'.-V:*''-*,'^ I. !Q tion. This consisted in taking them to a distant place and paying them out for purchases in the rural dis- tricts, where envious brokers and rival bankers would no longer be able to hurry them back forthwith to their issuers. Many of the small banks, particularly of the Eastern and Middle States, lived wholly by their circulation, which was thus kept afloat in the Western States at high rates of interest. The scarcity of loanable capital in those' States rendered it easy to circulate any thing that purported to be money. But the mo€t effective means yet devised of driv- ing specie out of a country, and making paper redun- dant, is found in the issue of notes of small denomina- tions. A note for a small sum will pass with less objec- tion, and circulate more rapidly, than one for a large sum. A dollar bill will be received without question, when one for a hundred dollars would be rejected, unless the responsibility of the issuers were known, and the certainty that it represented sjrecie existed. Large notes circulate only in wholesale business. Their use is confined to transactions between the dealers themselves, or in adjusting balances between the banks. Small notes, on the other hand, are em- ployed in retail trade ; they are paid out for wages ; they circulate among the people in the thousand petty transactions of daily life. It is impossible for every one to know the worth of each note ; they are passed from one person to another on the implied under- standing that the person giving them will take them back if bad ; they circulate rapidly ; they move from hand to hand so fast that there is no time to present them for redemption. It requires, therefore, a less 80 PAPEE MONEY. percentage of specie to keep small notes afloat than large ones. It also happens that where small notes circulate, specie always disapj)ears. The reason of this disap- pearance is sometimes supposed to be that bank-notes are more convenient, and are generally preferred to coin. This view is far from the truth. The real cause of the displacenient of specie is found in that most elementary principle, that the poorer currency always supersedes the more valuable. A person who has in his pocket both gold and doubtful bank-notes, nat- urally prefers to rid himself of the latter. As between the two, there is always some doubt attached to the bank-notes. In order to know their value, it is neces- sary to know the circumstances of those who issue them, while gold is value itself. Accordingly, where small notes are crowded into circulation, coin is hoarded by individuals, or collected into the bank vaults, and drops out of general circulation. The profit made by banks of issue is realized largely from the small notes. The large ones beiug used only in large transactions are generally deposited forthwith, and thus come into the possession of a bank by which they are returned to the issuer for redemption, or to settle balances, having had but a limited circulation. In the redemption of large notes, therefore, each bank acts as a check upon every other. But small notes are carried in the pocket-books of in- dividuals to meet daily expenditures, or are collected in the money-drawers of the shopkeepers ; and when at last they are deposited in a bank, instead of being sent home for redemption, they are paid out to meet a particular demand for them, and to commence another CONVERTIBLE BANK-NOTES. 81 round of circulation. Thus more small notes can be kept afloat than the commerce of the country really requires, and, as the banks are under the strongest temptation to press them into circulation, they soon exceed in amount the specie that ■would naturally cir- culate if no paper were issued. Prices accordingly are enhanced. But this en- hancement is not always shown by the. market re- ports and trade statistics. It is much more observable in retail dealings than in wholesale transactions. It is marked better by the expenses of living than by sta- tistics of prices. The latter are derived from sales by the quantity in open market, where the causes that de- termine exchange-value are the cost of production, and the law of supply and demand, and where the cur- rency ordinarily has but little effect on price, save as it can be made a means of speculation. Prices at re- tail, however, are determined by quite different causes. They depend largely on custom and combination. The retail dealers generally manage to adjust their prices to the amount of money in the hands of the commu- nity ; and, when there is a multitude of small bills cir- culating, not only have they a pretext for asking more, but the capacity of the consumers to pay more is in- creased ; while, as a certain degree of discredit attaches to such money, and to the one paying it out, it does not feel so valuable as the solid metal, it is parted with more easily, and for less value in return. When it is said that an increase of the quantity of money raises prices, and a diminution lowers them, the proposition is much truer of prices at retail than of prices at wholesale. The latter are determined by general laws, while the former are determined by what the 82 PAPER MONEY. shopkeeper can extract from his customers. When by the issue of such bills a higher scale of retail prices has been established, it requires, of course, more money to make purchases. Nor does a temporary scarcity of small bills have any effect in inducing the/ retailers to lower their prices. Accordingly, when- ever such a scarcity arises, the complaint is made at once that there is not enough currency, and the banks are urged to increase their issues, and they, taking advantage of the circumstance, press their small notes into the channels of retail trade without much regard to the amount of specie in their vaults. So potent is the effect of small notes, that it may well be concluded that convertible bank-notes cannot be- come redundant, when those for small sums are for- bidden by law. It is the unanimous testimony of the English bankers, who have been examined before suc- cessive Parliamentary Committees, since the suppres- sion of small notes, that the banks have no power of increasing their circulation so long as it remains con- vertible, unless there be an increased demand for cur- rency, caused by an increase of the business to be done. It is admitted, however, that after a specula- tive movement has set in, an over-issue of bank-notes, even when subject to this restriction, may be made in order to prolong the duration of the movement, and delay the inevitable reaction.* There is this differ- ence to be noted, however, between England and the United States : that, in a small country, covered with railways, bank-notes can be sent back to their issuers for redemption more readily than in a land of great * Mill, " Principles of Political Economy," Book III., chap. xxiv. CONVERTIBLE BANK-NOTES. 8.3 distances ; while in an old country, where rates of in- terest are low, and the accumulations of moneyed capital are enormous, there is not the same opportu- nity to circulate paper money, as in a newly-settled country, where new enterprises are daily developing, and the demand for loanable capital largely exceeds the supply. Even though small notes had been sup- pressed in the United States, the country hanks would have been tempted none the less to have circulated their bills in the remote States of the South and West, and they might still have found it possible to have issued them in excess of specie. It is certain, how- ever, that such a restriction would have gone far tow- ard elevating the value of the currency unaccompanied by any other repressive legislation. MUl, while sustaining the position of those who deny the bank-notes any power of increasing prices so long as their convertibility is maintained, admits that the rule ceases to apply when small notes are issued. " I cannot but think," he says, " that this employ- ment of bank-notes (in retail trade) must have been powerfully operative on prices when notes of one and two pounds value were permitted by law." * If he had witnessed the effect of one and two dol- lar notes on retail prices, he would have admitted the power of the banks to issue paper in excess of the nat- ural circulation, and would probably have classed bank-notes with money, and not with credit in their effect on prices. Another cause which has tended to make the issues of bank-notes in this country excessive is the * " Principles," etc., Bool£ III., oliap. xxir., sec. 2, 84 PAPER MONEY. practice established in many States of requiring the banks to deposit with a public officer collateral secu- rities for the redemption of their circulating notes. Such laws, just in proportion as they secure the ulti- mate value of bank-notes, diminish their present value. They give them a quasi government endorsement. They relieve the holders from the necessity of watch- ing the coin reserves of the banks, and, by thus giving the notes a wider circulation, impede their return for redemption, and enable the issuers of them to keep a greater amount afloat with a limited reserve of specie. That bank-notes thus secured circulate on the credit of the securities as much as of the banks issuing them is shown by the fact, that at the outbreak of the Rebel- lion the Western bank currencies, founded on Southern State bonds, depreciated as those bonds declined in price, with occasional exceptions of solvent issuers, in- volving in ruin merchants who received such notes in the course of trade, and bankers who took them on deposit. But while from these causes the mixed currency of the United States had reached previous to the war a stage of development similar to that of the currency of Great Britain at the end of the last century, and bank-notes were frequently issued in excess of the natural circulation, the periods during which such ex- cess lasted were always limited. The ultimate regu- lator of the amount of bank-notes that can be kept convertible is the movement of the precious metals. When not redeemable in coin, there is no limit to the amount that can be circulated. The simple effect of issuing them is, that, as the money in circulation is in- creased, prices rise. But the limit to which prices in CONVERTIBLE BANK-NOTES. 85 coin can rise is speedily reached. If commodities are high, coin is exported until prices decline. The pre- cious metals seek the best market. They flow to the country where prices are low, and from the country where prices are high. So long, therefore, as bank- notes are convertible into coin, the banks have no power of issuing them so as to permanently elevate the prices of commodities. Yet this does not affect the conclusion that they have this power temporarily. "When prices rise, the gold is exported gradually, and an inflation may continue for a considerable period before the natural check of an exportation of specie brings it to an end. It is natural, also, that the banks should exercise this power, where small notes are issued more frequently than when they are prohibited. For, in the latter case, the enhancement of prices begins in the wholesale markets, and is felt immediately on the international exchanges. But, because the effect of issuing notes of the large denominations is more lim- ited and temporary, the conclusion does not follow that they differ in their nature from small notes. The dif- ference is one of degree, and not of kind. From these considerations, it seems reasonable to conclude, that paper money, while nominally convert- ible on demand, is sometimes issued in excess of the quantity of the precious metals that the laws of com- merce would assign to the country in which it is issued, and that in few countries has such excessive use of paper money been more prevalent than in the United States. CHAPTER V. SPECULATION AIJD PANICS, AS AFFECTED BT A MIXED CUBKBNCT. To many minds, every attempt to reduce to laws actions apparently so erratic, and closely allied to gambling, as the speculative operations of the stock- exchange and the markets, mil seem fruitless. Yet the limits within which men are free to act are as nar- row in speculation as in any other department of hu- man effort. As the facts of political economy can be classified, and through them all the sequence of cause and effect can be observed, so in that minor branch of the science of exchanges which includes specula- tion, causation can be traced. Men act from motives, and in this case, as in every other, their actions can be followed back to their causes. The motive in speculation is the love of gain, and its apparent object is to turn to advantage changes in the prices of things bought and sold. But as price is the value of any commodity stated in terms of another commodity, the value of which is taken to be constant, to know the probable changes of prices the causes that affect values must be understood. The one who perceives, or thinks he perceives, a cause likely to affect values, attempts to make money by his foresight. SPECULATION AND PANICS. 87 He buys the commodity affected for a rise of price. He speculates, and the cause of his speculation is the change of values that acts on prices. Hence specula- tion may be defined as an effort of those making ex- changes to profit by real or expected variations in the values of commodities or securities. When a mer- chant buys goods to distribute them to the consumers, he adds a new value to them. When he buys them because he thinks their price is going up, he founds his expectation on something affecting, or likely to affect, their values on which he speculates. The changes in the values of commodities result- ing from an increase or diminution of the cost of pro- duction are usually so slow in coming that they do not lead to speculation. It is the change of the immedi- ate value of a commodity produced either by a dimin- ished supply of it, or an increased demand for it, on which most speculations are based. In the markets for merchandise, it is commonly a short supply of any thing that changes its value relative to other com- modities, and thus puts up its price. The harvests are bad. The stocks of bread-stuffs consequently are lessened. A war or political disturbance may hinder importations. Some important article of foreign pro- duction cannot therefore be obtained to the usual amount. As soon as it is seen that the supply of any necessary commodity is likely to be deficient, and that, as the demand for consumption will remain constant, the price must be enhanced, dealers in that commodity begin to lay in a stock in order to gain the increased price. The prospect of realizing an easy fortune by buying at one price to-day, and selling at a higher to- morrow, attracts numerous buyers from those engaged 88 PAPER MONET. in other pursuits, and a speculation lor a rise takes place. A similar effect may be produced by a new demand for any commodity, or class of commodities. It is witnessed when the breaking out of a European war creates a sudden demand for arms, saltpetre, or naval stores in our markets ; and an example of the effect of a new demand concurring with an expectation of a reduced supply is furnished on such an occasion by the course of bread-stuffs. But the speculative effect of an increased demand is more directly visible in the market for securities than in the markets for commodities. During any period of speculative quiescence, loanable capital ac- cumulates. Rates of interest thereupon tend to de- cline, and the demand for securities increases. A speculation in the stock-market follows, during which the prosperity of the enterprises whose stocks are dealt in is frequently misrepresented or overlooked. Such accumulations of capital sometimes occur on a large scale. In countries which are in a rapidly pro- gressive state of wealth, like Great Britain and the United States, the accumulations of new capital are enormous. The amount of it which is in a loanable form is subject to periodical enlargement. The abil-_ ity of the banks to accommodate their customers is then enhanced. Rates of interest and of profit tend to decline. Outbursts of overtrading, aud wild spec- ulation result. During these, capital is destroyed, or changed from the circulating to the fixed form, and, after the inevitable commercial revulsion that follows, profits and interest again rise. These accumulations 'of capital cannot affect directly the values, or con- sequently the prices of commodities. But if they are SPECULATION AND PANICS. 89 contemporaneous, as is always the case, with changes in values arising from other causes, overtrading is greatly increased. At such times, also, too much cap- ital may be drawn into banking, and excessive issues of notes may take place depressing their value as marked by a general rise of prices. It is, however, the quotations for securities that such accumulations of capital affect the most conspicuously. They are pow- erful on the stock-exchange, where values can be made to order, and room is left for the imagination to play with them its most fantastic tricks. They are absorbed also in puTchases of real estate, where the rise of twen- ty years can be discounted in a siilgle season. The most prominent instances of these speculative out- bursts are those which occurred in this country in 1837, and again in 1857. . In the latter case, accumu- lated capital acting through the banks produced such an over-issue of bank-notes, and so great a rise of prices, that Prof. Bowen, writing before the culmina- tion of the movement, ascribed the rise to a marked decline in the value of the precious metals, an expla- nation which overlooks the main cause at work. Such a general rise of prices has been seen in this country since then, caused by a decline of the value of the money by which prices are measured, and the depre- ciation of greenbacks has been accompanied with the excessive speculation such a change of values would naturally cause. If these conclusions are correct, but little place is left for those " currency theorists," who ascribe almost every rise or fall of prices to an enlargement or con- traction of the issues of bank-notes. An over-issue of the latter cannot be the proximate cause of specula- 90 PAPER MONEY. tion, and the prevention of such issues cannot do away with it. Speculation is a necessity which can- not he escaped, until supply and demand never vary, and capital ceases to accumulate. In its right place it is a benefit. It opens a proper outlet for human activity. It is the excess of it that is an evil. Intemperance in speculation is stimulated by noth- ing so much as by an excessive use of credit, and par- ticularly of bank-notes. While the allegation that bank-notes create speculation cannot be sustained, the fact that they foster its excesses cannot be disproved. The efiects of the different instruments of credit in stimulating speculation will be best seen by observing them separately, and it will be found that in propor- tion as credit supersedes specie, and drives it away, speculation thrives, and the worse become the effects of the subsequent reaction. The manner in which credit is employed in pur- chasing commodities has been touched upon in a former chapter. Its most simple form is that of a book credit. In most branches of trade, by the custom of merchants, a buyer is allowed a specified term of credit on his purchases. At the end of the term only is his account presented, and payment asked. Or, if a note is given, it is only when it falls due that the maker must be prepared with the funds to meet it. Any dealer, therefore, can make large speculative purchases within the term of credit customary in his business, without laying out a dollar in money. But the credit of most merchants is limited. If, then, to his own responsibility a buyer can add that of another person, the confidence of the seller is increased. Two names are better than one ; accordingly, a speculator, SPECULATION AND PANICS. 