent controversy with the banks, nor did he specially discuss the issue of the demand notes ; on the general question of government paper currency he did call attention to the inconveniences and hazards of the issue of United States notes, possibly ending in the " immeasurable evils of dishonest public faith and national bankruptcy." 121. Suspension of Specie Payments. Although the secretary did not officially take notice of the growing embarrassments of the banks, bankers found them very serious ; and on December 30, under the lead of the New York City banks, specie payments were suspended throughout the country ; and this action was speedily followed by the government. This sudden and eventful shock to pri- vate and public credit has been the subject of much contro- versy. Chase declared that suspension was inevitable, because of unexpected military reverses, increased expenditures, and diminished confidence in public securities; and in this conclusion Republican leaders of the time acquiesced ; they denied that the issue of demand notes in any way caused suspension, since only ^33,460,000 was in circulation at the date of suspension, and up to that day every note presented for payment had been promptly redeemed in coin. On the other hand the bankers declared that the two reasons for suspension were first, the pressures on banks because they were not allowed to retain the government deposits received in the loan operations until they were actually needed ; and second, the banks were expected by their customers to receive the government demand notes for de- posit, and permit them to be drawn against in coin; and such 282 Civil War; Legal Tenders. [§121 a burden the banks affirmed was too heavy to carry. They therefore laid upon Chase the responsibility for the suspension of specie payments : first, because he forced the banks to transfer the principal of the loans to the government without giving them the advantage of retaining the funds temporarily on deposit ; and, secondly, because the banks were obliged to sustain the credit of the demand notes as well as the bank- notes. It has even been declared that the banks were sacrificed on the altars of their own patriotism, and that Chase had a wild idea of locking up the funds thus secured until needed for expenditure, so as to make a broader field for the circulation of United States demand notes.^ A fair judgment on this important question will be aided by carefully considering the legislation which bears on the subject. In 1 86 1 the law provided : (i) that the sub-treasury should receive and pay out only coin or government notes ; (2) that the treasury could deposit with such specie-paying banks as might be selected any of the moneys obtained from the new loans. Mr. Horace White believes that the act of August 5, 1861, "suspended the operation of the sub-treasury act so as to allow the secretary to deposit public money in solvent specie-paying banks and to withdraw it at his own convenience and pleasure for the payment of public debts. In short, he was permitted to handle the proceeds of the three loans in whatsoever way he pleased." Possibly it may have been the intention in framing the law of August 5 to permit the banks to pay in notes as well as to receive deposits from the government, but it is not clearly expressed, and in the opinion of some, as for instance John Sherman, the secretary could hardly have acted other than he did without laying himself open to the charge of ignoring the law.' .Against this opinion it may at least be admitted, without attempt- ing to locate the blame, that the first material mistake in the management of the war finances occurred when the 1 Coiij;. Kcc, Feb. 9, 1895, P' 2200. ' John Sherman, Recollections, vol. i, p. 269. § i2i] Suspension of Specie Payments. 283 government declined to use the bank check and the clearing- house. The real explanation of the financial crisis of December, 1 86 1, is not to be found either in errors of the treasury or in the selfishness of the banks, but in the condition of public feel- ing and a lack of confidence in the success of the war. The credit of the government was undoubtedly injured by the failure of Chase to recommend or of Congress to enact a far- reaching system of taxation, and the recent Trent affair caused an apprehension of international difficulty with England. Because there was little indication that the credit of the govern- ment was to be supported by vigorous taxation, the banks were handicapped in their efforts to sell bonds to investors. Deposi- tors were also withdrawing funds from the banks for hoarding, so that the specie reserve was slipping away. On January i, 1862, the banks had but ^^87, 000,000 of specie to meet ;?459,ooo,ooo of indebtedness. It would have been impossible to go through a war on the basis of a currency system so inadequate. The demand notes not only irritated the banks, they also held an important relation in subsequent discussion to the legal tenders and the agitation for fiat money. After the suspension of specie payments these notes which were receivable for all public dues, circulated at a premium over State bank-notes and also over the treasury notes or greenbacks, which were issued in the following year but were not made receivable for cus- toms. Hence it has been argued that the greenback circula- tion issued in 1862 might have been kept at par with gold if it, too, had been made receivable for all payments to the govern- ment, as well as given a legal-tender quality for settling private debts. The depreciation of the greenback is thus ascribed to the fact that it was not given the fullest credence and honor by the fiat of the government. The premium for the demand notes was, however, not due solely to their receivability in payment of duties ; other causes had influence, such as the joint effect of the limitation upon their quantity and the prohibition of reissue. 284 Civil War; Legal Tenders. [§122 122. Issue of Legal-Tender Notes. The recommendations of Secretary Chase in his report of December, 1861, were referred to the committee on ways and means, and by it to a sub-committee of which E. G. Spaulding of New York was chairman ; in due time the sub-committee prepared a bill which resulted in the act of February 25, 1862, one of the landmarks in the history of American finance. Its main provisions are as follows: (i) the issue of Ji 50,000,000 of legal-tender United States notes (including the demand notes already authorized, in denomina- tions of not less than §5) ; (2) the issue of ^1500,000,000 of bonds (familiarly known as five-twenties, redeemable after five ' years and payable in twenty years) bearing 6 per cent, inter- est, to be sold at market value for coin or treasury notes; (3) the issue of certificates of deposit bearing 5 per cent. interest, in exchange for United States notes left on deposit not less than thirty days, and to an amount not exceeding g 2 5, 000, 000, payable after ten days' notice; (4) the creation of a sinking-fund. No more striking illustration of the unsympathetic relations of a cabinet minister with the legislative branch can be found in the range of fiscal history ; the act does not so much as mention the national banking system advocated by the secretary, but it does authorize legal-tender notes, which the secretary had not suggested and to which he was at heart opposed. The suspen- sion of specie payments which occurred after the submission of the secretary's report had in a measure changed the situation ; but, with all allowances possible, the history of the legal-tender act is a remarkable commentary upon the methods of financial legislation at this period. The account of Spaulding, chairman of the sub-committee, is that he applied to Chase for details on a new system of bank currency ; inasmuch as the secretary did not promptly respond with a bill, he himself began the prep- aration of a measure such as he thought the treasury depart- ment desired, but while engaged upon it came to the § 122] Issue of Legal-Tender Notes. 285 conclusion that it could not be made available quickly enough to meet the crisis. " A system of national banks could not be organized and put in effective force for more than a year, and in the mean time the State banks would be in a condition of suspension, without coin or the possibility of obtaining it, and we need effective money.'' He saw that no tax legislation could be promptly effective ; hence he drafted a section au- thorizing legal-tender notes, which was later, on January 7, 1862, submitted to Congress as a separate bill. . At first great opposition appeared throughout the country ; the metropolitan press, with two exceptions, denounced it, and committees representing the State banks hastened to Washington to set forth their objections and to propose another project involving an increase in taxation, an issue of non-legal- tender two-year treasury notes, the use of banks as deposito- ries of public funds, and the sale of bonds without limitation as to price. The bankers' plan, however, ran counter to popular convictions ; it was virtually an abandonment of the sub-treasury system, against which there was no longer opposition ; and it was a plan of carrying on the operations of the government by banks over which Congress had no control and which could issue money without limit so far as national laws affected it. It was furthermore shown that in the loyal States the bank circulation of January i, 1862, was only $132,000,000; that this was diffused throughout the country and was not sufificient for the purpose of negotiating the loans which were required ; and finally that there was popular opposition to selling bonds below par. Nor did the bankers' scheme appeal to the leaders of the political party which had breathed deep of the spirit of national sovereignty. Banks were referred to as " usurers " and " note-shavers ; " " shinning " by the government through Wall street was strongly condemned ; and the gov- ernment was advised to " nerve up." " Why, then, go into the streets at all to borrow money? " " I prefer to assert the power and dignity of the government by the issue of its own notes." " To render the government financially more inde- 286 Civil War; Legal Tenders, [§ iz2 pendent, it is necessary to make the United States notes a legal tender." The debate opened January 28. Originally Mr. Spauld- ing's bill proposed the issue of only ^100,000,000 of legal- tender notes, but the idea once planted grew with rapidity. Chase was reluctant to accept the measure, but day by day as the immediate needs of the country became more pressing and legislation lingered his opposition faded away. Never- theless the measure did not pass the House without earnest protests, based both upon the unconstitutionality of the measure and upon the economic disasters it would entail. '■' If it be a war measure," said Morrill, " it is a measure which will be of greater advantage to the enemy. I would as soon provide Chinese wooden guns for the array as paper money alone for the army. It will be a breach of public faith. It will injure creditors ; it will increase prices ; it will increase many fold the cost of the war." This view was supported in many quarters and the government was assured that those who had sent their sons to the conflict would even more willingly lend their credit. In the Senate the bill was supported by Senator Sherman in a speech the burden of which may stand as typical of the current argument : he said that every organ of financial opinion in the country was agreed as to the necessity of a legal- tender clause if the issue of demand notes was authorized ; its necessity had been declared by the secretary of the treasury, the Chambers of Commerce of New York, Boston, and Philadelphia, the Committee of Public Safety of New York, and in fact by almost every recognized organ of finan- cial opinion in the country; ^100,000,000 was immediately due to the army and ^250,000,000 was due by July i ; the banks had exhausted their capital in making loans ; money could not be borrowed except at great sacrifice ; there was no money to buy bonds; gold and silver had ceased to circu- late ; legal-tender currency was necessary to aid in making further loans; without the legal-tender clause the notes pro- § 122] Issue of Legal-Tender Notes. 287 posed to be issued would fall dead upon the money market ; with it the notes will be the life-blood of the business of the country; the issue of ?i 50,000,000 cannot do harm; it is only a mere temporary expedient. " As a member of this body, I am armed with high powers for a holy purpose, and I am authorized — nay, required — to vote for the laws necessary and proper for executing these high powers, and to accom- plish that purpose. This is not the time when 1 would limit these powers. Rather than yield to revolutionary force I would use revolutionary force." If soldiers were to be com- pelled to take these notes as money, every one else should be compelled to take them. Sherman's majn argu ment was that .ji L-necessity — necessity to meet the immediate obligations of government ; necessity to give currency to treasury notes ; necessity to provide money which would in turn purchase bonds ; he was willing to leave the question of constitution- ality to the courts. The bill passed the House by a vote of 93 to 59 ; in the Senate it was considerably modified. The House provision that the treasury notes should be receivable for taxes, debts, and demands of all kinds due to the United States and all debts and demands owing by the United Slates was amended by requiring that duties on imports should be paid in coin, and that the interest on the bonds to be sold should be pay- able in coin. The Senate also added the sections authorizing the sale of bonds, the issue of certificates of deposit, and the establishment of a sinking fund. " These amendments," says Senator Sherman,^ " were considered of prime importance. It was felt that the duty on imported goods should not be lessened by any depreciation of our local currency. Such importations were based upon coin value, and the tax levied upon them was properly required to be paid in coin. This security of coin payment would enable the government to sell the bonds at a far higher rate than they would have com- manded without it ; and tended also to limit the depreciation 1 Recollections, vol. i, p. 275. 288 Civil War ; Legal Tenders. [§ i2z of United States notes," which were convertible into bonds. The majority in the Senate was overwhelming, the vote being 30 to 7. The act says nothing as to time of repayment of the legal-tender notes and makes no pledge against further issue. A most important clause permitted the conversion of the legal-tender notes into five-twenty bonds ; for it was argued that holders of notes would instinctively desire to exchange them for interest-bearing bonds ; and upon reissue by the government they could be again exchanged for bonds. Ac- cording to Stevens, this process would operate with such magic that the ;?5oo,ooo,ooo of bonds authorized would be subscribed before the government could use the funds; $150,000,000 of paper notes would do the work of J5 00,000,000 in bonds ! The first step was soon repeated ; in little more than three months, because of the inability of the government to borrow on the terras authorized, and the tardy effect of new taxes, Secretary Chase asked for another issue of legal tenders, a part of which should be in denommations of less than five dollars. Congress quickly assented by the act of July it, 1862, pro- viding for the issue of another J 150,000,000, of which ;?35,ooo,ooo should be in denominations less than five dol- lars but not less than one dollar. On January 17, 1863, a third issue of $100,000,000 was authorized, increased March 3 to $150,000,000, all of which might be in denominations of one dollar or over. By this time opposition had practically disappeared in Congress, for in the House the last bill passed to its third reading on the same day that it was presented, and in the Senate concurrence was secured on the following day by a vote of 38 to 2. Provision was made for the reissue of the new notes but not for their conversion into bonds ; and the right of conversion for previous issues was to cease on July i, 1863. Of the $450,000,000 authorized under the three acts named, $431,000,000 was actually outstanding on June 30, 1864. This was the endl of emissions of non-interest legal-tender notes ; these issues were supplemented by fractional currency §122] Issue of Legal-Tender Notes. 289 and by interest-bearing notes running for a brief period, both of which classes were endowed with the legal- tender quality. No subject in American finance has been more controverted than the exact degree of Secretary Chase's responsibility for the issue of legal tenders. That Mr. Chase was no friend of paper money is easily proven ; by private experience, politi- cal training, and conviction he shared in a distrust of the local banking associations. When entering upon the duties of governor of Ohio in 1856, he referred to all mere paper- money systems as pregnant with fraud, justly incurring univer- sal reproach. In his report of July, 1861, he recognized in plain language the danger in the issue of demand notes ; he made no suggestion of legal tenders in his report of December, 1861 ; and it was with great reluctance ' that he accepted the plan formulated during the next few weeks by Spaulding's sub- committee. Chase was governed by "public exigency." On January 22 he regretted "exceedingly that it is found neces- sary to resort to the measure of making fundable notes of the United States a legal tender " ; on January 29 it was his " anxious wish to avoid the necessity of such legislation"; if, however, United States notes be issued, " discriminations should if pos- sible be prevented; and the provision making the notes a legal tender in a great measure at least prevents it, by putting all citizens in this respect on the same level, both of rights and duties " ; and on February 5 he insisted that " it is very important that the bill should go through to-day, and through the Senate this week. The public exigencies do not admit of delay." He probably did not expect that the notes would remain in permanent circulation, since they were made con- vertible into the five-twenty bonds. Further proof of his innate dislike of the system may be found in his successive annual reports urging a limitation on the issues, and finally in the notable decision delivered in 1869, when as chief justice he declared that the legal-tender clause was unconstitutional. The critics of Chase, however, assert that if he was so re- luctant to issue notes, his political and moral responsibility 19 290 Civil War; Legal Tenders. [§ 123 was so much the greater ; that his opposition to legal tenders was weak-hearted ; an able financier should not have accepted with reluctance a proposition which he thought alarming, but should have aggressively fought it to the end. A bolder opponent of legal-tender paper money if pressed too hard by an impatient Congress would at least have used every agency in his power to avoid a second issue : he would have insisted on more taxation, and the selling of bonds for what they would bring ; he would for the time being have smothered his an- tagonism to local banks, and accepted the conclusion that a great struggle for national preservation and national credit was not the time for reforming the paper currency by bringing forward a scheme of national banking. To such an arraignment an answer may be found in a passage of the report of Fessenden, the successor of Chase, in December, 1864: "It is, in the secretary's judgment, not only difficult but impossible to apply fixed rules to a Condition of affairs constantly changing, or to meet contingencies which no human reason can foresee by a steady application of gen- eral laws, especially in a government and with a people where public opinion is the controlling element, and that opinion is not under the direction of those who may happen to admin- ister public affairs. Accordingly it has been seen that the attempt to conduct financial operations on so immense a scale, upon a strict specie basis, soon proved impracticable." 123. Convertibility of the Greeaback. The details of the loans and taxation during the war may be postponed to another chapter, but it is advisable here to carry the history of the legal tenders down to the end of the war, and to describe some of the economic results of the system. In the first place, it is to be observed that the first two issues of legal-tender notes were fundable within five years at the option of the holder into 6 per cent, gold bonds ; this privilege was an indirect method of redeeming § 123] Convertibility of the Greenback. 291 the notes by turning them into the most valuable and best protected form of government indebtedness founded on a specie support. Within a year, however, Chase objected to the option thus given to the holder of the note on the ground that it restricted the treasury in the sale of bonds. Obviously it would be impossible to sell bonds bearing a lower rate of interest, as he believed he could, so long as 6 per cent, bonds could be had through the funding of legal-tender notes. In view of his objections the act of March 3, 1863, made no provision for conversion of the third series of legal tenders, and even changed the contract expressed in the previous issuer by requiring that the right to exchange notes already issued for bonds should be exercised before July i of that year. The note-holders made little protest and the serious results of this shifting of conditions were not recognized until afterwards. Spaulding, who took so important a part in the original legal-tender legislation, regarded this change of policy as the greatest mistake of the war ; for legal-tender notes were a forced loan from the people to the government, and the former were protected as long as the lender had the option of promptly converting the notes into a loan at a fair rate of inter- est. After the act of March 3, 1863, the previous standard of value as measured in bonds was destroyed, and this led to an advance in the price of gold expressed in commodities and services. Senator Sherman in 1876 declared that this altera- tion was a most fatal step, and for his part in acquiescing in and voting for it he felt more regret than for any other act of his official life. Although the supporters of the adminis- tration maintained that there was no right which could not be barred by a statute of limitation, it was justly held that the credit of the government had sufifered by this paltering with the public faith ; and Chase so far recognized the obligation as to allow the exchange to continue until the beginning of the year 1864. The most serious effect of this suspension of convertibility was seen at the close of the war ; under the original conditions 292 Civil War; Legal Tenders. [§ 124 the legal-tender notes would have eventually returned to the treasury to be exchanged for gold-bearing bonds, and con- traction of the currency would have proceeded according to economic law, instead of being subjected to the rigid formulae of statutes, or to the vacillating policy of an administrative secretary. On the other hand, after the credit of the govern- ment so advanced that the bonds rose in market value above par in greenbacks, the government got the advantage of sales at a premium or the equal advantage of placing bonds at a lower rate of interest ; this advantage, however, could not compensate for the indirect disadvantages of the greenbacks in weakening the assets of the treasury, nor for the subsequent unsteadiness of the standard of values. 124. Depreciation of the Greenback. The economic results of the successive issues of the legal- tender United States notes, accompanied by enormous issues of short-term treasury notes which circulated almost as money, make a chapter of monetary history and experience too long for this work. The difficulty of clear comprehension is increased by the rapid expansion during the same period of local bank circulation, which added to the inflation. The two most distinct consequences to the government were : the ri se of prices of commodities , and the fluctuating premium on g;old.. The first greatly increased the cost of the war, and the second seriously disturbed the operations of the treasury, which was especially interested in stable quotations of specie because on the one side it received gold for cus- toms and on the other hand it paid it out in interest on its bonds. The depreciation of the currency, measured in gold, is seen in the following table, which gives by months, 1862-1865, the average gold price of one hundred dollars in currency in the New York market : — 124] Depreciation of the Greenback. 293 Month 1862 1863 1864 i86s January $98 $69 J64 $46 February 97 62 63 49 March 98 65 61 57 April 98 66 S8 67 May 97 67 57 74 June 94 69 47 71 July 87 77 39 70 August 87 79 39 70 September 84 74 45 69 October 78 68 48 69 November 76 68 43 68 December 76 66 44 68 The other index of depreciation is found in the general rise of prices ; this cannot be attributed alone to the issue of paper currency ; other factors were at work, such as increased taxation and the insatiable consumption of provisions and materials of war. We cannot take the premium on gold as measuring the difference between actual prices and the prices which would have existed if the country had remained on a gold basis, for the premium varied sharply from day to day, according to the progress of the war, the movements of foreign trade, or the manipulations of speculators ; while the changes in prices moved sluggishly. When allowance is made for all the special factors there was an undoubted rise in general prices which can only be accounted for by the existence of a large volume of depreciated currency. The total effect of paper issues in increasing the cost of the war has been esti- mated at between ^528,000,000 and ^600,000,000; even this large amount is small when compared with the burdens which inflated prices placed upon the people in the ordinary relations of trade and industry. True to the general law that wages of labor do not respond to economic forces as promptly as prices of commodities, sta- tistical inquiry shows that the depreciated value of the money medium during the Civil War was not reflected in an equal measure by an increase of money wages. The relative course of prices and money wages has been computed in the " Aldrich Report " as follows : — 294 Civil War; Legal Tenders. [§125 Year Prices Money wages i860 1000 1 00.0 1861 100.6 1008 1862 117.8 102.9 ■ 863 148.6 1 10. 5 i86,( ■905 125.6 1865 216.8 ■ 431 As the purchasing power of earnings was greatly diminished a heavy load was placed upon the laborers of the country. Tlie government was the largest employer of labor in work- men, clerks and soldiers ; but the government] rarely makes changes in its salaries or pay, and hence did not feel the full effect of the increase in wages which took place in the individual field of labor. Of course government ofHcials complained because the increased cost of living was out of proportion to income ; and some of the best trained and most competent employees left the public service. The wages of soldiers, from the beginning of the war, long remained at Si 3 a month, although prices had about doubled by 1864. The distress indeed became so great that Congress on May i, 1864, advanced the pay to ^ 1 6 per month in currency. This was no great relief, since after the increase prices continued to rise. Artisans were forced to make similar sacrifices ; the depre- ciated currency in its final consequences affected every wealth producer. 125. Gold Premium. Another important consequence of the suspension of specie payments was the fluctuating premium on gold caused by the demand for specie as a commercial commodity. Gold was required in large quantities for three purposes : by the gov- ernment for the payment of interest on bond issues; by importers to pay customs duties ; and by bankers to settle balances due abroad. The stock of gold in the country in 1 86 1 was not large, and was speedily lessened by the exten- sion of paper issues and by unfavorable balances of trade, due to the sale of American securities by foreign holders and the § 125] Gold Premium. 295 decline of important exports. During 1862 the fluctuations in the quotations of gold in paper currency ranged between 102 and 132; in 1863 between 125 and 160; and in 1864 between 155 and 258. The political and economic factors which occasioned these varied changes were many and have been exhaustively treated by Mr. Wesley C. Mitchell in a recent study. Among the most striking of these influences he mentions the following : First, the increase in the amount of greenbacks as, for ex- ample, reflected in the rapid rise of premium after July 11, 1862, the date of the second legal-tender act; secondly, the condition of the treasury as disclosed from time to time by the secretary's reports ; thirdly, the credit of the government from week to week as shown in the quotations of its bonds ; fourthly, changes in the personnel of the government, either in the treasury department or in Congress through political elections ; fifthly, the state of the foreign relations of the country ; sixthly, the war news and the fluctuation between hope and discourage- ment consequent upon military success or defeat. At the time, however, the relation between these several factors and the premium on gold was not clearly apprehended either by the treasury department or by Congress. Purely speculative influences also played an important part in the variations of the premium. In order to provide a market for the purchase and sale of gold, an exchange was opened in New York, and the legitimate dealings executed there were quickly supplemented by the gambling of specula- tors, who found in the rapid fluctuations the elements of chance which always claims its followers. So open was this trading, virtually in the public credit, that it constituted in the minds of many a public scandal. It became an accepted belief that the evil of fluctuation was due to the " unpatriotic criminal efforts of speculators and probably of secret enemies to raise the price of gold regardless of the injury inflicted upon the country." " Gold gamblers as a class," said one senator, "were disloyal men in sympathy with the South." 296 Civil War; Legal Tenders. [§ «zs It was indeed charged that some of the banks had assisted in this trading by making loans based on speculative values of special deposits of gold.^ Various methods were consequently enacted to check and even to stop this form of trading. For example, a tax was placed (March 3, 1863) upon time-sales of gold; and loans upon coin for security for more than its par value were prohibited. Chase also experimented with selling exchange upon London at a rate below the market, but this proved inoperative. Finally June 17,1 864, a " gold bill " to prevent wagers in the price of gold was enacted with the approval if not at the prompting of Secretary Chase. This act declared unlawful any contract to purchase or sell gold to be delivered on any day subsequent to the making of the contract ; it also forbade the purchase or the sale of foreign exchange to be delivered at any time beyond ten days subsequent to the making of such contract ; or the making of any contract for the sale and delivery of any gold coin or bullion of which the person making such contract was not at the time of making it in actual possession. The predicted failure of such drastic legislation was soon realized. The fluctuations in the premium on gold during the next few days defied all calculations, vary- ing as follows : — June 18, 95 to 9SX " 20, 98 i< ^% " 21, 99'A (I io8 " 22, 105 (( 135 " 23, •OS " 125 " 24, no if 117 " 25, 112 It 120 " 27, 130 tt 140 " 28, 130 (( 140 " 29, 140 II 150 " 30. 140 " 151 July I. 125 " i8s " 2. '3° *• 150 " s. 140 " 149 ' BoUes, vol. iii, p. 142. [§ 12? Gold Premium. 297 The situation in New York became intolerable ; protests rushed upon Congress; and the law was repealed July 2, in fifteen days after its passage. From this time on, in spite of rapid fluctuations, the range of depreciation was held in check ; no more non-interest-bearing legal tenders were issued beyond the ^450,000,000 authorized under the three laws referred to on page 288, and the military successes which occurred during the summer of 1 864 presaged the speedy end of the war. CHAPTER XIII. LOANS, TAXATION, AND BANKING OF THE CIVIL WAR. 126. References. Bibliographies : Bogart and Rawles, 47-49. Loans : Finance Report, 1861, pp. 7-10; 1862, pp. 24-25; 1863, pp. 13- 18 ; 1864, pp. 19-22 ; Statutes, XII, 259, 313, 345, 352, 709 ; XIII, 13, 218, 425, 468; or Dunbar, 160-198; Bayley, 370-383, 446-462; W. F. de Knight, 81-99; J- Sherman, Reeollectwns, I, 299-302; J. W. .Schuckers, Li/e of Chase, 338-355, 406-417 ; H. C. Adams, Finance, 537-542 ; or Public Debts, 126-133, 167; D. 'K.m\ey, Independent Treasury System, loi-iii; A. B. Hart, Chase, 236-245 ; E. A. Ross, Sinking Funds, in Pub. Amer. Econ. Assn., VII, 389; H. Adams, Historical Essays, 288-300; H. Mc- Culloch, Men and Measures, 184; J. J. Knox, United States Notes, 97 (price of bonds). Taxation : Finance Report, 1863, pp. 3, 62-78 (internal revenue) ; 1864, p. 14; 1865, pp. 27-31 ; 1883, pp. 163-165 (direct tax) ; Statutes, XII, 294; XIII, 223, 432, 469; E. Young, Customs Tariff Legislation, cxxi-cxlii ; Report of Revenue Commission, 1865-1866 (Well's etc.), pp. 13-16, 18-37, 44-48, 161-167; G. S. Boutwell, Reminiscences, 1, 303-315; J. Sherman, Recollections, 302-309, 329-332 ; J. Sherman, Speeches, 299-306, 317 (income tax) ; J. W. Schuckers, Life of Chase, 312-316, 332-337 ; F. C. Howe, Taxation under Internal Revenue System, 50-190, 82-go (direct tax) ; J. G. Blaine, Twenty Years, I, 429-434 ; F. W. Taussig, Histoiy of the Tariff, 160-170 ; Bolles, III, 63, 159-196, 398-405 (internal revenue) ; W. M. Daniels, Public Finance, 136-143 (tax on spirits) ; C. F. Dunbar, The Direct Tax in i86i, in Quar. Jour. Econ., Ill, 444-451 ; J. A. Hill, The Civil War Income Tax, in Quar. Jour. Econ., VIII, 416, 491 ; S. W. McCall, Stevens, 174-181. National Banking System: Finance Report, 1861, pp. 18-20 ; 1S62, pp. 17-21; 1863, pp. 20-21, 49-58; 1864, pp. 46-55; Statutes, XII, 665; XIII, 99, 484; or Dunbar, 171; J. W. Million, Debate on National Bank Act of 1863, in/our. Pol. Econ., II (1894), 251, 280 (references to Congressional Globe] ; E. McPherson, Political History of the Rebellion, 356-57,1; J- Sherman, Speeches, 32-79; J. Sherman, Recollections, I, 2S4- 299; J. G. Blaine, Tzoenty Years, I, 470-487; J. J. Knox, History of /?««/'/«(,■-, 96-10 r, 220-269 (includes summary cif debate) ; H. McCulioch, Men and Measures, 165-170; J. W. Schuckers, Life of Chase, 2'ii-2,ii ; 298 §•^7] Taxation in 1 861-1 862. 299 Report of Monelary Commission (1898), 197-203, 505, 508, 511 (statutes); Bolles, III, 197-226; W. G. Sumner, History of Banking, I, 457-464; C F. Dunbar, history and Theory of Banking, 132-141 ; C. A. Conaiit, History of Modern Banking, 348-366; H. White, 406-414; J. K. Upton, Money and Politics, 1 1 1-126 ; W. C. Mitchell, in Jour. Pol. Econ., X (1902), 539-543 (State bank-note circulation) ; A. B. Hart, Chase, 274-284. Cost of the Was: Bolles, III, 241-248; H. C. Adams, Public Debts, 127-133. 127. Taxation in 1861-1862. The weakest element in the financiering of the Civil War was the delay in applying effective taxation. During the four fiscal years 1862-1865 the net receipts from taxes and loans (including treasury notes) were as follows : — Customs Internal revenue and income tax Total taxes 1 Loans including treasury notes 2 1861-62 1862-63 IS63-64 1864-63 Total $49,056,397 69,059,642 102,316,152 84,928,260 137.640,787 109,741,134 209,464,215 $50,851,729 108,185,534 212,532.936 295,593,048 *433i663,S38 596,203,071 7 19,476,032 872.574.145 $305,360,451 $356t846>i36 $667,163,247 $2,621,916,786 From this it will be observed that during 1861-62 the ratio of loans to taxes was as ^8.52 to ^i ; in 1862-63, ^s ^5.51 to $1 ; in 1863-64, as ^3.38 to $1 ; and in 1864-65, as ^2.95 to^i. It is easy after the war to blame the government for its procrastination and lack of vigor in laying taxes, but in 1861 and in the early part of i86z the way did not appear clear. The blunder of delay was due in part to the fact that a new tariff had just been enacted ; it is probable if there had been a clear realization of the enormous demands 1 Including {54,956,657 in payments on a direct tax. 2 Obtained by subtracting " expenditures on account of loans " from " receipts on account of loans " as given in the " Finance Reports," premiums in each case being added in. The results differ slightly from those obtained by taking issues and redemptions of public debt as given by Bayley, and summarized on page 308. 300 Loans, Taxation, Banking. [§ 127 which would soon threaten the treasury, that the Morrill tariff measure would have been thoroughly recast before passage even at the expense of protection ; there was, however, no such misgiving, and the law of March 2, 1861, was enacted, as framed in the peaceful days of the spring of i860. For similar reasons the tariff act of August 5, 1861, touched only a small part of the schedules, increasing the rates on sugar, tea, coffee, and several other food products, not native to the United States; on hemp, hides, rubber, silk, lead, salt, soda, brandy, spices, and a few other articles. The act of Decem- ber 24, 1861, was limited to raising the duties on sugar, tea, and coffee. This tardiness was not due to the unwillingness of the people to be taxed ; there was no disposition to shirk the burdens of increased taxation ; on the contrary, as stated by Senator Fessenden, the country was impatient to con- tribute ; it had been calling for a tax bill that should raise revenue equal to the demands of the time ; and so Repre- sentative Morrill referred, as early as January, 1862, to the necessity of assuring the country that whatever the army was doing, the committee on ways and means had not " hutted " nor gone into winter quarters. In the development of a tax system appropriate to the events and conditions of the war. Chase took no leadership. At the outset, in July, 1861, he laid down certain propo- sitions as to what constituted adequate revenue ; but he believed that the war demanded no extraordinary taxation beyond what was necessary to pay the interest on the new loans created, and to extinguish annually a small amount of the new debt. In December, 1861, the taxation which Chase recommended was not intended to yield more than a frac- tional part of that expected from the loans, and he even advised against any radical change of the Morrill tariff, on the ground that the manufacturing interests ought to have a further trial of the system ; he did ask, however, for internal revenue duties. In January, 1862, Congress adopted a more determined § iz7j Taxation in 1861-1862. 301 policy and announced its purpose to enact a revenue measure which would yield $150,000,000 annually. The plans in- cluded the development of an internal revenue system and the increase of customs duties. Of excise duties the country had had no experience for more than a generation, and conditions had greatly changed since 1815 : the country was not homogeneous ; over its broad surface were scattered the most diverse interests ; population in some portions was dense, in others very sparse. In some States the people were without exception engaged in agriculture ; in others there were important classes occupied in manufactures and commerce. It was therefore inevitable that an excise measure, when applied to so great a variety of subjects as it was absolutely necessary to include in order to yield an abundant revenue, should create some marked inequalities. The guiding principle of the internal revenue measure of 'July I, 1862, was the imposition of moderate duties upon a large number of objects rather than heavy duties upon a few. It included rates upon luxuries represented by spirits, ales, beer, and tobacco ; licenses upon occupations ; duties upon manufactures or products, upon auction sales, carriages, yachts, billiard tables, and plate ; upon slaughtered cattle, hogs, and sheep ; upon railroads, steamboats, and ferry boats, railroad bonds, banking institutions, and insurance companies ; upon salaries and pay of ofScers in' the service of the United States ; upon advertisements,, incoiiBe, and legacies; and an extended list of stamp duties..- r TieiUniversality of this measure has been concisely describenl/byiiWfelllSj; " Wherever you find an article, a product, a'ttradeii'fprdfession, or a source of income, tax it." CoinGid«rirt;owith,';!the enactment of this measure was the passagp; of-Taritarifr^ bill (July 14, 1862) ; for the revision of impairtj;diiti«fe /was .absolutely required in view of the new jM^es-j,]^ced! by the internal revenue act upon domestic pranttfacttdrfes and industries. It was necessary " to make fcjqpejr^,rfi>aration, otherwise we shall have destroyed the ||00«» -liiat lays the golden egg." The protective features '302 Loans, Taxation, Banking. [§ 128 then added were simply designed to compensate temporarily for the internal duties. While the measure afforded in some instances more protection to the home manufacturer, it did not materially modify the provisions of the Morrill tariff of 1861. 128. Increase of Taxes. In the secretary's report for 1862 there is no discussion whatever of taxation, although an internal revenue measure had been enacted by Congress which was more far-reaching than anything as yet suggested by Chase, and in 1863 the subject was dismissed with a short paragraph, in which at- tention is approvingly called to the recommendation of the commissioner of internal revenue, that excise receipts be in- creased to ^150,000,000. The returns of the internal revenue measure of 1862 proved most disappointing: instead of the estimated ;^Ss,456,ooo from internal revenue duties for the fiscal year 1862-1S63, the returns were but $37,640,000. While this was a serious miscalculation, it was largely due to the unsettled conditions of business as well as to the necessity of establishing at short notice an entirely new branch of treasury administration for the collection of duties. Although the revenue from customs duties more nearly ap- proached the estimates, foreign trade was seriously affected by the energetic movements of the Confederate navy, and the proceeds of the new schedules wersj i«adequate to the financial strain. A second expansion of -the' revenue policy was made in 1864, more far-reaching in -its 'objects" than.< that undertaken in 1862; but it was from the inilfeTiSilfiJe'veiine law that the chief source of strength was derivedi"> TheiB- duties were so increased in June, 1864, that their yield ' becSBie twice as large as that from customs. Industry and aomlnerde speedily adjusted themselves to the new conditions with theisrbsil.lt that the taxes afforded a revenue of ;?io9,74i,oo6 in •Ii863-n864i and in the succeeding year of $209,464,000.^ '^Tbe- gentiai 1 Mthougli a new net was passed in 18(14, the reveniie'1^"'l864^f8l^ was largely due to the old schedules of the fust internal reve«iB6 Wtt'O^J §128] Increase of Taxes. 303 character of this excise act has been well summarized by Howe : " In general the bill followed the lines outlined by earlier legislation, although a general increase in rates was made. Thus the duty upon spirits which had been 20 and 60 cents under the earlier laws, was increased to ^1.50 and ;?2.oo per gallon under the new; upon smoking tobacco the tax was more than doubled, while the tax upon cigars was advanced from a maximum rate of $3.50 per thousand to a maximum rate of 1^40.00 per thousand. In a like manner, although not to such an extravagant extent, license taxes were increased, while specific duties upon many manufactured products were doubled. The general ad valorem rate was increased from 3 to 5 per cent, upon most articles included in the former schedule, while numerous new sources of revenue were ferreted out and taxed. Nothing was omitted, from the raw product to the finished commodity. Often an article received a half- dozen additions ere it reached the consumer. And not only were all the constituent elements which entered into an article taxed, as the bolts, rivets, castings, trimmings, and the like, of an engine, but the engine when completed was subject to an additional ad valorem duty upon its value ; while all repairs which increased the value of an article 10 per cent, were rendered dutiable at a like rate." The tariff act of June 30, 1864, like its predecessor of 1862, was necessary because of the increased excise duties placed upon manufactures ; but it went further in the direc- tion of protection, and did much to bring the customs sched- ules up to that level to which the country has since been accustomed. The average rate on dutiable commodities was increased from 37.2 per cent, under the act of 1862 to 47 per cent. A study of the measure does not yield much for guid- ance in finance. It was pushed through Congress with Httle debate ; revenue was imperative ; the industrial conditions of the country were in a rapid flux due to the abnormal and violent changes in price caused by the currency expansion ; 3^4 Loans, Taxation, Banking. [§ 128 and there was little opportunity to examine and no adequate expert opinion available to criticise details. This act of 1864 later became of interest because until 1883 it remained the basis and controlling principle of tariff legislation. A few examples illustrate the character of the increases be- tween 1 86 1 and 1864: — Morrill tariff, March, 1861 Tariff of July 14, 1862 Tariff of June 30, 1864 Pig iron ... .... Iron rods Steel in ingots valued less than 7 cents per lb Salt ... Silks Wool, valued 18 to 24 cents Wper pound bol, valued 24 to 32 cents per lb. . Woollen manufactures not otherwise specified .... $6 per ton ^20 per ton li cents per lb. 4 cents per bush. 30 per cent. 3 cents per lb. 9 cents per lb. 12 cents per lb. and 25 per cent $6 per ton $25 per ton 1} cents per lb. 18 cents per cwt. 40 per cent. 3 cents per lb. 9 cents per lb. 18 cents per lb. and 30 per cent. $Q per ton i^ cents per lb. 2^ cents per lb. iScentspercwt. 50 per cent 6 cents per lb. ID cents per lb. and xo per cent. 24 cents per lb. and 40 per cent- The willingness if not indeed the open zeal of the people for taxation continued noteworthy. A foreign minister re- marked to Seward that he was learning something new about the strength of popular government. " I was not surprised," he said, " to see your young men rushing enthusiastically to fight for their flag. I have seen that in other countries. But I have never before seen a country where the people were clamorous for taxation." David A, Wells, a careful observer of financial and industrial affairs during the war, has well said that such was the fervor of patriotism and determination to push the war to a successful issue that the people rejoiced in taxation : " The country was rich, and its accumulated re- sources had not for nearly two generations been in any degree drawn upon by the national government for extraordinary taxation." The revenue receipts in the latter months of the war were almost beyond belief. In the fiscal year 1865-1866 the tax receipts were nearly ^5 00,000,000, as much as in the eight years preceding the war ; nor was there any serious §129] Income Tax. 305 attempt to evade taxation. This acquiescence in the revenue policy of the nation was partly due to the material prosperity of those portions of the country which escaped the immediate ravages of war. Prices were rising rapidly, and this with the enormous demand fpr agricultural and manufactured products for the army gave for the time being an unexampled stimulus to the farmer and manufacturer. 129. Income Tas. A convincing illustration of the willingness of the people to submit to revenue exactions was seen in the cordial acceptance of the income tax. In times of peace this duty, novel to the federal budget, would have met with instant condemnation; but under the circumstances its imposition and payment was held to be a patriotic duty. The first tax on incomes was authorized August 5, 186 1, at a rate of 3 per cent, on the excess of all incomes above ^800 per annum. This was in- creased in 1862, and again in 1865, until incomes between $600 and ^5000 were taxed at 5 per cent., and above ^5000 at 10 per cent. As the immediate war necessities became less pressing, the limit of exemption was advanced to ^1000, and in 1867 to ^2000; in 1872 the tax was abolished. The number of persons assessed with the total amounts received from this form of duty throughout the period of its imposition was as follows : — Number of Amount persons collected 1863 $2,741,000 1864 20,294,000 1865 32,050,000 1866 460,170 72,982,000 IS67 266,135 66,014,000 1868 254,617 4',4S5,°oo 1869 272,843 34,791,000 1870 276,661 37,775,000 I87I 74,775 19,162,000 .872 72.949 14,436,000 1873 5,062,000 3o6 Loans, Taxation, Banking. [§ 130 This clearly shows that the tax as a whole was very pro- ductive, amounting during the entire period to ^347,000,000. Owing to delays in establishing the system, its assistance was not so powerfully felt during the years of actual warfare ; but in the subsequent reorganization of the finances this revenue was of great help. 130. Loan Act of February, 1862. As has been indicated, the loan operations of 1861 were temporary, with the exception of ;?5 0,000,000 in twenty-year 6 per cent, bonds; but in February, 1862, along with the legal-tender notes, provision also was made for a large 6 per cent, loan, popularly known as the five-twenty bond issue. From this time on loans followed each other with great rapid- ity, and with a perplexing variation in terms and conditions, which embarrasses an orderly presentation of the government financiering. And when to loans are added the issue of treasury notes and certificates of deposit the disorder becomes still more bewildering. The subject is rendered clearer by noting that the various forms of indebtedness may be grouped under four general classes as follows : — Rate of mterest Length ot loan A. Long-term bonds : 1. Loansof July and August, 186 2. Five-twenties of 1862 3. Loan of 1863 .... 