91 by transferring any notes or acceptances he may have, is enabled largely to increase his purchases. Nego- tiable paper, whether given in the course of business, or made for accommodation merely, is an instrument largely employed in speculative transactions. But, even when the buyer actually pays for his commodi- ties at the time of the purchase, the element of credit may enter into the transaction, and form its basis. The money used may be obtained on credit — and it is in this manner that the majority of speculative trans- actions are carried on. The banks furnish the money to conduct them. This they do, either by discounting commercial or accommodation paper on the security of the names thereon, or by directly loaning the money to be used in making the purchases, and taking a pledge or hypothecation of the commodities bought, or their paper representative, as security for the loan. At the stock-exchange the custom of call loans has long existed. One who purchases securities on specu- lation, either buys an option, by which he is entitled to call for the delivery of the securities purchased at any time within a fixed period, or else he pays for them at the time of the purchase, and they are regu- larly delivered to him. The money for this payment is furnished by the banks or money-lenders, to be repaid on call, and as collateral security, the certificates of stock, or the bonds purchased, are pledged. The whole transaction is consummated by a broker, who borrows the necessary money, and keeps the loan good, if possible, and who receives from his customer a certain percentage of the purchase-price, which is held by him as a margin to cover any fluctuations in the market-price, and save him harmless. This cus- 93 PAPER MONEY. torn of the stock-exchange has extended to most spec- ulative transactions, and the operations of the corn- exchange are conducted in a similar manner. The transactions there, also, may be conducted through the agency of a broker or commission merchant, who receives a margin for his own protection, and the pur- chases are made either on time options or for cash. In the latter case the money is usually furnished by the banks, though not necessarily on call. When the fever of speculation runs high, there is hardly any of the leading articles of commerce that cannot be bought or sold on a margin, or time option. But as specula- tive trtosactions are altogether at wholesale, the money is paid, not by actually counting it out, but by' transferring a credit on the books of a bank. It is by means of their deposit-loans that the banks furnish the money "to carry" the securities, bread-stuffs, provisions, and other commodities held on speculation. When the speculative spirit is strong, and buyers are anxious to increase their stocks, the pressure brought to bear upon the banks for increased discounts is very hard to withstand, and increased accommoda- tions are generally granted. But a bank does not ordinarily expand its loans by crediting deposits in its books without having some increase of the percent- age of cash on hand to correspond. This increase cannot be had by obtaining more of the precious met- als. Gold will not come at the bid of speculators. The desired money is gained, therefore, by adding to the issue of circulating notes. It is true that deposits are legally payable in specie on demand, just as much as the notes circulating as money. But this legal liability is effectually escaped in practice. It is usual SPECULATION AND PANICS. 93 for the banks to receive the accounts of their deposit- ors with the understanding that payments are to be made in current funds — that is, hank-notes. It is fre- quently expressed in checks that they are to he paya- ble in current funds. Though the legal validity of such agreements has been questioned, practically the banks retain the power of paying deposits in what- ever funds are current. It is obviously just that a depositor should be paid in the same money he depos- ited. To give bank-notes and demand gold seems inequitable. Public opinion, therefore, does not re- quire of the banks the same punctuality in paying deposits in coin, as in redeeming their circulating notes in coin. Nor usually are the same penalties imposed by law for such non-payment in the former case as in the latter. Besides this, is the further consid- eration that every depositor desires to retain the favor of the bank, that he may obtain loans when desired. This feeling is carried so far that money is left on deposit at one time expressly in order that the depositor may become entitled, according to the custom of bankers, to receive a corresponding favor at some future time. Thus the practice of " compulsory deposits " has arisen, and many business men are compelled to keep " good accounts " that the bank may gain more inter- est, and grant them more extensive loans at times of urgent necessity. Under these circumstances it is evident that, ordi- narily, the percentage of cash retained by the banks to meet deposits may be in bank-notes, just as safely as in coin. When, therefore, speculation runs high, and the pressure for greater discounts weighs heavily on the banks, they expand their loans by inscribing 94 PAPER MOXEY. new deposits on their boots, and increase their circu- lating notes to correspond with the increase of deposits. As the notes are issued to meet an increased demand, caused by the increase of the business to be done, they are not likely to be returned for immediate redemption. It is in this way that the percentage of specie to their demand liabilities has at times dwindled down to so narrow a margin. If no circulating notes had ever been issued, the banks would have had much less power of increasing their deposit-loans, par- ticularlj' if the percentage of specie necessary to have on hand had been fixed by law. By the aid of bank-notes, therefore, speculative purchases have often carried prices to a higher point than would have, been possible without them. It is further to be remarked, that while the banks of this country have ha^ the power, from causes men- tioned in the preceding chapter, of issuing their circu- lating notes beyond the natural specie circulation, it is particularly in times of speculation that this expan- sion has taken place. When banks can have no money but coin in their Vaults, there is a fixed limit to their power of assisting speculators, by inscribing deposits in their favor. In that case, speculative purchases would be restricted, for the most part, either to the term of credit customary among merchants, or to time options. Overtrading by dealers in merchan- dise would still be likely to happen ; but as the usual term of credit of any particular trade would be given only to merchants actually engaged in business, the facilities for "outside operators" and the general public would be materially lessened, while the mer- chants making the speculative purchases would, be SPECULATION AND PANICS. f>5 compelled frequently to find a market within the time of the credit, and would not he able to carry the com- modities for an indefinite period on borrowed capital. The effect of speculation on prices, consequently, would be diminished. For it is the real purchases that de- termine prices, and not those on time options.* The latter are gambling transactions, or bets on prices, and have little influence on the general markets, as they are usually closed by paying the difference be- tween the agreed price and the market-price, at the time of the settlement. If no circulating notes were issued, or the amount were diminished, it would also result that the percent- age of specie to their demand liabilities held by the banks would be much greater. The precious metals, which, superseded by paper, had gone to other lands, would then return, and would become the basis of bank deposits. That the deposits would at times be expanded beyond just limits^ is probable. But, as the amount of money required to transact the business of the country would remain the same, the percentage of cash necessary to keep on hand to meet deposits would not be diminished, and would consist of coin only. It is evident, then, that credit in some of its forms is the means always used to produce a speculative en- hancement of prices, and that the efficacy of the sev- eral forms of credit, when used in enhancing prices, is in the order in which they have been named. Book credits have the least effect. Negotiable paper ranks next higher, and bank deposits are above either; * Except in case of " a corner." 96 PAPER MONET. while as bank-notes, besides the quality of being cur- rent as money, possess the additional power of in- creasing the capacity of the banks to make loans by inscribing deposits, they have the greatest efficacy of all. To defend bank-notes, as has been done by Mill,* following Tooke and Fullarton, on the ground that without them, credit, and particularly bank deposits, would stUl be used by speculators as a means of en- hancing prices, is to take an imperfect view of the subject. The assertion that credit and its transfer- able instruments can be abused, does not disprove the other assertion, that the abuse can be carried further when they are based on bank-notes than when they are based on coin. Ifor does denying to the banks " any power of increasing their circulation, except as a consequence of, and in proportion to, an increase of the business to be done," settle the ques- tion. For the increase of business may be purely speculative, and the demand for accommodation may proceed from visionary; o.perators who need restraint instead of encouragemeat. To assert that banks never make excessive issues of their notes, is to assert that bankers are always prudent. The proper conclu- sion for those writers to have made would have been that, if bank-notes need regulating by law, so also do bank deposits. But it is in the panic which follows over-specula- tion that the bad effects of excessive issues of bank- notes become clearly visible. A speculative enhance- ment of prices almost always ends in a financial revul- * Mill, " Principles,'" etc., Book III., chap, sii,, sec. 6 ; and Id. chap, xxiii., sec. 4. SPECULATION AND PANICS. 97 sion. In no country are these disasters so common or so destructive as in England and tlie United States. The credit system adds immensely to the capital that can be employed in production, and is one great source of the material prosperity of the Anglo-Saxon people. But it has also its dangers. It sometimes collapses, wrecliing fortunes, causing widespread mis- ery, bringing to a stand-still many productive enter- prises, and blighting the whole business community. If its disadvantages could be removed, without at the same time diminishing its benefits, credit would be- come worthy of the praises of its advocates. This can be done, in part at least, by resting it on a broader foundation of gold. Paper money is the principal source from which flow the evils of the credit system. While there is doubt as to the influence exercised by bank-notes in creating speculation, there is none as to their efiect in aggravating panics. In them is found the most ac- tive agent in causing that total collapse of credit which is called a financial revulsion. Under a system of mixed currency, credit is an inverted pyramid rest- ing on a narrow point of specie. Bank-notes are based on a percentage of coin, deposits on a percent- age of bank-notes, while bills of exchange, promissory notes, and book credits, are paid principally by checks against deposits. In Great Britain, according to high authority * the pyramid of transferable credit is composed " of gold, three per cent. ; of bank-notes, eight per cent. ; of checks, thirty-six per cent. ; of bills of exchange, fifty-three per cent." In America, * Robert Slater. 98 PAPER MONEY. its composition is not materially different, promis- sory notes being included in ike class of bills of ex- change. . When a part of the coin is withdrawn from a country whose exchanges are effected iinder such a system, the foundation of the edifice of credit is weak- ened. If the withdrawal goes too far, the whole fab- ric falls, and the whole machinery for making ex- changes ceases to work. Suppose a foreign demand for gold causes its continued export ; the amount of specie held by the banks is thereby diminished. This compels them to withdraw from circulation a part of their circulating notes ; this, again, causes a contrac- tion of loans and deposits. There is less currency left then to meet the bills and promissory notes of individuals, and to pay for goods bought on simple credits. Each form of credit is necessarily contracted, but the more specie the currency contains at the out- set, the less will be the extent of the contraction. Take, for example, ' a case that has not unfre- quently ooourred in this country. A bank, having thirty thousand dollars in gold, uses that sum as a margin on which to base one hundred thousand dol- •lars of circulating notes. The one hundred thousand dollars of notes are used as a margin for three hun- dred thousand dollars of deposits. To meet its total liabilities, payable on demand in coin, it would have then only thirty thousand dollars in coin; that is, seven and one-half per cent. If from any cause a demand for specie is made upon such a bank, it is compelled forthwith to contract all its liabilities. This demand, when made, will be by means of the circulating notes, which will be presented for redemp- SPECULATION AND PANICS. 99 tion. The specie in its vaults ■will forthwith begin to diminish, and in place of that withdrawn will remain its own notes. These can no longer be used as a margin for deposits, unless the bank suspends specie payments altogether. In the struggle to avert that catastrophe, with its accompanying penalties of bank- ruptcy and loss of chartered rights, the loans by way of deposit will be greatly curtailed. The depositors, engaged, perhaps, in a similar struggle to maintain their own credit, or losing confidence in the bank, will then demand payment of the obligations to them ; and as the seven and one-half per cent, of specie will be speedily exhausted, a suspension of specie pay- ments will be necessary, no matter how great the assets of the bank over its liabilities may be. If, instead of thirty thousand dollars in specie, it had held one hundred thousand dollars, though the loss of ten thousand dollars of the specie would have necessitated a curtailment of the demand liabilities, yet the contraction plainly would have been much smaller, and might have caused but little incon- venience. That which happens to one bank may happen to all. When the total percentage of specie to their demand liabilities, held by all the banks together, has sunk to a small fraction, a foreign de- mand for specie, causing the withdrawal for exporta- tion of a portion of that in the bank vaults, compels an immediate contraction of the demand liabilities of all of them. A number of the bank^ may have kept the necessary reserve, but this fa<3t will hot save them. Even those which are strongest have only gold enough to meet a quarter or a third of their notes and deposits. Ordinarily it is the weak banks 100 PAPER MONET. which are in the power of the strong ones ; but as soon as the former have suspended specie payments, and still continue their business, this condition is reversed. Whenever any checks or drafts on the banks which have not suspended come into the possession of those which have, the latter immediately present them for payment in order to strengthen their own position. In a panic, therefore, the banks all go together, just as much as when banking was monopolized by a single corporation with numerous branches. Thus, one bank in the city of New York may boast that it has never suspended payment of its circulating notes. By retaining enough specie to meet the notes dollar for dollar, this was not difficult to do. The same bank, however, has been compelled to suspend pay- ment of its deposits in specie whenever its fellow- banks could no longer resist the pressure. When, therefore, a financial crisis compels a general contrac- tion, the extent of it will be increased if the gross amount of specie to their demand liabilities, held by all the banks of the country together, has been re- duced to a small percentage. At the same time, after a reaction in prices has begun, the desire of each per- son to realize the funds necessary to meet his engage- ments, and the shock communicated to the nerves of the public, cause the contraction to be carried much furthet than in the ratio of the gold to these demand liabilities. A cpmplefe collapse of the whole fabric lof'orfedit then ensues. ", Distrust succeeds confidence, and sta^nkfidn follows^ Capital diminishes its aid to productive enterpriseB() and is hoarded on call-loans at nomina^ interest, but on unquestionable security. This state of afiairs^may continue for months or years SPECULATION AND PANICS. loi before confidence is fully restored, and capital again seeks employment in speculative enterprises. No-w, a speculative enhancement of prices in any country necessarily causes an unusual exportation of specie. If the enhancement is in the price of bread- stuffs, for instance, the people who have been in the habit of drawing their supplies from that country seek a cheaper market. If the enhancement is in the prices of foreign products, they are immediately im- ported to realize the rise, and gold is sent back to pay for them. In accordance with the law of the circula- tion of the precious metals, gold flows from a country where prices ai-e high, to the countries where prices are low. Every general speculation, therefore, causes a foreign demand for specie, and, when a mixed cur- rency is used, has, as its logical termination, a com- mercial crisis and a suspension of specie payments. It is the struggle of the banks to avoid suspending payment of their circulating notes that causes a large portion of the suffering which ensues. Stringent pen- alties for such a suspension are usually provided by law. The banks, to save themselves harmless, sac- rifice their customers, and the latter, in desperation, withdraw their deposits, demanding gold therefor, and driving the banks into the pit so much dreaded. The suspension of specie payments is generally looked upon as a calamity to be averted at any expense. Such, however, it is not. The evil lies in the expan- sion of the demand liabilities of the banks which pre- cedes. The suspension is an effort of nature to throw off the disease. It diminishes the export of specie from the country. Foreign goods, after it happens, are sold for suspended paper at lower, prices than 103 PAPER MONEY. when bank-notes were convertible, and, if gold is remitted in payment, it must be bought at a pre- mium. The profit on foreign importations, therefore, is diminished both by the fall in prices of commodi- ties and the rise in the price of gold. Importations accordingly fall off untU commerce is restored to its natural condition. The immediate cause of the great financial revul- - sions with which this country has been smitten, has been the loss of gold by the banks. It is possible to suppose, however, that a panic might happen before a dollar in specie had been withdrawn from their vaults. When speculation has caused a general rise in prices, a point will finally be reached where the number of persons selling to realize profits will exceed those buying for a further rise. As soon as the sellers are more numerous than the buyers, prices begin to fall ; confidence is broken ; the panic becomes contagious ; a rush to realize takes place ; and, as the specie on which the whole edifice of credit has been built is the only money perfectly free from doubt, every one will desire to possess it, and will make any sacrifice to obtain it. The cause of the panic will be the general desire to realize on a falling market, and might occur if there were no paper money in use. Under a mixed currency, however, the banks commence with the fall in prices to contract their liabilities in order to strengthen their own position, and this contraction operates to increase the panic. The effort to obtain gold is not the only thing that aggravates the disas- ter ; for in every general speculation large amounts of capital are destroyed, or, being tied up in an incon- vertible form, are wholly withdrawn from the loan market. SPECULATION AND PANICS. 103 The extent of the contraction, however, which the banks will be compelled to make, will depend mainly in this case, as in that of the exportation of specie, upon the percentage of reserve they hold to their demand liabilities ; that is to say, upon the extent to which the expansion has been pushed. But, while a mixed currency has a decided effect in increasing speculation and aggravating panics, it may have a similar though less apparent disturbing effect on prices when the markets are in an ordinary state of quiet, and speculation is confined within nar- row limits. As the notes of the banks constitute the currency which is the medium of exchange for the greater part of the commodities of the country, if this currency varies in amount without a similar variation in the amount of exchanges to be effected, an element of doubt and uncertainty is introduced into all busi- ness transactions. Such a variation in the circulating medium would affect the prices at which commodities would be exchanged, and another cause would be added to those which nature prescribes, necessary to be taken into accovint in conjecturing the probable price of commodities at any future time. If the amount of bank-notes is diminished while the business to be done remains the same, prices will fall. The same amount of business cannot be effected immedi- ately with a less amount of money, except by exchang- ing commodities at a lower range of prices. But we have seen that even metallic money is not per- fectly free from variation. The exchange-value of the precious metals is subject to slight temporary varia- tions, caused by a diminution of the supply. Now a mixed currency intensifies any such variation in the 104 PAPER MONEY. Talue of the precious metals. The withdrawal of gold causes a contraction of the circulating notes, and this again causes a contraction of the deposits ; the varia- tion in the value of gold is multiplied ; and this may take place at any time, independent of speculation or the state of the markets. The outbreak of war, a political disturbance, or a financial revulsion in a neighboring country, may cause a demand on us for gold to ship thither, and we may suffer from overtrad- ing in which we have had no part. These vibrations of a mixed currency depend on the percentage of specie it includes. The longer the pendulum, the greater the arc through which it swings. The more credit the currency contains, the greater its contractions and expansions. Where none but metal- lic money is current, the contraction is not double ; though credit may be contracted, the amount of money stiU remains the same. In that case, also, the gold for exportation is drawn in part from private hoards, and not from the coffers of the banks ; or, if it comes from the banks, the consequent rise in the rates of interest draws in a fresh supply from the hands of the people, and thus diminishes the stringency. The more metallic money there is in circulation, the greater is the reserve to meet a foreign demand, and the broader the foun- dation of credit. In that case a tiollapse of credit would not destroy a part of the circulating medium, and there would stUl remain enough money to transact the business of the country without waiting to attract back the value-money, which, superseded by paper, had been driven to foreign lands, or without resting in a state of stagnation, until the renewal of confidence had restored credit-money to its usual proportions. SPECULATION AND PANICS. 105 The subject of the relations of bank-notes to credit and its transferable instruments, and the several rela- tions of each to prices, has been much obscured by the discussions of the English economists. On one side are the advocates of the "currency principle," who attribute every change of prices to an increase or diminution of bank-notes ; and who infer that, by a law regulating their issue, speculation can be held in check, and panics can be prevented. On the other hand, their opponents, in contending against the inter- ference of the law, have taught that there is no differ- ence between bank-notes and the other forms of credit, and have concluded that banks are unable ever to make over-issues of convertible notes. Yet the truth remains, that bankers are gifted with no more foresight and prudence than the rest of humanity. They sometimes become infected with the sanguine hopes of their speculative customers, and end by finding their liabili- ties dangerously expanded. Credit economizes capital, just as steam saves labor. But as a boiler which can safely run with a pressure of seventy-five pounds becomes dangerous when the pressm-e is trebled, so a bank, which is strong with a specie reserve of thirty per cent., is weak when only ten per cent, is left. The conclusion, however, that the reserve should be regulated by law is wide of the mark. Men cannot be made prudent by law any more than they can be made honest by law. All that the law ought to do, is, to punish wrong-doers — ^those who are dishonest, and steal, by imprisonment — bankers who are impru- dent, and suspend, by bankruptcy. CHAPTER VI, THE EFFECT OF A MIXED CUEEENCT OK THE DISTEI- BTITION OF WEAiTH. The produce of human labor and saving is divided primarily into three shares, and under the name of wages, rent, and profits, is distributed among the la- borers, landlords, and capitalists, -who are entitled to it. This distribution is made by a process of ex- change. The wages of the laborer, the rent of the land-owner, and the profits and interest of the capital- ist, are measured out to each by the same means by which the exchange of commodities is effected. Money is used as the medium, and as the common measure of values, in making the division. The distribution of wealth, therefore, cannot be just, unless the measure by which it is made be true. If the yardstick varied from thirty inches in one week to forty inches the next, while prices remained the same, injustice would enter into every transaction in which it was used. If every dealer kept by him two yardsticks, one forty inches long to measure off the purchases of the rich, and ainother but thirty inches long to measure off those of the poor, not only would cruel wrong be done, but the face of society would be changed. It is the strongest objection to paper money that it fre- EFFECT OF A MIXED CURRENCY. 107 quently acts witli precisely this inequality. It Le- comes an instrument by which, in the distribution of ■wealth, the capitalist obtains a greater proportionate share than the laborer. It is one of the causes owing td which those who work for wages own in the end the smallest portion of the products of labor. As society is at present constituted, the reward of the laborer is not a proportionate share of the profits of the enterprise in which he assists, but consists of the market value of his services paid to him in money by the capitalist who employs him. The market value of these services, or the rate of wages, depends mainly on the ratio between the demand and the supply of labor. That portion of the capital of a country which is laid out, or intended to be laid out, in hiring labor- ers, is sometimes called the wages fund. ■ It is on this fund that the demand for labor depends. The supply, on the other hand, consists of that portion of the pop- ulation who offer their services for, hire, in which class are included, as well those who work for wages, as those whose compensation is called a salary. It is the com- petition of the laborers among one another to meet the demand, which is said to regulate the rates of wages. But the wages fund is not a fixed quantity. It can be increased by adding to it a portion of the profits of the capitalist, if the latter can be induced to make the transfer. The laborers, feeling this fact, without understanding it, have begun in latter times to substitute combination for competition, and by strikes, labor unions, or simple moral pressure, to in- duce the capitalist to subtract from his profits to add to the wages fund. The first peculiarity of a mixed currency, to be 108 PAPER MONEY. noticed in tracing its effect on the distribution of wealth, is the fact that, while certain classes gain im- mensely by the issue of circulating notes, the one which works for wages does not share in the gain. No part of the profit derived from issuing them is allotted directly to the laborer. It is by the common consent of all the members of society that paper is permitted to have the force of money. The laborer, as well as the capitalist, receives bank-notes as the equivalent of gold, and consents to their use as money. It is not just, therefore, that the former class should monopolize all the profit derived from this substitu- tion of credit for value, and as there is no practicable means, except the imperfect one of taxation, by which all the members of society can share in the gain, this inequality is a valid objection against bank-notes. But a mixed currency is made to injure the labor- ing class more directly by its use in fostering specula- tion. It was shown in the preceding chapter that whatever opinion is held, as to whether the issue of bank-notes is ever the proximate cause of a specula- tive euhancement of prices, it must be admitted that they are often made the instrument of enhancing prices beyond what would be possible if specie only were used, and that they always intensify the ruin of a panic. Now, those who suffer most from a specula- tive rise in prices, and the subsequent depression in business, are those who work for wages. A specula- tive demand for some one or several of the leading articles of commerce, may carry prices to a point un- reasonably high, and if, as is usually the case, the commodity which is the subject of speculation is a necessary article of consumption, the cost of living EFFECT OP A MIXED CUKEENCY. 109 may be greatly enhanced. The rates of wages, how- ever, may remain wholly stationary, while their pur- chasing power is thus diminished. For the number of laborers still continues the same, and there is no in- crease of the demand for labor. It is true, wages may advance somewhat, for the laborer must have what are termed necessary wages. He must be enabled to obtain the things absolutely necessary for his own support, and for the maintenance of his family, in the manner customary in his rank in life. If flour or pro- visions are enhanced in price for a considerable length of time, wages will be likely to advance enough to en- able the laborer to maintain his family after his cus- tomary manner. But this advance in wages will not be immediate, and, if the speculation is not long pro- tracted, none may take place ; nor when it does come are wages likely to rise in the same proportion as other things. For " no one speculates in wages." * There is no way of buying them for a rise. They are forced up by the demands of the laborers, who, spurred on by the pressure of necessity, are' impelled to act in combination, while the advance is resisted by the cap- italist as far as possible ; for it must be paid out of his profits. Hence, it is sometimes maintained that some necessary article of consumption is a more just instru- ment for the payment of wages than money. The ex- periment of paying them on the basis of a barrel of flour for a week's work of a common laborer has been tried, and, it is stated, has been found satisfactory. Certainly the money wages are a most deceptive measure of the real wages, or the share of the prod- * A. Walker, "Science ofWealth." 110 tAPER MONEY. nets of lalbor which the laborer receives for his ser- vices. But the laboring class suffers, also, from the depression vehich always results from a financial revulsion. At such a time the wages fund is dimin- ished. Capitalists hesitate to engage in new enter- prises. Confidence is impaired, and capital is hoarded. It can no longer be borrowed on the usual terms, and the amount of it available for the purchase of labor is thereforediminished, while the number of the. laborers remains constant, A portion of them, accordingly, are left idle, and, as they must live, a sharp competi- tion for employment begins, against which combina- tions are powerless. The rates of wages are then lowered, perhaps even more than the prices of com- modities have fallen. Hence, in times of speculation, wages go up the last and the least of any thing, and fall the soonest and the lowest. But it is when a mixed currency is composed in part of small bills, issued as largely as the circulation of the country can absorb, that the result to the class living on wages is the most unequal and unjust. This injustice arises from the effect of small bills in enhanc- ing retail prices. The extent of the enhancement will appear from an examination of the nature and charac- teristics of retail trade, a subject to which attention has already been directed. The causes that determine prices at wholesale and prices at retail are very different. In wholesale trans- actions, commodities are bought in open market, by those whose business it is to know the lowest price at which they can be had, and are sold by those studious to obtain the highest price current. Competition is EFFECT OF A MIXED CUKRENCT. m the ruling influence, and the laws which determine the point ahoye which the buyers do not rise, and below which the sellers do not go, can be ascertained. The permanent price of any article in open market is de- termined by the cost of production, and the tempo- rary fluctuations depend upon variations in the supply and demand for consumption. It is of prices which can be referred to fixed laws that political economy treats, and to analyze and investigate those laws in one of its most important functions. But prices at retail are little treated of in that science. They are not de- termined by any established rules. The motives by which retail buyers are influenced are quite different from those which determine wholesale purchasers. The former do not always seek the lowest prices. They buy perhaps for the sake of display, often from a pass- ing whim, and seldom after a careful study of the market ; while the poor, or those who buy on credit, are often coerced into paying extortionate rates. Re- tail prices, accordingly, do not follow with regularity the variations of the general markets. It is true, that a continued change in the wholesale rates will finally affect the prices in the shops. But the effect is nei- ther immediate nor uniform. A decline at wholesale is stubbornly resisted by the retail dealers, and those who yield do so irregularly, according to the times of replenishing their stocks. On the other hand, a rise in the wholesale markets becomes a ready pretext for marking up all goods on hand. Competition has but little power among retail dealers. It removes striking disparities in the same neighborhood, but it does not prevent two prices for the same article at the same time. There are other 112 PAPER MONEY. influences more powerful in determining retail prices. Of these, combination is one of the most iinportant. Instead of competing with one another, the dealers of any town are quite likely to confederate together, either tacitly or expressly, to keep up prices to what they call living rates. Only goods enough to satisfy the wants of the community can be sold in any event. The profits, therefore, can be more readily increased by raising prices than by enlarging sales. If the number of dealers is augmented, the number to share the profits becomes greater, and, instead of lowering prices, this may become a reason for putting them up. Hence it follows that the accession of a new dealer to those of any town seldom has any permanent effect in bringing down prices. His expenses are as great as those of his neighbors, and he is under the same neces- sity as «they of realizing the usual profit. He may begin by underselling the rest in order to draw off their customers, but he soon finds that he can gain more by joining the confederation than by opposing it. The manner in which the retail dealers of a town can organize to keep up prices and prevent competition is shown by the following notice, which lately appeared in a Western newspaper : " OEGANizBirG. — The dry-goods merchants of this city held a meeting yesterday morning, at the Cham- ber of Commerce rooms, for the purpose of perfecting an organization, having for its object the establish- ment of a uniform scale of prices for dry goods, below which none are to sell. In the evening, another meet- ing was held,- at which a constitution was under con- sideration." Custom is another potent regulator of prices in EFFECT OF A MIXED CUKKENCT. 113 retail trade. When the price of an article has hecome established in any community, people continue to pay it merely from hahit. The sellers have become accus- tomed to exacting, and the buyers to paying it, and they continue to do so, without much regard to the percentage of profit realized by the former, or to the variations in distant markets. If one dealer breaks through the custom, and endeavors to establish lovrer prices, he makes himself obnoxious to the rest, and "is perhaps coerced into harmony with his fellow-trades- men, either directly or by a sort of moral pressure. Another powerful cause in increasing retail prices, is the practice of selling on credit. When that practice exists, it becomes necessary to dealers to make profits enough to cover losses by bad debts, and the honest are thus made to pay for the purchases of the dis- honest. For these reasons, it happens that prices of the same articles are often quite different in neighboring towns, without any apparent cause. Different classes of people also become accustomed to different prices, and in the same town are found shops in one street where certain articles are sold at one price to a certain set of customers, and shops in another street where precisely the same articles are sold at quite different prices to another set of customers. It frequently hap- pens, also, that in the same shop sales of any article are made at different prices, according to the persons who make the purchases. In this respect the custom that prevails in England and the United States is very dif- ferent from that of the countries of continental En- rope. In the latter each dealer attempts to adjust his price to his customer. He always has several prices 114 PAPEE MONEY. for any article, and does not begin by asking that at •wMcli he expects to sell, nor does the buyer expect to pay the price first announced. A process of beating down commences, and the price finally paid depends very much on the sharpness or knowledge of the buyer. A native learns the lowest rates of the dealers in his own town, and is seldom imposed upon at home. The dealer however expects to obtain a. higher price from one who can afford to pay it, and will not abate BO much for the rich as for the poor. Prices are ad- justed somewhat to the purses of the buyers. Take for example a town in South Germany. _ There lower prices are demanded of a resident than of a stranger. A North German pays more than a South German ; an Englishman than a Frenchman ; and an American obtains less for his money than either. It is mean, ac- cording to his notion, to beat down the price ; while the European, accustomed to the practice, expects it. It is noticeable that the French word "marchander" does not carry with it the opprobrium of our higgle, or jew down the price. Our shops, for the most part, are on the plan of " prix fixes," and if lower prices are desired they must be sought in some other shop or in some less fashionable quarter. The continental sys- tem admits of competition between dealers, which ours does not. It is worthy of notice in this connection, that in England the principle of cooperation has been ap- plied for the most part to co5perative stores ; while in France, and the adjoining countries, cooperation is practiced more frequently in the form of associated labor, and in the still more desirable form of a direct admission of the workman by the capitalists to a par- EFFECT OF A MIXED eUERENCY. 