4. Ten-forties of 1864 . . . 5. Five-twenties of June, 1864 6. Navy pension fund . . . B. Short-term loans : 7. Treasury notes of 1861 . . 8. Seven-thirties of i86r 9. One-year notes of 1863 . 10. Two-year notes of 1863 . . 11. Compound-interest notes . 12. Seven-thirties of 1864 and 186 C. Non-interest notes : 13. Old demand notes .... 14. Legal-tender notes . . 15. Fractional currency . . . D. Temporary indebtedness: 16. Tem|iorary loans .... 17. Certificates of indebtedness 6 6 6 5 6 3 6 r 6 compound None 4, 5.6 6 20 years 5-20 years 17 years 10-40 years 5-20 years Indefinite (60 days I a years 3 years 1 year 2 years 3 years 3 years Indefinite II I year § 130] Loan Act of February, 1862. 307 Issues and redemptions and conversions of some of the short-term forms of indebtedness were going on at the same time. In order to measure the growth of the annual indebt- edness the redemptions must be subtracted from the issues for each year. This is done in the table on page 308, derived from data published in " Bayley's Report." The loan act of February 25, 1862, authorized the issue of ;j!S 00,000,000 of bonds redeemable after five and payable twenty years from date, bearing 6 per cent, interest. The bonds could be sold "at the market value " for either coin or treasury notes. This act proved to be of little immediate assistance, for previous to December, 1862, only ^23,750,000 of the issue were sold. The reasons for the failure are not far to seek. Chase interpreted market value as at least equiva- lent to par value, and would not sell bonds below par ; ac- cording to the treasury department these conditions made the negotiations of the bonds on a large scale practically impos- sible, for it was reasoned that no one vi'ould buy any consider- able amount except with the idea of selling again at a profit ; and, as bonds would not go above par because of the free convertibility of treasury notes into these securities at that rate, there was practically no reason for speculative purchases on the part of buyers. Chase was sharply criticised for his peculiar construction of the term " market value," which other financiers consider to mean not par value, nor value at a specified time or place, but the " going " price. The criticism is justified ; the market value was the price the securities would bring when offered in the market; and the treasury could have sold a large amount of bonds at any time if it had placed them in the market, and sold them for what they would bring. Other reasons assigned for the slovir sale of the bonds were the lack of currency, the high profits of commercial undertakings, the low rate of interest, and the indefinite time of payment, the bonds being neither for a long nor a short term. Again, the earlier issue of seven- thirty notes of 1 86 1 bore a more favorable rate of interest to f \0 3SU3J3ap ION \D *D inooo 3SB9JDm 30^ s IpU^I °^J||||-p||?| t^ p3UI33p3^ 1^ ^njpi^ i^l^ii it f panssj ° iPi^^i ipiefipiiii % 00 13N NO -n-ino ■♦►; ooffl ^ , coco ■4- " * MO ro M - * CO 3SE3JDUI J3N to CO pBuiaaps-^ vD *0 -a-ir^qin^^co-f-Miococo — M coco^f-«'-^i-I*doO'i'fo — « CI •- — Ci panssi \OmN\Ol^O^ MM* «*0001J-0* i CO J3M O <> ts. 0\ M O - M • N GO ^ M Ct 35E3J3tlI 13N * lilA I ili 1 %^l ^ to pauiaapa^ o q c.^.-or,.oc-o^o>p--r w - C - ■iS "^-"B, S £>£ a V psnssj mi I ii i « inui 2 S I astajDap 13M ^ ^ 1 asESjaui laX ' ^ i ^ ^ l^lMi pauiaapa^ " - ^-:^ -:i jf OO panssj 1 • 1 ? ^ pnil 10 1 sO OO 3SEaj3ap ;aN -n asBajout 13N ° n ^ i iUiin to pauiaapa^ ni a - - panssj ' n 11^ iHiiif CO 1 3 Oregon war debt Loan of iS-}2 . . Texan indemnity . . Loan of July and Au- gust, i86i . . . Five-twenties of 1862 . Loan of 1863 . . . Ten-forties of 1864. . Five-twenties of June, 1864 Navy pension fund , Total . Treasury notes of 1857 Seven-thirties '* rS6r One-year notes " 1863 Two-year " *' 1863 Com pou nd-interest notes . . Seven-thirties, iS64-'35 Total . . Old-demand notes . . Legal-tender notes Fractional currency . Total .... Temporary loans Certificates of indebt- edness Total .... 1 § i3i] Temporary Indebtedness. 309 investors, and so long as this was on the market it handicapped the new 6 per cent. loan. 131. Temporary Indebtedness. The fiscal year 1862-1863 covers the darkest period of finan- cial credit. The army suffered unexpected reverses during the summer of 1862 ; the proceeds of taxation were not large, bonds did not sell, and to tide over difficulties Chase had recourse to more novel forms of indebtedness, each of which constituted a slight measure of relief. Temporary loans were secured, for which certificates of deposit bearing 5 per cent, interest were granted ; and the offers of such loans proved so large that the first limit of ^25,000,000 imposed by the act of February 25, 1862, was on March 17 extended to ;?5 0,000,000, on July 11 to ^100,000,000, and finally, June 30, 1864, to 1150,000,000. These certificates were in special demand by banks, being used in settling clearing-house balances; ^50,000,000 of the legal-tender notes, authorized July II, 1862, were set apart as a reserve for the reimburse- ment of these certificates. Another measure to meet temporary needs was the act of March i, 1862, authorizing the issue of certificates of indebt- edness to such public creditors as were willing to receive them in exchange for audited accounts. These certificates were payable in one year (or earlier at the option of the govern- ment), bore interest at 6 per cent, and were issued in sums not less than |>i 000 in amount; they entered into the currency until enough interest accumulated to make it an object to capitalists to hold them as an investment. During the year 1862, on account of the premium on the precious metals, silver coins, including the small change, went out of circulation, greatly to the embarrassment of retail trade. Recourse was had to notes and tokens of municipal corpora- tions and mercantile houses; and the Congress, July 17, 1862, authorized the use of postage and other stamps. This incon- venient medium was in turn replaced, March 3, 1863, by small 3IO Loans, Taxation, Banking. [§'32 notes known as fractional currency, in denominations running as low as three cents; eventually I5 0,000,000 of this non- interest currency was authorized : at the time of issue it was an effective addition to the resources of the treasury. 132. Loan Act of March 3, 1863. When Congress met in December, 1862, it was confronted by a deficit of ^276,900,000. Especially serious were the unpaid requisitions amounting to ^46,400,000. It was at this hour of depression that Congress, January 17, 1863, ordered the third issue of United States notes; this was followed by invigorating measures, as the national currency act of February 25 and a new loan act of March 3. The latter measure gave opportunity for a great variety of credit opera- tions ; it provided for the issue of one-year, two-year, and compound-interest notes, and for the sale of 6 per cent. bonds payable in not less than ten nor more than forty years. Although ^900,000,000 of this latter issue were authorized but ^75,000,000 were sold, since new and successful efforts were made to dispose of the five-twenties authorized the year previous. Chase attributed the successful turn in bond-selling to the removal of the restrictions upon the negotiation of bonds prescribed in the act of February 25, 1862. The section providing for sale of bonds at " market value," which Chase interpreted as par value, was repealed ; and, as has been stated, the opportunity to convert United States notes into bonds was limited to July i. It is probable that the depreciation of the convertible greenback had much to do with stimulating bond sales ; for when gold was at a high pre- mium the true interest earned by a gold-bearing security doubled and sometimes trebled the nominal rate written in the bond. Chase, indeed, has been accused of endeavoring to inflate the currency in order to hasten conversion. His own words on a later occasion were : " The bonds do not seem to be readily taken as yet by the people. It required §132] Loan Act of March 3, 1863. 311 the printing and paying out of ^400,000,000 of greenbacks be- fore the five-twenty 6 per cent, bonds could be floated easily at par, and it will probably require the circulating paper issues of the government, now amounting to about ^625,000,000, to be increased to ^650,000,000 or ;?7oo,ooo,ooo before the people will be induced to take 5 per cent, bonds in order to get rid of the surplus circulation that may accumulate in their hands, that cannot be more profitably invested in other modes." The real reasons for success in selling bonds at this crisis was the passage of the national banking act in February, 1863, the adoption of a different method of selling bonds direct to the people, and the increasing confidence in victory by the army. In selling these bonds the systematic attempt of agents to make a wide distribution gave gratifying evidence of the feasibility of a popular loan. An experienced banker, Jay Cooke, was employed as general agent, receiving a com- mission of three-eighths of one per cent, on all sales (one-half of one per cent, on the first ^10,000,000). He in turn en- gaged twenty-five hundred sub-agents in a large number of towns and cities, and made every effort to present the attrac- tions of bond investment. A pamphlet was published by this active broker, who styled himself " General Subscription Agent of the Government Loan," in which a national debt is por- trayed as a national blessing : the country was told that the generation fighting the war should not be called upon to pay for it, but should rely upon borrowing. The popular interest thus excited operated very powerfully in enlarging the subscriptions and as a result of this energetic campaign Chase was able to report, in December, 1863, the sale of nearly ;Jl400,ooo,ooo of five-twenty bonds. This plan of selling bonds through a system of agencies outside of the immediate control of the government met with bitter criticism on the ground that it afforded opportunities to speculators and syn- dicates, and was abandoned by Chase in the negotiation of the next loan. 312 Loans, Taxation, Banking. [§ '34 133. Short-Time Notes. The loan act of March, 1863, also provided for the issue of short-time notes bearing 5 per cent, interest; they were legal tender for face value and convertible, principal and in- terest, into United States notes ; it was not, however, intended that they should circulate as currency, but be held by investors. In the fiscal year 1 863-1 864, one-year notes of this character were sold through the associated banks of New York, Phila- delphia, and Boston, aggregating ;?44,5 20,000 ; and two-year notes to the amount of 1166,480,000. Experience soon proved that these notes had undesirable qualities. At the request of the banks, coupons were attached to the notes, with the troublesome limitation that they should not be cut off except by an officer of the government. This condition naturally made the notes unsuitable for popular investment, but they were largely taken by banks for reserve purposes ; these in turn set free their own paper currency, and in pro- portion increased the evils of an inflated monetary medium. When the interest became due the coupons were cut and the banks sent the notes once more into circulation. " It was evident," says Mr. Chase, " that the periodical payments of interest would periodically make the notes simple legal tender, and so increase from time to time the volume of currency and expose the government and the business com- munity to the evil of recurring inflation and contraction." Consequently, when a temporary loan had to be negotiated in the succeeding year, preference was given to the com- pound-interest treasury notes at a higher rate of interest. 134. Financial Situation in 1864. When Chase made his third annual report to Congress in December, 1863, the finances were in a more favorable con- dition : the national banking act had been passed ; taxation began to be productive ; the successes of the Union armies at Gettysburg and Vicksburg in July, 1863, increased confidence; §134] Financial Situation in 1864. 313 the premium on gold went down to 23^; and there was a rapid subscription for the five-twenty bonds. The receipts, as stated in the report, during the fiscal year 1862-1863, were Ji 24,443,000 from ordinary sources, and the enormous sum of ^590,266,000 from loans; and the expenditures were $714,709,000. The debt, July i, 1863, was ;J!i, 098,793,000, of which more than one-half had accumulated in the year then ending. Although the customs produced all that had been hoped for, $69,000,000, the internal revenue taxes (as already stated) proved a disappointment. Little change, how- ever, was proposed in the sources of revenue ; to meet the estimate of $755,000,000 for total expenditures in 1863- 1864, Chase relied on ordinary receipts of $161,500,000, and further loans of $594,000,000 ; some additional increase of internal revenue duties was recommended, so that the yield from this source might be at least $150,000,000. In compliance with a request of the secretary that he be given still greater freedom in negotiating loans. Congress, by a new loan act of March 3, 1864, provided for an issue of $200,000,000 of bonds bearing interest at not over 6 per cent, and redeemable at a period between five and forty years at the pleasure of the government. The government placed the minimum period of redemption at ten years, thus giving to the loan the popular name of ten-forties. For reasons not clearly apparent. Chase determined to lower the rate of interest on this loan from 6 to 5 per cent. The result was disastrous, for the market quotations of government bonds at the time were not so high as to jus- tify expectation that the public would absorb a large amount at a lower rate of interest. Bond-buying nearly ceased. The total amount sold under the act of March 3, 1864, up to the end of the fiscal year, June 30, 1864, was only $73,337,000; and at the same time the expense of the war was increasing. The treasury was once more forced to fall back upon short loans including one-year and two-year notes, compound- 314 Loans, Taxation, Banking. [§ '35 interest notes, and certificates of indebtedness. The inge- nuity of Secretary Chase in devising short-term loans, under the discretionary powers of the acts of 1863 and 1864, is well illustrated in the three-year compound-interest notes, with a minimum denomination of $io, which were legal tender for their face value; at maturity each ^loo note was worth ^119.40. As the rate of interest was high, — 6 per cent, compound, — and as like other treasury notes they were exempt from taxation, they were sought by investors. At first the right to issue compound-interest notes was but sparingly exercised ; and it has been asserted that the treasury erred in not putting out a much larger volume of this currency in small denominations, as low everi as ?io. The critic however must recognize that the small denominations would have gone into general circulation to reinforce the greenback circulation, which was especially responsible for the premium on gold. On the other hand the notes of denominations of ^50 and upwards were absorbed by banks for reserve, where they displaced and drove into circulation greenbacks bearing no interest, thus increasing the currency inflation. 135. Administration of Secretary Fessenden. On June 29, 1864, Chase resigned his secretaryship. He had been irritated over appointments to important positions in the treasury ; he was also influenced in some degree by the dis- couraging aspect of the finances caused by the decline in bond sales ; he was possibly embarrassed by the unexpected conse- quences of the passage of the Gold Bill of June 17, which has been previously described ; and probably he expected to be recalled. Much against his will, Senator Fessenden of Maine was appointed successor to Mr. Chase. As chairman of the finance committee of the Senate he had taken a leading part in framing measures relating to revenue and appropriations. An Eastern lawyer, he did not carry into office a hostile sus- picion of the banking interest; and, although he had been originally an opponent of the legal-tender bill, he afterwards § i3S] Secretary Fessenden. 315 admitted that there was under the circumstances no other resource than government paper. The financial situation confronting Fessenden was one of embarrassment, particularly to a conservative financier. The cash balance in the treasury on July i, 1864, was only ^18,842,000; the customs duties for 1864-1865, estimated at i?7o,27i,ooo, would not long pay the interest on the public debt, then estimated at ^91,800,000; $161,796,000 of cer- tificates of indebtedness were outstanding, for the payment of which there was a continuous pressure ; a considerable por- tion, $110,000,000, of the seven-thirties of 1861 fell due in August and October ; there were unpaid requisitions amount- ing to $71,814,000 ; pay to the soldiers was in arrears; and an immediate increase in the army had been ordered, which would further increase the daily expenses of the war from $2,250,000 to $3,000,000. Fessenden continued in office only until March 3, 1865 ; but during this brief period he displayed courage and vigor. Although opposed to further short loans or note issues which tended to swell the paper currency, he found that the banks were not willing to take long loans on terms acceptable to the treasury. He consequently issued proposals for a great national loan under the act of June 30, 1864, authorizing $200,000,000 in the form of notes payable in three years with interest at 7.3 per cent., and for this purpose he employed once more the services of Jay Cooke and his sub- agencies. In the latter half of 1864 $ir 0,800,000 of the seven-thirties were sold, and in 1865 $718,000,000, — the amount originally authorized being increased $600,000,000 by the act of March 3, 1865. Of the very first issue $20,000,000 went to the " gallant soldiers, who not only re- ceived them with alacrity but expressed their satisfaction at being able to aid their country by loaning money to the gov- ernment." These temporary loans not only bore an excep- tional rate of interest, but carried the valuable privilege of conversion into five-twenty 6 per cent, bonds. As for long- 3i6 Loans, Taxation, Banking. [§ 136 term loans, Fessenden took no chances ; in place of the 5 per cents, which Chase attempted to market he returned to the 6 per cent, five-twenty and ten-forty bonds. Fessenden undertook the retirement of .the 5 per cent, coupon treasury notes which had proved so troublesome be- cause alternately withdrawn and rushed into circulation, and he substituted 6 per cent, compound-interest notes, the popu- larity of which had been tested by Chase, and which were absorbed in large amounts. By these issues and conversions, as well as by the more determined military policy of 1864, the confidence of investors was strengthened. 136. Summary of Loans. The loans of the Civil War period were summarized on page 306 under four general headings : long-term loans, interest-bearing notes, non-interest-bearing notes, and tem- porary loans. The use made of these several varieties during the successive years of the war is compared in the following table, which gives the net annual increase and decrease for each group in millions of dollars : — Kind of loan 1861-1862 1 862- 1 863 1863-1864 1864-1865 1861-1865 A. Long-term loans . . . B. Interest-bearing notes C. Non-interest-bearing notes D. Temporary loans 648 106.4 158.6 107.8 172.4 15.1 253.2 154.8 466.6 209.3 43-6 24.0* 340.8 SS9.0 2-7 30.9' 1044.6 890.3 458.1 207.7 Total 437-6 595-5 6g6.o 871.6 1600.7 1 Decrease. At first reliance was placed on the short-term loan, a policy which introduced a distinct element of weakness. The pro- portions of long-term and short-term indebtedness by years were as follows : — §«37] Loan Policy of Chase. 317 Long term Short term 1861-1862 1862-1863 I863-I864 1864-1865 15 per cent. 29 " " 67 " " 39 " " 85 per cent. 71 " " 33 " " 61 " " 1862-1865 40 " " 60 " " Instead of incurring liabilities which would run for ten, twenty, thirty, or even forty years' time, the country was flooded, especially in the earlier years of the war, with short-tin:ie paper, which served in many instances the purposes of cur- rency, expanded prices, and increased the speculation and extravagance always incident to war. Temporary obligations falling due in the midst of civil conflict were a source of double vexation to the treasury department, which was obliged to conduct a series of refunding operations, and at the same time to go into the money market to borrow ever- increasing sums for a war which apparently would never end. 137. Loan Policy of Chase. In his policy for the negotiation of loans. Chase kept four objects steadily in view: (i) moderate interest; (2) general distribution; (3) future controllability; (4) incidental utility. Each may conveniently be discussed in turn. (i) Moderate interest. Chase felt much satisfaction in the continuous decrease in the rate of interest. The first loans were negotiated at 7.30 per cent. ; the next at 7 ; then at 6 ; and finally 5 per cent, was offered ; while the in- debtedness represented by United States notes and fractional currency bore no interest. To carry out the policy of low interest, and to stand by an unwillingness to sell bonds below par. Chase refused to borrow" except on his own arbi- trary terms. While unable, or perhaps unwilling, to establish a productive tax system at short notice, the treasury placed 31 8 Loans, Taxation, Banking. [§'37 bars across its own path, and left te itself no other recourse than the issue of treasury notes and short-term loans. The prejudice against the sale of bonds by the government on terms fixed by the commercial conditions of the money market early manifested itself in the financial history of the United States and has been referred to in a previous chapter. It rests on the same basis as the persistent political agitation against banks from the beginning of our government, and the deep- seated belief that there can be no harmony of interests between the public and the money lenders and brokers. Congressional debates during the Civil War furnish plenty of illustrations of this antagonism ; banks were " sharps " and "harpies"; "out of the blood of their sinking country" banks are enabled to coin the gains of their infamy ; brokers and jobbers and money changers are pitted over against the people of the United States. How far responsibility for insist- ence on a low rate of interest is to be distributed between Secretary Chase and other party leaders it is difficult to deter- mine. Chase, however, did not hesitate to take great credit for this element of war financiering. A signal blunder was made in substituting a 5 per cent, for a 6 per cent. bond. The actual results on the national credit were not anticipated ; so long as the legal-tender notes were convertible into 6 per cent, bonds, in spite of military reverses and national discouragement, the premium on gold was kept within comparatively narrow limits. With the issue of the new bonds at a low rate of interest the subscriptions fell off by one-half; but more than that, as pointed out by Amasa Walker, " by issuing the new bonds at 5 per cent, instead of 6 the secretary virtually depreciated his own cur- rency by the difference, because it required ?i.20 in green- backs to purchase an equal income or interest on 5 per cent, which $1.00 would purchase on bonds bearing interest at 6. Consequently the price of gold was raised 20 per cent., and of course the prices of all the government must purchase to carry on the war." It was this error which gave new encouragement §137] Loan Policy of Chase. 319 to the secretary to issue more short-time notes, legal tender for their face value, in order to induce purchase of 5 per cent, bonds, and this in turn of course occasioned a further rise in the premium on gold. (2) General distribution. A second object of Chase was the "general distribution" of the bonds : he wished the obli^ gallons of the government to be held far and wide, and pointed with satisfaction to the results of the popular subscrip- tions for bonds through the agency established by Jay Cooke in 1863-1864; in a single district in Ohio there were six thousand bondholders. Although he abandoned this method in the sale of the ten-forties because of the calumnies to which he was subjected, he " had determined to return to it and dis- regard slander and slanderers." When Fessenden undertook his great loaning operation he re-engaged Cooke and his agents, as he believed with great advantage. The method of appeal to the public for subscriptions instead of bargaining with the banks met on the whole with popular approval, and was again in accord with the underlying hostility to the large moneyed interests of the great cities. (3) Future controllability. Chase was strongly opposed to long loans ; it was his leading purpose, he says, to intro- duce into the financial methods of the treasury the principle of controllability. " He could never consent that the people should be subjected to the money-lenders, but insisted that the money-lenders should rather be subjected to the people." ^ It was with reluctance that at the outbreak of the war he acquiesced in the apparent necessity of negotiating twenty- year bonds ; and in the issue of five-twenties and ten-forties, and the development of a system of temporary loans as the one-year and two-year treasury notes, certificates of indebtedness payable in one year, and certificates of deposit, lie soon developed a policy more in harmony with his own convictions. In this way Chase was convinced that when peace was established the government would be able to 1 Schucker's Life of Chase, p. 408. 320 Loans, Taxation, Banking. [§ 138 fund the debt at a moderate rate of interest and to provide for payment at such periods as then seemed most advantageous. Within limits this policy has merit, but a reservation to the government of the right to extinguish bonds after five years must be paid for by the sale of bonds to investors at a lower price. This sort of time limitation also gave the impression to foreigners who were unacquainted with novel restrictions of this kind that "the funded debt was of a vague and dubious character." It has been suggested that the short-term notes were in reality exchequer notes, and that in their issue the treasury department followed respectable precedents, as for example that of the British government. Our policy differed from that of Great Britain, however, in two respects : no earnest and persistent effort was made to limit the floating indebtedness by attracting its conversion into long-term bonds ; and a large part of the treasury notes were made a legal tender. (4) Incidental utility. In order to secure indirect advan- tages to business. Chase advocated the receipt of temporary loans in the form of deposits, reimbursable by the treasurer after a few days' notice, so that any stringency of the market might be alleviated. The advantage of this was seen in 1864, when during a pressure for current funds the treasury depart- ment quickly paid out over J5 0,000,000 of these deposits. Chase found advantage also in the wide diffusion of the debt, by which national unity and strength were secured ; and finally he discovered " national good growing from the bitterness of debt " in the new basis of a national banking currency. 138. Arguments in Favor of a NationEil Banking System. Chase's first recommendation of a national banking system in 1 86 1 has been noted; though not then acted upon the idea was not allowed to disappear. Chase had long been con- vinced of the evils of paper currency issued by local institu- tions; in his maugural address as governor of Ohio in 1856 he not only announced that it was constitutional for Congress § 138] National Banking System. 321 to prohibit local bank circulation, but he spoke favorably of free issues based upon ample securities. In 1862 when Chase again brought forward the plan, and- made a more detailed study of the factors involved, the project met with greater public favor. The charter of banks resting upon national authority, and not upon a State, appealed to the growing feeling of nationalism in all departments of political action ; it appealed also to those who were jealous of the power of private cor- porations ; it appealed to those who wished to relieve the government from distressing bargains, and who hoped the government would thus gain the ascendancy in the control of capital ; and finally it appealed to those who feared that further issues of United States notes would ultimately ruin both the government and private credit. Indeed, the national banking plan now found favor with many State banks and private bankers who had previously denounced any such scheme. From the beginning of the public discussion to the thorough- going Bank Act of 1864 the arguments for the substitution of a national banking currency in place of notes issued by the State banks cover a wide range and furnish a useful pictura of State banking in its later development. First there was the argument tha t a national system would furnish an u niform / circulation. On January i, 1862, there were in the United ' ^ States 1496 banks that issued circulating notes, possessing an aggregate capital of ^420,000,000 and carrying a circulation of ^184,000,000. "They were established under the laws of twenty-nine different States ; they were granted different privileges, subjected to different restrictions, and their circula- tion was based on a great variety of securities, of different qualities and quantities. In some States the bill-holder was secured by the daily redemption of notes in the principal city ; in others by the pledge of State stocks; and in others by coin reserves. There were State banks with branches, inde- pendent banks, free banks, banks organized under a general law, and banks with special charters." In New York there 322 Loans, Taxation, Banking. [§138 were banks incorporated by special act, individual banks, and banks organized under the free banking law; in Louisiana there were chartered banks and free banks ; in Ohio, inde- pendent banks, free banks, and a State bank with numerous branches ; in Indiana a State bank with branches, and free banks; in Massachusetts, banks under special charters, and banks organized under a general law. In some States there were boards of bank commissioners who made frequent and thorough examinations, while in others no such boards existed or existed only in name ; in a few States the public was in- formed as to the condition of the banks by the publication of periodical statements, but as a rule publicity was not insisted upon. In November, 1862, the circulation in the loyal States was ;? 1 67,000,000. In only nine of the States did the law require the circulation to be secured by State bonds, and the State securities pledged for the notes were only ^40,000,000, leaving over ^120,000,000 provided for by other assets, sometimes by none. All told, about 7000 different kinds of notes circulated, to say nothing of successful counterfeits. Over 3000 varieties -of altered notes were afloat, 1700 varieties of spurious notes, and over 800 varieties of imitations, making more than 5500 varieties of fraudulent notes; and "the dead weight of all the losses occasioned by them fell at last upon the people who were not expert in such matters." In 1862 only 253 banks issued notes which had not been altered or imitated. The desire for a national currency to put an end to these irregularities was probably stronger than any other considera- tion for arousing the popular interest in the establishment of a national banking system. It was this feeling which led to a reluctant acquiescence in the exemption of the capital, circu- lation, and deposits of national banks from taxation. It was the day of sacrifices ; public good demanded the giving up of State banks as agents of currency and as a source of local taxation ; it was held right that the national currency should § 138] National Banking System. 323 be accorded privileges equal to those of the national bonded securities. On the other hand the danger of monopoly was recognized, and many wished to reserve the right of taxation to States and towns, so that the system might be destroyed, if necessary, after the crisis was over. If the country had been at peace it is doubtful indeed if the measure could have been passed. A second argument against the State banks was found in the redundancy of the circulation,, particularly after the issue of United States notes in 1862 ; and the blame for the general disorder of the currency was laid by many upon the bank-note circulation rather than upon the government notes. It was on this ground that Secretary Chase made a special arraignment of the banks in his report of December, 1862. While not believing that the volume of currency of the country was greatly in excess of legitimate demands, he admitted some redundancy and consequent depreciation, and attributed it to the banks. The increase in the circulation of State bank-notes in the Union 'States, in one year, 1862, from ^130,000,000 to ^167,000,000 was in his opinion due to no public neces- sity; and he held that the banks ought not to have been allowed to expand their issues during the suspension of specie payments. Bankers, he complained, did not even suggest a practical limit to the increase of circulation, and in this respect they showed a marked difference in policy from the government, which restricted the issue of treasury notes, made its bills convertible into United States bonds, and re- quired that the interest on the bonds should be payable in coin. This criticism made by Chase was admitted by many ex- perts. In October, 1862, the Bankers' Magazine expressed a fear that the banking movement of that year had been unwise. There had been an " unfortunate rush for profit through the enlarged volume of circulation and loans, an in- flation more rapid than ever occurred before in this country." Circulation had increased in New Hampshire 27 per cent. ; in (r- 324 Loans, Taxation, Banking. [§ 138 Philadelphia 138 per cent. ; in Providence 86 per cent. ; in six months the bank circulation of New York City had increased 69 per cent. ; in Massachusetts 20 per cent. ; in Baltimore 32 per cent. ; in Newark, N. J., 42 per cent. ; and in the interior of New York nearly 1 1 per cent. By others the banks were accused of absorbing the government notes as fast as they were issued and of putting out their own notes in substitution, and then at their convenience converting the notes into bonds on which they enjoyed interest. " It is a struggle on the part of the banking institutions of the country to bleed the gov- ernment of the United States to the tune of 6 per cent, on every dollar which it is necessary for the government to use in carrying on this struggle for our independence and our life." A third defect in the State banks was found in their unequal distribution . At that time the relation of credit institutions to accumulated capital and volume of enterprise was but vaguely apprehended, if indeed it was recognized at all. In New England the circulation of the banks was about §5 0,000,000, while in Ohio, with three-quarters as large a population, it was but ^9,000,000. Such sectional inequality was held by many to be dangerous and undemocratic. State bank issues had also been characterized by violen t contractions and expansions of the currency ; this has already Deen referred to in previous chapters, but its renewed impor- tance at this time justifies a brief review in illustration : in three years ending with 1818 the currency had been re- duced from ^110,000,000 to ^45,000,000; in 1834 there was ^95,000,000 in circulation; in 1837 the volume had risen to ;^ 1 49,000,000, and before the end of the year it fell to $116,000,000. In 1841 there was §107,000,000; at the end of 1842, only $59,000,000. In 1857 it had reached $215,000,000, its highest point of inflation before the war; and on the first of January, 1858, it had sunk to §155,000,000. This periodic inflation and witlidrawal of currency was gen- erally regarded as an evil; there was little appreciation of the §138] National Bankijig System. 325 excellent commercial functions of elastic bank-note issues for satisfying the needs of exchange as they fluctuate from day to day. Again, the issue of notes by local banks was regarded as incompatible with the advantages to be derived by the gov- ernment from the issue of treasury notes. At the outset the State banks had attempted to discredit the demand notes ; and after the suspension of specie payments they used the legal-tender notes to redeem their own circulation, selling at a premium the gold which they otherwise would have been obliged to hold for this purpose. This gave the banks a freer opportunity to expand their own currency, and indirectly served to diminish the demand for the treasury notes of the government. Of less importance was the conviction not yet extinct that State banks could not constitutionally issue paper money ; if objection was made that banks chartered by federal authority would have no more constitutional basis, an in- genious reply was made that national banks do not "issue" notes, but only use such as are furnished them in such quantities and under such restrictions as are prescribed by Congress. In addition to these evils of the currency a potent reason for the establishment of the national banking system was the 5up]3prt to be _aifoiLded_io. public credit and national union. Chase thought that at least 1250,000,000 of bonds would be required for deposit as security for circulation, — a constant demand which would secure steadiness in the price of the bonds. National institutions would also be convenient for the deposit of public moneys, since the government would possess an ultimate control over these funds, which was not possible in State institutions ; and particularly would this be the case in the deposit of receipts accruing under the internal revenue act- In referring to the law which permitted the payment of in- ternal revenue duties in legal-tender paper of the government, Blaine writes that no provision "could have operated so powerfully for a system of national banks. The people were 326 Loans, Taxation, Banking. [§ 139 subjected to annoyance and often to expense in exchanging the notes of their local banks for the government medium. The tax collectors could not intrust the funds in their hands to State banks except at their own risk. The fact that the bills of State banks were not receivable for taxes tended constantly to bring them into disrepute. The system of internal taxes now reached the interior and the people were made daily witnesses to the fact that the government would not trust a dollar of its money in the vaults of a State bank.'" Of importance in the development of public conviction in favor of a national system was the plea that the commercial interests of existing institutions might be reconciled with those of the whole people ; that a national system was " recom- mended by the firm anchorage it will supply to the union of the States." Indeed a few advocates extravagantly declared that if the system had existed in i860 secession would have been impossible. _, 139. National Banking Act of 1863. The act to provide a national currency secured by a pledge of United States stocks and to provide for the circulation and redemption thereof was approved February 25, 1863. The system provided that a banking association upon depositing bonds with the treasurer of the United States could receive circulating notes to the amount of 90 per cent, of the current market value of the bonds deposited (not exceeding, however, 90 per cent, of the par value). The amount of notes to be issued was originally limited to ;?300, 000,000, to be apportioned to banks in the different States according to population and existing banking conditions and necessities. The notes were receivable for all government dues except duties on imports, and were payable by the government except for its indebtedness and for interest on its bonds ; otherwise the notes were legal ' Blaine, T\i'itity Ytars, i, 473. § 139] National Banking Act of 186.3. 327 tender only between the national banks. Each bank was required to redeem its circulation at its own counter. The system was to be supervised by a bureau of currency in the treasury department. After the passage of the first act (1863) the system de- veloped but slowly. The banks organized were for the most part in the Western States of Oliio, Indiana, and Illinois, due to the greater need of circulation in that section. On Octo- ber I, 1863, 66 banks had deposited less than ^4,000,000 of United States bonds; a year later there were 584 with a circulation of ^65,000,000. As the original banking act was defective in many particulars it was largely recast by the law of June 3, 1864. Provision was then made for redemption of circulation of all banks at agencies in certain principal cities ; the amount of capital necessary for establishing a bank was in- creased, together with stricter provisions in regard to the pay- ing in of capital ; more convenient provision was made for the conversion of the State banks into national associations ; and the banking business was given a status somewhat more inde- pendent of the treasury department than at first designed ; of special importance was the modification of the independent treasury act in giving the secretary of the treasury power to select banks to be depositories of public money, except re- ceipts from customs, on deposit of United States bonds as security. Provision was also made for taxing the national banks by the federal government, for in the few months which had already elapsed since the introduction of the sys- tem there had risen a clamor that the banks were evading taxation altogether, inasmuch as there was some question vvhether States under the decision oi Maryland v. McCuUoch (1819) would have the right to tax. Consequently in the act of 1864 -Congress placed federal taxes upon the capital, de- posits, and circulation of banks, and gave authority to States to tax the shares of banks. The advantage of a currency uniform throughout the country speedily converted many who at first disapproved of the na- 328 Loans, Taxation, Banking. [§ 139 tional banking system. Among these was Fessenden, who frankly acknowledged his change of mind and declared that the plan was based upon sound principles, and that its full benefit could not be realized "as long as any system at war with the great objects sought to be attained continued to exist unchecked and uncontrolled " ; he consequently recommended in December, 1864, that discriminating legislation be enacted at the earliest possible moment to induce the withdrawal of all local circulation. Congress agreed, and in the act of March 3, 1865, ordered the taxation of State bank issues 10 per cent, annually, beginning with July i, 1866. This forced local notes into retirement. The founding a banking currency upon national government securities had many advantages ; first of all, it not only cre- ated a special demand for bonds, but enlisted a strong and active financial interest in the general welfare of the govern- ment's credit. In the second place, by driving State bank issues out of existence through heavy taxation, it tended to create a demand for United States legal tenders and other treasury issues for meeting the ordinary operations of trade and exchange. Lastly, the assistance of the national banks in floating the loans of the government was of the greatest importance, A more remote effect of this legislation was its influence in shaping both popular discussions and congres- sional action upon government paper currency as a rival system to bank paper. The full measure of these results, however, was not felt while the war was actually in progress. The banks which were chartered during this period had already, as State institutions, invested their funds largely in government bonds, being attracted by the high rate of interest as meas- ured in paper money ; and too much weight must not be given to the new banking system as an instrument of war finance. It was not until the war was over, when the State bank issues felt the heavy hand of taxation, that the national system took complete possession of the field. §140] Receipts and Expenditures. 329 140. Receipts and Expenditures, 1861-1865. The ordinary receipts of the. treasury from taxation during the period of the Civil War have already been presented in a table on page 299. The proceeds from sales of public lands dwindle to insignificance, but under "Miscellaneous," as indicated in the table on page 330, there was an important increase in 1864 due to the sale of captured property and prizes, premium on sales of gold coin, and commutation money. Expenditures, 1862-1865, were as follows: — War Navy Miscella- neous * Interest on debt Total i86j 1S63 1864 1865 $389,173,000 603,314,000 690,391,000 1,030,690,000 $42,640,000 63,261,000 8s,7°S,ooo 122,617,000 $24,564,000 27,428,000 35,186,000 64,395,000 $13,190,000 24,729,000 53,685,000 77,395,000 $469,569,000 7i8,733>«» 864,968,000 1,295,099,000 Including Indians and Pensions. An examination of these figures gives an approximate esti- mate of the cost of the war. In four years the expenditures for "war" amounted to ^2,713,568,000 compared with ;?88,3o6,ooo in the preceding four years (1858-1861) ; and for the "navy" to 1314,223,000 compared with ^52,644,000 in the previous term. To these totals must be added the interest charges on the debt created during the period. The expenditures during the four years of conflict, however, are but a portion of the account; several years elapsed before the expenditures for war and navy were brought down to a normal basis, and in the last year of the war, pensions began to swell the yearly cost of the government. In 1879 an estimate was made of the expenditures growing out of the war down to that date, showing the enormous sum of ;^6, 190,000,000. A complete estimate would include a large amount of State 33° Loans, Taxation, Banking. [§ 140 expenditure which finds no record in the books of the national treasury. A comparison of receipts and expenditures is shown in the following table in millions of dollars : — Receipts Year Expendi- tures Deficit Taxes Miscella- neous 1 Total 1862 ^50-8 $1.1 $51-9 $469.6 S4I7-7 1863 108. 1 3.9 IZ2.0 7.87 606.7 1864 212.5 30.8 243-3 865.0 621.7 1865 295.6 26.4 322.0 1295.1 973.1 1 Including sa les of public and. CHAPTER XIV. FUNDING OF THE INDEBTEDNESS. 141. References. Contraction of the Currency: Finance Report, 1865, pp. 11-14; 1866, pp. 8-10; 1867, pp. v-xiv; 1868, pp. iii-vii; 1869, pp. xiii-xiv; Statutes, XIV, 31 ; XV, 34 ; or Dunbar, 199-201 ; J. Sherman, Speeches, 88-96; J. Sherman, Recollections, I, 373-388, 433-435; W. D. Kelley, Speeches, 210-238 (Jan. 18, 1868) ; J. A. Garfield, Works, I, 183-201 (March 16, 1866), 284-312 (May 15, 1868) ; H. McCuUoch, Addresses and Speeches, 48-53 (Oct. 11, 1865); H. McCuUoch, Men and Measures, 210-213; J. G. Blaine, Twenty Years, II, 317-330; Bankers' Magazine, XXI, 674-688 (G. Walker), 859-862; XXII, 5-8 (McCuUoch), 161-170 (A. Walker), 351-356 ; XXIII, 698-713 (speeches of Senators Morton and Sherman) ; BoUes, 111,263-281 ; A. D. Noyes, Thirty Years of American Finance, ^ly ; Report of Monetary Commission (1898), 416-423; W. G. Sumner, History of American Currency, 211-214; J. K. Upton, Money and Politics, 127-145. Funding of the Debt: Finance Report, 1865, pp. 21-26; i868, pp. xxxix-xliii; 1869, pp. xvi-xviii; 1870, p. vi ; 1871, pp. xvii, 255-259; Statutes, XVI, 272 (funding, July 14, 1870) ; or Dunbar, 205 ; J. ^h^x- man, Speeches, 97-120 (May 22, 1866), 156-178 (Feb. 27, 1868), 239-283 (Feb. 28, 1870) ; G. S. Boutwell, Reminiscences, II, 141-145, 183-202 ; J. Sherman, Recollections, I, 435-440, 451-458 ; H. McCuUoch, Men and Measures, 243-257 ; E. McPherson, History of Reconstruction, 597-604 (funding act of 1870); Bayley, 387-390, 464; W. F. de Knight, 103- 108; J. G. Blaine, Twenty Years, II, S56-559; Bolles, III, 305-336; H. C. Adams, PuHic Debts, Z26, 231-236; J. S. Gibbons, Public Debt of the U. S., 1-38. Taxation of Bonds: Finance Report, 1865, p. 26; 1867, p. xxx ; J. A. Garfield, Works, I, 327-355 (July 15, 1868), 356-363 (July 23, 1868) ; J. Sherman, Speeches, 150-152; J. B. Thayer, Cases on Constitu- tional Law, II, 1357-1363 ; BoUes, III, 323-326; J. N. Pomeroy, Consti- tutional Law, 249-253 (ed. 18S6); J. I. C. Hare, American Constitutional Law (1889), I, 258. Payment of Debt in Specie : Finance Report, 1867, pp. xxii-xxviii ; Statutes, XV, I ; J. A. Garfield, Works, I, 439-442 (March 3, 1869) ; J. Sherman, Speeches, 142-150 (Dec. 17, 1867), 159-170 (Feb. 27, 1868), 203-206 (Feb. 27, 1869) ; J. Sherman, Recollections, I, 440 ; Bolles, III, 315-320; E. L. Pierce, Memoir of Charles Sumner, IV, 353-355. 332 Funding of the Indebtedness. [§ 142 Sinking Fund: Finance Report, 1869, xiii ; 1875, ix ; 1876, ix; 1884, XX ; BoUes, III, 314; E. A. Ross, Sinking Funds, in Pub. Amer. Econ. Assn., VII, 289-392. 142. Character of the Public Debt in 1865. The return of peace brought with it the necessity for a radi- cal reorganization of the finances. " In the midst of the war, when the blood of the nation was up," as Garfield eloquently remarked ; " when patriotism was aroused; when the last man and the last dollar were offered a willing sacrifice, — it was comparatively easy to pass financial bills and raise millions of money. But now when we gather up all of our pledges and promises of four terrible years, and redeem them out of the solid resources of the people in time of peace, the problem is far more difficult." The immediate tasks before the govern- ment were three : funding the debt into a more convenient form; revision of the tax system to accord with the debt policy ; and the restoration of the standard of value by the resumption of specie payments. A fourth and embarrassing question was the order in which these problems should be settled. The public debt reached its highest point September i, 1865, when it stood at ^2,846,000,000, less |88,ooo,ooo in the treasury, leaving a net debt of ^2,758,000,000. Of this vast indebtedness less than one-half was funded; 11433,160,- 000 was in United States legal-tender notes, 126,344,000 in fractional currency, and the remainder consisted of various forms of short time paper or temporary securities, a large part of which was due before 1868, and a considerable amount was maturing daily. For example a temporary loan of $107,000,- 000 was payable at ten days' notice on the part of the holder ; there were ;?830,ooo,ooo seven-thirty notes; compound-in- terest notes amounted to ^2 17,700,000; and certificates of indebtedness to ;?85,ooo,ooo. On June 30, 1866, the inter- est-bearing debt consisted of loans bearing five different rates of interest and maturing at nineteen different periods of time. § 143] Funding or Contraction. 