115 ticipation in the' profits of the enterprise. This differ- ence in the application of cooperation seems to result directly from the difference in the manner of conduct- ing retail business. A partial remedy for the evil of our system has arisen in some of the large cities, where a tendency to assimilate retail business to wholesale has developed itself. Certain large houses possessed of sufficient capital have drawn to themselves the retail trade, by underselling the dealers of smaller means, relying for profit on the magnitude of their sales rather than on high prices. But, in considering the remedies for the evil, the effect of the currency should not be overlooked. It ' necessarily follows from the peculiarities of retail trade, that, bank-bills of the smaller denominations have a direct influence in enhancing retail prices. As has already been mentioned, such bills, circulating rapidly from hand to hand, are not often presented for redemption, and by issuing them the banks are enabled to make their circulation excessive. The community, therefore, has more money to expend, and is prepared to submit to higher prices. In the case supposed by MUl, that if, to every pound, shilling, or penny, in the possession of any one, another pound, shilling, or penny, were suddenly added, there would be an increased demand, and consequently higher prices for things of all sorts, it is evident that the in- creased prices would be at retail ; for the demand would come from those buying for immediate con- sumption. Small bills have precisely the effect of such an increase of money. They cause more money to circulate in the channels of retail ti-ade, and the re- 116 PAPER MONEY. tail dealers adjust their prices to the amount of money in the hands of the people for expenditure. When money is abundant, they eypect and obtain a higher rate of profit than when it is scarce. When coin only is used, the amount in circulation cannot be artificially increased ; but, when notes of the smaller denomina- tions are crowded into circulation, a pretext and an opportunity are necessarily given to the retailers for obtaining extortionate rates. An increase of small bills would not affect prices at wholesale to the same extent. The cost of production would still remain the controlling influence, leaving the surplus currency to be absorbed by a higher scale of prices at retail. The fluctuations in prices likewise, which result from the use of a currency weak in gold, render it necessary for tradesmen to have a larger margin ^f proflt, in order to protect themselves against a fall in the whole- sale markets. When the custom of high rates of profit for retailers has thus become established, com- petition has but little power in destroying its effect. From this custom the community suffers, though the individual dealers are not all enriched. Whether the general percentage of profit is twenty-five per cent., or two hundred per cent., the total yearly profit of any retailer will depend on the amount of his sales, and, if a. business is overdone, the share of profits, even at the highest rate, falling to each of those en- gaged in it may be small. But, as the public must buy all articles of consumption at these advanced rates, the expenses of living are largely increased, and this increase is felt most by those of small means. One who is living within his means has a surplus capi- tal with which to buy his supplies. He can lay in "a EFFECT OF A MIXED CURRENCY. ]17 stock at wholesale prices in anticipation of Hs wants, while one who is living from hand to mouth must buy in small quantities at the highest retail rates. Often the prices of the necessaries of life, paid at the corner grocery in a side-street, are higher than those paid in the miost extravagant establishment of a fash- ionable quarter, and always higher in proportion to the means of the purchasers. The effect of the high rates of living proceeding from this cause, is precisely like that proceeding from taxation in proportion to consumption, sometimes called indirect taxation. The amount consumed by any family does not necessarily depend on its wealth. Whether a man's fortune is ten thousand dollars, or one hundred thousand dollars, the appetites of those for whom he must provide re- main the same. The price of flour, or of any other article of necessary consumption, therefore, is of much greater importance to the poor man than to the rich man. The latter, when prices have risen, finds a little less surplus added to his wealth at the end of the year. The former finds that he has saved nothing from his scanty earnings, or that the frugal savings of former years have vanished. It follows, that the higher range of retail prices, that results from the issue of small bills, affects most disastrously those who have no other means of support than their daily labor. Wages are not increased by small bills. The rate of wages depends on the demand, for labor, and the sup- ply of laborers ; and, as both of these quantities are unaffected, the result of the increase of retail prices is to compel those who work for wages to be content with a lower standard of living. It may be said that the laboring class has been better off in this country, 118 PAPER KONEY. whicli has always been flooded with, papei" money, than in those European countries where specie has been used. The statement is true. But would not the laboring class have been even better off here, if paper had never circulated as money ? When popu- lation has not yet begun to press on the means of sub- sistence, and- material wealth is increasing at a rapid rate, wages are higher, pay them in what currency you will, than in those overpeopled countries where the struggle for existence makes wages low. But with the occupation of all the new land east 6f the Mississippi, this country is entering upon another stage of growth. The time is approaching when the question, With what money wages shall be paid ? will become worth considering. The agriculturist, likewise, derives but little bene- fit from bank-notes, while he frequently suffers great injustice from their use. The demand for the products of agriculture, which are consumed as food, varies but little, the population remaining the same. The first thing that every man must have is the food nec- essary to sustain life, and when his appetite is satisfied he wants no more. The principal cause, therefore, upon which the variations in the prices of those prod- ucts depend, is a change in the supply. The market rates for such articles are affected immediately by a good or a bad harvest. The causes which determine the prices of the things the agriculturist sells are very different, therefore, from the causes on which depend the prices of the things he buys ; while the latter prices depend greatly on the amount of bank-notes in circulation, the former may not be much affected thereby. Agricultural products, it is true, are a fre- EFFECT OF A MIXED CURRENCY. 119 quent subject of speculation, and bank-notes are the most potent instrument of speculators ; but, of the profit derived from a speculative enhancement of prices, a small part only falls to the share of the pro- ducer. The rise is very apt to come after he has dis- posed of his crop, and in any event he must sell, not simply at the lowest wholesale price then current, but at a price even lower ; while in a country like the United States, where a surplus of agricultural prod- ucts is produced, the price of the whole crop depends on the price which can be realized for the surplus. When, as is usually the case, we are exporting bread- stuffs, it is the Liverpool market which governs our own. But specie is the only money current between nations. The sales of the products of our agriculture, therefore, are made on a gold basis, though our farm- ers may never handle any money but paper. But while they sell- on the basis of specie, and at whole- sale, they buy for paper, and at retail. The efiect of small bills on retail prices is quite as great in the country as in the cities. Competition has no power as a regulator of prices in the village and cross-roads stores. When the custom of high profits for retailers is established, it becomes prevalent throughout the land. Even when no money is used, but the farmers barter their products for merchandise, they are cred- ited in account with the lowest wholesale prices, and are charged the highest retail rates. The efiect, then, of a mixed currency on agricul- ture is, that while the producers are sometimes bene- fited by a speculative rise in prices, they are constantly compelled to pay for their implements, groceries, clothing, and articles of. luxury, the highest retail 120 PAPER MONEY. prices that result from the issue of bank-notes, and that they lose more than they gain by the operation^ The agricultural class in this country has been uniformly prosperous, notwithstanding paper money. But when taxes are low, and land is cheap and easily acquired, no defect in the currency can prevent that class from prospering. At the same time this pros- perity does not excuse the injustice inflicted by the currency, nor is it safe to believe that the future will necessarily resemble the past. The share of wealth which is distributed to the capitalist in the form of interest is increased by the used of a mixed currency. This results, in part, from the aid it gives to speculation. A period of specula- tion is usually preceded by an accumulation of capital, caused either by a natural increase of wealth, or con- sequent upon a state of depression and hoarding. At such times rates of interest are low. But when a speculation, fostered by bank expansion, is fairly un- der way, those who take part in it are willing to pay more for the use of money than when the markets are in a quiescent state. Prices are advancing, and the amount paid in interest seems small, even at the high- est rate, compared with the expected profit. In the speculation, for instance, which culminated in the United States in 1857, there was a general advance in the rates of interest. But the advance was particu- larly observable at the West, where the common rates were two, three, and five per cent, per month. All real property was rising rapidly. The Eastern banks were sending on their notes to give them " a gqod cir- culation." Capital was attracted by the prospect of great gains ; and as long as the fever lasted, and buy- EFFECT OF A MIXED CUEKENCT. 121 ers could be found, no rate of interest seemed too high. But it is usually at a later stage in a speculation that interest advances to the highest point. In the endeavor to avert a decline, the demand for capital increases, and an additional rate is paid for its use. When, however, the struggle to maintain prices has failed, and panic rages, the necessities of those who have obligations falling due compel them to pay the most extreme rates for the use of capital. The usury laws in this country have generally prevented the banks from making loans above the legal rate. But the " street rates," which have ruled at such times in New York, have been as high as three per cent, per month, and in other parts of the country even higher. It is not, however, solely by the demand for mon- eyed capital that the rate of interest is governed. The nature of the security, or the risk of the return of the principal, is an element of the calculation. But it is the tendency of a mixed currency to increase the uncertainties of business. To the natural causes likely to affect prices must be added bank contraction and expansion. Under such a system the solvency of mercantile houses is more apt to be doubted, and those whose solvency is in doubt must pay, in addi- tion to the current rate of interest, a premium suffi- cient to cover the supposed risk. The quantity of commercial paper that is rated as second-class is in- creased, and it often happens that, when rates^ of interest are nominally low, they are in reality exceed- ingly high to those who are in the greatest need. If specie only had been current in this country, the rates of interest would certainly have been more regular, 1 122 PAPER MONEY. and probably, on the average, lower than under the system of bank money. The effect of a mixed currency in increasing the share of wealth which is distributed to the capitalist in the fox-m of profits, remains for consideration. All the profit which is derived directly from the displacement of value money, by the various instru- ments of credit used as currency, goes to the capital- ist. By their use his profits are increased enormously. But, by the substitution of credit for money, the standard of customary profit is raised in a manner which, without beinefiting the capitalists as a class, greatly injures the rest of the community. Capital invested in any productive enterprise is exposed to risk. The danger is covered, however, by the expec- tation of profit. The greater the risk, the greater the profit that ought fairly to be obtained. "When, to the ordinary risks, that arising from the uncertainties of the currency is added, the margin for profit must be raised. The manufacturer and the merchant must add to the prices of their commodities an insurance against this risk. If they only add enough to fairly , insure against it they gain nothing on the average ; while the consumers, who pay the insurance in the in- creased prices of what they purchase, are the sufferers. The rates of profit on capital in this country have always been higher than in older countries. Of this feet the uncertainty of the currency has been one of the secondary causes. The insecurity resulting from the nature of the cur- rency has also a more direct effect on the distribution of wealth. Frequent fluctuations in prices render a greater amount of capital necessary for the safe trans- EFFECT OF A MIXED CUKKENCY. 123 action of business, and give the strong a great advan- tage over the weak. A fall in prices, that would ruin a house of small means, would not only fail to seriously impair the capital of another of great wealth, but the latter, being enabled to purchase largely at low prices, would be enriched by the event which destroyed its neighbor. Credit, in some form, is an element of al- most every business transaction. But when a decline commences, or confidence is weakened, the credit of a firm of slender capital fails at precisely -the time when it is needed, while the credit of one possessed of accumulated capital may continue readily available. Hence the process constantly going on, of the weak disappearing and the strong becoming stronger. Hence the tendency of capital to become aggregated in the hands of a few. So far as this concentration of capital results from the excess of credit in ihe currency it is unjust. If a merchant buys goods on time, and before his note be- comes due a bank contraction depresses prices so low that he cannot realize enough to pay his note, he has suffered imjustly. His property has been transferred to another without his consent or fault. These invol- untary transfers of property are constantly occurring under a mixed currency. An unnecessary element of hazard enters into all business transactions. This incites, also, to speculation and gambling. The greater the fluctuations in prices, the greater the opportunity of those who are watching the markets in ordOT to buy at a low price and sell at a high one. Speculation is not as unmitigated an evil as is some- times supposed. The speculator has a necessary place in the economy of society. If he deals in merchan- 124 PAPER MONEY. dise, he collects a supply of any article in anticipation of a dearth, and, by meeting the ensuing demand, diminishes the enhancement of prices. On the other hand, by buying after a decline he brings the decline to an end. It is his office to equalize prices, and pre- vent the extremes which without him. would exist. Speculation, therefore, when based on variations in the supply and demand of commodities, is a neces- sity and a benefit. But, when stimulated by defects in the machinery for efiecting exchanges, it becomes an evil. It is a means of diminishing production, and causing an imequal distribution of wealth. It causes capital to concentrate in fewer hands. The loss of that sunk in foolish undertakings is the least calamity attending a speculative outburst. It is the transfer of property from those of small means to those of greater wealth, which is the most deplorable circum- stance occurring at such times. It is then that those possessed at once of capital and sagacity can hardly fail to swell their fortunes. The fluctuations which are the ruin of the weak holders, are the opportunity of the strong. Credit, then, more than ever, strength- ens those who are least in need of its aid.- So far as paper money increases speculation, and causes it to extend beyond its legitimate sphere, it has a direct tendency to cause the concentration of property among a few owners. The effect of a mixed currency, then, on the distri- bution of wealth is, in brief, as follows : It lessens the share of the laborer by diminishing the purchasing power of wages ; it injures the agriculturist by caus- ing him. to receive a smaller quantity of the commod- ities he needs for consumption, in exchange for what he EPTECT OF A MIXED CURRENCY. 125 produces ; it increases the rates of interest and profits received by the capitalist, and has, at the same time, a strong tendency to aggregate capital in the hands of a few, while it is the capitalist who receives the direct gain from the substitution of his own credit for money. The same is true of the whole credit system. It is the capitalist who gains all the direct benefit from the use of the economizing expedients of credit in the place of value-money. To these causes, in part, may be attributed those striking inequalities in the distribu- tion of wealth which have accompanied the great material progress of the age. Credit is to the capital- ist what primogeniture is to the land-owner. In a country whose government purports to be founded on equality, the concentration of property in the hands of capitalists, which results from an excessive substi- tution of credit for money, ought to become as odious as the aggregation of landed estates in a few families by means of unjust laws of inheritance. If a just distribution of wealth is sought, the first thing to be done is to limit the element of credit in the currency. There is another efiect of the bank currency of the United States, relating more properly to the produc- tion than to the distribution of wealth, which deserves notice. It has frequently had a tendency to give the foreign manufacturer an advantage over the home manufacturer in our own markets, and to destroy the protective efiect of our tariffs. The importers of foreign merchandise have been enabled to sell their goods at paper prices, and remit the proceeds in gold without paying any premium for the latter. High 126 PAPER MONET. prices ift paper are as profitable for the importer as any other, when the paper is convertible into specie on demand. The expenses of production, also, as measured in money, have been increased by the currency. When the purchasing power of money declines, the nominal or money cost of manufacturing increases. Wages rise enough to support the laborer in his customary mode, for he must obtain at least necessary wages, while all other expenses increase as money sinks in purchasing power. The enhancement is, in fact, only nominal. The cost, measured by the number of days' labor it takes to produce a given article, may remain the same. But as the money still retains its converti- bility, the increased price of the manufactured article, which results from the decrease in the purchasing power of money, inures to the benefit of the foreign manufacturer. He converts the paper he receives for his goods into gold, and transports the latter to a country where it retains its natural purchasing power; and, accordingly, he can afford to undersell our man- ufacturers, who have conducted all their operations on the basis of paper prices. A fluctuating currency also renders necessary a . higher standard of profits as well in manufactures as in commerce. But of the manufacturers competing in the same market, the one can sell the cheapest who is contented with the lowest profit, supposing the cost of production to be the same. Foreign competition has often kept capital from investment in manufactur- ing enterprises in this country, not because our manu- facturers could not manufacture as cheaply as their competitors, but because capital avoids those enter- EFFECT OF A MIXED CUEEENCY. 127 prises in which it cannot realize the customary profit. So far, therefore, as the insecurity of the currency has increased the standard of profit demanded by capital in. this country, the currency has operated to retard the development of manufactures. The statistics of our trade show that the imports have not diminished with an increase of the tarifi"; while they have, with persistent regularity, followed every increase in the amount of the circulating me- dium.