333 On a part of the loans the interest was payable in coin, and on part in currency. Of the 6 per cent, bonds and notes there were twelve different kinds; of the 5 per cent, loans five different issues ; and of the seven-thirty notes at least five, some convertible at the option of the government and some at the option of the holder. Bonds of some issues were exchangeable for others. A large portion of the five-twenty bonds caused uneasiness to investors, because of a contin- gency clause by which the government might redeem them within five years of date of issue, that is, in 1867. Of the total debt only one-ninth ran in any contingency longer than two years. " Eight-ninths of it consisted of transient forms issued under laws made up to a great extent of incomprehensi- ble verbiage giving unlimited direction over the mass to one man and expressing in the aggregate nearly one hundred contingencies of duration, option, conversion, extension, re- newal, etc." It was indeed difficult, as Senator Sherman remarked, for the people of the United States to understand any save two or three of the loans, and none but a successful investor engaged in the sale and purchase of stock could tell the various differences in value of the several securities^ and the reasons therefor. 143. Funding or Contraction. The political conditions at this critical period were not favorable to the settlement of any great public question, owing to the bitter estrangement of President Johnson from the party leaders in Congress. Fortunately, however, this dissension did not mar the administration of the treasury, for Johnson paid little attention to financial questions. Hugh McCulloch, who succeeded Fessenden as secretary of the treasury in March, 1865, was trained for the position; he had been a successful banker in Indiana, and as comptroller of the cur- rency had increased his reputation by the good judgment shown in establishing the national banking system. He possi- bly regarded fiscal subjects too partially from the standpoint 334 Funding of the Indebtedness. [§143 of a conservative banker; on the other hand his western associations stood him in good stead. The financial com- mittees of Congress were also under the leadership of strong men; Fessenden had returned to the Senate and was once more chairman of the committee on finance ; in the House, Justin S. Morrill was chairman of the committee on ways and means. Although, in the opinion of many experts, funding of the floating debt, and particularly the certificates of indebted- ness, was the first if not the only immediate duty of the government, McCulloch placed emphasis upon the necessity of a speedy resumption of specie payments, and declared that this could be effected only by a reduction of the volume of currency ; he consequently asked for wide discretionary powers to sell bonds for the purpose of retiring the notes. In a thorough review of the finances in December, 1865, McCulloch declared that the legal-tender acts were to be regarded as war measures ; that the statute making the notes a legal tender for all debts, public and private, was under ordinary circumstances not within the scope of the duties or of the powers of Congress ; and that while he did not recommend the repeal of their legal-tender provisions, he was convinced they ought not to remain in force one day longer than would be necessary to enable the people to return to the use of constitutional currency. The issue of green- backs as lawful money was a measure, expedient, doubtless, and necessary in a great emergency, but, as the emergency no longer existed, the notes should be speedily retired. McCulloch therefore asked that the compound-interest notes which were legal tender for their face value, should cease to be legal tender from the date of their maturity ; and that authority be given not only to fund the temporary loan and the certificates of indebtedness, but also to sell bonds for the retirement of the compound-interest notes and the United States notes. At first it appeared that this view would meet with gen- § I44J Theories of Resumption. 335 eral approval. The House of Representatives, December 18, 1865, passed a resolution, with only six dissenting votes, expressing its cordial concurrence as to the necessity of a contraction of the currency with a view to as early a resump- tion of specie payments as the various interests of this country would permit, " and we hereby pledge co-operative action to this end as speedily as possible." The resolution soon proved not to reflect the real sentiment of the people ; for before many months a determined effort was making to revolutionize the traditional monetary sytem of the country. Without dis- cussing all the propositions brought forward in this long con- troversy over resumption during the decade following the war, the narrative may be rendered clearer by a brief statement of the various theories of credit money set forth in the debates of the time. 144. Theories of Resumption. The first group of writers and speakers insisted upon an immediate or at least a speedy return to specie payments, without waiting for contraction of the notes, or indeed for any legislative action. In this class, for example, were Ex-Secretary Chase and the New York Tribune, which during months together heralded the cry, "The way to resume is to resume." Senator Sumner in 1868 looked forward to resumption in eight months ; he argued less from economic laws than from moral force, confidence, and the announced fixed purpose of the government to consummate the work. A second class, in which were found many eastern bankers, advised the speedy accumulation of a gold reserve in order to raise the value of greenbacks to a gold standard. The weakness of this plan was the difficulty of getting the gold. The trade balance was against the United States, and any effort to purchase the required amount of gold from abroad through the sale of bonds would, it was reasoned, derange commerce. The plan was also declared to be uneconomical, since it locked up in an idle hoard a mass of specie which 336 Funding of the Indebtedness, [§ 1+4 served no purpose other than to protect the treasury certifi- cates circulating in their place. If either were to be con- demned to idleness, why not retire the paper money altogether, and leave the gold free to do the ordinary work of exchange ? The advocates of establishing a gold reserve, however, grad- ually gained ground and finally won in the next decade, largely because this plan did not necessitate any decrease in the volume of paper currency. A third class believed that resumption could best be obtained by the retirement or contraction of paper currency. In this class there were many groups : some favoring contraction in one way and some in another. The extreme form of the theory was represented by Mr. David A. Wells in the so-called " cremation process " : "I would have it enjoined upon the secretary of the treasury to destroy by burning on a given day of every week, commencing at the earliest practical moment, a certain amount of the legal-tender notes, fixing the min- imum at not less than $500,000 per week, or at the rate of $26,000,000 per annum. This process once entered upon and continued, the gradual appreciation of the greenback to par with gold, and the ultimate equalization of the two, would not be a question of fact but simply of time. What specific amount of contraction of the legal tender would be necessary no one can tell with certainty." Another somewhat similar method, known as the graduated scale or English plan, pro- posed to redeem United States notes in gold outright at a fixed scale of say 90 per cent, of their face value. The objec- tion was the humiliation of the government going into the markets of the world to buy its own notes at a discount. A fourth class included those who did not believe in im- mediate action, but stood for inactivity : it was possible that contraction might not be needed to attain resumption ; and finance ought to wait while industry readjusted itself to the needs of peace. This class believed that resumption depended upon commercial rather than upon legislative con- ditions, and talked hopefully of " growing up to specie pay- §144] Theories of Resumption. 337 ments." As fast as the great West was opened up by the Pacific railways, commercial needs and mining enterprises would absorb the full amount of existing currency, and the outgo of gold would be checked by a favorable balance of trade with foreign countries. It was shown that the stock of gold was small in the United States ; and so long as the export of specie was larger than the annual production of the gold mines, the case was regarded as hopeless. Senator Sher- man thus contrasts the advantage of a waiting policy with the contraction policy of McCulloch : " Both of us were in favor of specie payments, he by contraction and I by the gradual advancement of the credit and value of our currency to the specie standard. With him specie payments was the primary object; with me it was a secondary object, to follow the advancing credit of the government. Each of us was in favor of the payment of the interest of bonds in coin and the prin- cipal when due in coin. A large proportion of national secu- rities was payable in lawful money or United States notes. He, by contraction, would have made this payment more difficult, while I, by retaining the notes in existence would induce the holders of currency certificates to convert them into coin obligations bearing a lower rate of interest." Still another class, at first small but soon gathering a large following, opposed contraction outright and advocated a freer use of paper money. The inflationist view is well illustrated by the following extracts from a speech made in Congress in 1868: "I am distinctly in favor of expansion. Our cur- rency, as well as everything else, must keep pace with our growth as a nation. My plan is to increase our circulation until it will be commensurate with the increase of our country in every other particular. . . . Expansion is the natural law of currency, and a healthy growth as a nation. . . . Reduce the currency — the means of the people — and in my opinion you are fast finding the road to universal bankruptcy. For my part I would issue as many greenbacks as the country can carry, — how great that amount may be I will not pretend to 338 Funding of the Indebtedness. [§145 say." According to this view resumption was both unne- cessary and undesirable. Greenbacks were to be substituted for all bank-notes and the interest-bearing bonds were to be retired with fresh issues of government money. The holders of such opinions in the course of a few years found common ground in a new political organization, the Greenback Party. 145. Arguments against Contraction. So important was the question of the paper currency after the war that it is worth while to state further in detail the arguments against contraction : (i) The argument of private interest. Prices would be reduced with injurious effects upon trade, possibly resulting in a panic. Even admitting that the note issues of the war were redundant, contraction would, only make matters worse ; for values and business had adjusted themselves to an expanding currency without interruption, and reverse steps could not be safely undertaken without affecting debts and credit contracts, which constitute a large part of property rights. The government and the debtor class would both have to pay in a dearer currency than that in which their debts were contracted ; as money decreases, prices shrink, but debts remain constant at their face value. (2) Arguments of governmental interest. Contraction would reduce the public revenues through a distressed con- dition of commerce and industry, affecting employment, con- sumption, and import of commodities. The public credit would be endangered by checking the funding of the short- term interest-bearing securities into bonds redeemable within a brief period at the pleasure of the government and bearing a low rate of interest; only when currency is plentiful and cheap would there be any object in exchanging it for bonds. " The very abundance of the currency," said Sherman, " obvi- ously enables us to fund the debt at a low rate of interest ; and as the debt was contracted upon an inflated currency it is just and right that upon that same currency it should be funded io its present form." Stress was also laid upon the § 145] Arguments against Contraction. 339 advantage of a loan in the form of legal-tender notes, upon which no interest was paid. (3) Argument of business interest. Contraction would embarrass the banks if it did not force many of them into liquidation : they would be compelled to sell the government securities in which their deposits were invested and also to curtail credits. Further, contraction would lower the rate of foreign exchange, and thus reduce exports and increase im- ports. The resumptionists maintained, in direct opposition to this argument, that the inflation of irredeemable paper money must infallibly raise prices so as to diminish exports and increase imports. Again the inflationists argued that more currency, rather than less, was needed, because of the immense area of the country to be developed under peace ; the Southern States had been drained of a monetary me- dium, and the supply in the West was deficient; with the recuperation of the South, the new employment of dis- charged soldiers, and the development of the resources of the country, the increase of population would create new uses for money. (4) Argument against the banks. Another line of argu- ment was that the banks had as much to do as any action of the federal government with the depreciation in the value of paper money, and that it was a serious question whether the government could afford to resign the privilege of issue to other agencies. The circulation of the national banks, it was urged, was expanding to the detriment of government notes, and consequently, if there was to be contraction, a beginning should be made with the retirement of the national bank- notes rather than with the treasury notes. By a curious slant of mind the advocates of more paper money insisted that the national bank circulation of ^300,000,000 was not needed : " It is so much over and above what the country can use to advantage. Its existence does infinite mischief, and while it continues must effectually prevent any return to specie payments." 340 Funding of the Indebtedness. [§ 146 146. Funding Act of April 12, 1866. The first legislative step taken by Congress toward a general reorganization of the debt was the act of April 12, 1866, em- bodying two important features : first, power to convert tem- porary and short-time interest-bearing securities into long-term bonds already authorized under previous bond acts ; secondly, a slight contraction of the United States notes. Under the first provision McCuUoch proceeded at once to convert the tem- porary interest-bearing obligations into 6 per cent, five-twenty bonds, and made such rapid progress that in two years the volume of this species of indebtedness had been decreased $900,000,- 000. The temporary loans and certificates of indebtedness were also wiped off the books of the treasury department. An examination of the table on the opposite page clearly shows the changes in the several loans. In dealing with the United States legal tenders, Congress was cautious and carefully held the secretary in check ; a grudging authority was given to retire $10,000,000 of green- backs within six months, and not more than $4,000,000 in any one month thereafter. Whether the method of a gradual and discretionary retirement of legal tenders was a wise solution or not, it placed a heavy burden of unpopularity upon the secre- tary of the treasury : if currency was scarce the secretary was blamed, and if it was redundant he was charged with inflating prices. The question of resumption was thus kept unsettled ; the country remained in uncertainty as to the date of a return to specie payments ; and this encouraged speculation in busi- ness affairs. It would have been better to provide for the note-holder as well as for the bond- holder by giving a right to convert the greenbacks into bonds, thus lifting the notes by gradual advance of public credit to par with gold. Certainly a great opportunity was lost, for public sentiment in the winter of 1866 would have sustained a more rapid contraction; the country at large was expecting it, and the deed might have been accomplished if Congress had had enough courage. §146] Funding Act of April 12, 1866. 341 l: Is <^ ■* t "o 000 9 «D ^N. CI \0 1- ^*wl ro o»o O^'*' 0* M •R 0606 M- Si 00 ■* m o«o « ■* ^% m J? ^ 00 ■* MO o-o ino* ^ ^^ 0 >OaO t^O t^ ■ %n & ^8 vd " •»» M « H j; WIONN ffimcO M -*• t^ et £■ SSR CO " c*« a ^ Co Olf>1^^0*O^D t^ ON « A- »;o. *^ (^ ff 0^»OtAf«.0\0 M «o °? CO 6> M " « o> •? M mM 000 OsDO -* M (O mo lomw ^.c^P^ ** ** « 00 M fOOO wO 000 0^O«O tn t^ • CO M o* m •^ " « m M 0000 000 ■♦vD CO p, C m ** " ■«• to \0 ro m« ^vO 000 M m „ * i^d -SSg S,2-SK.8 CO " " s- « t^ tN 00 ts M 00 l>.00 M ID s t^ O^ •^ " a -a rt 1 • •1 . ..3 m 00 ™ « 5 St; 01 a, a, ' ' ' S k ■•s • • Ip 1 1 ness ractional currency . iree per cent, certifi xes of 1S61 . . . ve-twenties of 1862 oan of 1863 . . en-forties of 1864 . ve-twenties of 1864 ive-twenties of 1865 : CO ft-^ c c tn 3 3 eS cnO HO ptaHmfc,H-lf-it^fe f^Ex !». < Oi a F H s s .a cm d) 9 •B T) « bo ta 342 Funding of the Indebtedness. [§ 146 The authorized measure of contraction gave but slight satis- faction to Secretary McCuUoch ; but he publicly expressed a hopeful outcome and predicted that resumption might be brought about by July i, 1868. Conditions were against him : in 1866 there was a poor grain crop, frauds in the revenue, a disastrous panic in England which required a withdrawal of capital from America, and unexpected expenses on account of Indian hostilities and military governments in the Southern States. Besides these difficulties the secretary had to meet an aggressive and growing opposition in Congress. This opposition was an early symptom of deep-seated dissatisfaction throughout the country, a dissatisfaction incident to the diffi- cult years of readjustment to peace conditions. Discontent was strongest in the agricultural sections, where farmers had incurred indebtedness on the long-time credits. Mortgages running for three, five, or even ten years were not uncommon. Farmers in the East were encouraged to larger enterprises by the high prices of agricultural products existing at the close of the war ; new settlers were lured westward by the glowing descriptions circulated by railroads which with marvellous energy were completing their network of systems in the middle West and even stretching out feelers into the immense domain across the Mississippi toward the Pacific. Thousands of war veterans, hardened to adventure and reluctant to turn back to the quiet life of the East, pushed to the frontier for the making of homes. Wages of labor, in mechanical and mining industries, were forced to a high level. Many of these new ventures were doomed to disappointment ; and, as is inevitably the case when economic disturbances are wide-spread and uniform in character, the blame was placed upon the government, and from it • relief was invoked. A complete list of the financial propositions put forth at the period is beyond enumeration in a work of this character; chief among those proposals are to be noted the follow- ing : — § 147] Abandonment of Contraction. 343 (i) Increase of government currency. (2) Payment of bonds in currency instead of in coin. (3) Taxation of United States securities. (4) Suppression of national bank currency. The first of these three controversies must be discussed be- fore describing the funding act of 1870; the fourth, con- current with the others, will be referred to in a subsequent chapter. 147. Abandonment of Contraction. Within a few months after the passage of the contraction act an agitation was under way to prevent any further with- drawal of notes. The difficulties engendered by the English panic in May, 1866, furnished effective arguments. McCulloch and the contractionists were driven to the defensive and with difficulty prevented inflation. In the House a bill was passed authorizing the redemption of compound-interest notes by a new issue of non-interest legal-tender notes not exceeding ^100,000,000. Influenced by the hostility displayed in the votes upon this and similar measures, by anxious foreboding of coming financial troubles, by the task of funding the interest-bearing notes, as well as by the unfortunate economic ■ conditions already referred to, McCulloch deemed it wise not to persist in the discretionary use of the powers granted by the law of 1866 authorizing the retirement of notes. Never- theless the secretary was not discouraged ; in December, 1867, he admitted the impossibility of resumption in the following July, but he hoped that with good crops and no unfavorable legislation it might be accomplished a year later. McCuUoch's hopefulness, however, counted for little as against the general uneasiness of the country, and he could not pre- vent the enactment of a measure by large majorities in both branches of Congress, February 4, 1868, suspending any further reduction of the currency. By this act the policy of gradual contraction was condemned. During the two years in which contraction was carried on, 344 Funding of the Indebtedness. [§ 148 ^44,000,000 in greenbacks were retired, but many asserted that the full measure of actual contraction included also the withdrawal of the compound-interest notes ; Sherman for ex- ample maintained that the active circulation was lessened by 11140,000,000; Sumner placed the reduction at g 160,000,000. During the earlier years of the issue of interest-bearing notes, temporary securities had to some extent swollen the volume of currency, but later, when peace was restored, they were held almost exclusively by banks for purposes of investment, and it is very doubtful whether they should be regarded as part of the circulating medium. Notwithstanding these con- siderations the public generally agreed with Sherman and Sumner, and the contractionists were obliged to carry the responsibility for disturbances which were really incident to the refunding of temporary indebtedness. 148. Payment of Bonds in Currency. Another assault upon national credit was made in the de- mand that bonds should be redeemed in paper money instead of in coin, unless there was an express stipulation to the contrary in the authorization of the particular loan. If we leave out of account the sensitive character of government credit, the complication of international fiscal relations, the' need of government provision for future credits, there might appear to be some reason in the plea that the five-twenty bonds be paid in greenbacks. The facts in regard to the several issues of bonds were substantially as follows : In the loan acts of July and August, 1861, no mention whatever was made in regard to the medium of payment, but this was before the suspension of specie payments or issue of legal-tender notes. The law of February 25, 1862, expressly appropriated coin received in customs duties " to the payment in coin of the interest on the bonds and notes of the United States," and also to the annual "purchase or payment of i per cent, of the entire debt." The act of March 3, 1863, under which ^75,000,000 of 6 per cent, bonds were issued, § 148] Payment- of Bonds in Currency. 345 expressly provides that such bonds shall be payable, principal and interest " in coin." The act of March 3, 1864, under which the ten-forty 5 per cents, were issued, contained a similar provision. The act of June 30, 1864, under which ^125,561,300 five-twenty 6 per cent, bonds were issued, con- tained no coin provision as to the principal but did provide that the interest be paid in coin. The act of March 3, 1865, under which ^203,327,250 five-twenties and ^332,998,950 of consols of 1865 were sold, was also silent as to principal but provided for coin payment of interest. Under this act additional loans were made, known as consols of 1867, and consols of 1868. It is thus seen that large bond issues were negotiated' under laws which were silent as to the currency in which the prin- cipal should be paid. There was obscurity in regard to the medium of payment at the normal time of redemption ; and the paper redemptionists particularly relied upon the circum- stances under which the act of 1862 was passed. This act provided for the issue of legal-tender notes which were con- vertible into bonds, and also provided that these notes should be a legal tender in payment of all debts, public and private within the United States, except duties on imports and inter- est of bonds. It was -therefore argued that since the laws issuing the legal-tender notes provided that such notes be received in payment of all claims against the United States of any kind whatsoever except interest on bonds ; and since no explicit exception was made as to their use in the payment of the principal of the bonds, it was obviously intended that greenbacks should be used for the redemption of the bonds. Some indeed contended that the omission of any express provision, except as to interest, was an intentional reserve on the part of the government, to be free to avail itself of the privilege of redeeming the bonds in currency during the suspension of sp'ecie payments ; and that with this end in view the bonds were practically made payable at the option of the government at the expiration of five years from date of 346 Funding of the Indebtedness. [§ 148 issue in whatever might then be the legal tender of the country. The government, it was urged, should have the opportunity of taking up its obligations in the same depre- ciated paper for which it issued them, and of re-negotiating its loans under the circumstances of improved credit. An illustration of a prevalent feeling as to the payment of debt is found in President Johnson's message of 1868, when he suggests that, inasmuch as the holders of government secu- rities had received upon their bonds a larger amount than their original investment as measured by gold, it would be just that the 6 per cent, interest then paid should be applied to the reduction of the principal of the debt, thus liquidating the entire "amount in sixteen years and eight months; public creditors ought to be satisfied with a fair and liberal compen- sation for the use of their capital. "The lessons of the past admonish the lender that it is not well to be over-anxious in exacting from the borrower rigid compliance with the letter of the bond." Apart from the phraseology of the statutes it appears that during the early years of the war the possibility of the payment of bonds in other than coin was hardly raised. According to the explicit statement of Garfield in 1868, when the original five-twenty bond bill was before the House in 1862, all who referred to the subject stated that the principal of these bonds was payable in gold, and coin payment was the understanding of every member of the committee of ways and means. It was only because of an occasional doubt then expressed that it was considered necessary "from abundant caution " to make a definite promise in the ten-forty act of 1863. Chase, who undertook the negotiation of bonds, had advertised that the principal as well as interest would be paid in coin, and the government did not correct this non-statutory notice. It thus became practically an unwritten law to pay the obligations of the United States in coin. ' Secretary McCuUoch contended that the credit of the five-twenties issued under the act of March 3, 1865, would § 148] Payment of Bonds in Currency. 347 be improved by an express declaration of Congress that coin should be paid : faith and public honor demanded that the contracts of the government be complied with in the spirit in which they were made. Even without further legis- lative sanction by Congress, neither Chase nor McCulloch ever exercised any option ; the six per cents, which matured in January, 1863, were paid in gold, and under date of November 15, 1866, McCulloch announced that the five- twenty bonds of 1862 would either be called in at the ex- piration of five years from that date and paid in coin, or would be permitted to run until the government was prepared to pay them in coin. Apart from these technical considera- tions there was a still more vital objection to payment in depreciated currency ; when the legal tenders were issued it was supposed that they would be but temporary and would be promptly redeemed at the close of the war, and the possibility of using them for bond payment had hardly occurred to any one. Until therefore the government discharged its green- back obligations by raising them in value to gold, it was dis- honorable to force a currency payment upon the bondholder. Notwithstanding the established policy of the government and the general understanding of the investing public, a per- sistent agitation to secure payment in currency gained many adherents in 1868. This time the argument took on more extravagant forms : it was urged that the bondholdefs had taken advantage of the national distress ; that the currency of the ploughholder was equally good for the bondholder ; that the people were sorely burdened ; that the bonds did not specify in what special currency they were to be paid ; that it would therefore be " right " to pay them in lawful money of the United States, and that if we looked in the dictionary under the word " lawful " and under the word " money " we would find that lawful money meant greenbacks ; that anyhow, no matter what it meant, the people would never consent to pay the bonds in coin, and that the bondholder had better make the best terms he could while compromise was still 348 Funding of the Indebtedness. [§ 148 possible. Said Thaddeus Stevens : " I want to say that if this loan was to be paid according to the intimation of the gentle- man from Illinois, — if I knew that any party in the country would go for paying in coin that which is payable in money, thus enhancing it one -half, — if I knew there was such a plat- form and such a determination this day on the part of my party, I would vote for the- other side, Frank Blair and all. I would vote for no such swindle upon the tax-payers of this country ; I would vote for no such speculation in favor of the large bondholders, the millionaires, who took advantage of our folly in granting them coin payment of interest." This interpretation of the obligations of the government found its principal support in the interior and Middle Western States. Ohio championed the proposition so warmly that it was popularly known as " The Ohio idea." Its opponents de- risively dubbed it the " rag baby." Each of the political parties was affected and for a time the bondholder was in peril. Even Senator Sherman, whose career on the whole stood for sound and trustworthy finance, supported a bill to compel holders of the disputed 6 per-cent. five-twenty bonds to accept a 5 per cent, security specifically payable in gold, and advised its adoption as a prevention of a worse measure. This doctrine of bond payment by currency instead of by coin was incorporated into the platform of the national Demo- cratic Party in 1868, although it did not gain endorsement from all elements in the party. The confusion is seen in the fact that Horatio Seymour of New York, who was not in accord with the financial plank of the platform, was selected for presi- dential candidate. The Republican party in its national con- vention denounced the plan, and yet several Republican State conventions showed sympathy with the idea. Not only did Butler of Massachusetts accept it, but some Republican leadere, as Morton of Indiana and Sherman of Ohio, compromised by declaring that the government had the right to redeem the principal of the debt in existing currency but did not have the right to make a new issue of currency for that purpose. § 148] Payment of Bonds in Currency. 349 The Republicans won in the election of 1868; in 1869 President Grant proceeded promptly to redeem the declara- tions of his party. In unmistakable words in his inaugural address he declared that the national honor must be protected by paying every dollar of government indebtedness in gold, unless it was otherwise stipulated in the contract. The first measure passed in his administration, on March 18, 1869, pledged the faith of the United States to the payment in coin or its equivalent of all the obligations of the United States, except when other provision had been made in the law author- izing the issue. The apprehension of investors was relieved, and refunding at lower rates of interest was greatly facilitated ; although in 1870 another wave of restlessness spread over the country, marked in Congress by the introduction of nearly fifty bills expressing every shade of financial opinion, government credit was not seriously affected. Thus far the question of payment of bonds has been dis- cussed from the standpoint of justice to the bondholder, and of advantage to the credit of the government by not standing on the letter of the statute. It has been asked whether the government, at the time of issue, might not have expressly stated, in terms so clear there could be no misunderstanding, that in redeeming the bonds it would pay either in its own notes or specie. As one critic states it, " Should not green- backs have been sufficiently good for all purposes, for the soldier as well as for the capitalist, for the porter as well as for the manufacturer?" The answer is clear: The govern- ment would have failed to secure credit on a paper basis ; it needed the best security it could offer ; and for a time that appeared none too good. While the method followed un- doubtedly placed a heavy load upon the people and re- sulted in the enriching of a special class so fortunate as to possess at the time funds for investment, the other method of supporting the finances entirely on promises must have resulted in even greater embarrassment than was actually experienced. 350 Funding of the Indebtedness. [§149 149. Taxation of Bonds. The value of the obligations of the government was attacked in still another way by the demand that bonds should be subjected to local taxation. The judicial history of this sub- ject is of interest, the earlier decisions of the Civil War period resting upon the opinion delivered by Chief Justice Marshall in the case of Weston v. Charlestown, in 1829. The question then before the court was whether the stock issued for loans made to the government of the United States is liable to be taxed by States and corporations. The court denied such power, and Marshall again placed on record the reasoning so powerfully expressed in his decision in the case of McCuUoch v. State of Maryland, in regard to the necessity of protecting the national government in the free and unhin- dered exercise of all its powers. In the case of Bank of Commerce v. New York City (1862) the court decided that the capital stock of a State bank invested in stock of the United States was exempt from local taxation imposed by the city of New York; and again in 1864 in the Bank Tax case, after the State of New York had passed a statute taxing banks in that State whose capital was invested in bonds of the United States " on a valuation equal to the amount of this capital stock paid in or secured to be paid in," the court decided that no distinction could be made between " capital at valuation " and " the property in which the capital had been invested," thus denying the power of the State to tax indirectly the government securities. After the revision of the national banking act, June 3, 1864, the question assumed a slightly different form, for Congress expressly gave the States power to tax shares of stock in a national bank, provided that the tax so imposed did not exceed the rate imposed upon the shares of banks organ- ized under State authority. This permission, however, still left private bondholders in a favored position and created dissatisfaction. The earlier attempts to tax bonds did not spring from an- §149] Taxation of Bonds. 351 tagonism to bondholders as such, but from a desire to compel the owners of property bound up in national securities to con- tribute some share to local burdens. Gradually emphasis was laid upon the fact that the bondholder had bought the bonds at specially favorable rates ; that they received an exceptional rate of interest ; that as interest was payable in gold com- manding a premium which in itself yielded a large profit, they were a favored class ; that their property was not actively employed in the production of wealth ; and in short that they constituted that national banking interest which came to be generally regarded as a privileged institution. Many bond- holders indeed during the Civil War acknowledged that taxa- tion of bonds would be wise not only on grounds of justice, but also for the public good because it would remove irritation. Finally as the attack upon the financial policy grew more and more bitter, charges were freely made as to unfair class divisions and burdens. The great body of the people were pictured as working with their own hands through all the weary days of the year, while the owners of idle capital, favor- ites of fortune and special legislation, like the lilies, toiled not, and yet surpassed kings in the splendor of their habits and luxuries. The farmer and mechanic toiled at home to meet the exactions of the tax gatherer, while those whose hands were unstained with labor shaped the legislation of the country for the purpose of private gain and individual monopoly. Amid the roar of cannon and deluge of blood the capitalists trafficked for a profit of one hundred per cent. ; over against this selfishness stood the patriotism of the soldier and the anguish of weeping firesides. So with taxation : contrast the exactions from the workers with the policy which exempts one-tenth of the property of the United States, — property that cost less by one-half than any other to obtain, which yields double the interest elsewhere derived, and which is owned by those who live in palaces. In opposition to such views insistence was laid upon the sanctity of contract; the bondholders were public-spirited 352 Funding of the Indebtedness. [§'5° men who had contributed their property in the days of the country's distress ; the large proportion of the bonds were held by investors with small means ; a large block of bonds was held abroad, and it was absurd to attempt to tax the sub- jects of Great Britain, France, or Germany. Explanations of this character did not appeal to all ; possibly it would have been wiser at the time of issuing bonds to have placed them on the same basis as other property. The exemption certainly made an invidious distinction and contributed much to the difficulties of financial legislation. This feeling grew in strength after the war was over, when it was no longer necessary to bolster up the credit of the government by extraordinary means. 150. The Refunding Act of 1870. McCuUoch retired from the treasury department in March, 1869, and was succeeded by George S. Boutwell of Massa- chusetts. Boutwell had long been in public service, including the office of bank commissioner of Massachusetts and com- missioner of internal revenue, and since 1863 he had been a representative. Experienced and well-informed on financial questions, he made it his chief object to fund the public debt at a lower rate of interest. He was convinced that so long as the flow of gold was adverse there could be no effective re- sumption ; his preference for funding received popular support because there was a widespread sentiment that the payment of 6 per cent, interest was discreditable to the reputation of the United States, inasmuch as European nations, with their com- plicated relations and expensive forms of government, were borrowing money at a lower rate; it was absurd to continue a war rate of interest in times of peace ! It was also urged that the high rate of interest offered by the government operated unjustly upon industry in attracting capital away from real estate and industrial enterprises. The time for refunding seemed favorable : the party in power was the party under which the debt had been incurred ; § i5o] The Refunding Act of 1870. 353 the act of 1869 had strengthened the public credit, and about $i,6oOj00o,ooo of five-twenty • bonds were already or soon would be redeemable at the pleasure of the government. In his first report, December, 1869, Boutwell presented a detailed plan of funding the debt and suggested a rate of interest of 4j/^ per cent. This was followed by the important legislation embraced in the acts of July 14, 1870, and January 20, 1871, authorizing the issue of ^5 00,000,000 bonds at 5 per cent., redeemable after ten years; ^300,000,000 at 4}4 per cent., redeemable after fifteen years; and ^r, 000,000, 000 at 4 per cent., redeemable after thirty years, all to be paid in coin and exempt from national as well as local taxation ; none to be sold at less than par in gold. The bill as originally reported by the finance committee of the Senate provided that the longest bond should be redeem- able within twenty years, thus adopting the American policy of early convertibility ; stress was laid upon the doctrine that there should be no permanent national debt, and that the first and most urgent duty in time of peace was to discharge promptly the obligations incurred in time of war. Thus the Louisiana debt of 1803 was reimbursable within fifteen years; the war loans of 181 2-18 15 within twelve years; down to the Civil War no loan ever ran beyond twenty years ; and Chase had compelled the right of optional payment within five or ten years at the utmost. The House of Representatives, however, in order to give the bonds greater acceptability to capitalists insisted that the 4 per cent, bonds should run for thirty years. Securities were thus created which unexpectedly went within no long period to a premium of more than 25 per cent, and afterwards when there was a large and growing surplus in the treasury it was difficult to retire the debt. Long before the bonds matured the government could borrow at a rate as low as 2j4 per cent. This legislation together with the supplementary acts of December 17, 1873, January 14, 1875, and March 3, 1875^ shaped the character of the debt for the next quarter of a 23 354 Funding of the Indebtedness. [§151 century. It settled once for all the question of taxation of bonds, and placed public credit upon a solid foundation. In one particular, however, it was ambiguous and opened the way to a new controversy. The funding act of 1870 uses the term "coin" and not gold. In 1870 silver was at a premium with gold in the bullion market ; in later years as will be seen the silver advocates asserted that it was honorable to redeem the bonded indebtedness in silver dollars as well as in gold. In- asmuch as the word " coin " after discussion was deliberately substituted for " gold," there was point in their contention, so far as their argument rests upon purely technical considera- tions, whatever may be the judgment of a deeper appreciation of the fundamental forces which control public credit. To many people the attempt to carry the public debt at less than 5 per cent, appeared foolish ; even Senator Sherman thought that the proposed reduction of the rate of interest to 4 per cent, was practically the defeat of the measure. For a few years during the unsettled conditions of commerce, industry, and finance, this prediction on the whole seemed justified, for conversion was slow. The five-twenties of 1862 were first attacked, but the work of converting them into the 5 per cent, bonds due in 1881 was not finished until 1876; attention was then turned to the later five-twenties of 1865, 1867, and 1868. By this time the rate of interest had fallen and it was possible to complete the funding in 1879 ; fortu- nately no limitations as to the time of refunding were placed in the act. The changes are seen in the table, page 341. 151. Sale of Bonds Abroad. In connection with the refunding scheme an interesting attempt was made by the treasury department to sell govern- ment bonds by direct negotiation abroad. During the Civil War earnest efforts had been made to borrow from foreigners, but there had been little encouragement for a steady market. Mr. R. J. Walker, formerly secretary of the treasury under Polk, was sent- by Chase as a special revenue agent to Europe, §151] Sale of Bonds Abroad. 355 and found strong distrust of the financial credit of our govern- ment. So bitter, indeed, was the hostility of Louis Napoleon and Lord Palmerston that United States stocks could iind no place either on the London or Paris stock exchange, although the Confederate loan was quoted in Europe at nearly par in gold. To this political hostility was added a growing suspicion of American credit due to the successive issues of treasury notes. Even in Holland there were doubts of the financial good sense, if not of the good faith, of the American govern- ment. While the war lasted, therefore, but little foreign capital was transferred to the United States ; but when peace was established European funds were rapidly turned westward and government bonds were sold abroad in large quantities until the agitation began for the payment of bonds 'in currency instead of gold. In the minds of many people in the United States there was a strong prejudice against borrowing money abroad, because it was derogatory to the American people to appeal to other peoples for aid. In an early debate after peace was restored, Mr. Kelley, a representative from Pennsylvania, opposed a foreign loan, because, after sustaining a war without resorting to the degradation of borrowing abroad, the United States should not ask foreigners to loan money at 5 per cent, in order to redeem a non-interest-bearing loan. In particular he denounced the proposed issues of bonds payable in France, Germany, England, or elsewhere, in francs, florins, or pounds, " a proposition that would call a flush to the cheeks of the directors of an embarrassed railroad company.'' More serious objections were urged against foreign loans : that the profit represented by the margin between paper and gold ought to be secured by Americans ; that foreign loans would drain the whole country of gold and silver, which would have to be paid out in interest to aliens and absentees ; that bonds would be returned when foreigners desired to realize a profit ; and thus the United States would be exposed to the vicissitudes of foreign markets. 356 Funding of the Indebtedness. [§152 It was hoped that the explicit declarations in favor of a coin redemption, as stated in the declaration of March, 1869, and renewed in the funding act of 1870, would remove the doubts of foreigners so that European capital would be attracted in a much larger volume for investment in the new securities, and thus secure absolutely the success of refunding. Possibly this might have occurred but for untoward events. A financial disturbance was occasioned in Europe by the Franco- Prussian War of 1 870-187 1, which created an unexpected demand for funds abroad. In the United States also the process of refunding was checked by the panic of 1873, and under these circumstances no bonds were sold until 1877 at a lower interest than 5 per cent. 152. Sinking Fund. In the reduction of the debt the machinery of a sinking fund was once more brought into play. The act of February 25, 1862, authorizing the issue of the first legal-tender notes and the sale of five-twenty bonds, pledged that the coin paid for duties on imports, after satisfying all interest requirements of the public debt, should be applied to the annual purchase or payment of i per cent, of the entire debt of the United States. The interest on the amount purchased was also to be used for the benefit of the fund thus created. During the war no attempt was made to fulfil this pledge, as the govern- ment was continually borrowing and adding to its total indebt- edness ; and when peace was restored the provision was not regarded as binding ; McCuUoch in his annual reports makes no reference to it. Although the form of the promises was neglected, the spirit was carried out, since McCulloch followed Gallatin's example of an earlier day by cancelling indebtedness outright from whatever surplus revenues were available. Secretary Boutwell, with more precise respect, inaugurated the policy of annual purchase of bonds, entered in a separate account as a " sink- ing fund." The funding act of 1870 no longer made it §152] Sinking Fund. 357 necessary to keep the bonds purchased in a separate fund, but directed that they be cancelled and destroyed ; the prin- ciple of reduction by annual purchase, however, was left untouched. After the panic of 1873, with the consequent lessening of government income, the treasury department fol- lowed a halting policy. Some of the secretaries were more impressed than others with the sacredness of providing annu- ally for the sinking fund, but found themselves hampered either by deficient revenues or by the objections to buy- ing bonds at a premium. Bristow regarded the sinking fund as an object second only to the payment of interest on the public debt, and yet could not execute this trust. Ingenious explanations were consequently devised to show that the gov- ernment was keeping faith when it did not keep its promises : the law providing for the sinking fund was not to be taken too literally: "the coin paid for duties on imported goods" was not actually " set apart as a special fund " ; it was rather a pledge by Congress that it would provide revenues enough not only to pay the expenses of the government, but also to redeem i per cent, of the debt ; the sinking fund was simply a representation of the balance of revenues over expenditures. Secretary Morrill, the successor of Bristow, in 1876 made an elaborate calculation to show that if the whole period be taken, beginning with 1862 and ending in 1876, the debt was reduced $223, 144,000 more than was actually demanded by the sinking-fund requirements. Again the necessary prepara- tions in 187 7-1878 for specie resumption through the sale of bonds for the purchase of gold checked a literal compliance with the law. It was manifestly absurd for the government to sell bonds for gold and at the same time buy bonds for the sinking fund. In the discussion of the strugghng and halting efforts to place the finances of the government upon a sound and per- manent basis after the war was over we must not hold a gloomy view of the condition of the country. To be sure there were agencies adverse to national development, such as 358 Funding of the Indebtedness. [§ 152 irredeemable paper currency, and unequal and heavy taxation. The condition of the laboring class possibly was not so good as in i860, for wages had not increased in proportion to the cost of living. The task of industrial readjustment imposed heavy strains, and in places the pressure created suffering ; but in spite of these difificulties the material factors of industrial pros- perity remained sound and vigorous, and the country quickly resumed the wonderful march of progress witnessed in the decade before the war. Immigration was large, and there was a generous increase in the products of industry. An official report in 1869 declared that within five years more cotton spindles had been put in motion, more iron furnaces erected, more iron smelted, more bars rolled, more steel made, more coal and copper mined, more lumber sawn and hewn, more houses and shops constructed, more manufactories of different kinds started, and more petroleum collected, refined, and exported, than during any equal period in the history of the country, — and that this increase had been at a more rapid rate than the growth of population. The natural resources of the country and opportunities for productive enterprise made it possible for the country to press forward by leaps which no mistakes of taxation, monetary issue, or treasury borrowing could withstand. CHAPTER XV. GREENBACKS AND RESUMPTION. 