* When our manufacturers properly appreciate the law of the circulation of the precious metals ; when they have learned that gold seeks the country where prices are lowest ; that it fiows to the market where it exchanges for the greatest amount of commodities, and commodities seek the country where they ex- change for the greatest amount of gold, they will strive to foster manufactures by diminishing the cost of production as measured in coin ; in other words, by ceasing to impose duties on raw materials, and by restraining the issuee of bank-notes within natural . limits. * Walker, "Science of Wealth," p. 194. CHAPTER Vn. THE EEGtTLATION OP A MIXED CITEEENCT. To one who admits that the non-interference theory of government is correct, and asserts that in a democ- racy the chief danger to be feared is that individual liberty may be crushed by the majority that claims- to personify public opinion ; that, therefore, no jeal- ousy of the extension of the powers of government can be too great, no opposition to those restless re- formers who seek to remedy sentimental wrongs by forcible legislation, instead of by convincing the pub- lic reason, can be sufficient, the preliminary question comes up, whether the regulation of the currency is beyond the proper sphere of government. The question is particularly worthy of consider- ation at the present time. Nothing is the country more in need of than to leam the proper functions of government. The Puritan spirit of meddling, which in the preceding century found expression in " Blue Laws," is still actively at work among us ; and those tainted with it are ever appealing to the law to aid them in carrying out their visionary reforms. Tet it was the triumph of the opposite principle in our poli- tics which made our country great and our institutions a model. " That government is best which governs KEGULATION OF A MIXED CURRENCY. 129 least," was the rule in our legislation until the sup- posed necessities of war reversed it. The attempted substitution of force for reason, as the motive power in government, is the most dangerous heritage the war has left us. Government meddling is the fruit- ful source of all our present wrongs. Yet it is ■■ not simply decentralization, or the restriction of the Fed- eral Government within its proper sphere, that is needed ; but rather to limit the functions of all our governments, municipal and State, as well as Federal. The complaint is made against our system of demo- cratic equality, that it tends to keep the most intelli- gent and capable portion of our citizens in private life. The rewards of private enterprise are greater than any offered by official position, save when the latter is used as a means of jobbery and corruption. To a man of"' self-respect and capacity, commerce and the professions open a more inviting field than poli- ties. Nor is the trouble wholly with this class. Where universal suffrage prevails, the office-holder will in the long run represent the average of his con- stituency ; and, when the legislator must reside within a narrow district, the choice of the electors is limited. The complaint, therefore, that the better class of citizens do not take an interest in politics is not likely to decrease. Occasional uprisings, compelled by un- endurable outrages, may periodically bring to punish- ment the most flagrant wrong-doers among our rulers, but the tendency will always be to revert to the former state ; and, for many years to come, " rings," corporations, caucus wire-pullers, and ward politicians, are likely to control our politics and name our legis- lators. The creatures, we may well believe, will not 130 PAPER MONEY. forget their creators. The remedy for present evils is to return to our primitive theory of a limited gov- ernment ; to restrict legislation to the establishment of security and the administration of justice, and to leave to an intelligent and enterprising people full scope for the development of their energies, unfet- tered by crude legislation. One method of limiting the powers of government provided under our system, is through written consti- tutions. But these are of little avail unless the habit of respecting them is thoroughly fixed. Unfortu- nately, the fact that slavery had intrenched itself behind constitutional limitations, had long diminished this habit of respect, and the inheritors of Federalism, restive under limited powers, made this fact and the necessities of war the pretexts for numerous usurpa- tions. Written constitutions, accordingly, have been brought into disrepute, and the efficiency of such limit- ations materially diminished. There iB one limitation left, however, which can be made effective — a restric- tion on the power of Legislatures to incur debts. Cap- italists have learned to shun securities over which hangs the question of a want of constitutional power, and this restriction carries with it respect. But to limit the power of a government to incur debts, is to limit its power to impose taxes, and it is through the latter power that many of the evils of government come. If municipal corporations in the State of New York had been restrained from incnrring any debt for any purpose whatsoever, the " Tammany frauds " would never have been perpetrated, and a load of railway indebtedness, improvidently incurred, would not now be impending over our towns and cities. If such a EEGULATION^ OF A MIXED CURRENCY. 131 limitation could have been retained in the Southern States, they would have been saved from becoming fields of plunder for wandering demagogues. There is no necessity for a State, or municipal government, which is never brought into contact with foreign governments, and can never be at war, to ever incur any funded debt for any purpose whatsoever. Such restrictions have been enforced in many of the West- ern States with the greatest success. In Iowa and Minnesota the State governments are hardly felt by the people, and, though the Legislatures must occasion- ally meet to record the decrees of the great railway corporations, being prohibited fi-om going in debt, they can do but little harm. The limitations of government power in other matters are to be gained, for the most part, by enlight- ened discussion, and by appealing to the public reason. The necessity of restricting the power of government to meddle with the currency is to be taught in this way, and in no direction is the desirableness of such a restriction more evident. The instrument of exchange is th« tool of commerce, and to permit government to tinker it is unendurable. Free banking ought to accompany free government. It is maintained by some writers, that banking can be made as free as commerce, and that the law ought not to meddle with those who issue notes to circulate as money, any more than with those engaged in any mercantile pursuit, leaving the public to protect itself against bad money by discriminating in favor of the notes of responsible issuers. The'system of banking, which, it is claimed, has proved the greatest practical success, is one of perfect freedom. " Though by law 132 PAPER MOXEY. there has never been any restriction against any one issuing notes in Scotland, yet in practice it has ever been impossible for any unsound or unsafe paper to obtain currency." * A mixed currency is self-regulating, and most of its evil effects result from attempts to regulate it by law. Such has been the case in the United States. The principal cause of the excessive use of bank-notes in this country, is the practice, ■which has long pre- vailed, of requiring banks to deposit securities with some public officer, as a pledge for the ultimate re- demption of their circulation. Bills have circulated, not on the credit of the issuers, but on the credit derived from the provisions of the State law under which they were issued. They have circulated ordi- narily without question, within their own State, and frequently far beyond it. If, however, no special secu- rity had been provided by law for the protection of the bill-holders, the bills would have circulated only where the responsibility of the issuers was known. Their circulation would have been, as it ought to be, local and limited, leaving coin the " uniform national currency." The theory on which these laws requiring special security for bill-holders .is based, 'is defective. The authors of them seem to have supposed that the first requisite of a sound currency is security for its ulti- mate redemption. They have accordingly permitted holders of public stocks and mortgages of real estate to turn them into money, by taking them as a pledge for the redemption of circulating notes, looking more *Ja3. Wilson, "Capital, Currency, and Banking." Herbert Spencer, " Social Statics " (Appletons), p. 48B. REGULATION OF A MIXED CURRENCY. 133 to the ultimate than to the immediate value of the currency. The latter value, however, is the one of chief importance, and it is determined almost wholly by the quantity of the money in circulation. Where the redemption of the paper medium in coin on de- mand is made doubtful by an excess of quantity, the currency is fatally defective, no matter how great the security for its ultimate redemption may be. And on the other hand, where the paper medium is certain to be redeemed in coin on demand, no other security is required. If ever the laws requiring the deposit of securities for the redemption of bank-notes are done away with, it is possible that not a little suffering may be endured. It will be but temporary, however, and the lesson will be worth its cost. When the public has no security whatsoever against the notes of irresponsible issuers, it will soon learn by bitter experience to exercise a sufficient discrimination, and the people of the United States will be found equal to the successful manage- ment of their own money matters,* without the pater- nal care of the government. While it is admitted, then, that the power to issue paper to circulate as money ought to be left free to all, in the same manner as the power to issue any other business paper, and that the proper remedy for its excessive use is to instruct the public mind and dif- fuse a correct knowledge of the evils of paper money, it is still claimed that there are remedies for these evils in the nature of police regulations, which the law * Mill maintains that " some kind of special security in favor of the holders of notes should be exacted." — "Principles," etc., Book III., chap, xxiv., sec. 6. 134 PAPER MONET. ought to apply. The suppression of bank-notes of the smaller denominations is a matter of such vital impor- tance that it will not do to wait until the people be- come so wise as to refuse to receive them. Small notes are used in retail trade, and in pay- ment of wages. They circulate among those who are least able to ascertain the responsibility of the issuers, whUe large notes are used in wholesale transactions, or in settlement at bank. Those who use them are certain to learn their value, not only on account of the greater sums at stake, but because they have ready facilities for making the necessary inquiries. The danger of loss by the public comes piincipally from the notes of the small denominations. The neces- sity of suppressing them was plainly pointed out by Adam Smith, and it is not creditable to American statesmanship that his suggestion, made upwards of ninety years ago, has not yet been adopted. " Paper money," says that sagacious writer, " may be so regulated as either to conform itself very much to the circulation between the different dealers, or to extend itself likewise to a great part of that between the dealers and consumers. Where no bank-notes are circulated under ten pounds value, as in London, paper money confines itself very much to the circulation be- tween the dealers." It was repeatedly proposed, during the struggle against the Bank of the United States, to place upon all notes, circulating as money of a less denomination than fifty doUars, a stamp-duty heavy enough to di- minish their .use. If such a restriction had prevailed, the evils which the country so long endured from the excessive use of paper money, would have been REGULATION OF A MIXED CURKENCT. 135 materially lessened. The element of credit in the cur- rency would have been diminished. By such a limita- tion probably one-third more specie -would have been retained in circulation. The whole credit system would have been built on a broader foundation. Paper money could not then have been used to render the currency redundant, except in times of excited speculation, and, in case of the withdrawal of specie, the effect would have been less serious. Part of it would have come from private hoards, and not all of it from the vaults of the banks. The chief benefit, however, would have resulted from the restriction of paper money to the circulation between the dealers. It would have con- tinued in use in all wholesale transactions, but, at re- tail, specie only would have circulated. Wages would have been paid in gold, and their purchasing power would have been increased. Paper would have been left to the rich. Gold would have rejoiced the poor. Instead of suppressing small notes, the opposite policy has been pushed to its utmost limits. When- ever money has ceased to be plenty in retail trade, complaint has forthwith arisen of the scarcity of small bills. Instead of compelling the retail dealers to ad- just their prices to the amount of money in circulation, and, by. lowering them, to render less money necessary for effecting the usual exchanges, the demand, for small bills has met with immediate response, and, by their aid the retailers have been enabled to main- tain prices at the customary rates. If ever such bills are suppressed in this country it will cause bitter com- plaints ctf the scarcity of money, and some lapse of time must pass before the standard of retail profits can be reduced to the level of specie. 136 PAPER MONEY. The easiest way of limiting the issue of small notes is by a graduated stamp-duty. The use of the taxing power for accomplishing incidental ends, it is true, has been brought into deserved disrepute by the ex- actions of the protectionists ; but the taxation of bank- notes is so just in itself, that it deserves to stand inde- pendent of the incidental benefit of limiting the use of paper money. As a medium of exchange a bank-note has all the efficiency of real money, and its cost is nominal. - If bank-notes were not used, specie which could be obtained only by giving for it an equivalent in value, would be necessary. The community which uses bank-notes as money saves capital equal to them in amount, less the expense of engraving, and the coin held as a reserve for their redemption. All the direct gain goes to the bankers who issue them. The public is benefited only by the increase of loanable capital. But it is only by the sufferance of the public that private notes can circulate as money. The forbear- ance is great which sufiers men to charge interest for lending their debts. It is but right, therefore, that the public should share directly in the profit of the transaction. No juster tax can be devised than a stamp-duty on paper issued to circulate as money, and no more appropriate time can be found for impos- ing it than when all other negotiable paper is subject to such a tax. Business notes circulate only once. Bank-notes are issued over and over again, and the smaller the denominations the greater their circula- tion. They ought to be subject, therefore, to a heavier duty than ordinary negotiable paper, and the duty ought to be increased as the denominations de- cline. REGULATION OF A MIXED CUEEENCT. ig-j There is a second restriction on the issue of hank- notes, which should he enforced hy law, however free banking is made. It is contained in a propositign set forth by President Van Buren in 1837. That officer recommended, in his first message to the twenty-fifth Congress, the enactment of " a uniform law concerning bankruptcies of corporations and other bankers." * Such a provision would be eminently proper ia the or- dinary administration of justice, independent of its effect in restraining over-issues of paper money, and ought to meet the approval of those who would set the narrowest limits to the powers of government. Banks act in a fiduciary capacity both to their bill-holders and depositors. Such debts need and deserve the watchful guardianship of the law. In case of the in- solvency of a bank, its creditors ought to share its as- sets without preference to any. No favored officers or directors should be permitted to seize upon its prop- erty to the exclusion of too confiding customers. * Even Herbert Spencer, while advocating the restriction of the powers of government within the narrowest sphere, admits this much: " The State's duty in the case of the currency, as in other cases, is sternly to threaten the penalty of bankruptcy on all who make engagements they cannot meet; and sternly to, inflict the penalty when called on by those aggrieved." — " Essays, Moral, Political," etc., p. 328. Appletons, 1868. " That the State should compel every one who has given prom- ises to pay, be he merchant, private banker, or share-holder in a joint-stock bunlc, duly to discharge the responsibilities he has in- curred, is very true. To do this, however, is merely to maintain men's rights — to administer justice ; and therefore comes within the State's normal function. But to do more than this — to restrain issues, or forbid notes below a certain denomination, is no less injurious than inequitable." — "Social Statics," p. 484. Appletons, 1869. 138 PAPER MONEY. Any depositor or Ibill-holder, -whose debt has not been paid in specie on demand, no matter how small the sum, ought to he permitted to throw the bank into the hands of a receiver, to the end that equal justice be meted out to all. If the merchant who permits his paper to remain under protest a limited time can be thrown into involuntary bankruptcy, much more ought the bank which fails to pay the least of its liabilities in gold on demand to be subjected to that process. The increased stability, however, which such an enactment would give to the currency, would be its most important result. In this way could a restraint be put upon the tendency to expand deposits beyond the limits of judicious banking, and even those bankers who issued no circulating notes would be taught the lesson of prudence. When corporations are created by law with the ex- clusive privilege of issuing circulating notes, the pre- ceding restrictions can be enforced with peculiar pro- priety. Corporations, the creatures of law, ought cer- tainly to be subject to the authority that gives them existence. Special privileges ought to be granted to them only, subject to such limitations as will prevent abuse. The issuing of notes to circulate as money is not a necessary part of the business of banking. Whenever it is found that the harm resulting from the issue of such notes exceeds the good, the power of limiting them ought to be exercised. But when banking is not left free, and government intrudes beyond its proper sphere, it is found that other regulations become necessary. One violation of a sound rule leads inevitably to another. When security for the bill-holders is enforced by a public REGULATION OF A MIXED CUEKENCT. 139 pledge of collaterals, the bills obtain an increase of eir-, culation by virtue of the safety which the law assures. But it is not the ultimate value of the notes that the law ought to guard most carefully. Their immediate value is of more importance, and this can only be secured by compelling the banks to keep themselves constantly in a condition to redeem their notes in coin on demand. They cannot, however, keep themselves in this condition, unless they are equally well prepared to cash their deposits in coin on demand. The great danger in banking under a mixed currency comes from the constant tendency of bank managers to re- tain only enough specie to make a reserve for the redemption of their circulating notes, and to use their own notes, or those of other, banks, as a reserve for the payment of deposits. From this practice it results that the percentage of specie to their demand liabili- ties is so often reduced to a minimum, and that, when an extraordinary demand for specie arises, they cannot meet it. They are then compelled to suspend, and by all going together they escape harm. The constitu- tional provisions and striagent penalties against the suspension of specie payments, which have always ex- isted in this country, have not been sufficient to pre- vent the recurrence of that disaster at the usual inter- vals. When all are guilty, none are prosecuted. The public has then a greater interest in preserving the banks, than in punishing the violation of law. The penalties accordingly have been evaded, or the law suffered to remain a dead letter. Though a stringent bankrupt act stood in terrorem over the banks, it is doubtful whether it would always be sufficient to in- duce them to restrain their demand liabilities within 140 PAPER MONEY. prudent limits, so long as they are organized as corpo- rations under laws which, by guaranteeing the ulti- mate redemption of the circulating notes, relieve the holders of them from all necessity of immediate watch- fulness. A third regulation, therefore, is necessary for such corporations. They ought to he compelled by law to keep a certain percentage of their demand liabilities in specie. Such a law was enacted in Massachusetts in 1858. By its provisions the banks of that State were required to keep on hand specie to the amount of at least fifteen per cent, of their notes and deposits. A similar provision has also been introduced into the present national banking law, substituting for specie lawful money. By diminishing the reserve of specie, the banks gain largely in interest. But, as the public good re- quires stability, they ought to be coinpelled to secure it, even at the sacrifice of a portion of their gains. It is not the suspension of specie payments which is an evil, but the expansion which precedes it. The remedy, therefore," ought to be aimed at the disease, and not at its effect. But such a restriction could never be enforced with unyielding severity. Occasions would occur when it would probably be found advisable to remove the limit. It was maintained by Lord Overstone that the value of paper money ought to follow the fluctuations in the value of the precious metals. This is the view on which the English bank act is framed. The Bank of England is required, not only to redeem its notes in coin on demand, but also to give them in exchange for bullion whenever bullion is brought for the pur- KEGULATION OF A MIXED CURKENCT. 