153. References. Constitutionality of Legal-Tender Notes: Opinions in 8 Wal- lace, 603-639 (1869) ; 12 Wallace, 457 (1872) ; no U. S., 421 (1884) ; also in J. B. Thayer, Cases on Constitutional Law, II, 2222 (1869), 2237 (1872), 2255 {1884) ; also in Bankers' Magazine, XXIV, 712-737 (1869) ; XXVI, 832-895 (1872) ; also J. J. Knox, United States Notes, 156-166, 193- 229 (1S84); also E. McPherson, Handbook, 1872, pp. 53-62 (1872); G. Bancroft, /Vcayb?- the Constitution (1884); also in Sound Currency, V, No. II ; S. F. Miller, Lectures on the U. S. Constitution, 530; J. B. Thayer, in Harvard Law Review, I, 79 ; A. B. Hart, Life of Chase, 389-414; BoUes, III, 251-262 (references, p. 257); E. J. James, Con- siderations on the Legal Tender Decisions, in Pub. Avier. Econ. Assn., Ill (1888), 49-80 (references, p. 80); J. H. Chamberlain, Legal Tender Decisions, in Amer. Law Review, XVIII, 410; T. H. Talbot, ditto, 618 ; H. H. Neill, Legal Tender Questions, in Pol. Sci. Quar., I (1886), 250-258 ; B. T. DeWitt, Are Legal-Tender Notes ex fast Facto ? in Pol. Sci. Quar., XV, 105-111 ; W. C. Ford, Legal Tender Decision, in Prince- ton Review, Sept., 1884, 123-132; J. K. Upton, Money and Politics, 157- 170 ; H. White, 231-234. Panic of 1873: Messages and Papers, VII, 243-247 (Grant, 1873), 268-271 (inflation veto), 285-287 (1874) ; Finance Report, 1875, PP- xi-xxi; J. Sherman, Recollections, I, 488-506; J. G. Blaine, Twenty Years, II, 556-566 ; E. McPherson, Handbook of Politics, 1874, pp. 134-155 ; Bolles, III, 283-290; H. White, Fortnightly Review, XXVI, 810; C. A. Conant, History of Modern Banking, 509-512; A. D. Noyes, Thirty Years of American Finance , 18-20; D. Kinley, Independent Treasury System, r8i- igo ; V. B. Denslow, Principles of Political Economy, 390-395 ; E. Atkin- son, yo«?-«fl/ »/" /"o/iV/Va/ .S^okootj/, I, 1 17-1 19 (inflation veto) : Kesumption of Specie Payments : Messages and Papers, VII, 348 (Grant, 1875); Finance Report, 1867, v; 1868, vii; 1874, x-xviii ; 1875, xii-xxii; 1876, xii-xviii ; 1877, xi-xvi ; 1878, viii-xvii ; 1879, ix-xii ; 1880, xii-xv ; Specie Resumption and Refunding of the National Debt, in Execu- tive Documents, ifd'Ca Cong., 2ndSess., XVII (1879-1880); Statutes, XVIII, 296; XX, 87 ; or Dunbar, 214, 217 ; E. McPherson, Handbook of Politics, 1876, pp. 120-127; 1878, pp. 143-152 (attempts to repeal); J. Sherman, 359 360 Greenbacks and Resumption. [§ '54 Recollections, I, 507-549, 565-602 ; II, 636-660, 686-700 ; J. A. Garfield, Works, II, 490-527 (attempt to repeal), 175-185, 246-274, 609-627 (Jan. 2, 1879) ; W. D. Foulke, Life of Oliver P. Morton, II, 74-102, 317-338, 355-363; Belles, III, 282-304; Report of Monetary Commission (1898), 425-436; A. D. Noyes, Thirty Years of American Finance, 21-56; J. K. Upton, Money and Politics, 146-156; C. F. Adams, Currency Debate of 1873,111 No. American Review, CXIX, 111-165; H. White, Present Phases of the Currency Question, in International Review, IV (1877), 730; H. White, After Specie Resumption, in International Review, V (1878), 833-847. Greenback Party: E. McPherson, Handbook of Politics, 1876, pp. 224-233; Atlantic Monthly, XLII, 521-530; E. N. Dingley, Life of Nelson Dingley, Jr. (1902), 134-146, 149-156; Alexander Johnson, in Lalor's Encyclopedia, II, 418-419; G. Walker, Bankers' Magazine, XXXIII (1878), 248-252; C. J. Bullock, Monetary History, 105-109. 154. Volume of Treasury Notes. It is now necessary to return to the fortunes of government note circulation. The repeal of the contraction policy in 1868 left the volume of legal-tender notes in uncertainty. The act of June 30, 1864, declared that the total amount of United States notes should never exceed ^400,000,000 ; and in 1866 a gradual reduction began, soon checked by the law of 1868. When Congress suspended further contraction the amount stood at J35 6,000,000 ; the ^44,000,000 of balance was generally regarded, at least by those who looked forward to an early return of specie payments, as a reserve issue to be used only in case of emergency, when revenues fell below expenditures, or possibly as a redemption fund for the frac- tional currency, which amounted to about ^50,000,000. In October, 1871, however. Secretary Boutwell issued §1,500,000 of these notes, and in the next year §4, 63 7,000. This action, though giving satisfaction to advocates of a larger supply of currency and to stock-exchange speculators who clearly recognized that speculation flourished best under a regime of a fluctuating supply of currency, was sharply criticised both by those who believed that contraction was the true road to resumption, as well as by those who felt that changes in the volume of currency should not be left to the uncontrolled § iS4j Volume of Treasury Notes. 361 judgment of any one official. Although the treasury depart- ment made no public explanation or defence, it was consid- ered expedient to retire the recent issues. The subject did not rest, for the panic of 1873 again aroused- a clamor for money. Secretary Richardson, who succeeded Boutwell, yielded under the plea of a great emergency, and between March 7, r873, and January 15, 1874, issued ^z6,ooo,- 000, of legal tenders, above the ^356,000,000, making the total ^382,000,000. These issues were put into circulation by the purchase of bonds. Congress, either because it thought there was some doubt as to the secretary's power and preferred to assume responsibility, or because it wished to inflate the currency beyond the limit reached by Secretary Richardson, passed a bill in April, 1874, for the permanent increase of the currency to ^400,000,000. The significance of this proposition is clear : it not only was an indemnity act for an emergency issue, but it practically authorized an increase of currency in times of peace, thus constituting a precedent for any future Congress to enlarge the volume at will. Grant vetoed the bill in a memorable message, April 22, 1874, which may be regarded as the turn- ing point in the agitation for an increased volume of treasury legal-tender notes ; the president declared that the theory of increased circulation was a departure from true principles of finance, national interest, national obligation to creditors, congressional promises, party pledges on the part of both political parties, and of his own personal views and promises made in every annual message sent by him to Congress, and in each inaugural address. " I am not a believer in any arti- ficial method of making paper money equal to coin, when the coin is not owned or held ready to redeem the promises to pay, for paper money is nothing more than promises to pay, and is valuable exactly in proportion to the amount of coin that it can be converted into." Notwithstanding the reference to his previous convictions. Grant's veto came as a surprise to the public at large. Only 362 Greenbacks and Resumption. [§'55 a few months earlier he had stated that in view of the relative contraction in currency, due to the increase of manufactures and industries, he did not believe that there was too much money even for the dullest part of the year. Under such cir- cumstances the party of monetary reform was greatly encour- age by his later decisive utterance. The victory, however, was not complete, for under cover of the act of June 20, 1874, affecting the distribution of national bank currency, a section was smuggled in, declaring that the amount of United States notes outstanding should not exceed ^382,000,000. This, however, was soon followed by the resumption act of January 14, 1875, looking forward to a final reduction in the volume to ^300,000,000. ^ 155. Constitutionality of Legal-Tender Notes. For some time after the issue of the greenbacks there was uncertainty as to the legal-tender attribute of the treasury notes, and questions quickly arose which required setdement in the State and federal courts. The trend of the decisions of the Supreme Court from the first was toward a limitation of the notes; in Lane County v. Oregon (r868) it was held that the notes were not legal tender for State taxes ; in The Bank V. Supervisors (1868) that they were obligations or securities, and consequently exempt from taxation ; and in Branson v. Rodes (1868) that they were not legal tender in the settlement of contracts specifically calHng for the payment of specie. Finally the more direct question of constitution- ality was passed upon by the Supreme Court in 1869 in the case of Hepburn v. Griswold. In i860 a Mrs. Hepburn in a promissory note agreed to pay Griswold on February 20, 1862, ^11,250. At each of the above dates the only lawful money was gold and silver coin. Mrs. Hepburn failed to pay the note at maturity, and upon a suit brought in Kentucky, March, 1864, tendered payment in United States notes which had been issued February 25, 1S62, that is, five days after the maturity of the note. The tender was refused. An appeal § 155] Legal-Tender Notes. 363 was carried to the United States Supreme Court, and a deci- sion rendered^ in December, 1869. Tlie opinion by a fateful stroke of fortune was delivered by Chief- Justice Chase, in whose administration as secretary of the treasury the notes had been first issued. The legal-tender quality was denied ; yet the whole question was not covered, because the case involved only the tender of notes in settlement of contracts entered on previous to the first legal-tender act ; and Chase, in the declaratory portions of the opinion, was careful to limit the application of the decision to such contracts. Nevertheless the court clearly indicated its conviction on the question of the constitutionality of notes tendered in the settlement of cur- rent contracts, for it practically asserted that the legal-tender clause was not only improper but unnecessary. "Amid the tumult of the late Civil War — the time was not favorable to considerate reflection upon the constitutional limits of legisla- tive or executive authority. If power was assumed from patriotic motives, the assumption found ready justification in patriotic hearts. Many who doubted yielded their doubts ; many who did not doubt were silent. Some who were strongly averse to making government notes a legal tender felt them- selves constrained to acquiesce in the views of the advocates of the measure. Not a few who then insisted upon its neces- sity, or acquiesced in that view, have, since the return of peace, and under the influence of the calmer time, reconsid- ered their conclusions, and now concur in those which we have just announced." Three justices concurred with Chase in the majority opinion, while a dissenting opinion was ren- dered by Justice Miller in which two of his associates joined, thus dividing the court, four to three. The decision was unpopular. The close division of the court, when it was not complete, was an irritating factor, to say nothing of the disturbance to business if gold payments were to be enforced. A second case, Knox v. Lee, conse- quently came before the court, but before the decision was rendered in May, 1871, the membership of the court was 364 Greenbacks and Resumption. [§ 155 changed by the addition of two members, one to fill a vacancy, and the other through a statute enlarging the court from seven to eight. Inasmuch as on this occasion the deci- sion of 1870 was reversed, there have been charges that the court was packed in order to bring about the reversal. The evidence on this point has been carefully examined by Pro- fessor Hart in his biography of Chase, and the charges of collusion clearly shown to be unfounded. That the new justices would be in general accord with the administration was to be expected ; there was, however, no previous under- standing of their views on the particular question of legal tenders, and no instructions to bring about a reversal of the earlier decision. Nevertheless, it must be admitted that there was a strong popular expectation that as soon as the court was reorganized, a reversal of the opinion would be made. This is seen in the fact that the first decision did not lead to a reduction in the premium on gold ; and the exceptional methods adopted by the court in order to bring another case quickly before it for adjudgment showed unusual feeling and pressure. In the opinion on the case of 1871 (filed in 1872), the court held that a broad interpretation must be given to the Constitution, for it could not be expected that this document would completely enumerate all the powers of government with details and specifications ; the powers of Congress must be regarded as related to each other, and means for a common end. Among the non-enumerated powers, there certainly must be included the power of self-preservation, and no reasonable construction of the Constitution could deny to a government the right to employ freely every means not pro- hibited, or necessary for its preservation. And in carrying out its purpose Congress is entitled to a choice of means .which are in fact conducive to the exercise of a power granted by the Constitution. Marshall's words in the decision McCul- loch v. Maryland are cited as convincing and conclusive. Let the end be legitimate, let it be within the scope of the § IS5] Legal-Tender Notes. 365 Constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but connect with the letter and spirit of the Constitution, are constitutional. There were two main questions for the court to consider : Were the legal-tender acts inappropriate means for the execu- tion of any or all of the powers of the government ? and were they prohibited by the Constitution ? As to the first question the emergency was great when the legal- tender acts were passed : the endurance of the government had been tried to the utmost. " Something revived the drooping faith of the people ; something brought immediately to the government's aid the resources of the nation, and something enabled the successful prosecution of the war and the preservation of the national life. What was it, if not the legal-tender enact- ments? " As to whether other means might not have been effective, that was not for the courts to decide ; the degree of appropriateness of given laws is for the legislature and not for the judiciary to determine. On the second point the court held that the making of the treasury notes a legal tender was not forbidden either by the letter or by the spirit of the Constitution. Although certain express powers are given to Congress in regard to money, it cannot be inferred, as the Constitution has been in general construed, that all other powers are by implication forbidden. Since the States are expressly prohibited from declaring what shall be money, or from regulating its value, whatever power exists over the currency is vested in Congress. Considering that there is no express prohibition upon Congress in this matter, and that paper money was almost exclusively in use in the States as the medium of exchange, it must be presumed that the framers of the Constitution did realize that emergencies might arise when the precious metals would prove inadequate to the necessities of the government. Nor could it be argued that the legal-tender acts are uncon- stitutional because they directly impaired the obligation of 366 Greenbacks and Resumption. [§'156 contracts, that is, of contracts made previous to the passage of the act. In contracts for payment of money, it did not mean money at the time when the contract was made, nor gold or silver, nor money of equal intrinsic value in the market ; the obligation was to pay that which is recognized as money when the payment is to be made. " Every contract for the payment of money simply, is necessarily subject to the constitutional power of the government over the currency, whatever that power may be, and the obligation of the parties is therefore assumed with reference to that power." More than this, Congress does have the power to impair contracts indirectly by rendering them fruitless or partly fruitless, as in bankrupt laws, declaration of war, and embargoes. No obli- gation of a contract can extend to the defeat of legitimate government authority. In conclusion, it was observed that the legal-tender acts did not attempt to make paper a standard of value : their validity does not rest upon the assertion that this emission is coin- age, or any regulation of the value of money ; or that Con- gress may make money out of anything which has no value. " What we do assert is, that Congress has power to enact that the government's promises to pay money shall be, for the time being, equivalent in value to the representation of value deter- mined by the coinage acts or to multiples thereof." 156. Issues in Times of Peace. This decision settled the question of constitutionality of legal-tender issues in times of war, but it left uncertainty as to the powers of government over currency during peace. The judicial decision on this point was made by the Supreme Court in 1884 in the case oi Juilliard v . Greenman ; the ques- tion before it was the constitutionality of that provision of the law of 1878 which required that all legal-tender notes redeemed at the treasury be reissued, kept in circulation, and continue to retain their legal-tender quality. The court decided in favor of the constitutionality of such reissues, by § 156] Issues in Times of Peace. 367 a generous interpretation of the doctrine of implied powers, in support of which the reasoning of Marshall, in the case McCitlloch V. Maryland, is again reviewed at length. As pre- liminary to the main conclusion, it is shown that Congress has the power to pay the debts of the United States ; that in pursuance of this, all means which are appropriate, and not prohibited, are constitutional ; that not too much weight should be given to the debates and votes of the constitutional con- vention of 1787, for there is no proof of any general con- sensus of opinion in the convention upon this subject ; that the power to borrow money includes the power to issue obli- gations in any appropriate form, and, if desired, in a form adapted to circulation from hand to hand in the ordinary transactions of commerce and trade ; that the issue of legal- tender notes is incident to the right of coinage ; and finally that Congress has power to provide a currency for the whole country. As a consequence. Congress " may issue the obli- gations in such form and impose upon them such qualities as currency for the purchase of merchandise and the payment of debts as accord with the usage of sovereign governments " ; and it is for Congress, the legislature of a sovereign nation, to declare whether, because of an inadequacy of the supply of gold and silver coin, it is wise to resort to legal-tender paper issues. The decision reopened the controversy ; this was largely academic ; Bancroft the historian made a passionate protest in a pamphlet entitled : " A Plea for the Constitution of the United States of America, Wounded in the House of its Guar- dians " ; but popular judgment on the whole was favorable. Lawyers and constitutional commentators were slowly coming to the conclusion that the interpretation of the Constitution must rest upon a broader basis than that of the debates of 1787 ; and the people at large were satisfied that there was to be no disturbance in the conditions to which they had been long accustomed. 368 Greenbacks and Resumption. [§ 157 157. Sale of Gold. Closely related to the question of contraction was the policy to be followed in disposing of the gold which flowed into the treasury in the payment of import duties. The treatment of this surplus gold was, as previously described, a perplexing problem during the latter years of the war when the amount locked up in the vaults of the United States treasury was a considerable part of all the gold of the country, and was more than was needed for payment of interest 011 the public debt. Great pressure was brought upon the treasury to part with gold in one way or another to make the coin available for commerce. The treasury accumulation of coin, together with the rapid and violent fluctuations in the value of gold, became especially prominent in 1864. To return gold into general circulation, three ways were proposed : one by antici- pating the payment of interest on the debt, a second by the purchase of bonds for the sinking fund, and a third by sale of specie. The first was thought ineff'ective, since the procedure would be too slow to have any appreciable effect upon the gold market ; the second was considered absurd, in view of the fact that the government was then borrowing ;?2,ooo,ooo a day to meet current expenses. In March, 1864, a joint resolution was adopted, involving the use of all three methods, authoriz- ing the secretary of the treasury to anticipate the payment of interest and to dispose of any gold in the treasury not neces- sary for the payment of interest on the public debt, provided the obligation to create the sinking fund be not impaired. McCuUoch in his treasury policy regarded a steady market in gold as of more importance than the saving of a few millions of dollars in interest through refunding measures. He main- tained that the treasury should use its powers to prevent specu- lative combinations in gold, and thus promote the steadiness of the money market, advance the currency toward a true standard of value, and prevent financial disturbance. This policy of continuous sale of gold met a double opposition ; on §157] Sale of Gold. 369 the one hand, from those who believed that gold must be amassed in the treasury to effect a speedy resumption of specie payments; on the other, from those who argued that an advance in the market price of gold was desirable in order to prevent bondholders, especially foreigners who had purchased American securities with paper money at a great discount as compared with gold, from realizing any advantage which would result by returning and reselling these securities for money of greater worth. For several years gold was sold by the treasury department at private sale, but in 1868, the practice was introduced of selling gold by auction to the highest bidder. Wall Street promptly protested, on the ground that the gold market was put into the control of speculators, to the great disadvantage of commercial buyers of gold for legitimate trade purposes. The commercial trading in gold as a commodity naturally cen- tred in New York City, the largest importing market in the United States, where the dealings were so constant and enor- mous that the gold-room, situated next to the Stock Exchange, was a recognized institution in the financial hfe of New York, and the quotations there established were sharply watched by business men throughout the country. As the supply of gold outside of the government treasury was quite limited, it finally occurred to Jay Gould and James Fisk, two of the most daring speculators developed by post-bellum conditions, to endeavor to corner the gold supply. Their financial venture came to a crisis in September, 1869, in the early days of Grant's administration, when Boutwell was secretary of the treasury. Complete success could be attained only by pre- venting any unusual sale of gold by the treasury department ; hence for months, as was afterwards learned, those connected with the project found means to impress upon the administra- tion the wisdom of keeping up the price of gold during the autumn, in order to assist the West in moving its crops, since a high premium on gold was supposed to make the farmers' grain worth so much the more. In a few days the premium 370 Greenbacks and Resumption. [§158 on gold was run up from 130 to 162 ; at this juncture Secre- tary Boutwell ordered the sale of gold, and the price then fell to 135, but in these few hours of rapid fluctuations many were irretrievably ruined. In the annals of Wall Street no day is more notorious than this Black Friday, September 23, 1869, and the unfortunate connection of the government with the affair helped to inflame the unreasoning hostility of the agri- cultural districts in the interior to all financial measures ema- nating from the larger cities of the East. 158. Panic of 1873. In 1873 occurred a panic which affected every operation of finance and commerce. It was more than a panic ; it was the beginning of a long period of financial and industrial depres- sion, in many ways the logical outcome of ill-adjusted produc- tion and inflated credit. Remarkable changes in industry and commercial organization were coincident with an enor- mous expansion of railway construction : during the years 1860-1867 the annual increase in railways averaged but 131 1 miles; in 1869 it rose to 4953; in 1870, to 5690; in 1871, to 7670; and in 1872, to 6167 miles, — a total of over 25,000 miles in four years. The process involved a sinking of capital far beyond what was immediately productive, and the opening of vast areas of wheat-growing country, revolutionized the price of grain, and disturbed the status of the farmer. The same expansion took place in Russia and South America ; and this accession of new sources of world supplies on a large scale, together with the readjustments in trade due to the Suez Canal, gave to industrial development sudden twists and turnings quite beyond calculation. The rapid and unprecedented construc- tion of railways in turn created a demand for iron, which led to over-investment in this industry. There appeared to be no end to possible opportunities and profits in the industrial world, and new securities were created on a large scale, while prices of all commodities were unduly inflated. §'S8] Panic of 1873. 371 Another important factor in bringing economic organization to a standstill was a change in the international trade relations. The United States had incurred a heavy foreign indebted- ness, having borrowed abroad between 1861 and 1868, on her national, state, railway, and other securities, an amount esti- mated at $1,500,000,000. In return for this credit the United States incurred an annual interest charge estimated in 1868 at $80,000,000 ; in addition payments made by American travellers abroad and for freights in foreign vessels brought the total annual tribute, in addition to payments for ordinary imports, up to $129,000,000. The natural resources for mak- ing this payment were curtailed by the war; the export of cotton practically ceased for several years; after peace was established, exports of merchandise increased, but not in the same proportion as the rise in imports. This is seen in the following table prepared by Wells and Cairnes, where a com- parison is made of imports and exports before the war with the five years succeeding : — Imports (less re-exports) Domestic exports (including specie) 1858 1859 $251,700,000 317,800,000 $293,700,000 335,800,000 i860 335,200,000 373,100,000 1868- 351,200,000 352,700,000 i86g 412)200,000 318,000,000 1870 431,900,000 420,500,000 187 1 1872 513,100,000 617,600,000 513,000,000 501,100,000 Annual average of last 5 years $465,200,000 $421,060,000 For a time the adverse balance was settled by the transfer of government bonds to foreign account, and these securities were as good as gold in settling the international balance of trade. An end came to the supply of bonds on terms which would satisfy the foreign creditors, and it became necessary to draw specie ; this disturbed the domestic money market. It is 372 Greenbacks and Resumption. [§ 159 easy now to diagnose the evils and dangers, but in 1873 there was little anticipation of disaster, and consequently no proper preparation by conservative financial interests. When the crisis came, the treasury was so involved and so connected with private finance, that tremendous pressure was brought upon the government to relieve by its fiscal aid evils occasioned by the bad judgment of the business world. Fortunately the receipts of the treasury were so large at this time that even a serious depression did not greatly embarrass the government in providing for current supplies. The secretary of the treasury was easily prevailed upon to issue (March, 1873-January, 1874) ^26,000,000 of legal-tender notes in the purchase of bonds in order to relieve a stringent money market; and when Congress met in December, 1873, demands for government action took every form known to finance. So great was the impetus to the activity of expan- sionists and greenbackers, that for a brief period any positive action looking toward resumption seemed indefinitely post- poned. Only by the veto of President Grant, which has been referred to, was actual inflation checked. 159. Resumption Act of 1875. The political consequences of the panic were seen in the autumn of 1874, when the congressional elections, for the first time since i860, went against the Republican party. Under the pressure of political necessity, inspired in part by the vigorous tone of Grant's veto and by the positive demands of Bristow who succeeded Richardson as secretary of the treas- ury, a bill was enacted for the resumption of specie payments by the expiring Congress, January 14, 1875, while the Repub- licans still held power to rally to its support sufficient votes for its passage. The measure was loaded with a variety of provisions: (i) A system of free banking which will be dis- cussed; (2) the retirement of greenbacks equal to 80 per cent, of the amount of new national bank-notes issued, until the greenback circulation should be reduced to $300,000,000, § iS9j Resumption Act of 1875. 373 after which no further reduction of the greenbacks was to take place. It was argued that this check would prevent either expansion or contraction of the currency, as nearly 20 per cent, of the notes were already held as bank reserves ; (3) the withdrawal of paper fractional currency and the sub- stitution of silver coin ; (4) removal of the charge for coinage of gold; (s) resumption of specie payments on January i, 1879 : for this purpose the treasury was authorized to use the surplus specie in the treasury ; and, if necessary, to sell bonds, of the classes authorized under the act of July 14, 1870, in order to obtain additional gold. The legal-tender quality of both greenbacks and national bank-notes remained unchanged. Like most compromises, the measure aroused little enthu- siasm : as a matter of fact, the premium on gold went higher in 1875 than in 1874, and in 1876 was as high as in 1871 or 1872. The act, save for fixing a distant date for resumption, contained but little definite provision for pressing the country on in its progress toward specie payments. It was regarded by some indeed as distinctly an inflation measure : the day of resumption was so remote that no inflationist need feel anxiety, and there was plenty of opportunity for more paper currency under the provision of free banking. The measure was pur- posely left vague, and by command of the party caucus there was practically no discussion of the bill in the Senate. If there had been strong conviction of the necessity of resumption, and a serious desire to effect it, a simple bill could have been passed, authorizing the retirement of treasury notes by con- version into bonds ; but when an attempt was made to secure an explicit declaration that the measure did not permit the future reissue of the legal-tender notes which might be returned to the treasury, Senator Sherman frankly declared that this question, as well as others, was not definitely settled in the bill, and that it was wiser to leave to the future questions that divide and distract, and for the present hold to the main pur- pose of accomplishing the great work of resumption. 374 Greenbacks and Resumption. [§ i6o The most serious practical defect in the law, as afterwards stated by Sherman who finally had the responsibility of carry- ing the measure into effect, lay in the withholding of power from the secretary to sell bonds directly for United States notes ; the treasury was obliged to sell bonds for coin, and as coin did not enter into general circulation, the treasury could not sell bonds at first hand to the people. It was liecessary to carry on negotiations with the bankers, and this operation gave rise to attacks upon the government for entering into dealings with syndicates and money brokers. An error of a different sort was to make the retirement of United States notes dependent upon the issue of new bank-notes. From the standpoint of resumption the two processes had no relation whatever to each other ; the retirement of a part of the gov- ernment notes undoubtedly advanced the residue toward par in coin, but the volume to be retired should have been deter- mined by considerations independent of national bank issues. 160. Resumption Accomplished. The act remained practically inoperative so far as the prop- osition for immediate resumption was concerned. Secretary Bristowin 1875-1876 did not favor the policy of accumulating gold in a reserve, as he deprecated the loss of interest on the specie so withdrawn ; and he feared the serious opposition of the financial world, particularly of Germany, which was at that time abandoning silver for gold monometallism. Political activity was again aroused to prevent contraction. The Dem- ocrats in their national platform of 1876 declared the resump- tion clause to be " a hindrance to a speedy return to specie payments," and this view was supported by a considerable number of Republicans. The views of the Greenback party will receive separate consideration. When Hayes became president, March, 1877, John Sherman of Ohio was appointed secretary of the treasury. Sherman had served continuously in Congress since 1855, first as mem- ber of the House until 1861, and then as senator ; in 1867 he § i6o] Resumption Accomplished. 375 succeeded Fessenden to the chairmanship of the committee on finance ; his ability was unquestioned ; he had shown ex- ceptional facility in handling financial details, understood the money market thoroughly, and was a shrewd judge of men. Although his record on financial questions was marred by inconsistencies, as, for example, a change of opinion on the refunding measures, he had the confidence of eastern capi- talists and of those who were working for an early resumption of specie payments. He had held an important part in fram- ing the resumption act, and immediately upon taking office undertook more decided measures to carry it out, Sherman relied almost solely upon building up a gold reserve through the sale , of bonds for coin. From Congress he realized that he would get no added support ; rather there was danger that he would be prevented from doing anything at all, for in 1877 the inflationists were in control of both Houses of Congress, and again made a determined effort to repeal the resumption act. Such a measure was passed by the House of Represen- tatives and failed in the Senate only through disagreement on details. The monetary system was also threatened with the free coinage of silver. Surrounded by embarrassments it was inevitable that Sherman should find difficulty in selling bonds : European financiers, alarmed by the greenback and silver coinage agitations, movements to be subsequently described, expected American finances to be deranged, and returned a considerable block of bonds which competed with the new issue. In spite of all obstacles, Sherman persisted in the policy of gold accumulation. He concluded that 40 per cent, of the notes was the smallest safe reserve of gold ; on this basis ;?i 38,000,000 in coin was necessary. On January i, 1879, the treasury had gathered together ^133,000,000 of coin over and above all matured liabilities. To do this ^95,500,000 of bonds were sold, the balance being met from surplus revenue. Slowly but gradually the value of the notes approached parity with gold, and on December r7, 1878, a fortnight before the date set, paper currency was quoted at par. 376 Greenbacks and Resumption. [§ 160 The following table shows the average annual value in gold of ^100 in currency during the entire period of suspension : Fiscal year Value Fiscal year Value 1853 $72.9 1871 »88.7 .864 64.0 1872 89.4 1865 49- S 1873 87.3 i855 71.2 1874 89.3 1867 70.9 1875 88.4 1868 71-5 1876 87,8 .869 72-7 .877 92.7 1870 81. 1 1878 97-5 In carrying through resumption, Sherman showed firmness and tact. He was careful not to antagonize too sharply the elements of both parties which favored silver coinage ; though he disliked the silver bill of 1878, he accepted it and declared that it should be given a fair trial. When the bankers stated that they would throw the burden of the resumption of bank- notes, as well as of United States notes, upon the government, he professed no concern, remarking that such action would be suicide to the banks ; that the government could withdraw all of its own deposits in banks, and present all bank-notes held, or received, for instant redemption. The banks, in his opinion, would find no profit in presenting treasury notes for coin in order to embarrass the government ; legal-tender notes were used by the banks for reserve ; and these, being interested in keeping a strong reserve for which greenbacks were available, would find it more to their advantage to aid the government by making employment for the treasury notes. To this day there is uncertainty and division of opinion as to what were the real forces that accomplished resumption, and the means by which it was afterwards maintained. Many have attributed the achievement solely to Secretary Sherman's financial wisdom and skill, and to the fact that as soon as it was seen that he was in earnest, public confidence co-operated to a successful issue. Without in any way questioning Sher- man's administrative ability, we must recognize as a powerful >-i 7. O S P. B s W £ « S o § i6o] Resumption Accomplished. 377 factor in eifecting resumption, and in maintaining it during the early years of trial, the favorable commercial position of the United States. The tide of trade turned about 1878, and the United States at last was selhng to foreign countries more than it was buying. Commerce came to the rescue of finance. Owing to the fall in prices following the depression of 1873, and the increasing demand of Europe for our cotton and food, intensified in 1879 and 1880 by the shortage in Eu- ropean crops, our exports more than doubled between 1872 and 1881, the increase from 1877 to 1881 being over 50 per cent. Such conditions were evidently favorable to the impor- tation and retention of gold; and coupled with this happy turn in market conditions, was the fall of prices occasioned by resumption itself, which in turn was a powerful magnet for attracting gold back to this country. In the actual carrying out of resumption, it is to be observed that there was no contraction whatever in the paper currency : no destruction of treasury notes took place ; very little paper money was presented for gold, and whatever came in was paid out again by the treasury for immediate use. Under the original resumption act of 1875, authority was given for the cancellation of ^82,000,000 legal tenders (dependent upon issue of new bank-notes), which would have reduced the total volume to ^300,000,000. Some contended that under the resumption act of 1875 there could be no reissue of the greenbacks when once received into the treasury. The infla- tionist successes of 1877-1878 settled this uncertainty once for all, since Congress, May 31, 1878, ordered that there be no further destruction of greenbacks. The amount then out- standing was $346,681,000, a slight reduction from the $382,- 000,000 outstanding in January, 1875. ^^ ^^^ ^^^ ^^^ never been changed, this volume of legal-tender circulation is still current. It was also enacted in 1878 that all notes when received into the treasury shall be " reissued and paid out again and kept in circulation," and the constitutional doubts as to the right to do this was, as has been seen, removed by 37^ Greenbacks and Resumption. [§ i6i the Supreme Court in the decision of 1884. The burden of redemption in gold was thus made perpetual, although no automatic process was devised which would promise an ever- ready stock of gold for exchange. Fortunately, on account of the commercial prosperity which was reflected in large treasury surpluses, the burden of keeping up the gold reserve was lightly felt during the next ten years. When, however, a new supply of treasury notes was added by the act of 1890, without any added provision for the gold reserve, and revenues showed a deficit instead of a surplus, the weakness of the arrangement was disclosed. 161. Greenback Party. The question of legal tender should not be dismissed with- out some further account of the greenback philosophy and its advocacy by political parties. In 1876 dissatisfaction with the financial policy of the government was so bitter that it crystallized in a separate political organization known as the Greenback or National party, and later as the Greenback Labor party ; a consideration of the views of this organization throws light upon the success of the free silver agitation. The propositions advocated by the Greenback party, as we have seen, were by no means new : inflationists are in evidence from the beginning of financial reconstruction ; at one time or another, when party lines were not firmly drawn on financial questions, they exercised influence within each of the great political organizations. Unable, however, to force these parties to accept their views without reservation, many voters in 1876 abandoned their allegiance in order to form a new organization ; nevertheless, this secession and party reconstruction did not mean that each of the older parties was purged of the doc- trines of government fiat money and payment of bondholders in greenbacks. There still remained such a latitude of opinion that, on all questions touching monetary policy or the treat- ment of public debt, Greenbackers were likely to find a sympathetic support among Republicans and Democrats. It was during this period that the term " soft " currency was § i6i] Greenback Party. 379 invented. The significance of the term is not very precise, but it included the doctrines of all then opposed to specie or hard money as the basis of the monetary system. The specific demands of the Greenback party in 1876 were as follows : (i) Repeal of the act for the resumption of specie payments; (2) Issue of legal-tender notes convertible into obligations bearing interest not exceeding one cent per day on each ;?ioo; (3) Suppression of bank-notes; (4) No gold bonds for sale in foreign markets. The underlying idea in the greenback philosophy, an idea which still finds much popular acceptance, is that the issue of currency is a function of the government, a sovereign right which ought not to be delegated to corporations. Such a view appealed to the spirit of nationalism and democracy, and naturally and quickly led to the full acceptance of the principle of "fiat money." This phrase in its extreme form signified a money that was not dependent for its value on the material of which it was made, that was not redeemable in any other money, and that had its origin, force, sanction, and value in the mandate of the government. The value of currency was held to depend not upon its convertibility, but upon its purchasing power. Bonds were based upon the credit of the United States and thus had value ; why not follow the same reasoning and policy as to paper money? The next step was to deny that there was any such thing as money of the world ; money is national, not international ; it is made money by law, and whatever the law makes money is money. " The only money capable of perfection would be one manufactured out of a material costing substantially nothing, redeemable in nothing else, inasmuch as the redemption of money is its destruction, non-exportable, deriving its existence from the will of the government, authenticated by an official stamp, and regulated as to its value by limiting the quantity." Much was made of a non-exportable currency. The dollar, it was said, should have at all times a certain fixed and stable value below which it cannot go ; it should be issued by the 380 Greenbacks and Resumption. [§ 161 government alone, in the exercise of its high prerogative and constitutional powers; it should be stamped on convenient material of the least possible intrinsic value, so that neither wear nor destruction will occasion any loss to the government ; it should be made of such material that it would never be exported ; when issued, it should never be redeemed ; and it was solemnly declared that there was no more reason why the dollar, the unit of values, should.be redeemed, than that the yard-stick, the unit of length, should be redeemed. The dollar so issued should possess a value, a httle greater than that of the gold dollar, in order that it might be fundable into a 3.65 per cent. bond. Its real value rested through the sovereign act of government, upon the wealth, the power, and the prosperity of the country. The note was a dollar and not simply an obligation. It was vehemently denied that the greenback was only " a promise " of the government ! Every promise made by it had been scrupulously observed ; the so-called promise on the United States notes to pay dollars was neither on demand nor at any fixed time. " Its value or purchasing power rested upon nothing except the laws of Congress making it receivable for certain classes of national taxes, and a tender for private debts, and the general consent of the people." " The degree of its purchasing value was determined by the quantity in circulation. Opinion as to the probability of its redemption in coin, neither created its value, nor fixed the magnitude of its value." According to the greenbacker logic, resumption in 1 8 79 was efifected not by the retirement of greenbacks, or the creation of a gold reserve backed up by fortunate trade conditions, but by the word of the secretary of the treasury ordering the acceptance of greenbacks at par at the custom-houses in pay- ment of the duties. " At once these greenbacks were made equal to gold. The greenback, meeting all the demands for money equally as well as gokl, iiad the same worth as gold, and the premium on gold at once disappeared." The speakers and newspapers in the greenback cause were § i6i] Greenback Party. 381 fierce in their denunciation of tlie so-called money interests ; to them the American people were opposed, if not enslaved by the bondholding interests. These interests, rendered skilful and wise by years of dealings in the old world and new, were accused of successfully laboring for two objects : the perpetua- tion of the bond, and the increase of the value of the currency in which all payments on interest or principal of the bonds were to be made. The American people should not be " hewers of wood and drawers of water " to foreigners ; it would gladly take at par all bonds that the government found necessary to sell, provided they were payable at the option of the holder and bore interest at 3.65 per cent, or lower. Finally the system of funding was held responsible for perpetuating an enormous, non-taxable, interest-bearing debt. It was reasoned that the bonds support the banks, the banks foster the public debt, and the funding measures deprived the people during twenty to thirty years, of their lawful right to pay the bonds, — a crime against the laborer and tax-payer. Recent legisla- tion was cited in evidence : the first step in this campaign of oppression by bond-holders, it was said, was the act of March 18, i86g, which by one stroke doubled the property of bond- holders by compelling the payment of all bonds in coin ; the second blow was struck in extending the bonds by the refund- ing act of July 14, 1870 ; and the plot was carried to complete success in- the laws excluding silver from coinage. It was thus reasoned that all of the banking, coinage, and bond legislation since the Civil War had been a part of a well-defined scheme to defraud the public. In 1876 the Greenback party polled less than one hundred thousand votes (81,740) ; in 1878, at the congressional elec- tion, it secured the support of more than 1,000,000 voters; in 1880, 308,578; in 1884, with Butler as the presidential can- didate, 175,370. This was the last presidential election in which the Greenback party figured. For a time its financial demands were enunciated by the Labor party, and later were put into the platform of the Populists or People's party. 