141 pose. If, therefore, gold flows into the country, it is presented to be exchanged for notes, and the circula- tion is increased. If, on the other hand, there is a drain of specie for export, notes are presented for re- demption, and the circulation is diminished. The contraction is double, including discounts and deposits as well as notes, and a general contraction of credit ensues. Thus the effect of the natural variations in the supply of the precious metals is increased. Com- merce, accordingly, oscillates like a pendulum. Gold accumulates, and notes are issued. The bank has no power to prevent their issue if the public is in a spec- ulative mood. Interest consequently falls, and capital becomes easily accessible. Then gold begins to be exported. The circulation and deposits are contracted, interest rises, credit in all its forms is restricted, and commerce trembles. The opinion that the paper cur- rency ought necessarily to fluctuate with the metallic basis is founded on a misapprehension. The precious metals are selected by common consent to be used as money, not because their value never fluctuates, but because it fluctuates less than that of any other com- modity. If their value were perfectly stable, they would be still better fitted for the office. Instead, therefore, of using bank-notes to increase the fluctua- tions in the value of money, we ought to use them for the opposite purpose. They can be made at times to give stability to the currency when it is most needed. They can be employed to fill the place of gold tempo- rarily withdrawn, and to thus equalize the inevitable fluctuations in the supply of the precious metals. It is often preferable, therefore, to increase instead of diminish the issues of bank-notes in the midst of a .142 PAPEK MONEY. commeTcial panic, and to support credit and restore confidence when the machinery for effecting exchanges has heen brought to a stand-still. If ever our banks are compelled by law to keep a certain percentage of specie to their demand liabilities, it will be found nec- essary to suspend the rule in case of a commercial revulsion. This, however, will be a gain over the former practice of suspending specie payments alto- gether on such occasions. The present National Bank Act contains a provision for lifting the restric- tion in such a case. The banks are required to keep on hand a certain percentage of " lawful money," but in case of a deficiency are allowed thirty days of grace in which to.make it good. Against all propositions for limiting the amount of bank-notes, it is constantly objected that, if such a limitation were enforced, there would not be money enough to transact the business of the country. To this objection there is a sufficient answer : The amount of money necessary to effect a given amount of ex- changes is wholly a question of prices. The higher the prices at which the articles are exchanged, the greater is the amount of money required, and the lower the prices, the less the amount needed ; while, in accordance with the law of the circulation of the precious metals, gold will always flow in where a va- cancy occurs. Prices, in any one country, must always bear a fixed relation to prices in every other country with which it has commercial intercourse. If bank- notes had at any time been wholly or partially driven out of circulation in this country, prices would have fallen until enough specie had come in to have filled their place. REGULATION OF A MIXED CUERElfCY. 143 Another objection constantly made is, that the limitation of hank-notes would diminish the amount of capital, and retard the accumulation of wealth. Specie can he obtained only for value. If bank-notes were cut off, the coin to fill their place would flow in only in. return for an equivalent amount of the prod- ucts of labor. But this loss, it should be remembered, would fall on the issuers of the circulating notes. -Those who receive paper money in the course of bus- iness part with value for it, the same as if it were specie. It is to be remarked, also, that to suppress small notes would not diminish the amount of capital by the full amount of their diminution. The issues of paper act as an increase of capital only so long as they fill the place of the specie which would naturally circulate. As soon as the paper becomes excessive, so as to en- hance prices, it adds nothing to the circulating capital. Its purchasing power sinks, and a greater nominal sum is required to effect a given amount of exchanges. When it is asserted, that more money is needed to transact the business of the country, what is really meant is, that there is a deficiency of capital. The borrowing portion of the community is always in search of loanable capital, and always persuades itself that " an increase of the currency " would furnish the object sought. The absorption of the excess of the circulating medium in inflated prices is overlooked. But even if a restriction on the issue of bank- notes would diminish the amount of loanable capital in this country, such a regulation has always been sorely needed. The rapid accumulation of wealth is less important than its just distribution. The methods 144 PAPER MONEY. of compensating the laboring classes, and of distribut- ing commodities to the consumers, have long pre- sented the -weakest points in our social economy. The preliminary remedy for these evils — one which ought long since to have been enforced — ^is to compel the use of specie in payment of wages and in retail trade. The diminution of the speculative feeling and element in business, and the greater stability in commerce which would follow from a proper restriction of bank- notes, have likewise long been of far greater impor- tance than any increase of the facilities for accumu- lating wealth. Capital invested in trade has been in greater need of reasonable security than of an oppor- tunity for extraordinary profit. These facts were well understood by those states- men who opposed the Bank of the United States. The memorable struggle against that institution had a double object in view. It was waged principally to destroy an overgrown corporation, which would have become an oppressive monopoly in business, and a controlling power in politics. But the ultimate end sought was to limit or prevent the use of paper money. The first object happily was attained. The second unfortunately miscarried. Benton has stated, with true Bentonian afflatus, the intention to destroy paper money, and the cause of the failure. " I am one of those," he has said,* " who promised gold, not paper. I promised the currency of the Con- stitution, not the currency of corporations. I did not join in putting down the Bank of the United States to put up a wilderness of local banks. I did not join in * " Thirty Years' View," vol. ii., p. 10. REGULATION OF A MIXED CDREENCY. 145 putting down the paper currency of a national bank, to put up a national paper currency of a thousand local banks. I did not strike Caesar to make Antony master of Rome." The defeat of the Democratic party, which was a consequence of the commercial revulsion of 1837, caused the abandonment of the war on paper money, and the STibsequent sinking of all financial questions in the slavery agitation prevented its renewal. But while bank-notes have thus had full sweep in this country, and have been used to excess, it must be admitted that the evil has not been without miti- gation. By the profit derived from issuing them capi- tal has been attracted into the business of banking, and the country has gained thereby. Where banks of , discount and deposit exist, the use of capital is econo- mized. Hoarding is brought to an end. Money is made to circulate more rapidly ; and its efiective pow- er is increased. The amount of wealth necessary for each individual to keep invested in the fixed form of specie is very materially diminished. So necessary is it to the material development of a country, that banks of discount and deposit should become numer- ous, that it is desirable to give to bankers the right to issue their own notes to circulate as money, in order to a'ttract as much capital as possible into the busi- ness of banking. The deposits are the chief source of profit in banking. But, in a country where moneyed capital has not accumulated, the deposits are neces- sarily limited. Cii-culating notes can then properly be used to fill their place as a source of gain to the bankers. The progressive state of v/ealth in this country 8 146 PAPER MONEY. which has resulted from the opening of new lands has kept the standard of customary profit in business, and the rates of interest for the use of capital at a high point. The demand for loanable capital has constant- ly been in excess of the supply. It is probable that the issue of paper money has filled this demand more completely than would have been possible, if specie only had been in circulation, and has attracted capital into the business of banking, which would otherwise have sought a different mode of investment. This process, however, has often worked unequally, and has given certain States an advantage over others ; thus the West has constantly sent its breadstuffs and pro- visions to the East, and received in return the notes of Eastern banks, parting with value for such notes to the same extent as if they were gold. Such use of paper money has failed to allure capital into the busi- ness of banking at the localities where it was most needed. But, while bank-notes in this country have had their advantages, there has never been a time when they have not intruded beyond their proper sphere, and when the regulation of the currency would not have been a blessing to the people. The subject is the more worthy of attention, because now the coun- try has accumulated sufficient capital -to be able" to dispense with the excessive use of bank-notes, and because, moreover, it is possible that out of the present financial chaos may be evolved an opportunity to en- force a proper regulation of the currency. CHAPTER Vm. " THE THEOEY OF GREENBACKS." The issue of government paper to circulate as money followed naturally from the situation in whicli this countiy found itself at the breaking out of the rebellion. The -weakness of the mixed currency then in use rendered a suspension of specie payments inev- itable. To borrow the bills of suspended banks, or to issue circulating treasui-y notes, became, thereupon, the only alternative. During the "War of 1812, the former course was pursued, and the government sold its bonds at twenty per cent, discount, taking for them inconvertible bank paper at par. But in 1862 the borrowing was on a scale so enormous that an exces- sive issue of inconvertible paper was probable in any event, and it "seemed better for the government to make a loan without interest, than to leave the profit of issuing irredeemable notes to the banks. War, it is true, can be carried on without borrowing. The necessary supplies can be obtained by taxation, or by living on the enemy. But to fit a nation to rely sole- ly on taxation, two things are requisite : a sound cur- rency at the outset, and a readiness on the part of the 148 PAPER MONEY. people to snliniit to the accompanying hardships. At the beginning of the rebellion, the United States pos- sessed neither. That our bank-note currency was fa- tally defective, we can now realize. That the people were not prepared to make the sacrifices, which a re- liance on taxation as the principal means of obtaining supplies would have called for, is probable. At all events the politicians in power feared to impose taxes, lest by burdening the voters they might imperil the success of their party. Taxation severe enough to cause the present generation to bear the whole cost of a war waged in part for the benefit of future gener- ations, always finds bitter opponents ; and, as the pol- icy which guided the dominant party in the suppres- sion of the rebellion was distasteful to a minority of the people, it became doubly important to the leaders of that party to use every expedient to allay opposi- tion. Any present financial depression might have endangered their ascendency. 'Paper money, there- fore, was to them a political necessity. The loan without interest, and the illusive prosperity, which re- sulted from ascending prices, they found a strong as- sistance at the polls. The most important attempt at direct taxation failed, owing mainly to this political timidity. The draft was in the nature of a tax by lot. The endeavor to enforce it caused the New- York riots. Those dis- turbances happily were suppressed. But the principle, for which the rioters contended, unfortunately pre- vailed. Thereafter the draft was used chiefly as an appliance for stimulating enlistments, and, by the ex- travagant bounty system, the burden of recruiting the army was thrown directly upon the property of "THE THEORY OP GREENBACKS." 149 the country, lessening, thereby, its capacity to bear taxation for other purposes. But however much the issuing of treasury notes, as a forced loan, can he palliated by the plea of necessity, the excessive issues and extreme deprecia- tion of them which followed can be met by no such apology. The political expediency, which was one motive for their issue, was a principal cause of their depreciation. In making things pleasant to carry elections, the ruling majority refrained too long from severe taxation. The ignorance and moral weakness of the politicians, who were our law-makers, held them back from imposing the proper burdens on the people, and it was not until the people, more enlightened than their rulers, clamored to be taxed, that the money to conduct the war began to be raised in the only man- ner according with far-sighted prudence. Meanwhile the sinews of war had been provided by issuing green- backs fast enough "to float" the loans placed on the market. The first internal revenue law went into operation October 1st, 1862, on which day gold sold at 123f, and the premium had reached 70 per cent, before the effect of the law in producing revenue was fully felt. Paper money, so far from being a source of strength in war, is the parent of all weakness. Excessive issues are accompanied by certain depreciation, and, if carried too far, end in a total collapse. In the latter case the war must cease or be carried on by taxation, and by drafting soldiers without pay. Common prudence, therefore, requires that paper money should be issued only as a last resort ; that it should be preceded by tax- ation as severe as the nation can endure ; and that tax- 150 PAPER HONEY. ation should accompany it at every step, it is to the pursuit of the opposite course in 1862, that the magni- tude of the national debt, and the present depreciation of our currency, may be largely attributed. A partial excuse for the adoption of that policy is the total ignorance of the nature and the dangers of i)aper money, which then prevailed among those in author- ity ; and also a failure to appreciate the magnitude of the contest upon which the nation had then en- tered. As it was, paper money wellnigh proved our ruin. It is possible that if the war had been con- tinued another year, or had resulted in a protracted guerilla warfare, a collapse of the currency would have changed its results. Fortunately it was in the nature of things that the rebel finances should col- lapse first. Before examining, by the light of political econ- omy, the effects of the present legal-tender currency of the United States, it is desirable to understand thoroughly upon what theory of the functions of money that system is based. It has already been stated, that an exchange of any article of merchandise for a given amount of the pre- cious metals is as essentially an act of barter, as to exchange two articles of merchandise, the one for the other. Gold possesses value in exchange like any other metal, or any product of labor ; and, when mer- chandise is sold for a certain amount of gold, value is exchanged for value. Coining the gold into money does not, in the least, affect the nature of the transac- tion. Value is still used to measure value. Coinage is a matter of convenience only. It is the means of assaying the bullion, and dividing it into pieces of "THE THEOET OF GREENBACKS." 151 equal weight. Coins are always mere " denominar tions of weight," like bushels. But in measuring value, as in measuring space, units of measure are necessary. It is only thus that different quantities or sizes can be compared with one another, and arranged in an ascending scale. As a portion of space first designated arbitrarily or by accident is called a foot, so an amount of the precious metals, fixed arbitrarily, is called a dollar. In the United States it is 25^ grains of gold nine-tenths fine. Thus, by having a unit of calculation to which a name is given, the values of different quantities can be readily compared, and accounts can be kept. In addi- tion to assaying the metal, and dividing it into pieces of equal size, coinage fixes the name of the unit of cal- culation, and provides a money of account. There is no necessity of making coin. a legal tender by express enactment. If men agree to pay dollars, in the ab- sence of any law, they would mean a certain amount of gold duly stamped, and the courts would be bound to enforce contracts according to the intentions of the parties, without any legal-tender act. It is so necessary, however, to have names for the measures of value, in order to compare values, that it is probable a unit of calculation would be fixed upon and a name given to it, even though it represented no value, and were a mere abstraction. " It is said there are African tribes, in which this somewhat artificial contrivance actually prevails. They calculate the value of things in a sort of money of account called ' macutes.' They say one thing is worth ten macutes, another fifteen, another twenty. There is no real thing called a macute. It is a conventional 152 PAPER MONEY. unit for the more convenient comparison of things with one another." * Inconvertible paper, when made a legal tender, re- sembles this contrivance. The' most important func- tion of money is then left out of view. A dollar is ■considered a mere unit of calculation, or money of account, and the fact that value only can measure value is ignored as much as possible. The name is substituted for the thing itself. The value of the thing called a dollar is wholly disregarded. A worth- less bit of paper is stamped as a dollar, and is thus supposed to be made one. This theory, it is true, is not strictly adhered to in practice. Value has been imparted to greenbacks in an irregular way by mak- ing them receivable for taxes, and convertible into government bonds, as the equivalent of real dollars. But the idea which controlled their issue was, that the principal function of money is to be a mere unit of calculation, and that the quality of value in the thing to which the name of money was given could be dis- regarded. As a measure of length is obtained by marking off an arbitrary space and calling it a foot, * Mill, Book III., chap, yii., sec. 1, quoting Montesquieu. The following is the passage from that author ("Esprit des Lois," Livre XXII., chap, viii.) : "Les noirs de la cote d'Afrlque ont uu signe des valeurs sans monnaie ; c'est un signe purement iddal foud§ sur le degre d'estime qu'ils mettent dans leur esprit k chaque marchandise, k proportion du besoin qu'ils en out. Une certaine denr^e ou marchandise vaut trois macutes ; une autre, six macutes ; une autre, dlx macutes : c'est comme s'ils disaient simplement trois, six, dix. Le prix se forme par la comparaison qu'ils font de toutes les marchandises entre elles : pour lors, il n'y a point de monnaie particuIiSre, mais chaque portion de marchandise eat monnaie de I'autre." "THE THEORY OF GREENBACKS." 