382 Greenbacks and Resumption. [§ 161 Although the advocates of greenbacks never acquired respon- sible party power, they gained several decisive victories which have left permanent results. Chief among these may be men- tioned the stopping of contraction in 1868, and in 1878, the repeal of the cancellation of notes which was authorized by the resumption act. CHAPTER XVI. BANKING AND TAXATION, 1866-1879. 162, References. Banking : Finance Report, 1873, PP- 76-98 ; 1875, pp. 202-205 (profits), 223-227 (taxation); 1877, pp. 168-176 (taxation); 1878, pp. 156-166; 1879, pp. 123-125 (profits), 144-150 (taxation of bonds); 1881, p. 188 (profits) ; Bolles, III, 341-365; J- A. Garfield, Works, I, 543-571 (June 7, 1870), 571-593 (June 15 and 29, 1870) ; C. A. Conant, History of Modern Banking, 265-270; Report of Monetary Commission (1898), pp. 200-218; C. F. Dunbar, Theory and History of Banking, 141-143; J. J. Knox, His- tory of Banking, 101-151. Taxation: Finance Report, 1871, p. viii; 1874, pp. xxiii-xxvii (cus- toms); 1875, pp. xxxiv-xxxvii ; 154-159 (whiskey frauds); 1877, p. '^o (frauds) ; 1878, pp. 61-64 (tax on tobacco) ; Report of U. S. Revenue Commission, 1865-1866 (Pub. Doc. 1866, p. 483); Bolles, III, 398-444 (internal revenue), 445-488 (tariff) ; J. A. Garfield, Works, I, 205-216 (tariff bill of 1866), 383-390 (Jan. 19, 1869), 520-543 (tariff bill of 1870) ; II, 551-571 (1878), 637-655 (1879); F. H. Hard, in Avierican Orations, III, 374-405 (Feb. i8, 1881); W. McKinley, Speeches and Addresses (ed. 1894); 1-22 (Apr. 15, 1878); W. D. Kelley, Speeches, 9-84 (Jan. 31, 1866), 322-391 (June I, 1868); J. Sherman, Speeches, 121-137 (Jan. 23, 1867), 284-306 (May 23, 1870), 336-355 (March 15, 1872); E. Young, Customs Tariff Legislation, cxlii-clxxviii ; F. A. Walker, Discussions in Economics and Statistics, I, 27-68 (1870) ; F. W. Taussig, History of the Tariff, 171-229 (references in foot-notes) ; F C. Howe, Taxation Under Internal Revenue System, 197-204, 214-222; D. A. Wells, Practical Eco- nomics, 152-234 (distilled spirits; industrial effects and frauds). 163. Bank-Note Circulation. The two preceding chapters have been devoted almost exclusively to questions relating to the debt, the struggle over issues of government paper money, and the resumption of specie payments ; there are three other subjects which require special consideration to bring the narrative during the period of readjustment, 1865-1879, into an orderly presentation: these are the development of the national banking system, the reduction of taxation, and silver coinage. If it be objected that precedence should be given to the subject of taxation, the an- 383 384 Banking and Taxation. [§ '63 swer is that while revenue is at the basis of national vitality, its treatment during these years received the barest consideration. When the war closed the bank-note circulation was about evenly divided between State and national bank bills. The applic,ation in 1866 of the 10 per cent, tax upon all local issues finally drove such institutions as wished to enjoy note circulation to reorganize under federal charters ; and from this date controversies over banking were added to the other per- plexities of Congress. Such subjects as the redemption of notes and the proper adjustment of bank reserves to deposits, do not properly concern national finance ; but some other phases of the banking problem are of interest to the govern- ment in its fiscal capacity ; among these may be mentioned the growth of bank-note circulation as related to the whole question of currency, the amount of United States bonds held by banks, the distribution of the circulation, the deposit of public moneys in national banks, the power of federal super- vision over bank issues, and the taxation of banks. In treating these subjects it is impossible to avoid an occasional reference to monetary controversies which have been previously discussed. Between 1864 and 1879 the number of banks, their capital, circulation, and bonds held to secure circulation, were as follows, in milions of dollars : — Bonds held (o No. of banks Capital Circulation secure circulation 1864 508 $86.8 Us-3 1865 I5'3 393-2 >7"-3 1866 1644 41 5- 5 280,3 »33-8 1867 1642 420.1 293.9 338.6 1868 1643 420.6 295-8 340.5 1869 1617 426.4 293.6 339-5 1870 161S 430-4 291.8 340.9 I87I 1767 458.3 315-5 364.5 1872 1919 479.6 333-5 382.0 .873 1976 491- > 339- > 388.3 1874 2004 493-8 . 333-" 383-3 ■87s 2088 504,8 318.4 370-3 1876 2089 499.8 2gi.5 337-» 'In 2080 470-5 291.9 336.S 1878 2053 466.1 301.9 347-6 1879 2048 454 I 3J3.8 357-3 § 163] Bank-Note Circulation. 385 In 1866 the national bank circulation was ^280,000,000, well within the limit of the ^300,000,000 which had been set in the original bank act. The law intended that one-half of the circulation should be apportioned among the different States according to population ; but in the earlier acts formulating the system, there were certain changes and contradictions, so that when this principle of apportionment was applied, it was found that banks in the older sections of the country, par- ticularly in New England, had gained more than their share of notes. For example, in 1869, Massachusetts held more than one-sixth of the circulation, and that State, with her neighbors, Rhode Island, Connecticut, and New York, enjoyed more than one-half of the entire amount. This was regarded as unfair to the West and the South. The deficiency of bank-note circu- lation was especially marked in the South which naturally had been in no position to avail itself of the privileges offered by the banking act in the early days of its development. Wisdom, if not justice, demanded that a fresh opportunity be given this section, since it was good national policy that the South be rapidly reunited to the North in a common industrial prosper- ity and in reciprocal financial interests. Some went so far as to urge that if there were to be inequaUties, the population of the Western States should have more circulation / 8 6 5-5 21.9 42.0 12.3 20.3 7-3 316.4 1873 32.0 8 7 6-3 18.2 38.5 1 1.6 17-3 7-2 188.1 .874 34-9 8 6.2 lo.g 323 9.0 142 6.J X63.1 1875 37-2 6 9 4-3 6.8 30.9 8.0 14.0 6.2 I57-* 1876 41.9 6 I 4-7 4-7 25-3 6.6 ■3-9 S-4 148.1 1877 37-I 5 5 4-4 3-8 20.3 6.5 12.8 5-3 131.0 1878 38.8 5 4.6 3-3 19.9 6.6 12.2 5-= 130.2 1879 40.3 5 2 4-3 3-7 18.8 lO.O 14.0 54 137-3 1880 42.2 60 4-7 19.2 29.2 10.8 18.6 6.0 186.5 * The totals in this column include miscellaneous classes which have been omitted. As customs receipts fell in two years, from I2 16,000,000 in 1872 to ?i 63,000,000, caused by the reduction of duties and the embarrassments of the panic of 1S73, the 10 per cent. horizontal reduction was repealed in 1875. ^his practically completed the tariff legislation until the general act of 1883. 168. Receipts and Expenditures, 1866-1879. The total receipts for the years 1866-18 79 are shown in the following table : — $25,000000 |. INDIANS $250,000000 200,000000 150,000000 100,000000 50,000000 $ 50,0000001- A WA \ R \ \ \ < |--^ NAVY $150,0000001- 100,000000 50,000000 $50,0000001- INTEREST PENSIONS . to^ MISCELLANEOUS " ^-^-^.^-r-^^ TrVrf-rT-i r^ $50,000000 1866 1870 1875 1880 1832 No, VTIT— ORDINARY EXPENniTURES, 1866-1882. (Continuation of Chart No. 3. different scale.) § 1 68] Receipts and Expenditures. 399 Customs Internal revenue Other Total net ordinary 1 866 $179,046,000 $309,226,000 $31,667,000 $519,949,000 462,846,000 1867 176,417,000 266,027,000 20,402,000 1868 164,464,000 191,087,000 20,883,000 376,434,000 i86g 180,048,000 158,356,000 18,784,000 357,188,000 1S70 ^ 194,538,000 184,899,000 16,522,000 395.959 000 1871 206,270,000 143,098,000 25,063,000 374j43i.ooo 1872 216,370,000 130,642,000 17,682,000 364,694,000 1873 188,089,000 113,729,000 20,359.000 322,177,000 1874 *63ii03»ooo 102,409,000 34,429,000 299,941,000 1875 157.167.000 110,007,000 16,846,000 284,020,000 1876 148,071,000 116,700,000 25,295,000 290,066,000 1877 130,956,000 118,630,000 31,414,000 281,000,000 1878 130,170,000 110,581,000 16,695,000 257,446,000 1879 I37»250j000 113,561,000 21,511,000 272,322,000 The miscellaneous receipts under " other " in the above table require some explanation. The sales of public land yielded from $1,000,000 to $4,000,000 annually ; the tax on circula- tion and deposits on national banks was nearly constant, approx- imately $7,000,000 ; the premium on sales of gold yielded several millions ; fees, — including consular, letters patent, steamboats and land, — proceeds of sales of government property, fines and penalties, and repayment of interest by Pacific Railway Com- panies account for most of the balance. In 1874 the award of the Geneva tribunal, $15,500,000 is credited to the treasury. Expenditures for the principal objects of government dur- ing the years 1866-1879 were as follows : — 1866 War Navy Pensions Interest on debt Indians Miscel- laneous Total $283,154,000 $43,285,000 $15,605,000 $133,067,000 $3,295,000 $40,613,000 $519,022,000 1867 95,224,000 31,034,000 20,936,000 143,781,000 4,642,000 51,110,000 346,729,000 1868 123,246,000 25.775,000 23,782,000 140,424,000 4,100,000 53,009 000 370.339,000 IS69 78,501,000 20,000,000 28,476,000 130,694,000 7,042,000 56,474,000 321,190,000 1870 57,655,000 21,780,000 28,340,000 129,235,000 3,407,000 53,237,000 293.657,000 187 1 35,799,000 19,431,000 34,443,000 125,576,000 7,426,000 60,481,000 283.160,000 IS72 35,372,000 21,249,000 28,533,000 117,357,000 7,061,000 60,984,000 270,559.000 ■873 46,323,000 23,526,000 29,359,000 104,750,000 7,95',ooo 73,328,000 285,239,000 I-S74 42,313.000 30,932,000 29,038,000 107,119,000 6,692,000 85,141,000 301.239,000 1S75 41,120,000 21,497,000 29,456,000 103,093,000 8,384,000 71,070,000 274.623,000 1876 38,070,000 18,963,000 28,257,000 100,243,000 5,966,000 73,599,000 265,101.000 1877 37,082,000 14,959,000 27,963,000 97,124,000 5,277,000 58,926,000 242,334,000 1878 32,154,000 17,365,000 27,137,000 102,500,000 4,629,000 53,177,000 236,964,000 1S79 40,425,000 15,125,000 35,121,000 ■05,327,000 5,206,000 05,741,000' 266,948,000 ; 400 Banking and Taxation. [§ '68 We have now reached a period when the amounts involved in the classification of the expenditures as returned in the summary tables of the " Finance Reports " are so crude that a more minute analysis of the figures is necessary in order to give even a slight comprehension of the meaning of the enor- mous outlay of the government. Particularly is this true of the columns entitled "War " and " Miscellaneous." Unfortunately the reports of the treasury department do not furnish any detailed tabulations for the period in question, and as there is no uniformity in the tables of expense given from year to year a table of only approximate completeness can be compiled. For example the title "War" is misleading; expenditures under this item include outlay for the support of the army, ordnance, signal service, forts, and fortifications, suppressing Indian hostilities, bounties, reimbursements to States for raising volunteers, claims of loyal citizens for supplies, and, most alien of all, improvements of rivers and harbors. During this period the annual amounts expended for rivers and harbors were as follows in miUions of dollars : — ■866 ■3 1874 5-7 1867 1.2 1875 6.4 1868 3-5 1876 5-7 1869 3-5 1877 4-7 1870 3-5 1878 3.8 1871 4.4 1879 8.3 1872 SO 1880 8.1 "873 6.3 1881 9.1 The general title " Miscellaneous " covers up expenditures of the most varied character, and in order to illustrate the growth of the governmental activity after the Civil War and the variety of objects supported from the national treasury, the following detailed table for a few items is given in millions of dollars : — § i68] Receipts and Expenditures. 401 MISCELLANEOUS EXPENDITURES. Civil Foreign Expenses of col- lecting customs Expenses of col- Postal Light- houses Public list inter- course lecting internal revenue defi- ciency Mint build- ings Total* 1866 12.3 1-3 5-4 5.8 ■7 1.4 •3 40.6 1867 15.5 1-5 5-7 7^9 2.6 •9 2.2 I.I 51. 1 1868 12.0 1-4 7.6 8.7 .7 2.6 1.4 530 •1869 12.4 8.4' 5-4 7-2 2-5 .8 1.9 "■S 56-5 1870 19.0 1-5 6.2 7-2 2.8 I.I 2.5 2.2 53-2 1S71 18.8 1.6 6.6 7-1 3-7 l.o 2-7 2.8 60.4 1872 l5.2 1.8 7.0 3-7 3-6 .8 3.1 4.0 6x.o 1873 >9-3 1.6 7-1 5-3 4.8 •7 2-9 6.8 73-3 1*74 17.6 i-S 7-3 4.6 4.3 1.2 2-5 7-2 85.15 187s 17-3 3-»' 7.0 4-3 b-i 1.2 2.9 8.6 71. 1 1876 17.2 1.4 6.7 3-9 4-5 1.4 2-7 4-7 73-6 1677 15.8 1.3 ^•| 3-6 5-7 1.2 2.4 5-1 58.9 1878 16.6 1.2 5.8 3-3 5-6 1.0 2.2 2-9 58.2 1879 16.4 5.8 » 5-5 3-5 5.3 1.0 2-3 3-4 O3.7 ' Including $7,200,000 payment for Alaska. ^ Including $i,goo,ooo British claims. 3 Including $5,500,000 award to Great Britain by Fisheries Commission. * Total includes other items in addition to those given in previous columns. This table is only approximately correct^ the figures being selected from the accounts at the end of the report of the secretary of the treasury. ^ Including award of Geneva Tribunal, $15,500,000, investment account. The following table compares the total receipts and expend- itures, 1866-1879, i^ millions of dollars : — Receipts Expendi- tures Surplus Deficit Taxes Other Total 1866 1867 1868 1869 IS70 187, 1872 1873 1874 ■875 1876 1877 1878 1879 490.2 446.6 357-3 339-2 379-7 349-9 347-0 302,1 265.5 267.2 264.9 249.6 240.7 250.8 297 16.2 19. 1 18.0 16.3 24.5 ■7-7 20.1 34-4 16.8 25.2 31-4 16.7 21.5 519-9 462.8 376.4 IS 322.2 299.9 284.0 290.1 281.0 257-4 272.3 519.0 346.7 37°- 3 321.2 293.7 283.2 - 270.6 285.2 301.2 274.6 265.1 241-3 237.0 266.9 -9 116.1 6.1 36.0 102.3 91.2 94.1 37-0 9-4 25.0 39-7 20.4 5-4 1-3 36 CHAPTER XVII. SILVER AND BANKING, 1873-1890. 169. References. Silver, 1873-1879: Messages and I'afiers.VU, 463-464 (iSyj), ^SS-^SS (Hayes' veto, 1878), 616-617 (1880) ; Finance Report, 1877, pp. xvi-xxv; 1878, pp. xiv-xvii; 1880, pp. xviii-xxii; Report of Monetary Commission of i&'j6, 87-131 (evil effects of demonetization; J. A. Garfield, Works, II, 329-353 (1876-1880); J. Sherman, A'fco/feft'oKj-, I, 459-470 ; 11,603- 635 (Bland Act) ; J. G. Blaine, Twenty Years, II, 602-611 ; J. J. Knox, United States Notes, 149-155; J. L. Laughlin, History of Bimetallism, 92-105 (act of 1873), 209-243 (act of 1878) ; D. K. Watson, History of Coinage, 135-160 (act of 1873), 168-178 (act of 1878); BoUes, 111,373- 397 ; A. D. Noyes, Thirty Years of American Finance, 35-42 ; F. W. Taussig, Silver Situation, 1-19 (act of 1878) ; H. White, 213-223 (act of 1873) > C. J. Bullock, Monetary History, 110-114 (references to Congres- sional Record); Report of Monetary Commission (1898), 138-145; J. K. Upton, Money and Politics, 197-226; H. B. Russell, International Mone- tary Conferences, 150-192 ; J. T. Cleary, The " Crime " of 1873, in Sound Currency, III, No. 13 ; F. A. Walker, Discussions in Economics and Sta- tistics, I, 1 77-191. Silver, 1880-1889: Messages and Papers, VIII, 243 (1884) ; 342-346 (Cleveland, 1885); Finance Report, 1881, pp. xiv-xv; 1SS4, pp. xxix- xxxiv ; 1885, pp. xvi-xxxiv (Secretary Manning) ; 1886, xix-xxxix ; 1SS9, Ix-lxxxiv (Secretary Windom) ; F. W. Taussig, The Silver Situation, 19-48; J. L. Laughlin, History of Bimetallism, 243-254; A. D. Noyes, Thirty Years of American Finance, 75-82, 96-99, 103-112, 138-145; H. White, The Silver Situation, '\n Qiiar. four. Econ., IV (1890), 397-407; W. C. Ford, Silver or Legal Tender Notes, in Pol. Sci. Qnar., IV (1889), 615-627 ; G. S. Coe, Bank Azotes and the Silver Danger, Banters' Maga- zine, XXXVIII, 367; R. P. Bland, Restoration of Silver, in Forum, II (1887), 243; Shall Silver be Demonetized? in No. Amer. Rev., vol. 140 (1885), 485; vol. 141, p. 491 (discussion); \V, M. Stewart, Contraction of the Currency, in No. Amer. Rev., vol. 146 (iSSS). 327 ; D. A. Voorhees, Plea for Silver Coinage, in A'o. Amer. Ro''., vol. 1 53, p. 5^4 ; Consult under " Silver " in Poole's Index, First Supplemen: (1SS2-18S7), p. 403 ; vol. HI (i8S7-iS92),p.393. 402 §170] Demonetization of Silver. 403 170. Demonetization of Silver. The long record of agitation, debate, and legislation on silver belongs more strictly to monetary history, but since the treasury was forced to support a coinage of inferior bullion value at a parity with gold, it demands a careful consideration from students of American governmental finance. During the Civil War and for some years afterwards, there was practically no public discussion in this country as to the use of silver as a monetary medium. Silver was slightly undervalued at the mint and never except in insignificant amounts had been coined into dollars ; only as minor coin did it appear in circulation. In 1866 a revision of all the laws relating to mintage and coinage was suggested in order to provide a code or compendium which would more clearly correspond to existing technical and commercial needs; and in 1869 a committee composed of Knox, comptroller of the currency, and Linderman, director of the mint, was appointed to consider the subject ; the follow- ing year a report was submitted which among other provisions recommended that the silver dollar be dropped from the list of coins. In view of the prolonged dispute over demonetiza- tion the paragraph in the report concerning the silver dollar is in part reprinted : — " The coinage of the silver dollar piece, ... is discon- tinued in the proposed bill. . . . The present gold dollar piece is made the dollar unit in the proposed bill, and the silver dollar piece is discontinued. If, however, such a coin is authorized, it should be issued only as a commercial dollar, not as a standard unit of account, and of the exact value of the Mexican dollar, which is the favorite for circulation in China and Japan and other oriental countries." The bill as a whole was a " mint " bill, designed to correct ambiguities in the law of coinage ; and there is no evidence that it was intended to reorganize the monetary system. The silver dollar was not and had not been in general circula- tion for years. The first bill to carry out general revision. 404 Silver and Banking. [§ 170 which was introduced in April, 1870, did, however, provide for the coinage of a silver dollar, limited in legal tender to five dollars in any one payment. It failed through lack of consideration in the House after passage in the Senate; a_ second effort succeeded, and a bill revising, and amending the laws relative to the mint, assay offices, and coinage of the United States passed the House May 27, 1872, by a vote of no to 113, and the Senate, January 17, 1873, with no dissenting votes. In this act the only mention made of any silver dollar was one of 420 grains designed to meet 1 the special trade in the Orient. At the time the omission of the standard silver dollar of 412^ grains occasioned no 1 comment, but in the subsequent fierce and partisan discus^j sions there has been a persistent endeavor to prove that the act of 1873 was the result of a conspiracy on the part of Eastern bankers and legislators to demonetize silver without the general knowledge of the public. So determined has been this effort to discredit the act that the episode has been frequently referred to by supporters of silver as the " Crime of 1873." There is no space to enter at length upon the evidence surrounding the passage of this act, but it is believed that the most careful investigation on the part of the inquirer accustomed to the use of public documents will not disclose any intention of deceit. There was no prolonged debate t)ver the demonetization of silver, for at the time there was little interest either in Congress or out of Congress in the fortunes of the silver dollar. The evidence connected with this legislative episode has been examined at length by Pro- fessor Laughlin in " History of Bimetallism in the United States," and by Mr. Horace White in his " Money and Bank- ing," and, if their conclusions be regarded as influenced by a long and continued advocacy of gold monometallism, the reader is referred to tho candid statements of General Walker, who certainly had no sympathy with efforts to limit the world's supply of metallic money. The latter says, " Now, as one § i7i] Struggle for Free Coinage. 405 who has read a good deal on both sides on this subject, I do not beUeve that any fraud was committed or intended. . . . Our public men had had almost no training in economics of finance. Very few people knew what the monetary system of the country was Few Congressmen outside of the committee knew that any vital change was impending. The measure passed through the usual course." ^ While Mr. Walker discredits the allegation of fraud and of sinister motives he affirms that there was a " grievance," inasmuch as the pro- moters of the measure did not call attention sharply to the changes proposed by the measure and make sure that its bearings were fully comprehended. This, however, raises the whole question of the merits of bimetallism, a- subject beyond the province of the present narrative. A striking illustration of the ignorance of this law, where it would be least expected, is seen in a letter of President Grant, October 6, 1873, several months after the passage of the act. In discussing the panic, its causes and methods of relief, he expressed a "wonder that silver is not already coming into the market to supply the deficiency of the circu- lating medium. ... I want to see the hoarding of something that has a standard of value the world over. Silver has this, and if we once get back to that our strides toward a higher appreciation of our currency will be rapid." 171. Struggle for Free Coinage; Bland Act. It was not long before the omission was brought to general notice, through a variety of causes which were assailing the whole structure of national finance. The panic of 1873 with the continued after depression aroused to new activity all who were convinced that relief depended upon fresh supplies of government money; the veto of the inflation bill by President Grant, however, checked any possible increase of treasury notes. The demonetization of silver and the adoption of a gold standard by Germany in 1871, 1 Walker, Discussions in Economics and' Statistics, vol. i, p. 1S3. 4o6 Silver and Banking. [§ >7« the limitation of coinage of full legal-tender silver by the countries of the Latin Union in 1873, coupled with the dis- covery of silver mines of large yield in this country, quickly unsettled the price of silver; it was natural, therefore, that both those who were interested in silver as a salable com- modity and those who were earnestly convinced of the need of an enlarged money supply should join hands in the protest against the demonetization of silver. The drop in the market price of silver is shown in the following table : — Price of silver per ounce in London, in Ratio of gold to silver pence 1840 60J 15.61 1850 60A 15.70 i860 6.}J 15.29 1870 60ft '5-57 .87. 6oi 1557 1872 60^ 15.63 1873 S9i 13.92 1874 5SA 16.17 187s 565 16.58 1876 523 17.87 1877 54H 17.22 1878 52A '7-94 1879 S'J 18.39 1880 S2j 18.04 1885 48J 19.39 1890 47H 19.77 1895 29I 31-57 After a resolute agitation a bill introduced by Mr. Bland of Missouri, July 25, 1876, providing for free and unlimited coin- age of silver, passed the House of Representatives November 5, 1877, by a vote of 163 to 34. The Senate, however, under the leadership of Senator Allison, changed the bill by limiting the volume of coinage, and in this form the measure was enacted ; it restored the full legal-tender character of the « o w > ■B , u is I m 1 ii X S Si2 d en „. ■D m I o § 172] Coinage under the Bland Act. 407 silver dollar and authorized the secretary of the treasury to purchase silver bullion at the market price, not less than |2,ooo,ooo nor more than ^4,000,000 worth per month, and coin the same into dollars. Provision was also made for the issue of silver certificates upon deposit of silver dollars, in denominations not less than ten dollars. The vote in the Sen- ate was 48 to 21. President Hayes vetoed the measure, but the silver sentiment in each House was strong enough to pass the bill over his veto. This act demanded the expenditure of at least ;?Z4,ooo,ooo per annum in the purchase of a com- modity which was falling in value in the world's markets, and which ultimately might be constituted a lien upon the gold assets of the treasury. 172. Coinage under the Bland Act. The Bland- Allison Act continued in operation until 1890, and during the twelve years of its existence was the occasion of the coinage of 378,166,000 silver dollars. By years the coinage and issue of silver certificates were as follows in mill- ions of dollars : — July I Silver dollars Silver certifi- issued to date cates issued 1878 8.6 1.9 1879 35-8 2-S 1880 63.7 12.4 1881 91.4 SI-2 1882 iig.i 66.1 1883 '47-3 88.6 1884 I7S-4 120.9 1885 203.9 '.19.9 1886 233.7 116.0 1887 267.0 I4S-5 1888 299.7 229-5 1889 333-5 262.6 1890 369-4 3or.S The purchase value of the silver in this coinage was ^^308,- 279,000, yielding a seigniorage of nearly ^7 0,000,000 which was turned into the treasury. From the beginning it was dif- ficult to keep the silver dollars in circulation. The New York 4o8 Silver and Banking. [§ 172 banks at the outset, November 12, 1878, placed their stamp of disapproval upon them by adopting a rule prohibiting the payment of balances between banks belonging to the clearing- house, in silver, either in coin or certificates. As Congress by the act of August 12, 1882, attempted reprisal by refusing an extension of charter to any bank that should continue mem- bership in a clearing-house refusing silver, the banks gave way, but they were then accused of boycotting silver under a tacit agreement. Nor did the coin find favor with the public at large. The people were not accustomed to use coins of heavy weight, and under the original act no provision was made for the issue of silver certificates in denominations of less than ten dollars. The government labored actively to get the dollars into cir- culation ; it not only required disbursing officers to use silver dollars in payment for salaries and other current obligations, but also offered to place the silver in the hands of the people throughout the country without expense for transportation. Notwithstanding these endeavors. Secretary Sherman in 1880 represented that it was difficult to maintain in circulation more than 35 per cent, of the amount coined. When re- ceived by creditors the coins were quickly deposited in local banks, and by them transferred to city institutions, until they finally found refuge in the sub-treasuries of the government. In the hope of making the silver money more acceptable to the public, Congress in 1886 authorized the issue of silver cer- tificates in smaller denominations, of $1, $2, and ^5, and the treasury department, by hoarding as far as practicable legal- tender notes of small denominations, created a demand for small bills which it met with silver certificates. A reduction of $126,000,000 in bank-note circulation during the years 1 886-1 890 also helped to provide an outlet for silver, and at the same time gave point to the contention of the silver advo- cates that without the use of silver the volume of monetary medium was deficient. § 173] Efforts to stop Coinage. 409 173. Unsuccessful Efforts to stop Coinage. From time to time the controversy blazed up anew. The treasury department felt the combined burden of providing for the continued purchase of silver, of coining it into dollars, and of maintaining a gold standard ; and endeavored either through the message of the president or the report of the secretary to impress upon the public its convictions. McCul- loch, in 1884 for a second time secretary of the treasury, dis- closed the executive apprehension by announcing that unless the coinage of silver dollars was suspended, there was danger that silver, and not gold, would become the metallic standard. In 1885 Secretary Manning, Cleveland's finance minister (1885-1889), devoted the larger part of his annual report to currency reform ; the latter warned Congress that the hoard- ing of gold had already begun ; that the ceaseless stream of silver threatened to overflow the land and cause fear and un- certainty ; and in conclusion recommended the suspension of compulsory coinage. The legislative branch of the government paid little heed to these executive appeals ; in the country at large there was in- dustrial unrest, and in some sections undoubted distress. All commercial ills were still widely supposed to be due to an insufficient volume of money. The greenback advocacy gave way in a measure to the agitation for the coinage of silver, with no limitation whatever as to amount. A commercial and financial panic in 1884 with its subsequent depression fur- nished the complainants with abundant illustration. There had been administrative mismanagement of important rail- way companies, an excessive construction of railways, and a wasteful investment of capital in non-paying enterprises. Iron and steel industries were consequently seriously affected, and this in turn extended the circle of disturbance. Many mines were shut down, and for a time there was a large " army " of the unemployed. While general conditions did not become so bad as in 1873, 41 o Silver and Banking. [§ 174 the discouragement was marked, because the reasons for com- mercial disaster were not so easily seen. After a partial re- covery in 1885 there was an unusual outbreak of strikes, boycotts, lockouts, and labor disturbances in 1886-1887 ; labor organization proceeded rapidly and the Knights of Labor for a brief period gained great power. An improvement of agri- cultural conditions in Europe after 1880 lessened the demand for American produce, and tended to lower the price of the surplus exported. The Western farmer attributed his evils in part to the railroads and in part to the demonetization of silver. " Granger " railway legislation to control rates was consequently sought in State legislation, and unlimited coinage of silver in Congress. International bimetallists of repute and authority attributed the bitter experience of trade and industry of May, 1884, "to the wanton mischief perpetrated by Ger- many between 1871 and 1875 " in demonetizing silver. Senators and representatives of both the great parties from Western farming and mining States could not be turned from persistent efforts to increase the volume of money ; in season and out of season they attempted to attach to every bill which had the remotest connection with government finance some proposition which would either secure an increase of treasury notes or add to the coinage of silver. The strength of their sentiment was seen in 1886, when a free-coinage bill was de- feated in the House of Representatives by a majority of only 37. Although the extreme silver party failed to carry out its projects, its opponents equally failed to stop compulsory coin- age. The advocates of silver also made strenuous efforts to force the treasury department to pay out silver indiscrimi- nately in order to force the government on to a silver basis, but were defeated by Secretary Manning, who stanchly declared that he would not pay silver except when silver was asked for. 174. Continued Oppositiou to National Banks. The elements which supported an enlarged issue of paper money or the unlimited coinage of silver kept alive antago- § 175] Decline in Bank Circulation. 411 nism to the national banks and opposed all legislation tending to relieve the difficulties which the system was then laboring under. While ever ready to point to the decline of bank- note circulation as an illustration of the evil in the monetary system which demanded rectification, they were unwilling to allow expansion through banking corporations. The banks could expect no favors. Popular denunciation of banks was rabid. Bankers were represented as meeting in annual con- ventions, " eating bonbons, and drinking wine, and passing resolutions '' hostile to public interest ; men were supposed to go into the banking business for selfish interests alone, thus supplanting the government which had a heart and sympathy for humanity ; the banks were said to defy the law by loaning money to Western farmers on mortgages, and also in exacting extortionate rates of interest. The banking interest was typi- fied as the supreme leader in the active opposition to an expanding monetary supply. The banks were constantly made to hear about their earlier hostility to the greenback financiering of the Civil War ; attention was directed to their attempt to retire the greenback circulation, and to their antagonism to the Bland Act by refusing to accept silver dol- lars. They were charged with trying to create a panic in 1 88 1 by withdrawing ^19,000,000 of currency in order to frighten Congress which passed a bill, vetoed by the president, to make the conditions of note issue less profitable ; and also with working in the same year to prevent the refunding of the debt, then maturing, at a lower rate of interest. 175. Decline in Bank Circulation. The commercial reasons for the reduction of the national bank-note issues are not far to seek ; the government in pay- ing off its debt limited the supply of bonds which could be bought by the banks, and at the same time there was an increasing demand for government securities by individuals, trustees, and financial corporations for investment. In this 412 Silver and Banking. [§>75 way the bonds advanced to so high a premium that it was unprofitable for the banks to retain them even with the accom- panying privilege of circulation. This is well illustrated in the accompanying chart. The steady shrinkage of circulation which took place, beginning with the year 1880, is seen in the following table ; — July. Volume of national July I Volume of national bank-notes bank-notes 1880 $344,505,000 1886 5311,699.000 188 1 355,042,000 1887 279,217,000 1882 358,742,000 1888 252,368,000 18S3 356,073,000 1889 211,378,000 1884 339,499,000 1890 185,970,000 1885 318,576,000 1891 '67,927,000 Repeated but unsuccessful efforts were made in behalf of the banks to secure laws less onerous to circulation. Among the measures proposed was an increase of notes to the face value of the bonds deposited, the plan finally adopted in 1900, or to 90 per cent, of the market value of the bonds as measured by their average market value for the six months previous ; the acceptance of bonds of the District of Columbia, guaranteed .by the United States ; repeal of the tax on circulation ; fund- ing of the high-rate bonds into a new issue bearing a lower rate of interest and running for a longer period of time ; sub- stitution of some other security, as State, county, or municipal bonds for United States bonds as a basis for circulation ; per- mission to banks to issue circulation upon their general credit, without the deposit of specific securities but protected by a general safety fund, as in the old New York system. The proposition which found general approval among those friendly to the banking interest was to refund the public indebtedness into a long low-rate bond. This was recommended by the comptroller of the currency in 1882 and 1883, and bills to that effect were advocated in Congress ; the defect in the plan was the postponement of the payment of the debt. Sugges- tions were made that the national banking system be continued § 175] Decline in Bank Circulation. 413 without the feature of note circulation, since the advantage of federal banks of deposit and discount was well worth retaining. So strong and persistent, however, was the opposition to any favors whatever to banks that no remedial legislation was obtained, and the banks were obliged to accommodate them- selves to laws antiquated and out of relation to the marvellous commercial and industrial expansion of the country. CHAPTER XVIII. SURPLUS REVENUE AND TAXATION, 1880-1890. 176. References. Tariff Legislation, 1880-1889: Messages and Papers, VIII, 580- 5gi (Cleveland, 1887); Finance Report, 1881, pp. xviii-xxi; 1882, pp. xxiv-xxxiii; 1883, pp. xliv-lii ; 1884, pp. xv-xvii: 1886, pp. xlvii-lviii; Report of the Tariff Commission, 1882, I, 1-35; 50th Cong. 1st Sess. (i888). Senate Report, No. 2332 (Aldrich), pp. 89, 91-101 (minority); House Rep07t,'^o. 1496, pp. 1 02-1 11 (Mills); E. V[.cY'\i&x&OTi, Handbook of Politics, 1884, pp. 18-77, 135-138; 1886, pp. 149-156; 1888, pp. 51-55, 146-166; 1890, pp. 169-189, 223-244; J. Sherman, Recollections, II, 841- 855 (1883), 1004-1010; W. McKinley, Speeches and Addresses, 70-123 (Tariff Commission, 1883), 131-159 (Morrison bill), 250-262 (1888), 277- 289 (minority report on Mills bill, 1888); F. W. Taussig, History of the Tariff, 230-250 (1883) ; A. D. Noyes, Thirty Years of American Finatue, 92-96; The National Revenues (ed. A. Shaw, 1888), 32-41, 78-123, 217- 226 ; O. H. Perry, Proposed Tariff Legislation since 1883, in Quar. four. Econ., II (1887), 69-78; The Tariff Literature in the Campaign, in Quar. four. Econ., Ill (1889), 212-217. Internal Revenue : Finance Report, 1881, pp. xx, 64; 1882, pp. 69- 73; 1883, 1-lii; 1886, Iv-lvi; 1887, xxix-xxxi ; F. C. Howe, Taxation under the Internal Revenue System, 165, 221-223; R. M. Smith, in The National Revenues (ed. A. Shaw, 1888), 68-77. Surplus: Messages and Papers, VIII, 48, 134 (1882); 178 (1883); 508-511 (1886) ; 580-583, 786-788 (1888) ; Finance Report, 1883, pp. xxx- xxxiii; i886, xl-xliv; 1887, xxv-xxxiii; E. McPherson, Handbook of Politics, 1886, pp. 225-229; Banker^ Magazine, XLII (1887), 335, 817- 821 ; XLIII (1888), 321-324 (bond purchases) ; H. C. Adams, Surplus Financiering, in The National Revenues, 45-55; -^. D. Noyes, Thirty Years of American Finance, 87-88, 123-126; W. '^lcK.m[e:y, Speeches and Addresses, 203-211 (1886), 263-270 (1888) ; C. F. Randolph, Surplus Rev- enue, in Pol. Sci. Quar., Ill (1888), 226-246; Poole's Index, vol. Ill (1882-T887), consult " surplus," p. 416. Expenditures: Messages and Papers, VIII, 120-122 (river and har- bor veto of Arthur, 1882), 137, 201,- 246, 677, S37-S43 (direct tax veto, 1889); A. D. Noyes, Thirty Yfiirs of Aniei i,an Finance, 89; E. W.C- Vherson, Handbook of Politics, 1888, pp. 173-174 (refunding direct tax); 1890, pp. 18-21 (ditto). 414 §177] Surplus Revenue, 415 177. Surplus Revenue. In 1882 there was a large balance of treasury receipts over expenditures, and a prospect of similar good fortune in the future. The secretary of the treasury with some humor observed that times had changed since the law of 1789 estab- lishing the treasury department, which made it the duty of the secretary to prepare plans for the improvement of the revenue : " What now perplexes the secretary is not wherefrom he may get revenue and enough for the pressing needs of the government, but whereby he shall turn back into the flow of business the more than enough for those needs, that has been drawn from the people." A reduction in the internal revenue duties, together with a change in trade conditions marked by the panic of 1884 and reflected in customs receipts, some- what cut down income, while more liberal expenditures by Congress put off for a brief period the need of decisive action to prevent a surplus. In 1886 a substantial surplus reappeared, and proved to be the beginning of a series of favorable annual balances; as in 1837, nearly half a century earlier, the problem of surplus financiering was too much for the statesmanship of Congress. In i88z the Republicans were still in power and the prop- ositions of Mr. Folger, Reptiblican secretary of the treasury, have special significance ; he recognized the evil of large receipts and small disbursements, so far as it affected the busi- ness of the country ; and he deprecated taking the collections of the government out of the money markets in sums and at dates which have Uttle or no agreement with the natural movement of money. He agreed that the locking up of no inconsiderable proportion of the currency could not fail to embarrass trade. Apparently the only available method of disbursing this excess of assets was by payment of the debt ; but the remedy seemed unwise in view of the ruling premiums on the bonds and the restrictions regulating the official call of bonds. At all events the secretary thought that if Congress 41 6 Surplus Revenue and Taxation. [§ 177 wished him to make purchases of bonds at a premium, it should assume the responsibility more explicitly by law. Secretary Folger also discussed the possibility of relief by the deposit of public moneys in national banks, but held it unwise to amend the laws so as to release any of the customs receipts to the custody of these institutions, since this revenue was to a great extent pledged to the payment of the mterest and principal of the bonds, and the government ought pru- dently to take heed of possible financial disturbance and dis- aster. Only two other means of disposing of the surplus occurred to the secretary : one was to parcel out the surplus among the several States of the Union ; the other to complete the terms .of the distribution act of 1836 by paying to the States the amounts due in the fourth instalment; neither of these propositions received any countenance. In his opinion the only radical cure was in the reduction of taxation ; there should be a repeal of all the internal duties except those on spirits, fermented liquors, tobacco, and bank circulation, and a general reduction of customs duties on nearly all articles in the tariff. This recommendation was responded to by the half-hearted revision of 1883. When the surplus again became embarrassing in 1886 the Democrats were in power. The premium on the bonds was higher than ever, and Secretary Manning emphatically con- demned any policy which would give the proceeds of taxation to bondholders in premiums by anticipated purchases, nor did he expect Congress to throw upon him such a thriftless task. He also frowned upon relief through extravagant appro- priations, or by the accumulation of a treasury hoard. His positive recommendations were reduction of taxation and re- tirement of the greenbacks ; that is, of the unfunded debt of 1346,000,000. These views were emphatically endorsed by President Cleveland, but did not receive the undivided sup- port of the Democratic party and thus came to nothing. In 1888 the Democratic platform simply called for tariff revision and the reduction of extravagant taxation. The Republicans § lyS] Funds in National Banks. 417 in their platform of that year " would effect all needed reduc- tion of the national revenue by repealing the taxes on tobacco, which are an annoyance and burden to agriculture, and the tax upon spirits used in the arts and for mechanical purposes, and by such revision of the tariff laws as will tend to check imports of such articles as are produced by our people." According to this program, if further relief were needed, the entire repeal of all internal revenue taxes was preferable to the surrender of any part of the protective system. Having briefly sketched the general background, the follow- ing phases of the whole problem of surplus revenue which excited public attention in the decade 1 880-1 890 may now be considered in detail: (i) deposits of public moneys in banks; (2) reduction of taxes ; (3) increased appropriations ; (4) purchase of bonds and debt reduction. 178. Deposit of Funds in National Banks. As has been stated, the original national bank act of 1863, so modified the independent treasury act, as to permit national banks, when designated by the secretary of the treasury, to be depositories of certain public moneys upon pledging with the treasury a security in United States bonds. The total gov- ernment balances in banks varied as receipts fluctuated, and as the several secretaries pursued different policies. In Cleve- land's administration from 1885 to 1889, the deposits were increased as a means of relief, so as to make the surplus revenues commercially available; and in 1888 they reached J6 1,000,000. Cleveland did not consider this an ideal method of disposing of government funds, and submitted to it only as a temporary expedient to meet an urgent necessity. Critics taunted the treasury department with virtual partnership with the banks. Mr. Windom, who became secretary of the treasury in i88g, representing a Republican administration, changed this policy, and announced that he should reduce the deposits as rapidly as possible "leaving only such amounts 27 41 8 Surplus Revenue and Taxation. [§ 179 as are necessary for the business transactions of the govern- ment. The national bank depositories have been, and are, useful auxiliaries to the sub-treasury system, but the deposit of public funds therewith to an amount largely in excess of the needs of the public service is wholly unjustifiable. Such a policy is contrary to the spirit of the act of August 6, 1846, which contemplates a sub-treasury independent of the banks." Among his objections were : a temptation to favoritism ; the dependence of the treasury upon the banks on account of the difficult and delicate task of withdrawing the deposits ; the injustice of granting to banks the free use of money, and at the same time paying to those parties interest on their bonds pledged as security ; and finally, and most important of all, interference with business whenever it was necessary to with- draw the deposits. This indictment does not represent the permanent attitude of the Republican party, for in the later administration of President McKinley the banks were again intrusted with generous deposits. 179. Reduction of Internal Revenue Duties. So long as revenues were heaped up in the treasury beyond immediate needs either for current expenditures or for the sinking-fund requirements, it was natural that there should be a growing demand for a reduction of taxation. It was urged with strong effect that the citizens of that day had already paid their share of the cost of the war, and that the remain- ing portion should be transferred to another generation. Many of those who under ordinary circumstances would have gladly continued taxation in order to effect a rapid extinguishment of the national debt, objected strenuously to its payment if it was necessary to offer premiums to the fortunate holders of government obligations. This reluctance was easily turned into bitter opposition by those who were openly hostile to the national banking system; they were convinced that bond- holders and bank directors were synonymous terms, and that the banking and trust institutions wjiich had bonds in large § 179] Internal Revenue Duties. 419 quantities were endeavoring to drive a hard bargain with the government. It is not unlikely, however, that banking and financial interests were content that the debt should remain stationary, in order that there might be no withdrawal of bonds which furnish the very basis of the banking system. Reduction of taxation could be brought about either by changes in the internal revenue or in the customs schedules. The former appeared the more attractive field for immediate action, inasmuch as internal .revenue taxes were popularly regarded as war duties, to be abandoned as soon as practicable in times of peace, and their modification would not affect unfavorably vested manufacturing interests as much as would changes in the tariff. Extren^e protectionists wished the abo- lition of all internal revenue duties ; Kelley argued with great elaborateness that their maintenance was a wanton exaction, costing in its administration ^5,000,000 annually and requir- ing the services of more than four thousand people ; that it created a lobby and bred political corruption; that it pro- duced monopolies and was unequal in its incidence. A com- promise was effected. There was a general agreement that certain odds and ends of excise might be sacrificed, as follows : — Friction matches .... . $3,272,000 Patent medicines, perfumery, etc. . . .... 1,978,000 Bank checks .... 2,318,000 Bank deposits . . . . 4,008,000 Savings-bank deposits . 88,000 Bank capital 1,138,000 Savings-bank capital . . . .... . 1 5,000 Total $12,817,000 In addition the national banks paid into the treasury ls,959,- 000, of which ^5,521,000 was on deposits, and the remainder on capital. The tax on bank checks was declared to be irritating and hampering in its nature ; the tax on matches was on a house- hold article of hourly and necessary consumption by all classes ; 420 Surplus Revenue and Taxation. [§ i8o the tax on savings-bank deposits was a tax on thrift ; the tax on patent medicines and perfumeries was vexatious because levied on innumerable articles; and the taxes on the capital and deposits of bajiks were not needed. The tax on national bank circulation was regarded in a different light, as a tax on a franchise of profit to a favored grantee. The act of March 3, 1883, abolished the above taxes and reduced the duties on tobacco by one-half. The loss in the total revenue was not so great as anticipated, as there was a constant gain from the duties on spirits and fermented liquors. In 1890 a further reduction of 25 per cent, was made upon snuff, chewing and smoking tobacco, and the special license taxes upon the sale of tobacco were repealed. The changes which took place are seen in the following table in millions of dollars : — Internal Revenue Bv Sources 1880-1890 Spirits Fermented liquors Tobacco Oleo- margarin Banks and bankers Adhe- sive stamps Total 1880 6l.2 12.8 38.9 3.4 7-7 124.0 I88I 67.2 13-7 42.9 3.8 7-9 J3S-3 1882 69.9 16.2 47-4 5-3 S.I 1465 1883 74-4 16.9 42.1 3-7 7-7 I44.7 I8S4 76.9 18.1 26.1 X2I.6 i8Ss 67-S 18.2 26.4 iia.S 116.8 .886 69.. 19.7 27.9 1887 65.8 21.9 30.1 0.7 118.8 188S 69-3 23-3 30.7 0.9 124.3 1889 74-3 23.7 31-9 0.9 130.9 1890 8,.7 26.0 340 0.8 X43.6 180. Tariff Revision. A general reduction of customs duties was not so easily effected. A revision of the tariff was necessary in order to meet the changed conditions of trade ; and popular favor greeted the suggestion that a commission be appointed, made up of leading representatives in manufactures, agriculture, and commerce, to frame a tariff. The proposition was supported m n * :^^^ * + ■* l^^ <*yxxx ■<■ +4^-< + + ■♦ *■ * *■ + + -* J. + ■ X.+ + + + + + +4 ;:: 1 1- + + ■ + + ■ ** 1,., ■ + + ■ + + ■ + + + + < r *■ * ■* ■ + + (*■ + ■' + + + *■ + + ^^^^^^^f ■» + + + ■ + + 1 + + 4 + t- + + + * :: [ m ^ f + + + + * .1 888?5?» i* * f - 1. ...: K + + * + - 'S ► + * -f- + •■ ■ " . \m + + + + + + + * *■ *++■*■*■ + + * »- + + + + + * + ♦J. _ 1 tii. ^ W» «wx, "X^- ' '■**** ''*'^^m % w > W i-l < w Iz; S o « en H Pu W u w o § i8o] Tariff Revision. 421 alike by those who desired expert consideration, and by those who welcomed any delay in legislation. A commission was consequently authorized by Congress in 1882; the method was new in this country, and indeed unexampled in its appli- cation to the principles of a tariff bill. The commission appointed by President Arthur as a whole represented high protectionist views ; but the members recognized in their report " that a substantial reduction of tariff duties was de- manded, not by a mere indiscriminate popular clamor, but by the best conservative opinion of the country, including that which has in former times been most strenuous for the preser- vation of our national industrial defences." In spite of any temporary inconvenience a reduction was regarded by the commission as conducive to prosperity. The average reduc- tion recommended was from 20 to 25 per cent. ; it applied to commodities of necessary general consumption, to sugar and molasses, rather than to luxuries, and to raw rather than to manufactured materials. The recommendations of the commission were eventually treated by Congress with disapproval if not with contempt, as is frequently the case with expert findings in a democratic state. The more radical protectionists secured modifications along lines of high and even increased protection. The act of 1883 was the most important revision of the tariff since the Civil War : its many details and the lack of any harmonious principle governing its rates make it hard to sum- marize its provisions within narrow limits. The duties were raised on certain classes of woollen goods, especially on dress goods, and the finer grades of cloths and cassimeres which were then commonly imported ; they were also raised on cotton hosiery, embroideries, trimmings, laces, and insertions, constituting abput two-thirds of the cottons imported; they were raised on iron ore and certain manufactures of steel. The duties were reduced on the finer grades of wool, on the cheaper grades of woollen and cotton goods, on steel rails, copper, marble, nickel, and barley. "As a rule," according 422 Surplus Revenue and Taxation. [§ i8o to Taussig, " duties were advanced on protected articles of which importations continued in considerable volume. The advance was by no means universal, being affected, as our tariif legislation so often has been, by the haphazard manner in which the details of the measure were finally settled. But it was made in so large a number of important cases as to give the act a distinctive protectionist flavor." The act did not receive general commendation even from protectionist supporters of the Republican party. Secretary Folger in 1883 referred to it slightingly and suggested the. need of further reduction of taxes. John Sherman is out- spoken in his criticism of the act of 1883, and the comment he makes in describing the forces at work in the passage of the measure may well serve as typical of conditions too often attending tariff legislation. " When the bill was reported to the Senate it was met with two kinds of opposition, — one, the blind party opposition of free-traders, the other, the conflict of selfish and local inter- ests, mainly on the part of manufacturers, who regarded all articles which they purchased as raw material, on which they wished the lowest possible rate of duty or none at all, and their work as the finished article, on which they wished the highest rate of duty. . . . The Democratic Senators with a few exceptions voted steadily and blindly for any reduction of duty proposed, but they alone could not carry their- amend- ments, and only did so when reinforced by Republican Sen- ators, who, influenced by local interests, could reduce any duty at their pleasure. In this way, often by a majority of one, amendments were adopted that destroyed the harmony of the bill. . . . This local and selfish appeal was the great defect of the bill." "^ Senator Sherman always regretted that he did not defeat the bill, by voting with the Democrats against the adop- tion of the conference report, for it barely passed 32 to 30. It was only because of the propriety and necessity of a reduction of internal revenue taxes included in the same bill that he felt 1 Rtcollectioiis, vol. ii, p. 851. § i8i] Democratic Tariff Measures. 423 justified in supporting the measure on its final passage. The complaint of selfishness and illogical vote is interesting as coming from a Senator who knew something about local considerations. Defeated in his endeavors to protect wool at a high level in the interest of his Ohio constituents, Sherman was himself willing to seek revenge by sacrificing compensatory duties on worsteds, and thus by his own action co-operate to mar the harmony of the bill. 181. Unsuccessful Democratic Tariff Measures. The tariff of 1883 did not settle the problem of taxation: if it was in order for Secretary Folger to suggest the possibility of another early revision, the Democratic party, traditionally opposed to protection, was sure to continue the agitation for lower duties. Daring the next five years the Democrats were strong enough to secure the consideration of two general tariff bills, but failed to enact new legislation. The " Morrison horizontal" bill of 1884 proposed an average reduction of 20 per cent, in import duties, with important additions to the free list. The principle of the bill never gained a warm . support ; it was not a scientific method of constructing a tariff, and its uniform levelling might cause unexpected injury and introduce new inequalities as troublesome as those already said to exist. Within the Democratic party a protectionist wing, led by Randall of Pennsylvania, harassed the tariff reformers, and ultimately, by voting with the Republicans, defeated the measure ; of the 151 negative votes in the House on the Morrison bill 41 were Democratic. In 1885 a Democratic administration was inaugurated and both the president and Secretary Manning advocated a radical overhauling of the tariff. The administration's repeated and vigorous demands tended to unite the Democratic party on this question and to eliminate those not willing to yield in- dividual interests to party conviction. In December, 1887, President Cleveland startled not only the country but his party by confining his entire message to the existing surplus and the 424 Surplus Revenue and Taxation. [§ 181 need of tax reform. He spoke decisively, if not over passion- ately, of the diffusiveness of the tariff system ; the uselessness of many of the duties, and the trifling service of others, and referred to the tariff as illogical and inequitable. " Our prog- ress towards a wise conclusion will not be improved by dwell- ing upon the theories of protection or free trade. It is a condition which confronts us, not a theory." With special stress he advocated free raw materials. The critics of the president held the message to be not a plea for reforming a defective tariff, or for lopping off excrescences or incongruities, but a free-trade document designed to destroy the protective system. The Republican majority in the Senate prepared a new and strong protectionist tariff measure as a counter- challenge. Under severe pressure the Democratic House passed the Mills bill with only four dissenting votes in the party. The Republican taunt that the Democrats were not sincere in their arraignment of the tariff had some ground ; the Dem- ocrats had been in control of the House of Representatives from 187s to 1 881 and from 1883 to 1888, and yet had never agreed on well-defined opinion-s in regard to import duties. After the Civil War the platforms of the Democratic party lacked clear and positive convictions as to a tariff policy. In 1868 the party demanded a tariff for revenue which would afford incidental protection to domestic manufactures ; in 1876 and r88o, that custom-house taxation shall be only for revenue ; in 1884, that any change of law must at every step be regardful of the labor and capital involved in industries ; and in 1888 they repeated the same proposition. The Dem- ocratic party during this period seemed concerned with the details of schedules rather than with fundamental principles, and consequently the issue did not arouse any popular enthusiasm in political campaigns. Even the reform message of Cleveland was delayed until the latter part of his term, and the continued clashing within the Democratic party was well illustrated in the closing days of the Cleveland administration. § i8i] Democratic Tariff Measures. 425 After the Mills bill was brought forward Randall proposed a protectionist tariff bill for the reduction of revenue by ^95,000,000, of which ^75,000,000 would come from cuts in the internal revenue ; and later with the aid of more than a score of Democrats he secured the reference of a bill for the abolition of all taxes on tobacco to the committee of appropria- tions, of which he was chairman, thus turning it away from the committee on ways and means, to which it more properly belonged. The Republican party was now united. From the first, it had on the whole legislated consistently in favor of protection to domestic industries, although only gradually did it accept this doctrine as a supreme test of party allegiance. In the platforms of 1872, 1876, and 1880, it cautiously declared that the import duties should be so adjusted as to aid in securing remunerative wages to labor, and to protect the industries, prosperity, and growth of the whole country; in 1884 it more frankly demanded that import duties should not be for revenue only, but should afford security to our diversified industries and " protection " to the rights and wages of the laborer; in 1888 it was more uncompromisingly in favor of the American system of protection. It was on this issue that the presidential campaign of 1888 was definitely fought out. The Republicans won the presidency, and in 1889, when the new House of Representatives was organized, prepared to carry out their pledges in the construction of a new tariff, designed at the same time to reduce revenue and afford protection. The customs receipts, grouped according to some of their principal sources, will be found in the Appendix. There were no marked fluctuations during this decade except a slight decline caused by the depression of 1884. • The total receipts, 1 880-1 890, from all sources were as follows : — 426 Surplus Revenue and Taxation. [§ 182 Customs revenue Internal revenue Other Total net ordinary 1880 $186,522,000 $124,009,000 $22,995,000 $333,526,000 I88I 198.159,000 135,264,000 27.3591000 360,782,000 1882 220,410,000 146,497,000 36,618,000 4(^,525,000 1883 214,706,000 144,720,000 38,861,000 398,287,000 1884 195,067,000 121,586,000 31,866,000 348.519,000 1885 181,471,000 112,498,000 29,721,000 323,690,000 1886 192,905,000 116,805,000 26,729,000 336,439,000 1887 217,286,000 118,823,000 35,294,000 371,403,000 1888 219,091,000 124,296,000 35,879,000 379 266,000 1889 223,832,000 130,881,000 32,337,000 387,050,000 1890 229,668,000 142,606,000 30,806,000 403,080,000 182. Increased Expenditures. The existence of large surplus funds in the treasury gave rise to many propositions for increased expenditures. Some of these were undoubtedly urged solely for selfish and partisan ends or as an easy way of temporizing with the revenue ques- tion. A few argued that money was lying dead in the treasury and that it was a duty for Congress to put this dead money into circulation; even distribution was again proposed. Other projects, however, were advocated in good faith in the belief that the government, with the enlarged sense of nationality developed by the results of the Civil War, now had oppor- tunities and even duties to perform for fuller enjoyment of its expanding life. Among the measures requiring greater ex- penditures were successive river and harbor bills. Although these improvements did not receive all that was asked for, generous provision was made in . comparison with previous appropriations. In 1882 President Arthur vetoed a river and harbor bill authorizing the expenditure of $18,743,875, on the ground that the amount called for was extravagant and be- cause appropriations were made for purposes not for the common defence or general welfare and which did not pro- mote commerce between the States ; and this attitude for a brief period held appropriations in check. Expenditures by years for rivers and harbors were as follows in millions of dollars : — I 82] Increased Expenditures. 427 Expenditures for Rivers and Harbors 1880 8.0 1886 4.1 i83i 8.5 1887 7.8 1882 11.4 1888 7.0 1883 13.6 1889 11.2 1884 8.2 1890 II. 7 1885 10.5 The defence of the sea-coast was also pressed on the ground that existing guns, forts, and ships were worthless. While the United States, wearied with war, had devoted its energies to internal transportation and to the payment of the war debt, other nations had been experimenting with coast defences, projectiles, explosives, armies, and new types of vessels. Large sums were claimed for the restoration of the merchant marine by bounties and subsidies, and for the construction of govern- ment public buildings to take the place of those rented. Further relief was asked for the veterans of the Union army, and a pension bill was pushed, granting pensions to sol- diers and sailors who had served in the Civil War, if they were no longer able to support themselves ; although vetoed by Cleveland in 1887, it attracted a large and popular support. Through several sessions of Congress debates were devoted to more rapid surveys of public lands, irrigation of the Western deserts, the construction of the; Nicaraguan canal, and the so-called Blair educational bill providing for the distribution of large funds to the several States for educational purposes. A bill was also passed in 1889, but vetoed by Cleveland, providing for the repayment of the direct tax collected under the act of 1861. This alone would have relieved the treasury of at least ^15,000,000, or if the percentage allowed for col- lecting the tax be included, of over ^17,000,000. The political philosophy which inspired these generous plans is well summed up in an appeal made by Senator Dolph of Oregon in the course of a debate in 1887: "In short, if we were to take our hands off the increasing surplus in 428 Surplus Revenue and Taxation. [§ 182 the treasury, and stop bemoaning the prosperity of the country and trying to make the people dissatisfied with the alleged burden of taxation which they do not feel; and devote our energies to the development of the great resources which the Almighty has placed in our hands, to increasing the products of our manufactories, of our shops, of our mines, and of our forests ; and to cheapen transportation by the improvement of our rivers and harbors and restoring our foreign commerce, we would act more wisely than we do." Only a few of the projects just outlined secured final ap- proval in Congress. The most notable increase in expendi- ture was for pensions; before 1880, the largest expenditure for this purpose in any one year had been but $35,000,000, — after that it was never less than $50,000,000 ; and in 1886 the beginning of a steady upward climb was made, reaching $106,936,813 in 1890 and $159,357,558 in 1893. Some slight increase was made for the navy beginning in 1889, but the more liberal expenditures for this branch of the public service did not swell the budget until the next decade. The total expenditures by years, 1 880-1 890, were as follows : — War Navy Indians Pensions Interest on public debt Miscel- laneous Total 1880 I88I 1882 1883 1884 1885 1886 1887 1888 1889 i8go $38,116,000 40,466,000 43.570,000 48,911,000 39,429,000 42,670,000 34,324,000 38,561,000 38,532,000 44.4^5.000 44,583,000 $13,536,000 15,686,000 15,032,000 15,283,000 17,293,000 16,021,000 13,907,000 15,141,000 16,926,000 21,378,000 32,006,000 $5,945 ,ODO 6,514,000 9,736,000 7,362,000 6,475,000 6,553,000 6,099,000 6,194,000 6,349,000 6,892,000 6,708,000 $56,777,000 50,059,000 61,345,000 66,012,000 55,429.000 56,103,000 63,404,000 75,029,000 80,288,000 87,624,000 106,936,000 $95,757,000 83,508,000 71,077,000 59,160,000 54,578,000 51,386,000 50,580,000 47.741.000 44,715.000 41,001,000 36,099,000 $54,713,000 64,416,000 57,319,000 68,678,000 70,930,000 87,494,000 74, 166,000 85,364,000 73,953,000 80,664,000 81,403,000 $264,847,000 259.650.000 257.981,000 265.408.000 244,125,000 260,226,000 242,482,000 267.931.000 S59 053.000 281,996,000 297,736,000 The principal items included under " Miscellaneous " are tabulated in a table to be found in the .Appendix. $25.000000 f C INDIANS i 200,000000 150,000000 100,000000 50,000000 111 3= I I I T I T I I - / \ / r^ / WAR / / 1 1 — 1 $50,000000 , NAVY ^ 1 1 1 1 1 1 rTT . 1 $50,000000 ^ ^ NT EREST — -1 1 — Q $150,000000 t ^ K ^ 100,000000 PENSIONS y /' $50,000000 ^ |— - r^ — 1 MISCELLANEOUS 00,000000 1- y / r\ ^ /] ^^ ^/" — — 50,000000 """" 1881 1900 1901 No. XII. — ORDINARY EXPENDITURES, 1881-1901. (Continuation of Chart No. 8, same scale. ) § 183] Treasury Purchase of Bonds. 429 A comparison of receipts and expenditures, with the sur- pluses annually accruing, is shown as follows in millions of dollars : — Receipts Expenditures Surplus Taxes Other Total 1880 310.5 23-0 333.5 264.8 68-7 I88I 333-4 27-4 360.8 259-6 101.2 1882 367.1 36.4 403.5 »57-9 145.6 1883 359-5 3S-8 398.3 265.4 132.9 1884 316.7 31.S 348.5 244.1 104.4 1885 293.9 29.8 323.7 260.2 63.5 1886 309.8 26.6 3364 242.5 93.9 1887 336.1 35-3 371-4 267.9 103.5 i88g 343-4 35-9 379-3 259.6 1 19. 7 1889 354-7 32-4 387.1 282.0 105. 1 189a 373-3 30. 8 403.1 297-7 105.4 183. Treasury Purchase of Bonds. It has already been stated that the funding act of 1870 tied up a large portion of the public indebtedness in a 4 per cent, thirty-year bond. Owing to the financial disturbances occasioned by the Franco-Prussian War and the panic of 1873, the placing of these bonds was not effected until 1877, which made the new issue irredeemable before 1907, save through purchase in the open market. The 4j^ per cent, fifteen-year bonds issued in 1876, were not redeemable until 1891. When the surplus appeared in 1882 there was no immediate embar- rassment, as over 1^400,000,000 of 3 per cent, and 3^^ per cent, bonds, temporarily issued in exchange for the 5 per cent, bonds which came due in 1881, were redeemable at the pleasure of the government ; three successive surpluses of equal amounts would cancel the outstanding debt. In 1886 this opportunity for relief was exhausted ; practically all the bonds subject to redemption at the option of the government had been cancelled, and Secretary Fairchild in 1887 questioned whether he had power under the law to buy bonds beyond the sinking-fund requirements. The dispute turned on a 43° Surplus Revenue and Taxation. [§ 183 clause in an appropriation act of March 3, 1881, empowering the secretary of the treasury to apply the surplus money in the treasury to the purchase and cancellation of bonds ; the admin- istration construed this as a power which lapsed with this particular appropriation bill, and it placed the responsibility upon the legislative branch by asking for definite authority. This was not granted, and the secretary at first refused to purchase bonds in excess of the requirements of the sinking fund ; and to buy even this latter amount involved difficulty. At best the purchase of bonds depended upon the frame of mind of bondholders ; and every proposition to purchase appreciated the price of securities, while the subsequent hig- gling over terms necessary to protect the interests of the government kept alive the commercial suspense as to whether the money market at a given time would be relieved. A striking instance of this bargaining took place in the summer of 1887, when the secretary called for offers; 4^ per cent, bonds ran up from 109 to in, and most of the tenders were above no. The next week bondholders recognized the stand taken by the treasury, and lowered their demands to no, but no acceptances were made higher than logj^. This firm- ness again led to offers varying from 106}^ to 109. The cost of redemption of public indebtedness is seen in the following table giving the prices of the two principal issues of bonds during the period 1 880-1 890 (fractions dis- carded) : — Tear Four and one-half per cents, of 1891 Four per cents, of 1907 1880 106-112 103-113 1S81 111-116 112-118 1882 1I2-II6 117-121 '■•"83 1 12- 1 15 11S-125 1884 110-114 iiS-124 1885 H2-113 121-124 1886 no-,, 4 123-129 '!?' 107-tio 124-129 1888 106-109 125-130 1889 1 04- log 126-129 1890 102-105 122-126 / / 1 / / / / / . / \ \ \ \ \ \ / 1 / / / \ — \ \ \ J / / \ / / \ / \ \ / 1 1 1 \ \ \ \ \ \ \ N \ \ \ \ s \ \ I I \ I 1 I 1 1 c 1 ( 3 O 3 C CO y^ CO (^ " 2 p ■1 s6 ro m — |l 00 i. 00 i 5 1 ^IJ ^^ M HI 0* 00 i 1 m n f 1^ 1 1 mi ^^ M to ^ 1 ^ 1 1 i mi ^^ M N M f I i ml H 1 i TO 1 i iiF ^i 10 00 r^ 10 f 1 1 ^ iiii ?^ 1 s 00 OQ 1 n " 11 I u- n 3» «" 1 OV) NOto i^ ■*■ in M 1 00 i-i ;|-o :|i'3;'o|:"«:ss-i:: •C2 -tcs ■=.Ei2'.;-g -gsa^ • . oogu 'OmO '^qo-tn 'Tat:*" 'S Ji|^|a|l|»-|al||i1l| r i 1 1 a s; § 184J The Public Debt, 1 880-1890. 433 1863, currency certificates in 1872, and silver certificates in 1878, the public debt tables become misleading' unless care- fully analyzed. Against certificates the treasury carries corre- spondingly large amounts of cash ; and the true liabilities of the treasury are determined by subtracting from the total indebtedness the item " cash in the treasury," which includes the gold, silver, or United States notes held in pledge for the certificates. 28 CHAPTER XIX. SILVER AND THE TARIFF, 1890-1897. 185. References. Silver Legislation: Messages and Papers, IX, 40-41 (1889), 113- 114 (1890), 193-195 (1891), 401-405 (Cleveland, special message, Aug. ■ 8, iS93),444, 483-489, 653-655 (1895) ; Finance Report, 1889, pp. Ix-lxxxiv (Windom's recommendation); 1890, pp. xlvii-I ; F. W. Taussig, The Silver Situation, 48-71 (act of 1890); A. D. Noyes, Thirty Years of American Finance, 138-152 (act of 1890); D. K. Watson, History of American Coinage, 179-191 (Sherman act of 1890), 192-201 (repeal); Report of Motietary Commission, (1898), 259-265 (act of 1890), 266-280 (repeal); J. Sherman, Recollections, II, 1061-1071 (act of 1890), 1175- 1200 (repeal) ; R. F. Hoxie, Debate of 1890, in Jour. Pol. Econ., I, 535-587- Free Coinage: W. H. Harvey, Coin's Financial School (Chicago, 1894); R. P. Bland, in No. Avier. Rev., CLI (1890), 344-353; D. W. Voorhees, ditto, CLIII (1891), 524-535; W. M. Stewart, a'/rti7, CLIV ([892), 552-561; R. P. Bland, ditto, CLVIII (1894), 554-562; W. J. Bryan, ditto, CLXIII (1896), 703-710; A J. Warner, ^r^>M, VIII (1893), 547; W. M. Stewart, Fortwt, XI (1891), 429-437; R. P. Bland, ditto, XIII (1892), 45-52 ; W. H. Harvey, ditto, XIX (1895), 405-409. Opposition to Free Coinage : F. W. Taussig, The Silver Situation in the U. S., in Quar. Jour. Econ., IV (1890), 291-315; H. White, /r Vcirs of. American Fiiunia-, 1 50-181 ; W. C. YaxA, Rfovcmciil of Cold and Foreign Exchanges, 1894-1895, in Yale Rei'ie^a, IV (1895), 12S; &\so\n Sound Currency, W, No. 22 ; F. Fetter, in To/. Sci. Quar., XI (1S96), 237-247 ; F. W. Taussig, 434 § 185] References. 435 Treasury Condition in 1894-1896, in Quar. Jour. Econ., XIII (1S99), 204-218. Panic of 1893: Report of Monetary Commission (i8g8), 219-223; A. D. Noyes, Thirty Years of American Finance, 182-206; or in Pol. Sci. Quar., IX {1894), 12-30; C. A. Conant, History of Modern Banking, 524-554; J. D. Warner, Currency Famine of 1893, in Sound Currency, II, No. 6 (copies of clearing-house certificates, etc.). Sale of Bonds; Messages and Papers, IX, 567-568 (Feb. 8, 1895); Finance Report, 1893, pp. Ixix-lxxiv ; 1894, p. xxxiii ; 1895, PP' l^ix-lxxii ; Investigation of the Sale of Bonds, Pub. Doc, 54th Cong., 2d sess.. Sen. Doc, 187 (1896), p. 332; A. D. Noyes, Thirty Years of American Finance, 207-223, 234-254; A. D. Noyes, The Late Bond Syndicate Contract, in Pol. Sci. Quar., X, 1895, 573-6o2; C. A. Conant, History of Modern Banking, 544-551 ; B. Ives, Government and the Bond Syndicate, in Yale Review, IV, 10-22. Banking and Currency: j^^waf^j«Krf/'«/^«, IX, 554-556 (1894); Finance Report, 1894, pp. Ixxviii-lxxxi (Carlisle), 393-398 (Eckels) ; 1895, pp. Ixxxii-lxxxv (Carlisle), 376-378 (Eckels) ; 1896, pp. 498-506 (Eckels) ; A. L. Ripley, Two Plans for Currency Reform, in Yale Review, VII (1898), 50-71; J. L. Laughlin, Baltimore Plan of Bank Issues, vn Jour. Pol. Econ., Ill (1894), 101-105; Report of Monetary Commission (1898), 20-75, 231-236, 260-276; J. F. Johnson, Report of Monetary Commission, in Annals Amer. Acad., XI, 191-224; F. A. Cleveland, Report of Mone- tary Comm-ission, va.' Annals Amer. Acad., XIII, 31-56; C. A. Conant, History of Modern Ba7iking, 377-385; C. N. Fowler, Financial and Cur- rency Reform, in Forum, XXII (1897), 713; H. White, Money and Bank- ing (revised ed.), 417-456. Tariff: Messages and Papers, IX, 121-122 (1890), 191-193 (1891), 309-311 (1892), 552 (1894), 741-743 (1896); Finance Report, 1889, pp. xxx-xxxii ; F. W. Taussig, History of the Tariff, 251-283 (tariff of 1890), 284-320 (tariff of 1894) ; F. W. Taussig, Tariff Act of 1894, in Pol. Sci. Quar., IX (1894), 584-609; William Hill, Comparison of Votes on McKinley and Wilson Bills, va. Jour. Pol. Econ., II, 290; J. Sherman, Recollections, II, 1201-1208 (tariff of 1894); A. D. Noyes, Thirty Years of American Finance, 223-233. Income Tax : Finance Report, 1895, PP- 481-483 ; J. M. Gould and G. F. Tucker, Federal Income Tax Explained ( 1894) ; F. C. Howe, U. S. under the Internal Revenue System, 233-252; W. M. Daniels, Public Finance, 196-206; George '^uneW, Legislative History of the Second Income Tax, in Jour. Pol. Econ., Ill (1895), 311-337; E. R. A. Seligman, in Pol. Sci. Quar., IX (1894), 621-648; Economic Journal, IV (1894), 639- 667; Forum, XIX (1895), 48-56; C. F. Dunbar, in Quar. Jour. Econ., IX, 26-46; A. C. Miller, in Jour. Pol. Econ., Ill, 255; J. K. Beach, Income Tax Decision, in Yale Review, V, 58-75; C. G. Tiedman, Consti- tutionality of the Income Tax, in Annals of Amer. Acad., VI, 268-279 ; A. Abbott, Bankers^ Magazine, L,(i894), 185 ; Pool^s Index, IV, 277-278 (references). 436 Silver and the TarifF. [§ i86 Sugar Bounty: Finance Report, 1892, pp. 454-47°; '893. P- 643; 1894, p. 706; 1895, pp. 478-481; 1897. P- 6" ; H- C. Beach, in Amer. Law Review, XXIX, 801. Reciprocity: Messages and Papers, IX, 123 (1890), 141 (treaty with Brazil), 148 (Cuba), 152 (Dominican Republic), et seq. ; F. W. Taussig, in Quar. Jour. Econ., VII (1892), 26-39; W. L. Wilson, Forum, XIV (1892), 255-264. 186. SUver Act of 1890. In 1890 the subject of silver coinage came up in an unex- pected form, and for eight years was the most serious financial and political problem. No special prominence had been given to this question in the presidential campaign of 1888. Mr. Windom, secretary of the treasury, however, in his first report, December, 1889, surprised the country with a novel plan for the utilization of silver; even the president declared that he had " been able to give only a hasty examination to the plan, owing to the fact that it had been so recently formulated." . Windom had formerly served as secretary of the treasury for a few months under Garfield and afterward as senator from Minnesota ; he was generally recognized as a shrewd politician, familiar with the temper of the West on the currency question. Six Northwestern States had recently been created, and as the silver sentiment was very strong in these new communities, the advocates of free coinage of silver gained a dispropor- tionate strength in the Senate ; and,- though the senators from these States were Republican on leading party issues, they were willing to hold up general legislation in order to secure a / currency to their minds ; it was even understood that no tariff V bill could be passed without concessions to the silver party. Windom's detailed discussion of the silver question is a useful compendium of the arguments for silver coinage ad- vanced by various classes of bimetallists. The solutions pro- posed are summarized as follows : I. A ratio between gold and silver fixed by international agreement ; the mints of the leading nations of the world to be open to the free coinage of Both metals. § i86] Silver Act of 1890. 437 2. Continuance of the policy of the Bland Act of 1878. 3. Increase of the purchases and coinage of silver to the maximum of ^4,000,000 per month authorized by that law. 4. Free coinage of standard silver dollars. 5. Coinage of silver dollars containing a dollar's worth of bullion. 6. .Issue of certificates to depositors of silver bullion at the rate of one dollar per 4 1 2 J^ grains of standard silver. All of these propositions were dismissed by Windom either as impracticable, inadvisable, or inferior in weight to his own plan. In brief, he recommended the issue of treasury notes against the deposit of silver bullion, at the market price of the silver when deposited ; the notes to be redeemable in either gold or in silver at the current market rate at the time of paym'ent. As this plan was not accepted, it is unnecessary to discuss it further. The bill which finally passed, July 14, 1890, authorized the secretary of the treasury to purchase 4,500,000 ounces of silver bullion each month and to issue in payment thereof treasury notes of full legal tender. The essential differences between this act and that of 1878 were : increase in the monthly purchase of silver ; treasury notes to be full instead of partial legal tender, as in the case of the silver certificates ; redemption of treasury notes either in gold or silver coin at the discretion of the secretary. After July I, 1891, standard silver dollars were to be coined only when necessary for the redemption of the notes. On the whole, the measure provided for the purchase of all the American product of silver, but did not admit unlim- ited coinage. In order to reassure those who feared that such large purchases would result in depreciation of the standard, the act declared that it was the established policy of the United States to maintain the two metals on a parity with each other. This was afterwards interpreted by the treasury as " a virtual promise that the notes shall always be redeemed in gold or its exact equivalent." Although an increase of silver purchases is apparently required by the Sherman Act as compared with 438 Silver and the Tariff. [§ 187 the Bland Act, this would not necessarily follow ; for by the act of 1890 the annual additions to the currency would grow Jess if the price of silver fell, while by the Bland Act the / annual additions grew larger as the price of silver fell. For substituting the measurement of purchases by ounces instead \ of by dollars, Senator Sherman has the credit, and its impor- tance becomes obvious in view of the subsequent fall in the value of silver. 187. McKinley Tariff of 1890. Closely following the silver-purchasing law was the enact- ment of a new tariff, October i, 1890, in order to fulfil the election promises of the Republican party in 1888. The Senate bill of 1888 was brought forward and served as the basis of the measure which was reported. As Mr. McKinley of Ohio was chairman of the House committee on ways and means, the act according to custom is popularly known by his name. The tide of the long and detailed act reads : " An act to reduce the revenue and equalize duties on imports, and for other purposes." The justification of any such character- ization lay in the repeal of the raw sugar duties ; in the reduc- tion of duties on steel rails, iron, and steel plates, and on structural iron and steel ; and in an increase of the free list embracing a number of articles of no great commercial impor- tance. Throughout the debate the protectionist philosophy was developed to a point hitherto unknown in tariff discussion. Restrictive duties were no longer regarded as a temporary stage in the arduous journey toward industrial freedom, but a principle which ought to be permanently adopted. Pro- tection was affirmed in increased duties upon wool, woollen goods, — particularly the finer grades, — and dress goods ; upon the finer cottons, lawns, laces, and embroideries; upon linens, silk laces, and plush goods ; upon cutlery and tin- plate ; and upon barley, hemp, and flax. In some cases the duties were practically prohibitory, and so far forth the revenue was certainly reduced. The minimum principle was extended § i87] McKinley Tariff of 1890. 439 beyond the experiment of 1828 ; for cotton stockings, velvets, and plushes, boiler and plate iron, pen-knives, shotguns, and pistols, and table cutlery, classes were established based upon values ; and on all goods of the same class the same specific duty was laid. The administrative regulations for collecting the customs were made more stringent by another act in the same session. Two new principles were introduced by the McKinley Act : one was the grant of a bounty of t^o cents a pound for fourteen years on the production of sugar within the United States ; and the other, the recognition of commercial reci- procity. The president was empowered to levy duties by proclamation on sugar, molasses, tea, coffee, and hides, if he considered that any country, exporting these commodities to the United States, imposed duties upon agricultural or other produce of the United States, which in view of the free admission of sugar, molasses, tea, coffee, and hides into the United States, he might deem to be reciprocally unjust and unreasonable. This policy was especially designed to apply to Central and Southern American countries, and was adopted largely through Mr. Blaine's influence as a part of a wider measure of Pan-American commercial union. By this method the executive branch of the government was relieved from submitting to the Senate special reciprocity treaties. Under this act commercial agreements relating to reciprocal trade were made with Brazil, the Dominican Republic, Spain (for Cuba and Puerto Rico), Guatemala, Salvador, the German Empire, Great Britain (for certain West Indian colonies and British Guiana), Nicaragua, Honduras, and Austria-Hungary. During the debate the reciprocity provision was opposed by some excellent constitutional lawyers within the Republican party, on the ground that Congress could not delegate its taxing power to the president. It is held, however, that the president did not under this act receive legislative power, but simply the right to determine the particular time when certain legislation should go into effect. 440 Silver and the Tariff. [§ i88 The grant of a federal bounty also raised constitutional objections, more particularly after the Democrats came back into power in 1893. In 1895 the comptroller of the treasury refused to pay the sugar bounty levied while the law was in operation, on the ground that such a grant was unconstitu- tional, but this contention was not sustained by the Supreme Court. Again, when the bounty provision was dropped in the Wilson Tariff of 1894, it was held that under the act of 1890 a contract had been made with citizens who had invested their capital in the beet-root industry, on the supposition that it would be protected for fourteen years ; this objection proved of little avail, and the sugar-beet growers found themselves as liable as other industries to the uncertainties of tariff legislation. 188. The Gold Reserve and its Decline. The enactment of these two important measures, the Sher- man Silver-purchasing Act and the Tariff Act, within a few weeks of each other, makes it hard to analyze the financial situation ; nor can the effects of either act be traced to their proper cause. The revenues declined more than was antic- ipated and commercial disturbances caused an increased exportation of gold which led to the presentation of treasury notes for redemption in gold : the net assets of the govern- ment were reduced ; and the quality of the assets was changed. Almost without warning the condition of the treasury gold reserve assumed the highest importance, and its ups and downs were daily watched for and discussed with feverish interest by bankers and moneyed interests. By the resumption act of 1875 the secretary of the treasury had authority to accumulate gold in order to resume specie payments, but no provision was made by law for a definite gold reserve of a precise amount. No attention had been paid to the earlier recommendations of Secretary Sherman from 1S77 to 1881 that the resumption fund be specifically defined and set apart ; the so-called reserve was simply the balance of the gold in the treasury, and not a distinct account. It was not. § 1 88] Gold Reserve and its Decline. 441 as sometimes stated, a fund sacredly pledged to redeem the legal tenders ; in reality it was only a part of the " available cash." Consequently the proportion and character of the reserve depended only on the practice of the treasury from time to time. Two considerations finally determined in the minds of the public what the size of the redemption fund ought to be : under the resumption act no part of the face value of the bonds sold for redemption purposes (amounting to ^95,500,000) could be applied to current appropriations ; and Secretary Sherman in his recommendations preliminary to resumption suggested a minimum reserve of at least ^100,000,000. An indirect recognition of a gold reserve is found in an act of 1882, providing for an issue of gold cer- tificates, which declared that such issue should be suspended whenever the gold coin and bullion in the treasury reserved for the redemption of the United States notes fell below jSioo,ooo,ooo. Some held that a separation of the treasury moneys into two funds, one for redemption and another fpr current disbursements, might be made simply by administra- tive act without the mandate of Congress ; but when Secretary Manning in Cleveland's administration tried to make the distinction, he was forced to abandon it, and the question slipped along without attracting much attention ; nevertheless, by tradition public sentiment adopted ^100,000,000 as the line of demarcation between safety and danger. . Later, when the silver question became more pressing, it was argued that there was no authority for making up this fund out of gold alone ; that the word coin in the resumption act included silver. Another line of argument was that the maintenance of a reserve composed of gold alone had cost the government immense sums through holding for years $100,000,000 of "dead" moneys and it was further urged that the law of 1878 requiring the reissue of legal-tender notes was practically a suspension of the resumption act of 187s, as far as the redemption of the new notes was con- cerned. The legal status of the reserve was, however, of little 442 Silver and the Tariff. [§ i88 concern as long as the amount of available gold in the treas- ury was so large that nobody apprehended another suspension of specie payments. For fourteen years, 1878-1892, only an insignificant amount of gold was paid out by 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 i, 1879, to ;?30o,ooo,ooo in 1891. In 1890 the new issue of treasury notes, together with a change in commer- cial 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 " " 1891 117,667,723 " " 1892 114,342,367 " " 1893 . . . 95.485.413 " " 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 tariflf. 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 Sher- man 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 f229,66S,ooo 1891 219,522,000 1892 177,452,000 'S*93 203,355,000 1894 131,818,000 in < P 1-1 O O H H I o 12; § 1 88] Gold Reserve and its Decline. 443 Fortunately the internal revenue receipts maintained their customary level with something to spare ; but on the other hand increased appropriations cut deep into the funds of the treasury. The treasury was slowly but surely exhausted. In 1890 the surplus was ;?i05, 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 passage 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 1 89 1 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 startling changes which took place in the quality of the receipts from customs at New York are shown in detail (page 444) for the two years 1 89 1 and 1892 by reducing the amounts to percentages. The reason for this substitution 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 1 889-1 890 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 custom purposes or export deliv- eries. In August, 1890, the treasury began the policy of using 444 Silver and the Tariff. [§ 189 Quality or Receipts from Customs at New York, 1891- 1892 Gold coin United States Treasury Gold Silver 1891 notes notes certificates certificates January , 41 5-2 88.5 3,1 February 1 5.0 7-3 81.0 6.6 March 2 6.0 12.4 64.9 16.S April 2 7-2 25.6 47.0 20.0 May 2 15.0 30.2 27.8 26.8 June 2 44.6 28.9 12.3 14.0 July 2 49.0 27.4 14.9 8.5 August 2 50.5 3I-5 ia.6 5-2 September I 55-3 28.4 "l 4.4 October 2 44.0 31.6 19.8 4-4 November 1 313 22.3 43-5 2.8 December I 14.8 16.7 65.3 31 1892 January .1 iS.o 14-5 66.1 4-3 February I 36.2 28.6 2S.8 9-3 March 1 42.5 33-0 18.7 5-7 April 2 46.4 3I.6 14.9 6.9 May I 40.6 36.4 9.9 13.0 June 2 26.8 49.1 8.0 15-9 July I 28.4 42.2 13.8 ■5-5 August 25.6 51.9 12. 1 10.4 September 45.8 39-7 3-6 10.9 October .1 51.9 3S-0 6.6 6.4 November .1 52.8 33-0 7.8 6.3 December 46.4 40.0 4.4 9.2 the new treasury notes in the settlement of New York balances, and in the year ending June, 1891, Secretary Foster, appar- ently convinced of the need of a larger gold reserve to sup- port the credit of 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. 189. Panic of 1893; Repeal of Silver Purchases. 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, how- ever, were still powerful in both parties, and President Cleve- land was at a disadvantage in not having the undivided support of his own party. Even the position of Secretary Carlisle was § 189] Repeal of Silver Purchases. 445 doubted : it was publicly declared that he stood ready, if ex- pediency demanded it, to redeem the treasury notes of i8go in silver instead of gold, and, while standing upon the letter of the law which demanded their redemption in coin, practi- cally 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 pur- pose 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 associated 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 ade- quate 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, passed 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 446 Silver and the Tariff. [§ 189 volume of 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 i, 1893, the actual net balance in the treasury above the gold reserve, pledged funds and agency accounts was only 211,038,448. Trade and industry had been disorganized; the panic of 1893 extended into every department of industrial life. In December, 1893, the comp- troller 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 institutions afterwards resumed business, but the permanent damage was great. The fright of depositors was general and the shrinkage in deposits enor- mous ; 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 i^i 14,000,000, to 15,242 in 1893, with liabilities of $346,000,000. The prob- lem 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 instituted. In the spring of 1894 general want and distress § igo] Sale of Bonds for Gold. 447 led to labor strikes and riots, as in Chicago, and even to more abnormal outbreaks, as seen by the march of Coxey'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. 190. 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 expendi- tures 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 assailed, 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 inter- ested ; 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 expor- tation in the settlement of trade balances. The decline of revenue, the presentation of notes for redemption in gold, and the proportion of the flow of gold to foreign countries as compared with the domestic supply through mining, is shown by years in the following table : — Silver and the TariiF. [§'9° Fiscal year ending June 30 Excess fif revenue over expenditures Excess of expenditures over revenue Legal-tender notes pre- sented for redemption Excess of exports of gold over imports Gold product of United States 1889 i8go 1891 1892 1893 1894 ? 105,053,000 105,344.000 37,240,000 9,914,000 2,342,000 #69,803,000 $730,000 732,000 5,986,000 9,126,000 102,100,000 84,842,000 $49,667,000 4.33 '.000 68,130,000 496,000 87,506,000 4,528,000 $32,800,000 32,845,000 33.175)000 33,000,000 36,000,000 39,500,000 $214,660,000 $207,320,000 The only way to protect the fund of gold reserve under the circumstances 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 post- poned 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 pro- vided only for ten-year 5 per cent., fifteen-year 4 '„, 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 § i9°] Sale of Bonds for Gold. 449 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 resump- tion 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 presi- dent 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 {565,650,000 February 10, " io^,iig,ooo Bondissue November 20, " 59,054,000 " 30, " . . . . 105,424,000 5(7«(/»>ja« 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 hoarding, 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 29 45° Silver and the Tariff. [§ 191 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 substituted, 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, Con- gress 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. 191. Legality of the Bond Issues. A prolonged debate followed over the powers of the execu- tive, involving a discussion of section 3700 of the Revised Statutes, originally passed in 1862, which authorized the sec- retary of the treasury " to purchase coin with any of the bonds or notes of the United States authorized by law, at such rates and upon such terms as he may deem most advantageous to the public interest;" of the funding act of 1870, which de- tailed the kinds of bonds that could be issued in funding, and which forbade any increase of indebtedness through the issue of bonds for funding purposes ; and in particular of the resumption act of 1875. § 191] Legality of the Bond Issues. 451 The opposition laid great stress upon the wording of this last measure which gave to the secretary of the treasury power "to prepare and provide for the redemption" of the legal- tender notes through the use of surplus reserves and the sale of bonds. No authority, it was declared, was given to main- tain redemption ; no permanent powers were thus bestowed upon the executive. Cannot the people through their Con- gress be trusted to meet their obligations, whether current or plighted, for the redemption of paper money? It was held contrary to the spirit of the Constitution that the executive department should be able of its own discretion to create debt, burden the people with interest charges, and thus neces- sitate taxation without legislative sanction. Such a practice was entirely inconsistent with the fundamental principles of popular government, for by it the executive could set aside the wish of the legislature and dispense altogether with the aid of Congress in raising money. Again it was urged that the issue of bonds for redemption purposes was limited by the amount of legal tender in circu- lation in 1875. At that time no provision was made for the reissue of the notes ; the possibility of an endless chain was not suggested. Authority for a fixed volume of circulation ($346,000,000) and for the reissue of notes was not granted until 1878; was it probable, therefore, that the act of 1875 in its provision for sale of bonds could have contemplated the use made during the years 1894-1896? In that case could not the secretary of the treasury issue bonds as many times as the legal-tender notes were passed over the counters of the treasury? Under no circumstances, it was reasoned, was there authority to sell bonds to redeem the treasury notes of 1890, for at best the power under the act of 1875 was limited to the earlier greenbacks. All this discussion, however, was really off the main con- tention which was that there was a surplus on hand for redemption if the secretary would only use silver; not only was there the free silver in the treasury, there were also poten- 452 Silver and the Tariff. [§ 191 tial funds in the "coinage of the seigniorage," and in the coinage of the silver purchased and stored under the act of 1890. Here was a reserve, a locked-up surplus of nearly three hundred million dollars ; how absurd, said the silverite, to declare that the treasury needed replenishing by borrowing ! Why should silver be dishonored by not issuing it for redemp- tion purposes? Moreover, this dishonor was wholly without warrant, for the act of 1890 expressly stated that it was "the established policy of the United States to maintain the two metals on a parity," and the act of 1893 repealing coinage further " declared that the efforts of the government should be steadily directed to the establishment of such a safe system of bimetallism as will maintain at all times the equal power of every dollar coined or issued by the United States in the markets in the payment of debts." By parity, it was urged, was meant something more than redeemability ; equality was its true significance ; " parity " is when " one is as strong and as tall as the other, and is able to bear as much burden as the other." There could be no parity as long as the govern- ment's creditor was given an option in the selection of the metal in which payment could be made. Extremists went so far as to declare that the panic of 1893 was brought about by a well-defined conspiracy of bankers " to bring the government to its knees and bully the people into submission to their terms." It was stated and apparently believed that capitalists, not finding profitable investment in railroads, mines, and manufactures, desired further issue of bonds in order that they might " invest their surplus in the muscle, blood, and sweat of the American people, and fix that investment far beyond the power of emancipation." The reply to these arguments was the swift and positive assertion that by existing law the secretary was under obliga- tion to borrow money to protect the credit of the nation, and that the powers granted under the act of 1875 were con- tinuous until repealed. There was a contract morally binding upon the government and possibly legally binding, to pay gold § 191] Legality of the Bond Issues. 