153 or a yard, so it was thougbt a measure of value could be obtained by taking a bit of paper, or any thing that government might choose to designate, and naming it a dollar. Whatever the law made current as a dol- lar, it was believed would be equal to a real dollar. Multitudes of people were unable to perceive why there should be any difference between a paper dollar and a gold dollar, and it was stoutly insisted, notwithstand- ing the premium on gold, that the currency was not depreciated, while the belief was universal (and still obtains) that a return to specie payments would be a speedy and simple matter. That notions so crude should prevail in this coun- try, and that a theory, resembling so closely that in accordance with which Law attempted to coin all the wealth of France into money, should be reproduced in this age, may seem strange. That such is the case, however, can be shown, not merely from newspaper reflections of the current opinions of the day, but from the laws of Congress, and the decisions of the Courts. A correct conclusion on this point is desirable, not merely as a matter of historical research, but because, in settling the debts contracted in greenbacks, a dispo- sition is now manifested to disregard the theory upon which greenbacks are founded. While in the bcgin- ino: it was claimed that a dollar is whatever the law makes a dollar, now it is attempted to transmute paper into gold by insisting that a dollar is 25-^ grains of gold of nine-tenths fineness. 1. That the foregoing is a correct statement ol " the theory of greenbacks," appears from the act of Congress authorizing their issue, A greenback pur- ports on its face to be a promise of the United States 154 PAPER MONKY. to pay to the bearer a dollar. It also purports on its back to be, and by law is, made a legal tender to pay all debts, public and private, within the United States. Each greenback, therefore, is a legal tender to pay every other, and the United States are under no legal obligation whatsoever to redeem these promises to pay a dollar by-the payment of a coined dollar. The dol- lar that is intended is the dollar of account. This one incidental quality of the dollar is selected out as its sole function, and the essential quality of value is dis- regarded. The theory of money prevalent before the science of political economy had been developed, is revived ; American dollars are made to resemble Afri- can macutes. The effect of the legal-tender act upon the treasury notes issued under it has been stated by a distinguished jurist in these words : " By the arrangements of the legal-tender act, the notes are not payable in coin, for the quality which makes them receivable for all public and private debts authorizes the government to redeem them in other notes of the same kind, so that they are to constitute a medium of payment and exchange, which is to be quite distinct from gold and silver money, and not convertible into it." * A greenback, therefore, whatever it may be as a government security, is, in its character of money, nothing but a stamped counter. 2. An apt illustration of "the theory of green- backs " is found in the decisions of the Courts invali- dating specific contracts to pay in coin. While the law making coin a legal tender remains uni-epealed, * Metropolitan Bank vs. Van Dyek, 27 New York Rep., p. 533, Donio, J. "THE THEORY OF GKEENBACKS." ]S5 such decisions can he arrived at only by disregarding the quality of value in money. If it be true that a dollar is only a unit of calculation, and not a fixed amount of the precious metals, only a name, and not a thing, then a contract to pay a dollar is satisfied by paying whatever the law makes a dollar of account. If the exchange-value of money is not recognized by law, there is no legal difierence between a treasury note and coin. A debtor can then agree to pay coin, and the law will none the less uphold him in paying legal-tender notes. For the latter " are lawful money, and have a legal value equal to that of coin in the cancellation of debts." * If, on the other hand, the teachings of political economy and of common sense had been heeded, such a conclusion could never have been reached. Value IS the essential quality of money, and every thing else is incidental. "When, therefore, the Government makes two different things of unequal value a legal tender, individuals ought to be left free to select whichever class of legal tender they can agree upon, f and their contracts ought then to be executed according to their tenor. Courts of justice are instituted to enforce con- tracts as made, and not to make new ones. When two things of unequal value are a legal tender, debt- ors, if left free to choose, pay their debts in that which is the less valuable. It accordingly happened that the law declaring coin a legal tender, though still remaining on the statute books of the United States, was, for a time, practically repealed by judicial legis- lation. * Rodes vs. Bronson, 84 N. Y., 649. ■f See Carpentier vs. Atlierton, 26 California Rep., 5'?o. 156 PAPER MONEY. , 3. That in issuing greenbacks the name dollar was mistaken for the thing itself, appears plainly from the reasoning pnrsued by various judges in attempting to sustain the constitutionality of the legal-tender act. By one, this assertion is made : " If Congress can coin any metallic substance, under the power to coin money, and stamp it with an arbitrary value, as it is conceded it may, then it follows that it can make such stamped metal a legal tender at any designated val- ue." * This jurist construes the constitutional power of Congress " to regulate the value of money," to mean a power to debase the coin after the manner of Henry VIII. He evidently mistakes the name dollar for the thing itself. He thinks that to stamp a piece of metal as a dollar gives it an arbitrary value as one, ignoring the fact that the value of a dollar is measured by what it will buy. Such a logician ought to believe that an act of Congress declaring two pecks to be a bushel would change the value of wheat. ■ Another judge says : " Gold and silver coin and money, are not necessarily convertible terms. The latter word is used in various senses, and has various shades of meaning, according to its employment or connection. It is generally the representative of values, and the instrument of exchanges. But it is no part of a contract of debt made at one time, for the repayment of money at another, that this representa- tive or instrument should possess the same exchange- able value, or the same purchasing power at the time of payment, as at the time of incurring the debt. All that the debtor contracts to do, is to return to his * Metrgpolitan Bank us. Van Dyok, 27 N, Y. Bop,, 430, Daviea, J. "THE THEORY OF GllEENBACKS." 157 creditor in dollars and cents as much as he received, and the advance and repayment are alike to he made in that which by competent and valid authority is made the medium of account and payment." * This jurist has evidently failed to learn that the fnndamental quality of money is stability in value ; that money which does not possess that quality is the most effective instrument of robbery ever devised. But here are the words of another, whose stud- ies plainly had never been extended beyond his law- books, and who had failed there to learn justice : " The legal-tender act does not deprive any person of property, for it makes the notes issued under it as valuable as gold coin in the hands of every person re- ceiving them for all commercial purposes. I of course lay out of view the difference created by brokers and speculators between the value of gold coin and such notes, as having no legitimate bearing on the ques- tion. That difference cannot be regarded, because it is not recognized by law, and all agreements to pay any such difference are utterly void." f According to this luminary, the law looks upon money simply as an idea. The worth of a dollar is wholly in its name ; whatever the law makes a dollar is a dollar, at least in Court. The theory propounded to account for the difference in value between green- backs and gold coin seems very absurd at this day, but in 1863 it was generally entertained. Indeed, there is a still greater degree of absurdity in the fol- lowing statement : " A treasury note of the denomination of ten dol- * Id., p. 487, Emott, J f Id., p. 4T2, B.ilcom, J 158 PAPER MONEY. lars is legally as valuable for the purposes of money as a coined eagle. The value of each is fixed at ten dollars money of account. If a gold eagle be -w-orth more in the market than a ten-dollar, legal-tender note, it is because it is wanted to pay duties and settle balances abroad. The market value of gold is there- fore regulated by the demand and supply. This de- mand for gold may be for legitimate purposes, as suggested, and it may be for speculative or illegiti- mate purposes; and, unfortunately, at the present time, most of the difference in value of gold coin and legal-tender notes is the result of a species of gambling in the metallic medium of circulation as private or public stocks are gambled with. It camnot be said that a measure of value thus affected by extraneous causes, fluctuating in its character, which may be more to-day and less to-morrow, can be any just criterion of what a creditor loses or gains." * To argue that a metallic medium of circulation becomes fluctuating in its character, when superseded by paper, and that the rise and fall in the premium on gold measure fluctuations in the value of gold, instead of greenbacks, denotes ignorance of the kind that can never be enlightened. Gross, however, as are the er- rors contained in these opinions, they correctly repre- sent the ideas prevalent at the time they were made,f and are in strict conformity with " the theory of green- backs." This was the view of the functions of money enter- tained by the legislators who passed the legal-tender act, as shown by their subsequent attempt to keep » Id., p. 482, Wright, J. f September, 1863. "THE THEORY OF GREENBACKS." 159 down the premium on gold by act of Congress. The law, they reasoned, had made a bit of paper a dollar. The law recognized no difference in value between such a dollar and any other dollar. Therefore there was no such difference. The apparent difference " had no legitimate bearing on the question," being " created by brokers and speculators." By suppressing specu- lation, then, the premium would be kept down. The attempt accordingly was made. Speculation in gold was forbidden. The whole supply of that commodity was driven out of the market, while the demand for it remained constant, and the premium advanced sixty per cent, in a few days. This " theory of greenbacks " differs in no respect from that in accordance with which the despotic princes of former ages debased their coinage and robbed their creditors. The theory upon which that proceeding was founded is distinctly stated by Montes- quieu. " Money," says that writer, " is both a thing and a name. Civilized nations which use ideal coins only, do it because they have converted their real into ideal ■ coins. At first their real money is a piece of metal Of a certain weight and fineness. But soon bad faith or poverty causes a portion of the metal to be deducted from each piece to which the same name is left. For example, from a piece of the weight of a pound of silver, the half of the silver is deducted, and it is still called a pound. Thus the pound is an im- aginary pound, and it may happen that no coin will be made worth exactly a pound. So that the pound will be purely an ideal piece of money. The denomi- nations of as many pounds as are wished may be given to each coin, and the variations may be continual. 160 PAPER MONEY. For it is as easy to give another name to a thing, as it is difficult to change the thing itself. In order to re- move the cause of the abuse, there ought to be a law in every nation which desires to foster commerce, that only real coins should be used, and that no expedient should be resorted to for mating money an idea only. Nothing ought to be so free from variation as that which is the common measure of every thing." The expedient of paper money had not then super- seded the more patent trick of debasing the coinage. But, notwithstanding the difference in fonn, the two are in fact identical. Both consist in diminishing the value of the thing used as money, while leaving the name unimpaired. The judges, accordingly, who have sustained the power of Congress to issue legal-tender notes, have been driven by inexorable logic to main- tain the position that Congress has despotic power to debase the coinage, and to make the debased coin tenderable in payment of debts contracted in coin of full weight.* In fact, the decisions made in the time * The power of Congress to debase the coinage so as to affect past debts was assumed in the case of Eodes vs. Bronson, before cited, In these words : "If by the legal-tender act the value of the creditor's claim has been reduced, the same effect might hare been caused, and to the same extent, without the agency of the paper money, by simply do- basing the gold and silver coin of the country to a sufficient degree — a measure unquestionably within the power of Congress. A tender in such debased coin would have been a literal compliance with the contract." The judges who made this decision displayed a perverse moral obliquity, which the progress of knowledge has rendered rare in this age, but which it is natural to expect in tbosa^who derive their political economy from the Year Books. In the opinion of the Court, in the ease before refoiTod to, of the '•THE THEORY OF GEEENBACES." 161 of Edward VI. and Elizabeth, affirming the validity of the payment in debased coin of a debt contracted in good coin, were quoted, to show that the law recog- nizes in money only the name and not the substance. Such, undoubtedly, was the common law of England Metropolitan Bank vs. Van Dyck, 2'? N. Y., p. 455, the ancient authorities sustaining this power to debase the coinage v/ere col- lected. The following is a synopsis of them : After the debasement of money in 6 Ed. VI., debt was brought against a lessee for arrear of rent. The lease was dated Nov. 2Ist, in the thirty-fii^t year of Henry VIII. At the time the rent fell due, the shillings, which, at the time the action was brought, were decried to 6A, were current at 12rogressing, is a fact which has now been thoroughly learned. Each man who passed them on to Ms neighbor can perceive that he was taxed to the amount of their depreciation while in his hands, as directly as if the government had taken a poxtion of his income. But it does not yet seem to be under- stood that, when the process is reversed, and the Value of greenbacks is steadily augmenting, a tax is equally imposed, not upon the holders of them, birfc upon those who have debts to pay with them. A man who con- tracts a debt payable at a futtoe day, and finds when the day of payment has arrived that the purchasing power of the money he must use has been enhanced in the mean time, is taxed to the amount of the en- hancement. He must part with a greater quantity of commodities or property in order to realize the means of payment. All fluctuations in the purchasing pow- er of greenbacks, therefore, operate as a tax upon 196 PAPER MONET. some portion of the oomimiiiity. When they are de- preciating, creditors are taxed. When they are ap- preciating, debtors are taxed. But such taxation is a very different thing from that levied for the support of government. It is confiscation. It is simply a means of transferring property from one person to an- other without the owner's consent. These vast trans- fers of property, made without any merit of the gainer, or any fault of the loser, are inseparable from a fluc- tuating currency, and render it a most unjust instru- ment for the distribution of wealth. When green- backs were issued, contracts made in gold became payable in paper ; debtors thus obtained a transfer of the property of their creditors. But when greenbacks were enhanced, creditors in their turn obtained an op- portunity to repeat the operation. Thus an incon- vertible currency becomes at every fluctuation an in- strument of robbery. But its effects on the distribu- tion of wealth will become more plainly visible when the shares distributed under . its operation to the several producers of wealth are examined. That convertible paper, when used in the payment of wages, becomes an instrument for depriving the laborer of a part of his just reward, has been shown in a former chapter. Inconvertible paper, however, is a far more potent instrument for producing the same injustice. Those who work for wages suffer the most severely from its use. As the emission of inconverti- ble paper progresses, all prices advance, and the rates of wages are enhanced with other things. But, un- fortunately for the laborer, it is a rule almost without exception that the prices of all the necessaries of life rise more than wages. EFFECTS OF AN INCONVERTIBLE CUERENCT. igf By the issue of greenbacks an artificial stimulus was given at once to the prices of all commodities, and speculation forthwith ran riot. The markets were filled with buyers, who, confident of a further advance, were eagerly bidding up prices. The commodities which then became the subjects of the most active speculation were those composing the food we eat and the clothes we wear. Speculation caused by the issue of inconvertible paper affects most the prices of the necessaries of life. But for wages there can be no speculative demand. The employers of labor, so far from speculating in labor, oppose every advance to the extent of their ability ; for any increase of wages is liable to. diminish their profits. Greenbacks made no addition to the capital which sought investment in the hiring of labor. The wages fund of the country gained nothing by their issue. Wages were advanced because the laborers must have their necessary wages. They must earn enough to buy the things without which life cannot be supported ; and they wUl not descend to a standard of living below that to which they have been accustomed, with- out a struggle. They obtain, therefore, a nominal advance of wages ; but not sufficient to make up for the loss of purchasing power which money undergoes. The withdrawal of laborers in the army caused a scarcity of labor while the war was in progress, and concealed for a time this effect of the currency. With the disbandment of the armies, however, and the return of industry to its accustomed channels, the wrongs which the use of inconvertible paper in the payment of wages inflicts upon the laborers have been fully developed. 1.98 PAPER MONET. The Special Conunissioner of Revenue, in his Report of 1866, after a careful investigation of the relative effect of the currency on the prices of commodities- and the rates of wages, states his conclusions as fol- lows : "The general result of an examination and com-- parison of all the statistics gathered leads, therefore, to the opinion that the average increase in the prices of lahor siace 1860 has heen ahout sixty per cent.,, and of commodities, as already stated, ahout ninety per cent." In the Western States the condition of the laborers has been more favorable than in the Atlantic States. The prices of food have been lower, because food is there the chief product ; while in a new and expand- ing country the demand for labor constantly ex- ceeds the supply, and enables the laborer to sell his services on better terms. The above citation, however, fairly- represents the relative advance of prices and wages in the greater portion of the coun- try ; but it fails at the same time to tell the whole story. It does not specify whether the prices of commodities from which the averages were made were prices at wholesale or at retail. The former are the only ones of which accurate statistics can be obtained, and from them numerical comparisons can be most readily drawn. But when the effect of inconvertible paper in enhancing retail prices is inves- tigated, it becomes evident that the loss of purchasing power wages undergo is greater than that shown by comparisons with wholesale prices; for the issue of such money enhances prices at retail in a greater ratio than at wholesale. Greenbacks caused prices to ad- EFFECTS OF AN mCONVERTIBLE CURRENCY. 