453 to the holder of every legal-tender note, and for this purpose the government should if necessary sell bonds. A refusal to pay gold on demand would send it to a premium and thus destroy the parity which had been stipulated in the act of 1890. As for using silver for redemption, that practically involved the whole question of the free coinage of silver, — a question which should be settled on its own merits, and not forced upon the country indirectly by depriving the executive of borrowing powers previously granted. In addition to the criticism upon the general question of the issue of bonds, the contract with the syndicate is of special interest for two reasons : first, because it was a nota- ble example of the assumption of administrative obligations by private bankers, in promising to protect for a definite period the gold fund of the government ; in the second place, it was an attempt on a large scale to import gold and pre- vent its exportation through the manipulation of the for- eign exchange market. The government on its side was forced to onerous conditions, yet thought it wise to make the arrangements secretly, or at least through agents selected without competition. The history of this negotiation and the difficulties attending the control of the international movement of gold in the face of adverse commercial conditions lie outside of this narrative ; here it is only necessary to state that 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 admin- istration resorted to *a bond sale, and again the action was pre- ceded by a special message from the president to Congress asking for a grant of authority to issue gold bonds instead of 454 Silver and the Tariff. [§ 191 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 |ioo,ooo,ooo 4 per cent, bonds. The treasury now carefully avoided any appearance of dealing through a syndi- cate and publicly advertised for offers, with the encouraging result of 4640 bids, amounting to ^684,262,850. 781 dif- ferent bids were accepted and the premium yielded about ;? 1 1,000,000. 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 190,000,000 because of hoarding 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 suc- ceeded, 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 § igz] The Gorman-Wilson Tariff. 455 for redemption. The administration empliatically 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 expen- ditures 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. The tables in the next chapter show that there was a series of deficits beginning with 1894, but the deficit by no means equalled the amounts of bonds sold. 192. The Gorman-Wilaon Tariff. When the Democrats returned to power in March, 1893, it was with the distinct understanding that the tariff should be revised. Between 1890 and the election of 1892 the McKin- ley tariff was held responsible for the general increase of prices and aroused a strong and immediate revulsion of popular feeling. Within a month after the passage of the McKinley tariff act the Democrats swept the country in the congres- sional elections of November, i8go. As the Republicans re- tained the Senate, no revenue legislation got even as far as the president. The tariff issue was again uppermost in 1892, for the financial difficulties of the treasury had not yet been clearly revealed to the public. Relying upon the arguments of increased prices and the dangerous power of trusts, which were denounced as creatures of the tariff, the Democrats gained complete victory. Although conditions greatly changed in the year between the election and the assembling of the new Congress in December, 1893, the Democratic party leaders determined to carry out their pre-election pledges. 456 Silver and the Tariff. [§ 192 Discipline within the party, however, had been weakened by dissensions created by the continued struggle over the repeal of the silver-purchase act, and the Democratic majority in the Senate was small, so that the proposed legislation required not only determination, but also very considerable compromise. The House measure as it first appeared under the leader- ship of Mr. William L. Wilson, while of necessity a concession to the adjustment of business under the protection policy, was a step in the direction of freer trade. In the Senate the bill was changed, under the guidance of Senator Gorman, until the protective elements fairly outweighed any principle of reform. The so-called Wilson Tariff Bill, passed August 27, 1894, was therefore by no means satisfactory to those who sincerely believed in tariff reform ; the dissatisfaction of Presi- dent Cleveland was such that he refused to sign the bill and allowed it to become a law by passive neglect. In a letter to Representative Catchings he complained that " Senators have stolen and worn the livery of Democratic tariff reform in the service of Republican protection." The details of this tariff, which continued in force less than three years, are for the most part of little present interest ; rates were modified here and there, and the free list was extended so as to include wool, and duties were reimposed on sugar. But these revisions of schedules do not disclose the application of any uniform or consistent principle. Reciprocity was practically abandoned. The tariff act of 1894 reintroduced an income tax, providing that a tax of 2 percent, be levied on all incomes above S4000. Besides the usual arguments that such a tax was inquisitorial, created perjury, was undemocratic and unconstitutional, a more serious objection was brought, that it made a discrimina- tion against the well-to-do and was a demagogic bid for the support of the poorer classes. Obviously with such a high limit of exemption and low rate of taxation the total proceeds from a revenue point of view could not be great. The adop- tion of a limit of exemption at S4000 was largely due to the strenuous efforts of the Populist party. Almost the entire § 192] The Gorman- Wilson Tariff. 457 support of the measure came from the South and West ; from New England, Pennsylvania, and New York there were but five votes in the House of Representatives in its favor. The income tax provision was brought before the Supreme Court in its October term, 18^4, on the ground of unconstitu- tionality, in the case Pollock vi Farmers' Loan and Trust Co. (157 U. S. 429) . Four questions were involved : first, whether a tax on the income of real estate is a direct tax within the meaning of the Constitution, and therefore unconstitutional unless imposed by the rule of apportionment ; second, whether a tax on income of personal estate is a direct tax ; third, whether the act infringed the rule of uniformity ; fourth, whether the tax imposed upon income from State and muni- cipal bonds is constitutional. The court unfortunately showed uncertainty as to its conviction. In an opinion rendered April 8, 1895, the court held that the tax on rent or income from land was a direct tax, and therefore unconstitutional unless apportioned ; it was evenly divided as to whether a tax on income derived from other sources, as trade or money at interest, was direct, and consequently declined to declare that part of the law unconstitutional. This left the issue in a most unsatisfactory form, and a re -hearing was arranged for May 6. As a result of re-argument one of the justices changed his opinion, and in the second decision, delivered May 20 (158 U. S. 601), the court decided against the con- stitutionality of the measure on all four points. This practically reverses the decision of the Supreme Court in 1880, in the case of Springers. United States (102 U. S. 586), involving the question of the constitutionality of the income tax of the Civil War. The court at that time closely followed precedent and, adopting the definitions accepted in Hylton v. United States, according to which the only direct taxes within the meaning of the Constitution are capitation taxes and taxes on real estate, declared that the income tax complained of was within the category of an excise or duty. In 1895 there was a much more elaborate if not ingenious dis- 458 Silver and the Tariff. [§ 193 cussion, both by the counsel and the court, not only of the legal and historical precedents, but also of the definitions cur- rent in economic literature. In the public discussion and in some of the court opinions the question was treated not so much from fiscal expediency as from the standpoint of funda- mental principles of liberty and right government. On the one side were those who were convinced that wealth should be taxed as such ; on the other, those who saw the beginning of a class oppression of property interests. It was also charged that the measure was sectional in its aim ; by putting the limit of exemption as high as ^4000, the South and West would largely escape the burdens of the tax. Since the decision of the court was adverse, further discussion of a federal income tax becomes largely academic : possibly an income tax can be framed which would avoid the constitutional objections ; if so, a revival of the tax is likely. The inconsistencies of the tariff of 1894 were recognized by many Democrats. Defeated in the effort to make a consistent general revision, several so-called " pop-gun " bills passed the House : bills to place raw materials, as coal, iron, and sugar, on the free list. They all failed in the Senate. Such a policy was harassing to commercial interests and tended to the un- settlement of business affairs. The result was a lack of con- fidence in the financial ability of the Democratic party ; a popular feeling sprang up that even the tariff of 1 894 favored the trusts, now looming into power ; and the failure of the income tax provisions to stand judicial review led to charges that some of the Democratic leaders were insincere. 193. Currency Measures. When the tariff bill of 1894 was disposed of, the attention of Congress was once more concentrated upon the credit cur- rency, and again the greatest variety of views found expression. At one extreme were those who attributed the financial ills to the over-issue of government notes, and who insisted that the remedy lay, if not in the absolute destruction of such issues, at § '93] Currency Measures. 459 least in their temporary withdrawal or suppression by some indirect process, so that the treasury might not be plagued by the demand for redemption. President Cleveland was of this class; and his secretary of the treasury, Mr. Carlisle, was finally converted to the same view. In harmony with the idea was the proposition of Mr. Gage, then a banker in Chicago, that ^200,000,000 in bonds should be issued for subscription in treasury notes, which were then to be cancelled, on the ground that " the government must be taken out of the note-issuing business." It was maintained that the desperate endeavor to uphold the redeemability of treasury notes resulted in a large increase of federal indebtedness, and that it would be far better to purchase and cancel notes outright with that outlay ; all the notes of 1890 and a portion of the greenbacks might then be destroyed. Absolute cancellation was in general regarded as too radi- cal, and Secretary Carlisle voiced the common opinion that the United States legal-tender paper had become so incor- porated into the currency system and constituted so large a part of the active circulation that it could not be absolutely withdrawn without producing disturbance both in the fiscal operations of the government and in the business of the people. Mr. Carlisle consequently devised a plan for the eradication of legal tenders without cancellation ; this was that banks should deposit in place of bonds United States notes (including treasury notes of 1890) to the amount of 30 per cent, upon the circulation applied for. If all the national and State banks in existence should take out circu- lation to the full amount proposed, this regulation, it was calculated, would tie up or " put under bushel " ^225,000,000 of treasury notes. Mr. Eckels, the comptroller of the cur- rency, went a little farther and proposed the deposit of as much as 50 per cent, of government notes as a pledge of bank circulation. Other proposals brought before Congress, while recognizing the desirability of relieving the government from the embarrass- 460 Silver and the Tariff. [§ 194 ments of redemption, did not place so much emphasis upon contraction of government currency, but looked especially to greater elasticity of the banlcing currency. The Baltimore plan (so called because endorsed by the American Bankers' Asso- ciation meeting held at Baltimore) did away altogether with the deposit of bonds for the security of notes ; circulation was based upon capital ; emergency circulation was allowed under special restrictions of taxation ; and the security of, the note- holder was protected through a guaranty or safety fund, as in the former New York State banking system and present Canadian banking law. None of these bills were enacted ; the defects of government note and bank note circulation could command little serious consideration in Congress as long as party pas- sion was so fierce over the silver question. 194. Struggle for Free Coinage. Apart from and antagonistic to all these schemes of bank- ing reform stood the supporters of free silver. To their minds the way to currency reform was clear and unconfused with questions of reserve, safety funds, elasticity of issue, or redemp- tion ; the evil lay in an inadequate money medium, and had little to do with banking or treasury finance. They held that industry was depressed because of the continued mint discrimi- nation against silver, and that it was folly to discuss banking systems and revenue bills until this fundamental defect was remedied. The doctrine that the forces controlling the flow of specie were universal in their operation was impatiently cast aside ; the interests of Europe and the United States were regarded as radically different. By the lowering of prices of agri- cultural produce since 1891, the debtor farmer found an ever-increasing difficulty in the payment of interest charges, and the foreclosure of city .ind farm mortgages through- out the West seemed evidence of general distress. Sober- minded representatives arraigned existing conditions : chains of slavery laid upon labor ; privileged classes more strongly § i94j Struggle for Free Coinage. 461 intrenched; silver stricken down as a co-laborer with gold. When told that the treasury was in difficulty, they called attention to the silver cash balance in the treasury. " What afflicts the country is a surplus and not a want of revenue," they said; money was impounded in the treasury. The industrial depression after 1893 made many converts to this idea, and the continued low price of wheat convinced the great agricultural West irrespective of party that its property interests were dependent upon the restoration of silver; the issue was distinctly presented to the people in the elections of 1896. The platform and the presidential candidate of the Democrats were clear and outspoken. " We demand the free and unlimited coinage of both gold and silver at the present legal ratio of 16 to i without waiting for the aid or consent of any other nations." This demand, which was first enun- ciated in a national platform of the Greenbackers in 1880 and kept alive by the Farmers' Alliance and People's party, was now accepted without reservation by one of the old his- toric parties. The Republicans on the other hand declared that they were " opposed to the free coinage of silver except by international agreement with the leading commercial na- tions of the world, which we pledge ourselves to promote." Seeing that the existing gold standard would be preserved by the Republicans till that unlikely event, an influential body of delegates, under the lead of Senator Teller, seceded from the Republican convention, and gave subsequent support to the . Democratic candidates. This defection from the Republicans was in turn offset by the inactivity of many Eastern Democrats, who had no sympathy either with the Democratic platform or its candidate ; this led to the nomination of an independent Democratic ticket on a gold platform. The Populists also entered vigorously into the campaign. Although advocating in their platform irredeemable paper money and the redemp- tion of the public debt in this currency, for the moment they united in the support of Mr. Bryan for the presidency. Undoubtedly other questions than that of free coinage 462 Silver and the Tariff. [§ 194 of silver influenced the minds of voters, such as Democratic criticism of the judiciary for the income tax decision, but tlie struggle centred on the money question. An effort was made by Mr. Bryan to rest the campaign on the deepest passions of human life : " In this contest brother has been arrayed against brother, father against son. The warmest ties of love, acquaintance, and association have been disregarded ; old leaders have been cast aside when they refused to give expression to the sentiments of those whom they would lead, and new leaders have sprung up to give direction to the cause of truth." Few new arguments were presented, but the activ- ity in meetings and political literature was unprecedented. The silver advocates made use of a very effective medium of argument by issuing millions of copies of pamphlets, as " Coin's Financial School," in which well-known business men in favor of the gold standard were represented as nonplussed and staggered by the simple conversational instruction of a guileless boy teacher. Public interest had never been so aroused over a financial question since Jackson's war on the bank. For a short time business almost came to a standstill because financial and commercial interests felt that the possi- ble adoption of free coinage would make revolutionary changes in prices and contracts. The elections were in favor of the Republicans, and hence of the gold standard. The continuance of a Republican majority in the House of Representatives, however, did not insure immediate positive action on the money question, for on this point even some of the Republicans who had stood by the party were not in accord with their own platform, and soon it became understood that upon any House bill on the currency the Senate would affix an amendment providing "for the free and unlimited coinage of silver at the ratio of 16 to I without the aid or consent of any other nation." This position was tenaciously held by the Senate from 1894 to 1900. CHAPTER XX. TARIFF, WAR, AND CURRENCY ACT. 195. References. Gold Reserve: Finance Report, 1897, p. 7; i8g8, p. 10; 1900, pp. 14-15. L. J. Gage, Condition and Prospects of the Treasury, in No. Amer. Rev,, vol. 168 (1899), pp. 641-653. Loans : Finance Report, 1898, pp. xciii-xcvii (Spanish war loan) ; igoo, pp. Ixxviil-lxxxi, 528; F. A. Vanderlip, War Loan, in Forum, XXVI {1898), 27-36. The Currency : Finance Report, 1897, pp. Ixxii-Ixxxi (Secretary Gage), 337-339 (comptroller); 1898, pp. xcvii-civ; 1899, pp. Ixxxviii- xcvi; F. M. Taylor, Quar. Jour. Econ., XII (1898), 307-342 (excellent bibliography, p. 342); Report of Monetary Commission (1898); C. N. Fowler, i^oraOT, XXII (1897), 713-721; R. M. Breckenridge, Comptrol- ler's Objections to Currency Reform, in Jour. Pol. Econ., VII, 253-267 ; Economic Studies, IV (Feb., 1899), 31-44 ; Report of Monetary Commission, in Bankers' Magazine, LVI, 193-201 ; J. L. Laughlin, Withdrawal of the Treasury Notes of 1890, in Jour. Pol. Econ., VI (1898), 248-249; O. A. Eliason, Notes Issued on Assets, in Bankers^ Magazine, LVI, 669-674. Tariff: F. W. Taussig, History of the Tariff, 321-360; or Quar. Jour. Econ., XII (1897), 42-69; or Econ. Jour., VII., 592-598; C. A. Conant, in Review of Reviews, XVI (1897), 167-174 ; R. P. Porter, in No. Amer. Rev., vol. 164 (1897), 576-584; J. Nimmo, Jr., Forum, XXIV (1897), 159-172 (transit trade) ; H. W. Wiley, Tariff on Sugar, in Forum, XXIV (1898), 689-697. Currency Act of 1900; Finance Report, 1900, pp. xxxi-xxxiv, 473- 477 ; F. W. Taussig, Quar. Jour. Econ., XIV (1900), 394-415, 450 (text) ; or Econ. Jour., X (1900), 226; J^ L. Laughlin, Recent Monetary Legisla- tion, in Jour. Pol. Econ., VIII (1900), 289-302 ; C. A. Conant, Refunding Law in Operation, in Review of Reviews, XXI (1900), 711-716; J. F. Johnson, Bankers' Journal (Chicago), VII (1901), 53-63; J. F. John- son, />«/. Sci. Quar., XV (1900), 482-507; R. P. Falkner, Currency Law of igoo, in Annals Amer. Acad., XVI (1900), 33-49; F. A. Vanderlip, Forum, XXIX (1900), 129-138. 196. Dingley Tariff, 1897. Although the industrial outlook had begun to brighten when the Republicans assumed control in' March, 1897, the 463 464 Tariff, War, and Currency Act. [§ 196 condition of the national treasury was unsatisfactory. After 1893 the annual deficits were as follows: — 1893-1894 $69,800,000 1894-1895 .... 42,800,000 1895-1896 . . 25,200,000 1896-1897 18,000,000 To the Republican leaders there could be but one cause, the inadequacy of the tariff of 1894, and there could be but one remedy, — another revision under Republican guidance and responsibility. Little respect was given to the plea that as long as the currency was unsound, no tariff could bring much comfort ; nor was any respect paid to the claim that the tariff was not the principal issue in the elections of 1896. Promptly after inauguration in March, 1897, Presi- dent McKinley called an extra session of Congress to consider the need of further revenue. A bill was reported from the committee on ways and means under the chairmanship of Mr. Dingley, and after a brief consideration in the House, a more leisurely discussion in the Senate, and conference between the two Houses, resulting in the usual compromise, it became a law, July 24, 1897. The measure was thoroughly protective in its provisions, but when it is remembered that the Wilson tariff of 1894 was also of the same general character, an analysis of the new tariff will not disclose many points of interest. On some commodities the duties of 1890 were restored; on others compromises between the rates of 1890 and 1894 were accepted, and in a few instances the lower rates of the Wilson tariff were allowed to stand. Duties were re-imposed on wool, increased on flax, cotton bagging, wool- lens, silks, and linens, and on certain manufactures of iron and steel. On coal there was a compromise ; on iron and steel, duties were left practically unchanged. On sugar, which plays a more important part from a fiscal point of view, there was a radical revision ; in place of tlie ad valorem rate of 40 per cent, on raw sugar, the duty was increased and made specific. The policy of free r;iw sugar adopted by the Repub- § '97] Spanish War Finance. 465 lican party in 1890 was definitely abandoned, for the need of revenue was urgent, and the slowly developing beet sugar industry demanded protection. The principle of reciprocity authorized by the McKinley tariff was again incorporated into the tariff system, but was to be brought into operation by treaties executed by the Senate, instead of by executive proclamation as provided in the act of 1890. The declared policy of the Republican party is that these treaties shall in no way infringe upon the principle of protection, but shall be " so directed as to open our markets on favorable terms for what we do not ourselves produce in return for free foreign markets." To make a treaty which will not in some degree modify the protective policy is a problem; and there are those who confidently expect that this country will gradually arrive at a greater measure of free trade through reciprocity. Although the congressional debates on the Dingley tariff were devoted largely to pictures of the industrial prostration due to previous relaxation of the protective principle, the majority keenly appreciated the needs of the treasury and gave more than usual attention to making it productive of revenue. The real merits of the Dingley bill on this point were obscured by the war with Spain in 1898, which in- terrupted commerce and business, and compelled recourse to internal revenue legislation. In fact it is hard to analyze the productivity of the several tariffs of 1890, 1894, and 1897, partly because the currency contest depressed business, and partly because there was never time enough to determine the real effect of the several measures. Industry cannot accommo- date itself at a moment's notice to changes of tariff schedules, and in each case the time was too brief to allow a safe gener- alization on the fiscal merits of the several measures. 197. Spanish War Finance. The course of financial reorganization was interrupted early in 1898 by the wax with Spain. The action of the treasury 30 466 Tariff, War, and Currency Act. [§ 197 and of Congress in this crisis was alike commendable : as soon as the possibility of war became apparent, Congress unanimously appropriated ^50,000,000 for national defence, to be expended without restriction by the president. The loan act was supplemented by the war revenue bill of June 13, 1898. The recent tariff measure was not disturbed, and reliance was placed almost wholly upon new internal revenue duties. Nearly all of the taxes on tobacco and fermented liquors were doubled ; but no change was made in the duties on spirits, thus leaving a fruitful source of revenue in reserve for future emergency. Special taxes were laid upon banks, brokers, proprietors of theatres, bowling alleys, billiard and pool rooms, and amusement places in general. Stamp taxes were imposed upon a great variety of commercial transac- tions, involving the use of documents, as the issue or sale of corporation securities ; upon bank checks, bills of exchange, drafts, etc. ; upon express and freight receipts, telephone and telegraph messages, insurance policies and many other busi- ness operations in daily use. Duties collected through the use of stamps, were laid upon patent and proprietary medicines and toilet articles, chewing gum and wines ; and an excise tax was imposed upon firms engaged in refining sugar or petroleum. A novelty in federal finance was a tax on lega- cies, ranging from three-quarters of i per cent, on direct heirs to s per cent, on distant relations and strangers, with a pro- gressive increase in the rates as the estates increased in size, to a maximum of 15 per cent. The productivity of the new taxes is seen in the following condensed table : — 1898 1899 1900 1901 Distilled spirits .... Manufactured tobacco . Fermented liquors . . Inheritance taxes . , . Stamp and business taxes ^Schedules A and B) . Miscellaneous .... $92 > 500, 000 36,200,000 39,500,000 2,600,000 $99,200,000 52,400,000 68,600,000 i,aoo,ooo 43,800,000 8,200,000 $109,800,000 59.300,000 73.500,000 2,Soo,ooo 40,900,000 9,000,000 $116,000,000 62,400,000 75,(.>oo,ooo 5,200,000 39,200,000 S, 000, 000 Total $170,800,000 $273,400,000 $395i3«>iOOO $306,800,000 § 197] Spanish War Finance. 467 Under the authority to borrow, conferred by the act of June 13, 1898, ;?20o,ooo,ooo of 3 per cent, bonds were sold. Any doubt whether a bond bearing so low a rate of interest could be advantageously placed under the existing sensitive conditions of trade and finance disappeared as soon as the treasury invited subscriptions. A popular loan was effec- tively secured by issuing the bonds in denominations as low as ;^20, and in giving priority in the allotment to subscribers for the lowest amounts. In all there were 232,224 subscriptions for ^500 and less, accompanied by a full payment for the bonds; and 88,002 bids for larger amounts. The total sub- scription amounted to ;^i, 400,000,000. The success of this loan was due partly to sentiment, as a patriotic desire to share in the financial support of the war ; and partly to the self-interest of the national banks, which were eager to obtain additional bonds to secure circulation. The " popular loan," however, was floated at a probable sacrifice of about ^5,000,- 000 which would have come as a premium from competitive bidding ; and the theory that " the dissemination of govern- ment securities among the people would attach the holders thereof by closer bonds of sympathy to the government," was weakened by the rapid sale of bonds at a small profit by the original subscribers. Within a few months the original hold- ings of about 116,000 subscribers passed into the possession of a comparatively few persons and corporations. The cost of the war is not easily estimated. The actual expenditure during the four months of hostiKties was not large, but the ultimate outlays have made an enormous difference in the nation's budget. During the four preceding years of peace, 1894-1897, the expenditures for the army were ^206,- 000,000 and for the navy, |i 22,000,000 , a total of ^328,- 000,000; while during the succeeding years, 1898-1901, the expenditures for the army reached ^603,000,000 and the navy ^238,000,000, making a total of ^842,000,000. A portion of this expense is to be charged to the campaign in China and the. restpration of peace in the Philippines, operations which 468 TarifF, War, and Currency Act. [§ 198 are consequent upon the Spanish War. The permanent result must be a higher level of expenditures for military and naval purposes, and probably a higher per capita tax for all federal purposes. Eventually new pensions are likely to become a large draft on the treasury. 198. Currency Act of 1900. The war was quickly over, and although new and difficult problems of colonial administration engaged the attention of the country, the need of reforming the currency and banking was not forgotten. At first the outlook was discouraging : early in 1898 the Senate passed a resolution that government bonds were payable in standard silver dollars at the option of the government with no violation of public faith ; and shortly ' afterward the silver element in the Senate forced the incorpora- tion of a silver coinage provision (section 34) into the war revenue act, directing the secretary of the treasury to coin into standard silver dollars, to an amount not less than $1,500,- 000 each month, all of the silver bullion in the treasury, purchased in accordance with the act of 1890. The advo- cates of reform, however, were not idle. Outside of Congress, a group of men known as the IndianapoHs Monetary Com- mission had been organized in 1897 through the action of a convention of representatives of chambers of commerce and boards of trade, particularly of the Middle West. This com- mission made a preliminary report in December, 1897, and in January, 1898, a bill embodying its proposals was introduced into the House of Representatives by Mr. Overstreet of Indiana. This plan provided for gold to be the sole standard of value ; the stoppage of the coinage of silver dollars ; a division in the treasury department between the funds received and used for current expenditures, and those used for issue and redemp- tion of treasury notes ; the retirement of the demand obliga- tions of the government; and a radical change in the national banking system. The activity of this commission, and the thoroughness of its report, established a centre of persistent §199] Redemption of Notes. 469 and aggressive influence in Congress and set before reformers a reasonable goal. The improvement in industrial conditions was encouraging ; foreign commerce was expanding enor- mously, and new records, both of imports and exports, were reached. Harvests were generous and manufacturers were be- hindhand with their orders. The revenues of the government were abundant, in spite of the war with Spain, and there was little complaint of the new taxes. The world's annual product of gold exceeded all previous figures and removed any reason- able apprehension of scarcity of goldj hence the argument for bimetallism lost practical weight. The struggle for currency reform was still prolonged, but on March 14, 1900, a gold standard or currency law was enacted. The important provisions of the law are three : First, gold is declared to be the standard, and it is made the duty of the secretary of the treasury to maintain at parity with gold all other forms of money : this parity is not to rest on a mere declaration ; fiscal machinery is provided by means of which, within certain limits, the redemption of government notes in gold may be automatically continued without special legislation. Second, the circulation of national banks is made more profitable, and opportunity is given for the ex- tension of the banking system to smaller towns and institu- tions ; and third, authority was given for the refunding of a large portion of the public debt at a low rate of interest. The measure was a compromise, for the silver advocates in the Senate still had to be reckoned with, and even the reformers were not agreed on all points. In view of the approaching presidential campaign in which silver was again to be the supreme issue, it is probable that the act went as far as con- ditions would warrant. 199. Redemption of Treasury Notes. Two changes were introduced to secure the better main- tenance of the gold standard and an unquestioned redemption of credit notes ; the gold reserve was enlarged so as to stand \jo Tariff, War, and Currency Act. [§ 199 at the outset at ^150,000,000; and authority was given for the sale of short-term bonds whenever in the future the ordinary receipts of gold should not be adequate to maintain the reserve at a level of at least ^100,000,000. That there may be no doubt as to the resources of the treasury, the reserve is made a specific and separate account in treasury book-keeping, so that it is now possible to distinguish between the general fund of the treasury and that set aside for the redemption of credit money. The machinery for maintaining the current integrity of the reserve is effective, though clumsy. If there be no gold avail- able in the general fund the notes which are presented for redemption must be retained until the gold reserve is made good, so that the sum total of gold and notes may equal ;? 1 5 0,000,000 ; if the volume of gold should then fall below $100,000,000, the gold reserve is to be restored by the sale of one-year three per cent, bonds. Under the conditions of this complicated and roundabout method, it is clear that though the gold reserve may be drawn down from $150,000,- 000 to $100,000,000, $50,000,000 of notes will be locked up in the reserve fund and withdrawn from circulation ; and the operations of the endless chain will so far forth be weakened. At the time of the passage of the act, the sum of the United States notes and the treasury notes of 1890 was $437,000,000, and the reserve of $150,000,000 was therefore equal to 34 per cent. During the period 1879-1890, the reserve of $100,000,- 000 to protect $346,000,000 of United States notes was equal to 29 per cent. ; and in 1893 when $153,000,000 of the new treasury notes had swollen the credit money to a grand total of $500,000,000, the reserve amounted to but 20 per cent. Although the act of 1900 increases the reserve, the obliga- tion to maintain silver at a parity with gold has increased the burden which, under certain contingencies, the gold reserve may be called upon to support. As yet, however, the pros- perity of the government has been so great that there is no apprehension- of difficulty from this source, and the possibility § zoo] National Banks. 471 of danger in the future is lessened on account of changes in the character of the paper issues. Whenever treasury notes of 1890 are redeemed, silver dollars only will be issued in their place : silver certificates take the place of United States notes hitherto issued in denominations of less than ten dollars, and according to the act not more than one-third of the out- standing notes of a national bank are to be in denominations of five dollars. These provisions will tend to enlarge the use of silver and silver certificates in retail trade ; and so broad is the territory of trade and so constant the demand for small bills, that it will be difficult to gather together quickly a dan- gerous amount of silver or its certificates for exchange into gold at the government counter. 200. ITational Banks. Under the new act a national bank may be organized with a capital of ;?25,ooo in a town with a population not exceeding 3000. Circulation is increased to the full face value of bonds deposited, so long as they stand at or above par ; and if new refunding bonds were deposited before a prescribed date to secure circulation, the tax on circulation is reduced to one- half per cent, per annum. The privileges thus granted led to an increase in the establishment of banking institutions and to an enlarged circulation. By October 31, 1901, a year and a half after the new law went into operation, national banks increased from 3617 to 4279; of the 503 new banks organ- ized, each had a capital of less than ^50,000 ; but it yet remains to be seen how far national banks will be established in small towns, and thus justify the claims of those who believed that agricultural communities, particularly in the South and West, had not been adequately provided with banking facilities. Many of the small institutions which have applied for charters have been pre-existing private or State banks ; and it is highly probable that unless the profits of circulation are greatly increased, the development of the national system will be checked by the more stringent re- 472 Tariff, War, and Currency Act. [§ zoi strictions of the national banking, law as compared with the freedom of operation under the statutes of many of the States. The circulation of all national banks increased from $254,- 000,000, March 14, 1900, to ^359,000,000, October 31, 1901, a gain of ;^ 105, 000,000, for which the new banks were responsible for only about $10,000,000. The act of 1900 has done little to render the monetary system more elastic ; and as for a reform in banking, the measure is likely to be of little service. 201. Refunding. The refunding provisions of the act of 1900 authorized the secretary of the treasury to refund into new thirty-year two per cent, gold bonds the outstanding three per cents, of 1908 (Spanish war loan), the four per cents, due in 1907, and the five per cents, due in 1904, a total of ;?839,ooo,ooo. In tak- ing up bonds not yet due, no higher price was paid than a capital value on the basis of a two and a half per cent. return ; the new two per cents, were issued at par, but only in exchange for the old bonds refunded, as they fell due or as holders agreed to surrender them ; and authority was given to the secretary of the treasury to pay in money the premium on the old bonds refunded. The success of a voluntary refunding scheme in anticipation of the term fixed in the bond always depends on the induce- ments to bondholders to make the exchange. In this instance there was a small compensatory premium in cash and an indirect but on the whole ingenious incentive was devised to interest banks in the success of the scheme ; banks which accepted new for old bonds as a deposit to secure circulation, were relieved of one-half of the tax on circulation, and this in addition to the advantage of prolonging the bank-note circu- lation by the possession of long-time bonds instead of those subject to a speedy surrender brought the banks into an active co-operation. The gain to the government is not so clear or complete : § 202] Receipts and Expenditures. 473 to be sure a more permanent provision was made for the in- debtedness which fell due within seven years of the act ; and there was a considerable saving in the interest charges. In return for these advantages, the government has hampered itself with conditions in the payment of its debt which will prove troublesome when there is a succession of treasury surpluses ; and the saving in interest is largely offset by the premiums paid by the government on bonds not due. The treasury also loses something by reduced taxation of bank circulation, unless this circulation should nearly double that of 1900. It was calculated in 1900, that the substitution of ;?850,ooo,ooo of two per cents., on the terms proposed, would give to the government a net profit of about ;?23, 000,000. Between the passage of the act and December 31, 1900, ;?445,940,75o of bonds were so funded; the premium paid was ^43,582,000, and the saving of interest was ^54, 548, 000. If no reckoning be made of the circulation tax surrendered, the net saving to the treasury on the exchange mentioned, amounts to ;?io,966,ooo. Certainly the opportunity for pay- ment of the debt has been too long deferred, as is illustrated in the current purchases of bonds at high premiums. On the whole it is fair to conclude that the funding scheme was intended rather to relieve the difficulties of banking than to offer the best possible management of the finances over a long series of years. The changes in the character of the debt, 1891-1901, are shown in the table on page 474. 202. Receipts and Expenditures, 1891-1901. The ordinary receipts during the years 1899-1901 were beyond all expectation, the customs and internal revenue each being in excess of the amount for any three previous con- secutive years. The ease with which these enormous sums were paid is a striking illustration of the growth of the country in a single generation. The internal revenue amounted to $876,000,000 as compared with $785,000,000 in the earlier 474 Tariff, War, and Currency Act. [§ 202 ■^ orn ^o T%0 00 •*« en vO ^» 8^ ii. 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MHlMC^ NN«N«-.-N«'-'-'*-rl Glass, manu- factures of cya pooo N N r«. r^ moo m n m m o N t*lM-*--VrOM-«"- O po dvoid-o d-o«o»d'd « — o - " P ■rt-aq^NND « " l>tN.O ^^^ 00 - i^-ffOM^t^iom -**d m<3 ti.o6 Wool, manu- factures of C-if^-. mromt-.N ■♦'j-omm Silk, manu- factures of «oqo r^q q o•m■.^f^^<^■*o i*> 00 d> « CT' 6* -i- m iJ^^D 1^00 d^ (^ d Cotton, manu- factures of q 00 N N »n c-oo r^ inoo t«-oo f o d d N M -■ d - - -^ d « ■*«d d* 4 tSt>-q r^O^^fT)-. tv.N rnN INOC + -i-vd r^'d t^oo d- d\ >- '^'C o Tf k NONNi;;.Nooqqqwm N 00 &''6 00 N w«3 NidmM . 2 ■,5i Nl^NKirnNN't- t<.00 in moo N \iS^ \^0"0 rx iv t^ r^ t^oo d-oo c- 111 *r*it«"00 ^^444^^^^4^4^^ - M f^ -^ m»0 t-OC Q^ - N (-^ OC'QOoCCCJCOOoEoCOC* CC->?-L-- ocoOanocococccooocoOoPo&ocoT' c u (0 5 j3 QJ rt 4) C ■" «■£ 3 O t. _ > lU rt p t "-2 S « S J3 = 0) Q^ 5 iS « cB ^ ^87,649.ii 2. Statement of the Treasury, March 14, 1900. CASH IN THE TREASURY. In Divisions of Issue and Redemption. Reserve Fund. Gold coin and bullion in Division of Redemption 3150,000,000 Trust Funds. Held for the redemption of the notes and certificates for which they are, re- spectively, pledged. Division of Redemption. Division of IssuS. Gold coin ^212, 799,779 Gold certificates out- standing . . . ?2iz,799,779 Silver dollars .... 408,447,504 Silver certificates out- standing .... 408,447,504 Silver dollars of 1890 . 9,399,308 1 Treasury notes out- Silver bullion of i8go . 77,370,692 j standing .... 86,770,000 United States notes . 15,045,000 Currency certificates outstanding . . 15,045,000 )i!723,o62,283 8723,062,283 General Fund. Gold coin and bullion ?53,4iS,4io.23 Gold certificates 41,117,182.00 Standard silver dollars 1,510,973.00 Silver certificates 6,132,998.00 Silver bullion . 11?, -,1^,93 United States notes ... . . 12,264,358.00 Carried forward Si 14, 557,2'/!, i6 Appendix 509 Brought forward . . . ... ^114,557,236.16 Treasury notes of 1890 . . 773,563.00 National bank notes 3,683,654.92 Fractional silver coin 5,284,216.72 Fractional currency . , 80,34 Minor coin 434,791.32 ^124,733,542.46 In National Bank Depositaries : — To credit of treasurer United States $105,543,454.69 To credit of disbursing officers 6,064,276.78 J5ii 1,607, 73 1.47 Bonds and interest paid . 438,387.19 112,046,118.66 i?236)779i66i-'2 Less national bank 5 per cent, fund Outstanding checks and drafts . . Disbursing officers' balances . . Post-office Department account Miscellaneous items 89,427,702.52 5,520,038.79 57,699,204.79 6,631,525.11 2,515,200.29 81.793,671.50 $154,985,989.62 IV Secretaries of the Treasury, 1789 to 1902. Name Alexander Hamilton Oliver Wolcott, Jr. Samuel Dexter Albert Gallatin George W. Campbell Alexander J. Dallas William H. Crawford Richard Rush Samuel D. Ingham Louis McLane William J. Duane Roger B. Taney Levi Woodbury Thomas Ewing Walter Forward John C. Spencer Whence Appointed Date of Commission of Service New York Connecticut Massachusetts Pennsylvania Tennessee Pennsylvania Georgia Pennsylvania Pennsylvania Delaware Pennsylvania Maryland New Hampshire Ohio Pennsylvania New York Sept. II, 1789 Feb. 2, 1795 Jan. I, 1801 May 14, 1801 Feb. 9, 1814 Oct. 6, 1814 Oct. 22, 1816 Mar. 7, 1825 Mar. 6, 1829 Aug. 8, 183 1 May 29, 1833 Sept. 23, 1833 June 27, 1834 Mar. 5, 1 841 Sept. 13, 1 841 Mar. 3, 1843 Jan. 31, 1795 Dec. 31, 1800 May 6, 1801 Apr. 20, 1813 Sept. 26,1814 Oct. 21, 1816 Mar. 3, 1825 Mar. 3, 1829 June 20, 1 83 1 May 29, 1833 Sept. 23, 1833 June 24, 1834 Mar. 4, 1841 Sept. 11,1841 Feb. 28, 1843 May 2, 1844 5IO Appendix Name Whence Appointed Date of Commission ^g^!^^ George M. Bibb Kentucky June IS- 1844 J^Iar. 7, 1845 Robert J. Walker M ississippi Mar. 6, 1845 Mar. 5, 1849 William M. Mereditl: 1 Pennsylvania Mar. 8, 1849 July 22, 1850 Thomas Corwiii Ohio July 23, 1850 Mar. 7, 1853 James Guthrie Kentucky Mar. 7, 1853 Mar. 6, 1857 Howell Cobb Georgia Mar. 6, 1857 Dec. 8, i860 PJiilip F. Thomas Maryland Dec. 12, i860 Jan. 14, 1861 John A. Dix New York Jan. II. i86r Mar. 6, 1861 Salmon P. Chase Ohio Mar. 7, 1 861 June 30, 1864 Wm. P. Fessenden Maine July I, 1864 Mar. 3, 1865 Hugh McCulIoch Indiana Mar. 7, 1865 Mar. 4, 1869 George S. Boutwell Massachusetts Mar. 11, 1869 Mar. 16, 1873 Wm. A. Richardson Massachusetts Mar. '7, 1873 June 2, 1874 Benj. H. Bristow Kentucky June 2, 1874 June 20, 1876 Lot M. Morrill Maine June 21, 1876 Mar. 9, 1877 John Sherman Ohio Mar. 9> 1877 Mar. 3, 1881 William Windom Minnesota Mar. 5, 1881 Nov. 13, 188 1 Charles J. Folger New York Nov. i4> 1 88 1 Sept. 4, 1884 Walter Q. Gresham Indiana Sept. 24, 1884 Oct. 19, 1884 Hugh McCuUoch Indiana Oct. 3', 1884 Mar. 6, i8Ss Daniel Manning New York Mar. 7, 1885 Mar. 31, 1887 Charles S. Fairchild New York April I, 1887 Mar. 4, T889 William Windom Minnesota Mar. 6, 1889 Jan. 29, 1891 Charles Foster Ohio Feb. 25, 1891 Mar. 6, 1893 John G. Carlisle Kentucky Mar. 7, 1893 Mar. 5, 1897 Lyman J. Gage Illinois Mar. 6, 1897 Jan. 31, 1902 Leslie M. Shaw Iowa Feb. I. 1902 INDEX INDEX " ABOMINATIONS," tariff of, i8o. Accounting, officers, 87, 498-501 ; reforms in, by Guthrie, 269. Adams, J., secures loans in Holland, 48 ; opinion of Robert Morris, 53. Adams, J. Q., position on the tariff, 1827, 177; tariff duties, 1832, 183; tariff bill, 1832, 184 ; tariff and prices, X93 y removal of deposits, 207 ; in- ternal improvements, 1825, 215, Administration, fiscal, during Revolu- tion, 52 ; requirements in tariff of 1789, 83 ; establishment of, in 1789, 85 ; corruption, 1837, 233 ; see ch. xxi ; Frauds ; Treasury Depart- ment ; Customs Administration. Ad valorem, duties, colonial, 17 ; in tariff of 1789, 81 ; in tariff of 1846, 25 1 j and customs frauds, 491 . Agricultural discontent after the Civil War, 342. Agriculture in 1789, 76 : and taxation in 1789, 81. Aldrich Report, prices and wages, 1860-1865, 294. Allison, Senator, and silver legislation, 406. American policy of debt redemption, 353- "American System," 183. Appraisement of imports, Act of 18x8, 189; boards, 492 ; see Customs Ad- ministration ; Undervaluation, Appropriations, colonial, 17-18 ; in Constitution, 72 ; bills in 1789, 115 ; method of making, 482-488 ; riders, 485 ; specific, 488 ; committees, 487. Arthur, President, veto of river and harbor bill, 426. Articles of Confederation, financial provisions in, 49. Asset banking, 497. Assumption of State indebtedness, 92-95. Attack upon the Bank; Surplus, ch. ix., 197-222. Auction sales, tax on, 1794, 108 ; duties on, 139 ; system, evils of, igo. Auditors, treasury, duties of, 87, 498. gACON'S REBELLION, 12. Balance of trade, after Civil War, 371 ; and resumption, 377 ; after 1880, 410 ; in 1893, 442. Baltimore plan, 460. Bancroft, G., on constitutionality of legal tender issues, 69, 367. Bank checks, tax on, 419. Bank, Loan, in Massachusetts, 24 ; in Pennsylvania, 26. Bank of Augusta v. Earle, 261. Bank of Commerce ». New York City, 350- Bank of Commonvrealth of Ky. v. Wister, 160. Bank of New York, 1784, 98. Bank of North America, 54-56. Bank of Pennsylvania, 55. Bank of U. S. v. Planters Bank of Ga., 160. Bank, Silver, 26. Bank v. Supervisors, 362. Banking and Taxation, ch. xvi., 385- 401. Banks, local, in 1 790-181 1, 127 ; in- crease, 1811-1816, 144 ; in 1815-1830 (table), 153-155 ; Suffolk system, 155 ; safety fund system, 155 ; notes 33 5H Index issued by, i6o; in 1819, 166; in 1829-1845 (table), 225 ; notes re- ceivable by government, 228 ; ex- pansion of circulation, 1834-1836, 232 ; contraction of circulation after 1837, 233 ; opposed to independent treasury system, 253 ; in 1837-1861 (table), 260 ; and speculation, 262 ; and panic of 1857, 264 j loan of July, 1861, 278-281 ; suspension of specie payments in 1861, 281 ; opposition to increase of, in 1862, 285 ; opposition to, during Civil War, 318 ; arguments against, in 1862, 321-324 ; fluctua- tions in circulation of, 324 ; taxes on issues of, in 1865, 328; in 1902, 496. Banks, national, proposed by Chase, 280 ; arguments in favor of, in 1863, 320-326; Act of 1863, 310, 326-328 ; and legal tender notes after the Civil War, 339 ; taxation of, 350 ; in 1865- 1879 (table), 388 ; and resumption, 376; in 1864-1879 (table), 384; as depositories, 1S64-1879 (table), 387; opposition to, 389-391 ; profits of, 390 ; 410, 418 ; refusal to take silver, 40S ; deposit of government funds in, 417; failures in 1S93, 446; and silver question, 452 ; in Currency Act of 1901, 471; as depositories, 493; reports of, 497 ; government super- vision of, 495-498 ; organization of, 496 ; failures of, 497. Banks, national, circulation of, after the Civil War, 383-387 ; and resump- tion, 374 ; and silver issues, 408 ; reduction, 1880-1890,411-413 ; table, 412 ; tax on, 420 ; in 1901, 472. Banks, " Pet," 209-210. Baring Brothers, failure of, 442, Barter, colonial, 19. Bastable, Professor, definition of finance, 3. Beaumarchais, aid in securing loan, 47. Benton, Senator, on tariff of 1828, 180 ; against re-charter of bank in 1831, 201 ; removal of deposits, 207 ; on use of specie, 210; internal improve- ments, 212; distribution of surplus, 221; treasury note issues, 234; independent treasury system, 240; bank bill of 1841, 242. Biddle, N., President of U. S. Bank, 156 ; correspondence with Secretary Ingham, 204; denounced iy Jackson, 1832, 205 ; memorial of, in 1832, 208. Bills of credit, revolutionary, 35 ; de- nominations of, 37 ; attempts to redeem, 37-40 ; depreciation of, during Revolution, 39; redeemed under Funding Act of 1790,41,92; opposition to issues, 43 ; State issues, 43 ; in Constitution, 67 ; States for- bidden to emit, 69 ; see Treasury Notes ; Legal Tender Issues, Bimetallism, argument drawn from Constitution, 70-71 ; in Mint Act of 1792, 103 ; 1873-1885, see ch. ivii. ; also Free Coinage ; Ratio. Black Friday, 370. Blaine, J. G., on tariff of 1846, 264 ; panic of 1857, 264 ; reciprocity, 439. Bland-Allison Act, 407, 43S. Bland, R. P., on silver coinage, 406. Bonds, influence of depreciation on sales of, 310; purchase of, by national banks, 325 ; payable in currency, question of, 344-349 ; sold abroad, 352> 334-356 ; taxation of, 350-352, 354 ; methods of selling, for resump- tion, 374 ; Manning on purchase of, 416 ; difficulties in redemption of, 1880-1890 (table), 43a; sale of, in 1893, 447 ; legality of issue, in 1894, 450; syndicate, 453 ; sale of, in Cur- rency Act, 470 ; see Loans. Bondholders, denounced, 347; by Greenback party, 381 ; desirability of taxation of, 351. Book of Estimates, 488. Boston, use made of surplus in, 222. Bounty on sugar, 439-440. Bourne, E. G., on distribution of sur- plus, 220. Boutwell, G. S., Secretary, 352; sink- ing fund policy, 356; issue of legal tender notes, 360 ; sales of gold, 369- Bowen, Professor, on bank depos- itories, 391. Index 5^5 Branch drafts, 156, 202. Breck, S., on depreciation of Continen- tal bills, 41. Briscoe v. Commonwealth of Ky., 261. Bristow, Secretary, appointed, 372; sinking fund policy, 357 j gold re- serve, 374; whiskey frauds, 396. Bronson, H., value of Continental bills of credit, 40. Bronson v. Rodes, 362. Bryan, W. J., presidential campaign, 461. " Bubble" Act, 1741, 26. Buchanan, J., on tariff of 1828, 180. Budget, responsibility of, upon Con- gress, 87; lack of responsibility, 487. Bullock, C. J., value of Continental bills, 40 ; requisitions during Revo- lution, 45 ; finances, 1784-1789, 57. Butler, B. F., on payment of bonds, 1868, 348. (''AIRNES, Professor, on balance of trade after Civil War, 371. Calhoun, J. G., on a national bank, 1814, 147 ; attack upon State banks in 1816, 149; tariff of 1S16, 164, 194; tariff bill of 1827, 177; tariff of 1828, 178, 182; tariff of 1833, 188; resignation of Vice-Presidency, 186 ; distribution of surplus, 220; inde- pendent treasury, 1837, 236. Campbell, G. W., Secretary, 131. Canada, colonial export duties, 16. Canals in 1789, 79. Capital, lack of in 1812, 133. Capitation taxes in Constitution, 64. Capital of U. S. and assiimption of State debts, 93. Carlisle, Secretary, on silver, 444 ; sale of bonds, 448 ; withdrawal of green- backs, 459. Carriage tax, constitutionality of, 1796, 106-107; in 1814, 139. Carey, H. C, on tariff and prices, 194 ; "young industries" argument, 194. Carey, Matthew, on value of a home market, 192; tariff and prices, 193. Castle duties, colonial, 15. Certificate forms of money after Civil War, 431 ; in debt statement, 500. Certificates of deposit, 309. Certificates of indebtedness in Civil War, 309, 332. Certificates, silver, 1878-1890, 407; in Currency Act, 1900, 471. Chase, S. P., appointed secretary, 1861, 274 ; on public lands, 273 ; Independ- ent Treasury Act, 1861, 279-282 ; use of demand notes, 279 ; report of Dec, 1861, 280; suspension of specie pay- ments, 281 ; .Legal Tender Act, 286, 288-290; opposition to converti- bility of legal tender notes, 291 ; at- tempts to check premium on gold, 296 ; recommendation of taxes in 1861, 300 ; recommendations in re- port of 1862, 302 ; interpretation of market value of bonds, 307 ; tempo- rary loans, 309 ; success of bond sales, 1863, 310; short-term notes, 312; report of 1863, 312-313; compound interest notes, 314 ; loan policy, 317- 320 ; bank circulation, 320 ; resigna- tion, 314 ; resumption, 335 ; payment of bonds, 346; redemption of debt, 353 ; constitutionality of legal tender notes, 363. Cheves, L., on excise duties, 1812, 139 ; president of Second U. S. Bank 152. Choate, R., on Navigation Acts, 31. Circulation of bank-notes, sgg Banks, local; Banks, national; Banks, na- tional, circulation of. Civil War; Legal Tender, ch. xii., 271-297; Taxation and Loans, ch. xiii., 298-330 ; cost of, 329. Classification of imports, difficulties in, 491-492. Clay, H., in favor of U. S. Bank, 1816, 149; position on tariff, 1827, 177; tariff resolution, 1S30, 182 ; cham- pion of American system, 183; tariff resolution in 1S32, 183 ; Compro- mise Tariff of 1833, 186; arguments for industrial independence, 192 ; commercial freedom, 193; tariff and prices, 193; "young industries" argument, 194 ; re-chartering U. S. Bank, 208-209; internal improve- ments, 214 ; distribution of land pro- 5i6 Index ceeds, 218-221; independent treas- ury, 237 ; contest with Tyler over banlc, 240-241 ; initiation of tariff legislation, 479. Cleveland, President, on finances in 18S6, 416; deposit of government funds, 417; tariff message, 1887, 423 ; veto of pension bill, 427 ; veto of, re- funding direct tax, 427 ; silver pur- chases, 444; Venezuela message, 453 ; need of issue of bonds, 454; tariff of 1894, 456,481 ; withdrawal of green- backs, 459. Cobb, Secretary, tariff recommenda- tions, 265. Coffee, Secretary Walker on taxation of, 250; tax removed in 1872, 398. Coin, redemption of bonds in, 354, 356. Coinage, colonial, 18-21 ; meaning of, 70; in Constitution, 70-71; confu- sion in 1790, 102; in 1792-1853, 210-212; Act of 1834, 211; Act of 1853,212; j« Free Coinage; Mint; Silver; Seigniorage. "Coin's Financial School," 462. Colonial Finance, ch. i., 1-32. Commerce and navigation report, 1821, 165. Commerce, treaties of, in Articles of Confederation, 50. Commercial freedom, desire for, during Revolution, 51. Commodities as money, colonial, 19. Compound duties, 1828, 179. Compound interest notes issued by Chase, 314; by Fessenden, 316; in 1865, 332; retirement of, 334, 343. Compromise Tariff, 185-189.' Comptroller of the Currency, 496. Comptrollers, treasury, duties of, 87, 498. Confederation, see Articles of Confeder- ation; also ch. ii. Connecticut, colonial taxes in, 15 j ex- port duties, 15 ; tariff, 17. Constitution, financial sections in tlie, see ch. iii., 60-74 1 opposition to, j 73; Eleventh Amendment, 245. 1 Constitutionality of U.S. bank, 157- 160; Jackson's view, 1829, 200; of I State bank issues, 160, 261; tariff I legislation, 195-196 ; of legal tender notes, 362-367 ; of income tax, 456. Consular authentication, 489. Continental bills of credit, 36-43, Contraction of treasury notes, approved by House of Representatives, in 1865, 335; arguments against, 338-339; abandoned, 1868, 343 ; in Resump- tion Act, 373. Convention of 1787, 59-60. Conversion of indebtedness, 1790, 94- 96 ; see Funding ; Funding Act. Cooke, J., agent for sale of bonds, 311, 3'5. 3'9- Corwin, Secretary, on protection, 258- 259. Cost of collecting excise duties, 106, 120 ; in 1814-1817, 140 ; of customs, 489. Cotton crop in i860, 273. Cotton duties, 1816, 162. Cotton plantations, speculation in 1837, 226. Cotton, price of, 1833, 227. Coxe, Tench, on condition of United States, 58 ; manufactures, 77. Craig V. State of Missouri, 160. Crawford, Senator, on opposition to First U. S. Bank, 127; secretary, 1816-1825, 164 ; financial situation in 1S19, 174; mint ratio, 1819,211. Credit, national, affected by State re- pudiation, 244-246 ; in i860, 272 ; in 1861, 2S3 ; see Interest, Kate of. Credit system, in customs, 187, 191 ; abolished in 1842,239; in land sales, 216, 225. "Cremation theory" of resumption, 336. " Crime " of 1873, 404. Crisis of 1819, 166, 173; of 1825, 176; see Panic. Crop failures of 1835, 230. Cumberland Road, 213, 225. Currency, see Bills of Credit ; Green- back P.\rty; Legal Tender Issues; Circulation, National, Bank; Treas- ury Notes. Currency Act of 1900, 46S. Customs administration, colonial, 7, 9; 1789-1S33, 189-191, warehouse Index 517 system, 239, 252; Act of 1890, 439; present methods, 489-492 ; see Val- uation. Customs districts, 489. Customs duties, see Tariff. Customs receipts (tables) in 1789-1801, no; in 1801-1811, 123; in 1812- 1815, 142; in 1816-1833, i68; in 1833-1846, 246; in 1846-1861, 267; in 1861-1865, 299; in 1866-1879, 399; in 1S80-1890, 426; in 1891- 1901, 475 ; decline in, 1890-1894, 442; character of, 1891-1892, 443- 444; amounts by items, 1880-1S93, 506. £)ALLAS, Secretary, 131-132 ; on treasury notes, 136 ; in favor of permanent internal duties, 141 ; in favor of U. S. Bank, 1814, 145; im- port duties, 1816, 161 ; preparation of tariff of 1S16, 481. Davis, A. M., on Land Bank, 26 ; de- preciation of paper money in Massa- chusetts, 28. Debt, national, in 17S9, 90; in 1790, 94 ; difficulty in determining amount in 1795, 116; in 1789-1801 (table), 113 ; in 1801-1812 (table), 125 ; re- duction of, i8oi-i8r2, 124-126; in 1816, 165 ; difficulties in payment after 1822, 170-171; extinguished in 1835, 219 ; created by Mexican War, 255; in 1861, 276; character of, 1861-1865, 308 ; temporary, in Civil War, 309, 312; in 1865, 332; in 1865-1879 (table), 341 ; funding of, in 1870, 352-354 ; changes in, 1880- 1890, 431 ; reduction of, 1880-1890, 431 ; character of, i88o-i8go (table), 432; character of, 1891-1900 (table), 473 ; payment deferred in 1900, 473 ; see Bonds ; Loans. Debt, revolutionary, in 17S4, 56 ; for- eign, in 17S9, 57, 89; funded, 89; domestic, in 1789, 89. Debt statement, national, 497. Debtor laws, colonial, 8. Debts, State, assumed in 1790, 92. Deficit, in 1791-1801 (table), 112; in 1809, 123, 126 ; in 1816-1S33 (table), 170; in 1834-1846 (table), 247; in 1846-1861 (table), 269 i in 1862- 1865 (table), 331 ; in 1866-1879 (table), 401 ; in 1890-1901 (table), 476. Demand notes of 1S61, 279, 283. Democratic party on tariff in 1844, 249; payment of bonds in i868, 34S ; resumption, 374 : Greenbackism, 378 ; tax.ition of State bank notes, 388 ; tariff of 1883, 422 ; position on tariff, 416, 424 ; tariff of 1894, 455, 458 ; silver coinage, i8g6, 461. Democracy, influence of, and banking, 1830, 199. Demonetization, see Silver. Denominations of Continental bills, 37, Deposit of government funds, in First U. S. Bank, 1791-1811, loi ; in 1811, 127; in 1812-1817, 145 ; Act of 1816, 203; removal of, 206; 209-210 ; in local banks after 1833, 226 ; in 1841-1846, 243 ; in national banks, 325, 417 ; question of, 493. Deposit of surplus, 1836, 220. Depreciation, of colonial bills of credit, 23, 28 ; of bills of credit, during the Revolution, 39-41 ; of legal tender notes of Civil War, 292-294 ; influ- ence on bond sales, 310. Dexter, S., Secretary, 117. Dingley tariff, 463-465. Direct taxes, in the Constitution, 62 ; definition of, 65, 107 ; imposition of, in 1798, 109; m 1814, 139; in 1814- 1817 (table), 140; in 1861, 277; veto of refunding of, 427 ; in income tax decision, 1894, 457. Distribution of surplus, see Surplus. Dividends from U. S. Bank, loi. Dix, J. A., Secretary, 272. Dollar, in Mint Act of 1791, 103 ; Greenback definition, 380. Dolph, Senator, on appropriations, 1887, 427. Drafts, branch, introduced, 156; de- nunciation of, 1832, 202. Drawbacks, 1789, 83. Duane, W. J., Secretary, 199, 205; opposition to Jackson's bank policy, 205. 5i8 Index Dunbar, C. F., on meaning of direct taxes, io8 ; on sinking fund, 115. Dutch bankers' loans, 1782, 48. Dutch fiscal methods in New Nether- lands, 13. Duties, kinds of money received for, 1789-1S36, 227; collection of, in 1789, 84; j£f Customs ; Excise; In- ternal Revenue ; Rates of Duties on imports ; Tariff. gASTERN STATES, opposed to War of 1812, 133. Eckels, comptroller, on withdrawal of greenbacks, 459. Economies and War, ch. vi., 118-142. Embargo Act, 122-123. Endless chain, 449, 451. England, opposed to colonial paper money, 28-30 ; attempts to tax colo- nies, 30-32; customs laws during Revolution, 5 1 ; failure of banks in 1836, 230 ; reduction of import duties in 1842, 257. English plan of resumption, 336. Entry of goods, 4S9. Erie canal, 224. Establishment of a National System, ch. iv., 75-96. Ewing, Secretary, plan for a bank, 240. Exchange, domestic, 1830, 201. Exchange, foreign, in Massachusetts in 1740, 28. Excise duties, colonial, 10 ; in Massa- chusetts, 12 ; brought from New Netherlands, 13 ; in Constitution, 66 ; early opposition to, 73 ; difficulties of imposition in 1789, 79 ; on whis- key, 1791, J05 ; in 1794, 107; in 1789-1801, no; abolished, 1802, 120 ; see Internal Revenue. Executive in financial system, 72 ; Jackson's view, 2o5 ; see ch. xxi. Expenditures, colonial, 8-9 ; by Conti- nental Congress, 34; in 17S3, 56; 1 789-1801 (table), ni ; reduction in, 1801, 119; for national defences, 1S07, 123; in 1S01-1811, 124; in 1812-1815 (table), 141 ; in 1S20, 167; in 1816-1833 (table), 169; for roads and canals, 1802-1835 (table), 216; increase of, in 1837, 233, 247; in 1833-1846 (table), 246 ; during Mexican War, 255 ; after Mexican War, 258 ; in 1846-1861 (table), 267 ; in 1862-1865 (table), 329 ; in 1866- 1879 (table), 399 ; miscellaneous, 1866-1879 (table), 401 ; in 1880- 1890, 426 ; (table), 428 : in 1891- 190 1, 475 ; lack of classification, 498. Exports, colonial, 5 ; value of, in 1790, 79; in 1830-1837,226; in 1860,273; in 185S-1872, 371 ; after 1872, 377. Export taxes, in colony of Virginia, 12 ; colonial, 15-16 ; in Constitution, 62, 64. Export theory of taxation, 181, 184, 195. pACULTY TAX, colonUl, 10, 11. Fairchild, Secretary, on sinking fund purchases, 429. Famine in Ireland, influence of, 257. Federal administration of finances, 117. Federalist party, opposed to excise duties, 120 ; opposition to abolition of excise duties in 1802, 120 ; repeal of salt tax, 122. Fessenden, Senator, Committee on Finance, 275 ; on legal tender issues, 290 ; desire for taxation, 300 ; ap- pointed secretary, 314 ; resignation, 315 ; on national banking system, 328 ; in the Senate, 334. Fiat money, 379. Finance, definition of, 3. Financial Provisions of the Constitu- tion, ch. iii., 60-74. Fisheries, colonial, 6. Fisk, J., and gold speculation, 369. Five-twenty bonds of 1862, 306; pay- able in coin, 347 ; conversion of, 354. Florida, repudiation, 244. Folger, Secretary, on surplus revenue, 1882, 415 ; deposits in banks, 416; on tariff of 1883, 42a, 423, Foster, Secretary, on gold reserve, 444. Foreign debt in 1789, 89; after Civil War, 354-356, 371. Foreign holdings in First U. S. Bank, 187. Index 519 Foreign intercourse, expenditures, 1804-1806, 124. Foreign trade in 1789, 79. Fractional currency, 310, 332. France, Revolutionary loan from, 46, 48. Franco-Prussian War, influence on refunding, 356. Franklin, B., on prohibition of paper money in America, 30 ; secures French subsidies, 47; on coinage, 70. Frauds, in internal revenue, 393, 395, 492 ; in undervaluation, 491, Free coinage of silver, 405, 436, 460- 462. Free trade, ideas in i8i6, 163; con- vention in 1831, 183 ; arguments, 194-196 ; basis of tariff of 1846, 251 j progress toward, 1846-1857, 258. Funding Act of 1790, provisions of, 94-96; of April 12, 1866, 340; of 1870, 356, 429, 450; denounced by Greenback party, 381; and national bank-note circulation, 386, Funding of Revolutionary debt, 89. Funding of the indebtedness, ch. xiv., 331-358. Funds available in treasury, 221. Funds, custody of treasury, 492. QAGE, L. J., on withdrawal of greenbacks, 459. Gallatin, A., on powers of Secretary of the Treasury, 86; criticism of Hamil- ton, 115-116; appointed secretary, 119; sinking fund, 125; in favor of U, S. Bank, 1809, 126 ; financial preparation for war, 129; opposition to, 131; left treasury department, 1813, 131; treasury notes, 135; in- ternal improvements, 214; taxation of State bank notes, 388. Gallatin, J., on independent treasury legislation, 1861, 279. Garfield, J. A., on financial re-organiza- tion after the war. 332; bonds pay- able in gold, 346; tariff legislation after Civil War, 396 ; initiation of tariff legislation, 479. Germany^ demonetization of , silver, 405. Gerry, E., on management of finances, 18; treasury system, 1789, 85. Gold bill, 1864, 296; repeal, 297. Gold certificates in debt statement, 500. Gold coinage, 210, see Ratio, Gold premium during Civil War, 294, 295, 297. Gold, production of, and panic of 1857, 264; in i860, 273, 274 ; amount of, in 1866, 337. Gold reserve, advised for resumption, 335 ; decline after 1890, 440; protec- tion of, in 1893, 447 J amount re- quired, 454; in Currency Act, 470. Gold sales in 1864, 368; after Civil War, 368-370. Goodnow, F. J., on appropriations, 484. Gorman- Wilson tariff, 455, Gouge, W., on independent treasury, 235 ; examination of independent treasury system, 253. Gould, J., and gold speculation, 369, Granger legislation, 410. Grant, President, on payment of bonds, 1869, 349 ; veto of currency increase, 1874, 361, 362 ; national bank circu- lation, 387; silver in 1873, 405. Greeley, H., on protection, 397. Greenback party, 338, 378-382 ; num- ber of voters, 381; silver coinage, 409; see Inflation. Greenbacks, see Legal Tenders. Greenbacks and Resumption, ch. xv., 359-382. Groton, use made of surplus, 222. Guthrie, J., Secretary, on independent treasury system, 253; reduction of customs, 258 ; character of, 269. pjAMILTON, A., on right to issue bills of credit, 69; manufactures in 1789, 77; powers of the Secretary of the Treasury, 86 ; appointed secre- tary, 88 ; principal reports, 88 ; re- port on public credit, 89; funding of the debt, 89 ; assumption of State debts, 92 ; national banks, 98 ; coin- age, 103 ; excise duties, 105; sink- ing fund policy, 114; administration criticised, 115-117; value of a home 520 Index market, 192; tariff and prices, 192; tariff arguments for independence, 191 ; moneys receivable for duties, 227. Hare, J. I. C, on coinage, 71. Harrisburg Convention, 1827, 177, 179. Harrison, President, 238. Hart, A. B., on Supreme Court, 1871, 364- Hawley, Representative, on appropria- tion riders, 486. Hayes, President, veto of silver bill, 407 ; veto of appropriation bills, 485 . Hayne, Governor, and nullification, 186. Hemp, taxation of, 1789, 81 ; in 1824, 175 ; in 182S, 179. Hepburn v. Griswold, 362. Hildreth, R., value of continental bills of credit, 40. Hill, W., classification of colonial tar- iffs, 1 5 ; colonial evasion of taxes, 17 ; protection in 1789, 84-85. Holland, loans from. Revolutionary, 47; loans in 1784-1789, 57; Ameri- can credit in, during Civil War, 355. Home market and tariff, 192. Home valuation, 187, 190. Horizontal reduction of duties in Act of 1833, '88. Howe, F. C, on Internal Revenue Act of 1864, 303. Hylton V. United States, 457. ILLINOIS, increase of population, 224. Immigration, 1845-1855, 257 ; in i860, 273- Import duties, colonial, 12 ; imposed by England, 30 ; constitutional re- strictions, 73 ; payable in coin, 1862, 287; see Tariff; Rates of Duties on Imports. Imports, statistics of, 1789, 82 ; in 1 814- 1S16, 161 ; in 1816-1833 (table), 170; undervaluation, 176; in 1830- 1837, 226; in 1858-1872, 371. Imposts during the Confederacy, 49; measure of 1783, 80. Impressment of supplies during Revo- lution, 46. Income tax, colonial, 11 ; in 1861, 277; of Civil War (table), 305 ; in 1894, 456 ; declared unconstitutional, 457. Indents, 45. Independence and tariff, 191, Independent treasury recommended by Van Buren, 235 ; ^scossion, 235- 237 ; established, 236 ; repeal, 1841, 239 ; re-established, 1846, 252-255 j advantages of, 254 ; Act of July, 1861, 279, 282 ; deposit of public moneys, 4x7-418 ; moneys receivable by, in 1891, 443-444 ; the system, 492-494. India, mint closed in, 445. Indiana, banking in, 260 ; increase of population, 224. Indianapolis Monetary Conference, 468. Indians, expenditures for, 1791-1801, III ; 1833-1846 (table), 246 ; 1846- 1861 (table), 267 i 1866-1879 (table), 399 ; 1880-1890 (table), 428 ; 1891- 1901 (table), 475. Inflation advocated, 1868, 337 ; argu- ments, 339 ; in 1874, 372 ! ™ ^^ sumption Act of 1875, 373 ; in 1877, 377 J and National Bank Currency, 385 ; see Greenback Party. Ingham, Secretary, 198 ; correspond- ence with Biddle, 1829, 204 ; on silver standard, 211. Initiation of appropriation bills, 72. Initiation of revenue bills, in the Con- stitution, 66 ; history of practice, 478-482. Interest on debt, expenditures for, (tables), in 1791-1801, 111 i in 1801- 1811, 124; in 1812-1815, 141; in 1816-1833, 169 ; in 1833-1846, 246 ; in 1846-1861, 267 ; in 1862-1865, 329 ; in 1866-1879, 399 ; in 1880- 1890, 428, 431 ; in 1891-1901, 475. Interest, rate of, on loans, during Revolution, 46 ; on national debt, '79°) 95 i o" loans, 1812-1815, 132- 134; on loans, 1820-1821, 167 j on loans, 1841-1843, 235 ; on loan of 1847, 256 ; on loans of Civil War, 317, 332 i opinion of Boutwell, 352 ; on debt in Funding Act of 1*70, 353 ; opinion of Sherman, 354 ; on national Index 521 debt in Currency Act, 472 ; on war debt, payable in what medium, 287, 344. 345- Internal communication in 1 789, 79. Internal improvements, early, 212-216 ; reckless investments by States, 244 ; in 1831-1860 (table), 268 ; see Rivers and Harbors. Internal taxes, see Excise ; Gallatin on, in 1808, 129 ; neglect of, in 1812, 130 ; in 1812-1816, 138-141 (table), 140 ; increased, 1814, 139; repeal of, 1818, 141 ; Act of 1862, 301 ; Act of 1864, 302 ; in 1862-1865, 299 ; after Civil War, 391-396 ; in 1866-1879 (tables), 395, 399 ; reduction, 1880- 1883,418-420; in 1880-1890 (table), 420, 426 ; Act of 1898, 466 ; in 1S91- 1901 (table), 475 ; administration of, 492 ; frauds in, 393, 395, 492. Invoices, fictitious, 491. Iron, duties raised, 1818, 173 ; in i860, 273- JACKSON, ANDREW, position on J tariff, 1824, 177 ; tariff of 1828, 182, 185 ; proclamation in 1832, 1S6; value of a home market, 192 ; on Bank, 200; veto of bank, 1832, 203 ; removal of deposits, 203-208 ; internal improvements, 215 ; use of surplus, 218. Jefferson, Thomas, on value of conti- nental bills of credit, 40 ; coinage, 70, 102 ; internal improvements, 1805, 214; use of surplus, 217; in- dependent treasury, 235. Johnson, President, relations to treas- ury department, 333 ; on payment of bonds, 346 { veto of tariff bill, 481. Johnson, R. M., tariff of 1828, 180. Jones, W., in charge of treasury de- partment, 1813, 131. Juilliard v. Greenman, 366. J^EITH, W., on Loan Bank in Penna., colonial, 26. Kelley, W. D., on foreign loan, 35;; reduction of internal revenue duties, 419. Kentucky favors protection for hemp, 1824, 175 ; in favor of tariff of 1828, 181. Kinley, D., independent treasury sys- tem, 493. Knights of Labor, 410. Knox V. Lee, 363. Knox, J. J., on opposition to national banking system, 391 ; silver legisla- tion, 403. T ABOR, condition of, after the Civil War, 358. Labor party, 381. Land Bank, Massachusetts, 25 ; sup- pressed, 29. Land tax, colonial, 10, 12. Lands, public, pledged for debt in 1790, 96; receipts, 1801-1811, 124; sales of, 1810-1837, 216-217 ; money receivable for, 228 ; public use of, and speculation, 1837, 225 ; receipts, 1834-1846 (table), 246 ; sales of, 1854-1856, 258 ; receipts, 1846-1861 (table), 267 ; unoccupied in i860. Lane Co. v. Oregon, 362. Latin Union and silver, 406. Laughlin, J, L., on Act of 1873, 4^4' Law, relation of, to value of money, 379- Legacy taxes in 1898, 466. Legal papers, taxed in 1794, 109. Legal tender notes, of Civil War, 284- 294 ; opposition to, 1862, 285 ; de- bate, 286 ; second issue, 288 ; third issue, 288, 310 ; convertible into bonds, 288, 290-292 ; depreciation, 292-294, 360 ; circulation discredited by local banks, 325 ; considered as war measure by McCuUoch, 334 ; resumption, 335-33S ; in Funding Act of 1S66, 340 ; contraction of, in 1866, 340; retirement stopped, 343 ; amount retired, 344 ; question of use in redeeming bonds, 344-349 ; issued by Boutwell, 360 ; retired, 361 ; issued by Secretary Richard- son, 361 ; Grant's veto, 361 ; legisla- tion in 1874, 362; constitutionality of, 362-367 ; issues in time of peace, 522 Index 366 ! in Resumption Act, 373 ; value in gold (table), 376 ; amount in 1878, 377 ; preferred to national bank notes, 389 J gold reserve, 442 ; pre- sented for redemption, 448-450 ; proposition for withdrawal, 1895, 459 ; see Resumption. Legislation and Administration, ch. xxi., 477-5°»- Lincoln, President, 272. Linderman, H. R., and silver legis- lation, 403. Loan banks, colonial, 24-27. Loan offices. Revolutionary, 46. Loans, Bank of North America, 55. Loans, First U. S. Bank, 101. Loans, national, constitutional pro- visions, 67 ; in 1789-1801 (table)) ii2f Louisiana, 121; for war pur- poses, opinion of Gallatin, 129 ; in 1811, 130; in 1812, 130, 132; of 1813, subscriptions to, 133 ; August, 1S13, 134; March, 1814, 134; in 1812-1815, 132; in March, 1815, 134; in 1812-1816 (table), 138 ; in 1820, 167 ; in 1821, 167 ; in 1816- 1833 (table), 168; 1824-1825, 171 ; in 1837-1843, 234 ; Mexican War, 255-256; Feb., 1S61, 272; July, 1861, 277-281 ; ratio of, to taxes in Civil War, 299 ; Feb. 25, 1862, 306- 3°9. 344 ; agency of Cooke, 311, 3151 319; March 3, 1863, 3J0-311, 344; March 3, 1864, 313, 345; June 30, 1864, 345 ; short-term, 315, 316, 319; March 3, 1865, 345 ; in Civil War (tables), 306, 308, 316 ; Civil War policy, 317-320 ; Act of 1870, 352-354; difficulty in selling bonds for resumption, 375 ; in 1894- i8g6, 447 ; in 1898, 467 ; see Bonds ; Interest, Rate of, on Loans ; Tempo- rary Loans ; Five-twenties ; Ten- forties. Loans, revolutionary, 35 ; difficulty of securing, 42; domestic, 1776-1789, 45-47 ; foreign, 47-49 ; temporary, 47; see Holland. Loans, Taxation and Banking of the Civil War, ch. xiii., 298-330. Louisiana, purchase of, 121. Louisiana stock, 121 ; redemption of, 353- jyrcCULLOCH, H., Secretary, 333 ; on compound interest notes, 334; favors early resumption, 334 ; policy of contraction, 337; difficulties in resumption, 342; payment of bonds, 346; sinking fund policy, 356; sale of gold, 368 ; tariff legislation, 1867, 396 ; dangers of silver coinage, 409. McCulloch V. Maryland, 157, 364. McDuffie, G., on tariff law of 182S, 178 ; tariff proposition of 1832, 183; initiation of tariff legislation, 479. McKinley, administrative act of 1890, 491. McKinley tariff of 1890, 438-440. McLane, L., tariff report, 1S32, 1S4 ; tariff recommendations, 1832, 186; Secretary of the Treasury, 199; op- posed to Jackson's bank policy, 205. Madison, J., tariff of 1789, 80, 82; duties of the comptroller, 88; method of funding debt, 91 ; President, veto of bank, 181 5, 148 ; necessity of pro- tection, 1815, i6i ; tariff arguments for independence, 192; \'alue of a home market, 192 ; constitutionality of tariff legislation, 196 ; veto of internal improvements, 214. Maine, use made of surplus, 222. Mallary bill, 1827, 177. Manning, Secretary, on dangers of sil- ver coinage, 409 : payment of silver, 410; surplus, 416; revision of tariff, 1885, 423 ; gold reserve, 441; under- valuation, 490; customs administra- tion, 491 ; debt statement, 499, Manufactory notes, Massachusetts, 25, Manufactures, colonial, 5, 7, 19; in 1789, 77-79 ; after the Civil War. 358. Marshall, Chief-Justice, decision in McCulloch V. Maryland, 157 ; taxa- tion of national loans, 350 ; influence of decision in McCulloch !■. Mary- land, 364-367. Maryland, colonial taxes, 15 ; export duties, 16; tariff, 17. Mason, J., complaint against U. S. bank, aoo, Index 5 '^3 Massachusetts, colonial, taxes, 10-16; tariff, 16; bills of credit, 21 ; banks, 24-26; amount of paper money is- sued, 1 702-1 750, 29; industrial dis- content in 1786, 58; position on tariff of 1828, 176, 181 ; use made of surplus, 222 ; banking after 1837, 260; bank-note circulation, 1869, 385- Matches, tax on, 4x9. Maysville Road, veto, 215. Mediterranean Fund, 121. Merchant, colonial, 8. Merchant notes, Massachusetts, 23, 25. Meredith, Secretary, on undervaluation, 1849, 251 ; protection, 258, 259. Mexican claims, 268. Mexican War, finances of, 255. Michigan, increase of population, 224 ; banking in, 260. Miller, Justice, on constitutionality of legal tender notes, 363. Mills tariff bill, 1888, 424. Minimum principle in tariff, 162; ex- tended, 1824, 174; in 1S2S, 180; abandoned in 1832, 184 ; in tariff 0/ 1890, 438. Mint, colonial, 21; Act of 1792, 103; opposition in 1792, 1045 bill of 1873, 403; administration, 495. Miscellaneous expenditures, 1S46-1861, explanation of, 268; in 1862-1865, 329 ; explanation of, 1866-1879, 400 ; items under, 1880-J901, 505. Miscellaneous receipts in, 1866-1879, explained, 399 ; in 1S62-1865, 329 ; in 1866-1879, 399. Mississippi, repudiation, 244. Mitchell, W. C, on gold premium, 295. Mobile real estate, 1834, 227. Molasses, debate on taxation of, 1789, 81. Money, colonial, 18-30 ; substitutes, 19; valued by lavir, 20; of account, 20 ; definition of, 71. Money market and government de- posits; 493. Money, paper, during Revolution, 36- 43 ; see Treasury Notes ; Legal Ten- der Issues i see Paper Money. Monopoly, Jackson on, 1832, 203. Monroe, President, on value of a home market, 192 ; argument for independ- ence, 192 ; veto of internal improve- ments, 214. Morrill, J. S., Committee on taxation, 275 ; on legal tender issues, 286 ; desire for taxation, 300 ; taj'iff legis- lation, 1866, 396. Morrill, Secretary, sinking fund policy^ 1876, 357- Morrill tariff of 1861, 265-267. Morris, Gouverneur, on taxation accord- ing to population, 64. Morris, R., endeavor to secure taxes, 50; report on finances, 53; resigna- tion, 54; establishment of bank, 55 ; coinage, 102. Morrison bill of 1884, 423. Morton, 0., on payment of bonds, 1868, 348. "^AILS, taxation of 1789, Si. NationaT" banks, see Banks, Na- tional. Navigation Laws, 6, 31. Navy, expenditures, m 1791-1801- (ta- ble), 111; decreased, 1801, 120; increased, 1S04, 121 ; in 1801-1811 (table), 124; in 1812-1816 (table), 141; in 1816-1S33 (table), 169; m 1833-1846 (table), 246 ; in 1846- 1861 (table), 267; in 1S62-1865, (table), 329; in 1866-1879 (table), 399; in 1880-1890 (table), 428; in 1891-1901 (table), 475. New England, opposed to war loans of 1812, 133. New financial needs, ch. v., 97-117. New Jersey, colonial export duties, 15. New York, colonial taxes in, 13 ; co- lonial tariff, 16 ; depreciation of co- lonial bills of credit, 28 ; opposition to tariff in 1786, 51; banking after 1839, 260 ; taxation of banks, 350. New York tariff convention, 1831, 1S3. " New York Tribune," on resumption, 335; protection, 397. North Carolina, colonial tariff, 17. Northern States, resources in i860, 273. 524 Index Northwest territory, aid for roads in, 213. Note issues, in system of local bank- ing, 181 5-1833, 154; see Banks, Lo- cal ; Banks, National, Circulation of. Nullification doctrine, 182, 185. QCCUPATIONS in colonies, 5 ; in 1789, 76. Ohio, taxation of U. S. Bank, 159; increase of population, 224. " Ohio idea," 348. Ohio Life Insurance and Trust Co., failure of, 1857, 263. Osborne et al. -v. U. S. Bank, 159. Overstreet currency bill introduced, 468. pANIC of 1837 and Restoration of Credit, ch. a., 223-247. Panic Of 1837, 229-233, 237 ; of 1857, 263; of 1866, 342; of 1873, 370-372; of 1873 and protection, 397 ; influ- ence of, on refunding, 356 ; of 1884, 409; of 1893, 444; see Crisis. Paper money, colonial, 4, 21-27 ; rea- sons for issue, 8 ; depreciation, 28; old and new tenor, Massachusetts, 29; redeemed, 29 ; see Bills of Credit, Treasury Notes ; Legal Tender Is- sues; Paper Money; Revolutionary. Paper money, Greenback party view of, 379- Paper money in Constitution, 67. Paper money, Revolutionary, amounts issued, 36-43; was it necessary ? 41- 43 ; amounts issued by States, 36 ; value of, in specie, 40 ; State issues, 1783-1787, 58. Parity of gold and silver, 452. Patent medicines, tax on, 420. Pennsylvania, colonial taxes in, 15 ; tariff, 17; Loan Bank, 26; deprecia- tion of paper money, 28. Pensions, expenditures for, in 1816- 1833 (table), 169; in 1833-1846 (table), 246; in 1846-1 861 "(table), 267; in 1866-1S79 (table), 399; in 1880-1890 (table), 428; Cleveland's veto, 427; in 1891-1901 (table), 475. People's party, 381. Permanent appropriations, 484. "Pet" Banks, 209-210. Philadelphia, free trade convention, 1831, 183. Physiocratic definition of direct taxes, 108. " Piece of eight," 20. Pine tree shillings, 21. Polk, J. K., on tariff, 1844, 249. Poll tax, colonial, 10 ; Massachusetts, II ; Virginia, 12. Pollock V. Farmers Loan and Trust Company, 457. " Pop gun " bills, 1895, 458. Population of colonies, 7 ; and direct taxes, 63 ; method of apportionment according to, undesirable, 64; in 1790, 76; in i860, 273. Populist party and income tax, 456. Ports of entry and delivery, 489, Portuguese coins, 20. Postage currency, 309, Postal deficiencies, 268. Postal service in 1 790, 79. Powder duties, colonial, 15. Pownal, Thomas, comments on Penn. Loan Bank, 27, Premiulns on bonds, 1880-1890, 430- 43«- Premium on gold, see Gold Premium. Prices, regulation of, during the Revo- lution, 39; rise of, in Civil War, 293-294 ; of silver, 1840-1895, 406 ; and tariff, 192. Problems of Reorganization after War, ch. vii., 143-171. " Proclamation " money, 21. Property tax, colonial, 10 ; in New York, 13. Property, value of, i860, 273. Prosperity, national, 1S46-1857, 256 ; in 1898, 469. Protection of home industries, colonial, 14; Madison on, in 1789, 82; prin- ciple of, in Tariff Act of 17S9, S4-85 ; President Madison on, 1815, 161 ; Dallas on, i8i6, 161 ; Calhoun's position, 1S16, 164 ; significance of tariff of 1S16, 162 ; relation to prices, 19a; for young industries, 194; constitutionality of, 193; and Index 525 panic of 1837, 230 ; in 1840, 237 j ' and pauper labor argument, 259 ; in 1859,266; in 1862, 301; and Civil War, 393; in 1883, 421 ; in tariff of 1890, 438; in tariff of J897, 464; see Tariff. QUIT rents in New York, colonial, ^ 14. D AILWAY construction, 1830, 225 ; in 1846-1861, 257 ; and panic of 1857, 264 ; after the Civil War, 342, 370 ; decline in, 1893, 446. Ramsay, D., on depreciation of conti- nental bills of credit, 39. Randall, Representative, position on tariff, 423, 425. Randolph, J., in favor of repeal of excise duties, 120; repeal of salt tax, 122 ; opposition to bank, x8z6, 149. Rates of duties on imports, 1791-1801 (table), 83 ; in 1789-1816 (table), 163 ; in 1821-1842 (table), 189 ; on individual commodities, in Act of 1842, 239 ; in 1842-1845, 238 ; in 1846-1856 (table), 252 ; in 1858- 1861, 263 ; in Tariff Act of 1864, 303; in 1861-1864, 304; see Duties. Ratio between gold and silver, 1791, 103 ; in 1792-1834, 210 ; in 1840- 1895 (table), 406; see Bimetallism. Receipts, continental, in 1775-1783, 35 ; in 1 784-1 789, 57 ; in 1 789-1801 (table), no; in i8oi-i8n (table), 123 ; in 1816-1833 (table), 168; in 1833-1846 (table), 246 ; in 1846- 1861 (table), 267 ; in 1862-1865, 330; in. 1866-1879 (table), 399; in 1880- 1890 (table), 426 ; in 1891-1901 (table), 475 ; kinds of money accept- ed for, 1817, 151 ; see Independent Treasury. Reciprocity, in tariff of 1890, 439; tariff of 1894, 456; tariff of 1897, 465. Refunding, see Funding. Refunding Act of 1870, 352-354. Refunding in Currency Act, 1900, 472. Register, duties of, 87. Republican party, on financial legisla- tion, 1795, ii9i protection, i860, 266 ; payment of bonds, 1868, 348, 349 ; resumption, 1875-1879, 372, 374 ; Greenback party doctrine, 378 ; tariff, 1888, 417 ; deposit of govern- ment funds, 418 ; general position on tariff, 424-425 ; silver coinage, 1896, 461 ; tariff in 1897, 464 ; reci- procity, 465. Repudiation, State, 243-246. Requisitions during the Revolution, 35. 44-45- Reserve, see Gold Reserve. Resumption of specie payments, 1817, 151; in 1838, 232; advocated by McCulloch, 1865, 334; theories of, 335-338; opportunity for, m 1866, 340; opinion of Boutwell, 352; Act of 1875, 372-378; accomplished, 375 ; Greenback explanation of, 380 ; gold reserve, 440 ; sale of bonds for, 448; amount of treasury notes, 451; see Specie Payments. Revenue bills, initiation of, 66. Revenue, collection of, 488-492; see Cost of Collecting Excise Duties. Revenue Commission in 1865, 392. Revolution and the Confederacy, 1775- 178S, ch. ii., 39-59. Rhode Island, depreciation of colonial paper money, 28 ; opposition to tariff during Revolution, 50. Richardson, Secretary, issue of legal tender notes, 361, 372. Riders on appropriation bills, 485. Rivers and harbors, expenditures for, 1866-1881 (table), 400 ; in 1880- 1890, 426-427 ; see Internal Improve- ments. Roads, federal aid for, 212. Ross, £. A., on sinking fund of 1817, 171. Rum, high duty advocated in 1789, 81. Rush, R., Secretary of the Treasury, 1825, 165 ; on service of U. S. Bank, 1828, 157. gAFETY fund system. New York, 155 ; recent propositions, 460. Salaries, colonial, 8. Salem, use made of surplus, 222. 526 Index Salt, taxation of, 1789, 81 ; repealed, 1806, 122. Savings bank deposits, tax on, 420. Schurz, C, on panic of 1837, 229. Secretary of the Treasury, see Treasury Department. Sectional interests in 1790, 79 ; see South, Seigniorage, coinage of, 452 ; profits of, 495- Seligman, E. R. A., types of colonial taxation, 10. Senate, in revenue legislation, 478; and appropriation bills, 486. Seven-thirty notes, of 1861, 277, 307 ; of 1864, 315 i of 1865, 332. Seward, Governor, distribution of sur- plus, 221. Seymour, H., on payment of bonds, 1868, 348. Shaw, Secretary, on government de- posits, 493. Shays's insurrection, 58. Shepard, E. M., on speculation in 1837, 226. Sherman, J,, on independent treasury system in 1861, 282 ; in favor of legal tender issues, 286 ; converti- bility of legal tender notes, 291 ; on confused character of the debt, 333 ; methods of resumption in 1866, 337 ; supply of currency, 338 ; payment of bonds, 1868, 348 ; rate of interest on bonds, 354 ; Resumption Act of '875, 373 i defect of Resumption Act, 374 ; appointed secretary, 1877, 374 ; favors gold reserve, 375, 440, 441 ; tariff legislation after Civil War, 396 ; circulation of silver dol- lars, 408 ; tariff of 1883, 422. Sherman Silver Act of 1890, 436 ; re- peal of, 444, Shipbuilding, colonial, 6 ; taxation in 1789, 81. Shipping, taxes on, colonial, 15 ; foreign discrimination against, in 1789, 83. Short-term loans, see Loans. Signers of continental bills, 37. Silver, price of, 1840-1895 (table), 406 ; fall in value, 1893, 443- Silver Act of 1890, 436-438 ; repeal, 444. Silver and Banking, 1873-1890, ch. xvii., 402-413. Silver and the Tariff, cb. xix., 434- 462. Silver Bank, 26. Silver certificates, issue of, 407-408; increase in, 1900, 471; in debt state- ment, 500. Silver coinage, Spanish dollar, 20; in 1853, 211 ; demonetization of, 403-407 ; dollars coined, 1878-1890, 407 ; parity with gold, 452 ; struggle for, 460-462 ; and payment of bonds, question of, 354, 451 ; position of Senate in 1898, 468 ; final redemp- tion, 470 ; see Ratio ; Bimetallism ; Free Coinage. Sinking Fund established in 1789, 113 ; Act of 1795, 114; in 1817, 165, 171 ; after Civil War, 356-358; pur- chase of bonds for, 429. Slavery, relation of, to the tariff in 1828, 181. Slaves, colonial tax on, 10; import, taxes on, 16; and direct taxes in the Constitution, 63; taxes on, 65. Snuff, manufacture of, taxes, 1794, 108. " Soft " currency, 378. South Carolina, colonial tariff, 16; colonial export duties, 16 ; opposed to tax on exports, 64 ; on protective duties, 1825, 182 ; tariff demands, 1832, 183; ordinance of secession, 1861, 274. Southern States, on tariff duties in 1789, 81; assumption of debt, 92; tariff of 1824, 174; opposition to tariff of 1828, 181 ; distribution of surplus, 220 ; Confederacy in, 1861, 274; commerce in i860, 274; need of money supply after the war, 339 ; bank-note circulation, 1S69, 3S5. Spain, Revolutionary loan from, 471 war with, 465. Spanish coins, 20; dollar, disappears from circulation, 211. Spanish war, finances during, 465-468. Spaulding, E. G., Committee on Loans, Index ^■2-1 275 ; on Act of Feb. 25, 1862, 284 ; convertibility of legal tender notes, 291. Specie circular, 227-229. Specie, drain of, in colonial times, 8, 19; export during War of 1812, 145 ; in Independent Treasury Act, 236; export after Civil War, 371. Specie payments, suspended in 1814, 145; resumed in 1817, 151; suspen- sion m 1837, 229-231 ; resumed in 1838, 232 ; suspension in 1861, 281 ; resumption, advocated by McCuUoch, 334 ; theories of resump- tion, 335-338; Resumption Act of 1875, 3?^ « resumed in 1878, 404 ; see Resumption. Specie requisitions, during Revolution, 45- Specific appropriations, 488. Specific duties, colonial, 17; in tariff of 1789, 81 ; abandoned, 1846, 251; in Morrill tariff, 264. Speculation, in certificates of indebted- ness, 1790, 91 ; in 1837, 226 ; and banking, 181 5-1860, 262 ; in gold, 369. Spirits, duties on, see Excise ; Internal Revenue. Springer v. U. S., 457. Stamp duties, English in colonies, 31- 32 ; in 1814, 139 ; in 1898, 466. State bills of credit, 1783-1787, 58; issue forbidden, 69. State debts, assumed in 1 790, 92, 93. State repudiation, 243-246. State tariffs forbidden, 6{. Stevens, J. A., on indebtedness in 1795, 116. Stevens, T., chairman of committee on ways and means, 275 ; on converti- bility of legal tender notes, 288 ; pay- ment of bonds, 348. Storehouses for public property, co- lonial, 19. Story, Justice, definition of taxes, 108 ; note issues by State banks, 26r. Strong, Justice, on meaning of coinage, 70. Sub-treasury, see Independent Treasury. Suffolk system of redemption, 155. Sugar bounty, 439, 440. Sugar, duties on manufacture of, 1794, 108; duties in 1814, 139; in tariff of 1S94, 456 ; in tariff of 1S97, 464. Sumner, C, on resinnption, 335 ; re- duction of currency, 1S6S, 344. Sumner, W. G., on Revolutionary re- quisitions, 45; constitutionality of tariff legislation, 195. Snmptuary taxes, colonial, 14. Supreme Court, changes in, 1871, 364. Surplus, in 1791-1801 (table), 112; in 1801-1811 (table), 126; disposition of, in 1834, 217-222 ; deposited with States, 1836, 220; use made of, 222 ; inability to deposit fourth instalment, 229 ; in 1834-1S46 (table), 247 ; and independent treasury system, 254; in 1846-1861 (table), 269; in 1866-1879 (table), 401 ; in 1880-1890 (table), 429; in 1S90-1901 (table), 476; diffi- culty in management of, 494. Surplus Revenue, 1880- 1890, ch. xviii., 412-433- Suspension of specie payments, see Specie Payments. Syndicate, bond, 1895, 453. TPANEY, Secretary, supports Jack- son, 1833, 205; on removal of deposits, 207 ; Chief- Justice, note issues by State banks, 261. Tariff, in colonies, 14-17; attempts to secure a national, in 1783, 50 ; dur- ing Revolution, 50 ; State, forbidden in Constitution, 65; Act of 1789, 80; Act of 1792, 82; duty on salt removed, 122 ; of 1812-1816, i6i- 165, 173 ; of 1818, 173; bill of 1820, defeated, 174; Act of 1824, 174 ; of 1828, 176-181 ; relation of slavery, 181 ; of 1830, 182 ; of 1832, 184; of 1833, 185-189; of 1S42, 237-239; of 1846, 249-252 ; of 1S46, and panic of 1S57, 263; of 1857, 262-265; in 1861, 277, 300; Act of July 14, 1862, 301 ; of 1864, 303 ; of 1870, 397 ; a.fter Civil War, 396-398 ; of 1872, 398; revision, 18S3, 420-423; of 1890, 438-440 ; of 1894, 454, 455 ; of 1897, 463-465 ; early arguments, 191-196 ; constitutionality, 195 ; in- 528 Index itiation of bills, 478-482 ; see Rates of Duties on Imports ; Reciprocity ; Protection, Tariff, Independent Treasury, and State Banlcs, ch. xi., 248-270. Tariff legislation, 1813-1833, ch. viii., 172-196. Tariff, War, and Currency Act, ch. XX., 463-476. Taussig, F. W., tariff of 1832, 184; tariff of 1883, 422. Taylor, J ., denunciation of tariff, 194, Taxation, colonial, 9-17. Taxation, constitutional provisions, 62- 67 ; uniform, 62 ; on slaves, 65 ; pur- poses of, ill-defined, 65 ; see Direct Tax. Taxation during the Revolution, 44- 52 ; to redeem continental bills of credit, 39 j State, 44; difficulties, 44; method of levy, 49. Taxation, national; 1789-1900, see Cus- toms; Direct Taxes ; Excises; Income Tax; Internal Revenue; Tariff. Taxation of, banks, national, 327, 388 ; of banks, State; 328, 384, 388; of bonds, 350-352; of carriages, 1794, 106-107; of carriages, 1814, 139; direct, 1814, 139; of income (table), 305 ; savings banks deposits, 420 ; of U. S. Bank, 157; see Duties; Taxation, National. Tea, taxed by England, 32; tax re- moved, 1872, 398. Teller, Senator, and free coinage, 461. Temporary loans. Bank of North America, 47; in 1789-1801, 113; utility during Civil War, 320 ; in 1865, 332; after Civil War, 340. Ten-forties of 1864, 313. Tennessee, tariff of 1828, 181. Tobacco, colonial tax on exports, 12, 16 ; duties reduced in 1883 and 1890, 420; doubled, in 1S98, 466; see Ex- cise; Internal Revenue. Tonnage duties, colonial, 12, i;; in 1789, S3. Trade, balance of, and resumption, 335, 337. 377 i foreign, 79. Travel in 1790, 79. Treasurer, duties, 87. Treasurers, colonial, 18. Treasury department, administration during Revolution, 52 ; organized in 1789, 85-87 ; internal organization, 87-89; reports of, 115, 116; Presi- dent Jackson's relation to, 206 ; un- available funds, 221 ; changes intro- duced by Guthrie, 269 ; and sales of gold, 368-370 i and revenue legis- lation, 488 ; accounting, 498-501 ; miscellaneous bureaus, 501 ; list of secretaries, 509. Treasury notes, characteristics of, in 1812-1815, 137 ; amounts issued, 136-138 ; in 1837-1843, Z32, 234 ; receivable for public dues, 1846, 253 ; in Mexican War, 255 ; in i860, 272 ; Chase on, 1861, 281 ; shor^te^n during Civil War, 312, 313 ; issued under Act of 1890, 442 ; redemption of, in Currency Act, 469-471 ; retire- ment of, 471 ; see I^egal Tender Issues; Temporary Loans; Greenback party; Resumption; Seven-thirty notes; Compound interest notes, Fractional currency. Treasury, Secretary, see Treasury Department. Treasury statements, 507-509. Tripoli, war with, 121. Two and three per cent stock, 213. Tyler, President, 238 ; tariff veto, 238, 481 ; bank veto, 240-242 ; conflict with his party, 238-243; Tyler, L. G., on President Tyler's bank veto, 241-243. UNAVAILABLE funds in treasury, 221. Undervaluation of imports, 176, 189; legislation against, 1 82 ; increase of, 490 ; see Valuation of Imports. Unemployed in 1893, 44*- Uniform, meaning of, in taxation, 63. Unit of value, 1791, 104. United States Bank, First, advantages enumerated by Hamilton, 99 ; doubt of its constitutionality, 100 ; assist- ance to the government, 101 ; branches of, 100 ; political opposition to, 127 ; end of, 126-128. Index 529 United States Bank, Second, estab- lished, 145-150 ; operations of, in 1816-1819, 150-153 ; conflict with local banks, 155; operations in 1823-1829, 156-157 J attempt to tax, 157; circulation (table), 156 ; oppo- sition to, 1829, 200; President Jack- son's criticism in 1829, 200 ; favora- ble report on, in 1830, 200; petition for re-charter, 1832, 202 ; Jackson's cabinet paper, 1833, 205; Jackson questions soundness, 1832, 204; favorable report, March, 1833, 205 ; Jackson's opinion of Biddle, 1832, 205; loans, 1831-1832, 208; foreign holders of stock, 208; failure to secure re-charter, 208. United States v. Hylton, decision in, 107. yALUATION of imports, home, 187, 190; Act of 1851, 252; in present administration, 489 ; see Un- dervaluation. Van Buren, on tariff of 1828, 178-181 ; internal improvements, 1824, 214 ; President, refusal to rescind specie circular, 231 ; special message, 232. Verplanck, tariff bill, 1832, 186. Veazie Bank v. Fenno, 388. Virginia, colonial taxes, 12 ; export duties, 15 ; duties on shipping, 15 ; issues of paper money, 29 ; claim for fourth instalment, 221, Votes on tariff bills (tables), of i8i6, 163 ; tariff of 1824, 175 ; tariff of 1828, 180 ; tariff of 1832, 185 ; tariff act of 1833, 187 ; tariff of 1846, 250 ; tariff of 1857, 263. ■Y\7'AGES during Civil War, 294. Walker, A., on lowering rate of interest on bonds, 318. Walker, F. A., on Act of 1873, 404. Walker, R. J., Secretary, 249 ; tariff measure, 250, 481 ; on customs du- ties, 259; foreign sale of bonds, 354. War, expenditures, in 1791-1801, in ; increased, 1S09, 123 ; in 1801-1811 (table), 124 ; in 1812-1815 (table). 141 ; in 1833-1846 (table), 246 ; in 1846-1861 (table), 267 ; in 1862- 1865 (table), 329 ; in 1866-1879 (table), 399 ; misleading tables, 400 ; in, 1880-1890, 427; in 1S80-1890 (table), 428 i in 1891-1901 (table), 475 ; Spanish War, expenditures for, 467. War loans, see Loans, Warehouse system established, 1846, 239, 252. Washington, President, confidence in Hamilton, 116; tariff arguments for independence, 192. Washington Turnpike Co., Jackson's veto, 215. Ways and Means Committee in tariff legislation, 481, 487. Webster, D., on coinage, 71 ; plan for a bank, 1814, 147 ; position on tariff, 1820, 175 ; in 1824, 175 ; position on tariff of 1828, 176, 181 ; tariff of 1833, 187 ; on panic of 1837, 231 ; on Tver's bank plan, 243. Webster, P., depreciation of continental bills of credit, 41. Wells, D. A., on internal revenue taxes, 301 ; taxation during Civil War, 304 ; resumption, 336 ; balance of trade after Civil War, 371 ; Rev- enue Commission, 392; tariff meas- ure of 1867, 396. West Indies, colonial trade with, 6 ; exports to, 1790, 79. West, position of, on the tariff, 1824, 174 ; money supply deficient after Civil War, 339 ; bank-note circula- tion in 1869, 385 ; money question after 1S80, 410 ; economic condition after 1891, 460. Weston V. Charlestown, 350. Wheat, price, after Civil War, 370 ; in 1894, 447. Whig, position on tariff of 1844, 249. Whiskey insurrection, 106. Whiskey Ring, 492. Whiskey taxes in 1791, 105 ; opposi- tion to, 105-106 ; in 1S02, 120 ; in ■1812, 138 ; see Internal Revenue. White, H., on Act of August 5, 1861, 282; Act of 1873, 404. 34 53° Index Windom, Secretary, on deposits of government funds, 417 ; redemption of bonds, 431 ; silver recommenda- tion, 189a, 436. Wines, tax on, 108 ; see Excise; Inter- nal Revenue, Wolcott, R., Secretary, 117, Woodbury, L., Secretary, 199 ; com- plaint against bank, 1829, 200 ; use of surplus, 220 ; on specie circular, 1836, 228. Wool, duties on, 175 ; in 1824-1828, 179 ; abolished, 1894, 456 ; in tariff of 1897, 464. Wool schedule, history of, 1897, 483. Woollen duties, 1816, 162 ; in 1824, 176 ; in 1827, 177 ; in 1828, 179; in 1883. Wright, S., tariff of 1828, 180. Y'^U^^ industries argument, 194.