199 vance because, though there was no more value to lay out in exchange for commpdities, there were more dollars to expand for that purpose ; and, as this paper money wholly superseded the metaUio money, none other could be used in retail dealings. The retailers were entitled, on account of this increase of the money in circulation, to receive more for every thing they sold. But, from the manner in which retail trade is conducted in this country, they were enabled to take advantage of the occasiqii to increase their prices far beyond any thing they were reasonably entitled to. The retailers of the United States, never much re- stricted by competition, have, by the aid of green- backs, formed thenjselves in many localities into " rings " for plundering the community. Several causes, resulting directly from the nature of inconvertible paper money, have tended to enhance prices at retail more than at wholesale, 1. While the emission of greenbacks was in prog- ress, there was no perceptible limit of the extent to which they would depreciate. It was possible that they might follow the path marked out in history for inconvertible paper, and become as worthless as assignats or Continental money. A doubt hung over them. There was danger in holding them. Every one, therefore, who was compelled to receive them in exchange for merchandise, endeavored to add to the price of the article sold an amount sufficient to insure himself against the risk of their further depreciation while in his hands. At the same time the value of the currency was constantly fluctuating. Prices of all commodities varied, not only according to the state of the markets, but with the variations in the value of 200 PAPER MONEY. the circulating medium. These fluctuations were fre- quent and extreme. A dealer laying in a stock of goods, sufficient to last during the season, ran a risk of loss from a decline in their price before he could dispose of them to his customers. He endeavored, therefore, so far as he could, to add to his prices a sum sufficient to insure himself against the risks of these fluctuations. A higher rate of retail profits had become necessary. But the retail dealers, by tacit consent among themselves, made of this necessary insurance an additional source of profit. They fixed its amount themselves; and as, from the nature of things, there was no manner of fixing the amount with accuracy or certainty, they were always sure to stretch it to the utmost limit. The public was at their mercy. The wholesale dealers in like manner added the same insurance to their prices, btrt, being subject .to the competition of open market, they were unable to make of it so great a source of profit. 2. That prices at retail go up much more easily than they come down, is a matter of common observation. An advance in the wholesale markets is a valid reason for increasing retail prices. The retail dealers, accord- ingly, mark up their goods to correspond with every upward surge of wholesale prices. The standard by which they are guided in determining the rates at which to sell, is the highest fiuctuation of the season in the general markets, and not the average for that time, or what their goods cost them. But when high prices have thus become established, and people have become accustomed to paying them, the custom is continued after the reason for it no longer exists. 3, This practice of insuring against the uncertain- EFFECTS OF AN INCONVERTIBLE C0KRENCY. 201 ty of the currency, and the fluctuations in values, becomes prevalent in all commercial transactions. Every one must do it in self-defence. Hence, all the expenses, , both of doing business and of living, are greatly increased. This circumstance, again, is made an additional pretext for enhancing retail prices, and the inability of the people to endure any further exac- tions becomes the only restraint upon retail dealers. At the same time, that portion of the community that finds itself suddenly enriched by the transfers of property, which the fluctuations of values cause, gives itself over to all manner of extravagance. . Goods are purchased simply on account of their deamess. The higher the retailers can put their prices, the better for such customers. But, in enhancing prices for this class, they enhance them also for the rest of the com- munity, and the extravagant practices of a few thus become an injury to many. 4. There is still another quality of our greenback currency which assists this process of retail extortion. All coin, but debased copper or nickel, being driven out of circulation, paper takes its place in the smallest transaction. Small bills and fractional currency are issued to satisfy every demand for them, and become the most efiective instrument in enhancing prices. If they were scarce, and difficult to obtain, it would become necessary to lower prices somewhat, in order to adjust them to the amount of money circulating through the hands of the people. But, so far from contracting that portion of the currency which most needs it, small bills and fractional currency are crowd- ed into circulation, and retailers are enabled to put up prices until such excess of currency is absorbed. Ev- 202 PAPEB MONEY. ery clamor for small bills is immediately satisfied, as though such money were peculiarly the people's mon- ey, instead of an instrument for their oppression. Thus aU the evil effects of issuing snxall bills under a mixed currency are aggravated tenfold when the currency becomes inconvertible. It 4oe$ not follow that all retail dealers get rich under such a system. Where prices fluctuate ex- tremely, the risks of trade are greatly increased. The apparent high rate of profit also causes business to be, overdone, and, though the gross amount of profit received by the retail dealers of the country ha^ been greatly inpreasedj the number among whom it must be divided has been correspondingly augmented. The net profits of each dealer, therefore, depend princi- pally upon the two circumstances, whether his busi- ness is overdone in his own locality, and whether he is fortunate in making his purchases after a downward fluctuation in the market?. But, wMlo the profits, of the retailers as a class have been vastly enhanced, the purchasing power of wages has been correspondingly diminished. When, therefore, like Commissioner of Revenue states that in 1866 wages had advanced »iXij per cent, and com- modities ninety per cent., he fails to show the real loss to the laboring class. It ig probable th^t at that time commodities had advanced, at retaU, over one hun- dred per cent,, and that the purchasing power of wages iu many parts of the country had fallen nearly one-half< Since that time, prices have been reduced somewhat, but the condition of those who work for wages has not been restored to what it was before the war. Speculation no longer exercises its former pow- EFFECTS OP AN INCONVERTIBLE CURRENCY. 203 er. But it is observable that prices at retail have fallen in a less degree than at wholesale. The public has become accustomed to high prices, and the cus- tom is still continued in force. Competition has less power than ever. The number of distributors remains excessive, while their expenses have been but little diminished. They attempt to live, therefore, by ob- taining inordinate profits for what they succeed in selling. It is probable that nothing wiU reduce retail prices to their proper level but the use of coin as the sole medium of retail trade. But, while the expenses of living are thus kept up at nearly war rates, wages have declined considerably. The disbanding of our armies increased the supply of labor ; whUe the disturbance of business, and diminu- tion of production, which necessarily resulted from the decline in the prices of commodities, lessened the demand for labor. At the same time, the policy of contracting the currency was long steadily pursued, the greatest sufferers from which have been the labor- ing classes. Contraction causes capital to be hoarded; to seek any investment, rather than productive entei> prises. It brings production to a stand-stUI, and deprives the laborers of emplojrment. One of the standing arguments in its favor is the ultimate benefit to those who work for wages. But if they starve before specie payments are reached, the remedy must be pronounced more fatal than the disease. It is bet- ter for employed workmen to be partially robbed by paper money than to be left idle by a general stagna- tion of business. The foregoing conclusions can be supported by an ample supply of well-established facts. 304 PAPER MONEY. The condition of wages and retail prices in Massa- cliusetts in April, 1867, is stated by Amasa Walker in these words : " By careful investigations made in this Common- wealth, it is quite satisfactorily ascertained, that the average advance of labor in all departments, male and female, in shops and factories, on farms and in families, is near fifty per cent, since 1860. If so, the laborer gains fifty per cent, in wages ; but he must spend his wages for commodities, and these at the most moderate calculation have been raised in price at least one hundred per cent, above the natural average." In the Revenue Commissioner's Report of Decem- ber, 1868, the following statement is made: " The result of long and careful investigations in respect to the retail prices of the leading articles of domestic consumption by operatives in the manu- facturing towns of New England, the Middle and some of the Western States, have afforded data for accurately estimating the increase in the prices of such articles in 1867 as compared with 1860-'61. They establish the following conclusions : "That the average increase in the price of gro- ceries and provisions in 1867, as compared with 1860-'61, was 88 per cent. ; or, calculated on the basis of the quantity consumed on an average by a number of workmen, a little in excess of 86 per cent.; of domestic dry goods, including clothing, 86^ per cent. ; of fuel, 57 per cent. ; of house-rent, 65 per cent. " The average of these results, proportioned to the ascertained varying ratio of expenditure under the several heads, show that for the year 1867, and for EFFECTS OF AN INCONVERTIBLE CURRENCY. 205 the first half of the year 1868, the average increase of all the elements which constitute the food, clothing, and shelter of a family, has been about 78 per cent., as compared with the standard prices of 1860-'61. " The result, in general, of this large increase in the prices of commodities of domestic consumption to the laboring man becomes evident, by comparing such increase with the increase in the rates of wages during the period under comparison — which rates, for the year 1867, as compared with 1860-61, were as follows : For unskilled mechanical labor, 60 per cent. ; for skilled mechanical labor, 60 per cent. "The fact, therefore, is established by incontro- vertible evidence, that the condition of working men and women in a majority of the manufacturing towns of the United States is not as good at the present time as it was previous to the war, notwithstanding that their wages are greater, measured in gold, in 1867-'68 than they were in 1860-'61." In a speech made at Chicago, May 6, 1871, Mr. Welles shows that no improvement of condition has taken place since 1868, as tested by the consumption of certain leading articles — the best test of the general prosperity of the mass of the people that can be given, in the absence of such detailed investigations as those contained in his revenue reports. He says : " I want to teU you, gentlemen, here to-night, and the directors of our financial affairs, that there was less cofiee and sugar consumed last year per capita in this country than there was ten years ago. I want to tell you that we are consuming a proportionally smaller number of boots and shoes, hats and cloth, to-day, than we were in 1860; and that we consume less of cotton 206 PAPER MONEY. cloth, mea,5ured by the pound, in 1870, with 39,000,000 of people, than we did in 1860, witfe 30,000,000 of people." Part of these effects inupt be ascribed to taxation and the tariff, and, though the effects of that cause and of the currency cannot be separately stated in fig^ires, yet, from the a priori considerations above given, it is safe to conclude that the latter cause is by far the more powerfuL While those who work for wages suffer the most severely from the use of an inconvertible ovurrenoy, the effect on the profits of those engaged in agriculture is scarcely less disastrous. In a country which raises a surplus of agricultural products, the price of the whole crop depends upon what can be got for the surplus. "Vyhen there is more of an article produced than can be consumed at home, its price may decline indefinitely, unless the superabundance can be exported. Thus, in Illinois and Iowa, Indian com has frequently been used for fuel. But, when a part of any crop is exported, the price of the whole is regulated by the foreign markets, as there can be but one price, after allowing for the ex- penses of transportation. There are times, it is true, when our markets control the foreign markets. We represent supply, and England represents demand. By controlling the supply, therefore, we can sometimes force up prices. This power is one, however, that we never have when most needed — ^when our crops are largest. The prices of most of our agricultural pro- ducts, therefore, must depend in part on the price of gold. The quotations in the European markets rule, and the premium on gold is added in arriving at the paper prices in our markets. Hence, when, the gold=rpre- EFFECTS OF AN INCONVERTIBLE CUREENCY. 207 mium is depressed below the level of general prices, the farmers suffer. They sell their products on the basis of gold, and buy the greater portion of the mer- chandise they need for consumption at inflated paper prices. When gold has advanced forty per cent, ajid commodities sixty per cent., or gold ten per cent, and commodities twenty-five per cent., they lose the differ- ence. But this is not their only loss. Agricultural products are sold at wholesale prices, while the goods the farmers buy are at retail prices. Hence, when the products they sell have advanced only forty per cent., the goods they buy are really enhanced seventy-five per cen$., and when gold is at ten the difference is yet Vider. The full effect of paper money on the agricultural class is only just felt. Successive short crops had so diminished, the supply of breadstuffs throughout the civilized world, during the two years 1866-67 and 1867-'68, that famine prices ruled, disguising the ef- fects of our inconvertible currency, while owing to the short supply in our own markets, the prices of many agricultural products were independent of the foreign markets, and of the premium on gold. Specu- lation, accordingly, aided by its most convenient instru- ments, inconvertible paper, and banks freed from the restraint of paying specie, had full swing. But, since 1868, this has been changed by the return of our sol- diers to farming pursuits, and by favorable harvests, and the evU effect of the currency has begun to weigh heavily on the agricultural class. As there is a surplus of their products for export, the premium on gold has be- come a controlling influence in determining prices, and as it ranges constantly below the average of general 208 PAPER MONEY. prices, agricultural products have become relatively- very cheap. Thus, in many of the interior towns of the Northwest, spring-wheat of the second quality, of which the bulk of the crop consists, touched sixty- five cents in 1868, and in 1869 thirty-five cents a bushel in current money. At this rate a bushel of wheat has less power in exchange — will obtain for its producer less of other commodities, than ever before in the history of the country. During 1870 and 1871, wheat ruled higher, owing to the Euro- pean war; but, on the other hand, Indian com and hog products have ruled unprecedentedly low. At twenty cents a bushel for com, and three cents a pound live weight for swine to the producers on their farms, these commodities have less purchasing power than at any former period in this generation. Now, our farmers, in their turn, are having a taste of the in- equality and injustice of the greenback currency. Af- ter the poor harvests, it was made the instrument of enhancing the prices of the necessaries of life to the already overburdened laborers of the East. Now that the crops are superabundant, it is made the in- strument of robbing the producers of a part of their just reward. The increased use of machinery in agricultural op- erations and consequent decline of the cost of produc- tion have ofiset in part the evil effects of the currency. But that fact does not palliate the wrong. The cur- rency deprives the agricultural class of the increased welfare the use of machinery would naturally bring. The capitalist fares better than the laborer or the agriculturist, when inconvertible paper is used as the instrument for the distribution of wealth. The ap- EFFECTS OF AN INCONVERTIBLE CUREENCT. 209 parent gain to the owners of property from the issue of such money, it is true, is all in price. Production is in reality diminished, and there is less wealth to distribute. But, though capitalists do not gain so much as they would if gold were the only money, they receive a greater relative share of the wealth that is produced than before. Although a fluctuating currency causes many involuntary transfers of property, yet, as a rule, capital can protect itself. Money, always a power, is more powerful than ever when its value changes daily. The manner in which an inconvertible currency in- creases the profits of capital employed in distribution, and particularly in retail trade, needs no further eluci- dation. The fact, however, deserves consideration, that the shares of wealth received by the several own- ers of capital under the operation of inconvertible pa- per are widely different. While the process of depre- ciating the currency is going on, capital which is tied up in trust funds, or which consists of debts payable at a future day, is steadily diminished. The property of every creditor is then, in part, transferred to his debtor, without his consent. Widows and orphans, and those living on fixed incomes, are then robbed un- der authority of law. But, on the other hand, active capital, skilfully handled, can have no better oppor- tunity of increasing itself than is then afforded to it. An increase of prices, undoubtedly, is not an increase of values. A person holding the same property at the end of the inflation as at the beginning, would be no richer. But property does not remain constantly in the same hands. When prices begin to rise, people begin to buy in order to realize the increase. If, how- ever, they use their own money they gain nothing, 210 PAPER MONET. unless prices recede after they have sold. But, if they use borrowed money, they can sell at the advanced prices, repay the loan, and gain the difference. Com- modities are thus bought on a margin, and by a rise the margin may be doubled. The apparent gain is nothing more thaii a depreciation of the currency. The money borrowed is repaid with money of less purchasing power. The property of the ©^editor is transferred to his debtor. Thus, raany banks and money-lenders, insurance and trust companies, though having nominally the same capital to-day which they had in 1862, have really lost a part of it, unless they have gained enough by increased rates of interest to form a reserve. But prices do not advance steadily as the emission of- paper proceeds. The advance is always irregular and spasmodic, Reactions and fluctuations accompany it at every step. It is not eve?y one, therefore, at- tempting to gain by the rise in prices, who succeeds. Only a few draw prizes. AH business becomes gam- bling, and the most audacious are frequently the most successful. Success, however, is not wholly a matter of luck. In a market subject to frequent and violent fluctuations, those possessed of large capital have the most decided aidvantage over their less fortunate neigh- bors. A decline that ruins one operating on a narrow margin enables another having a large capital to btiy at the reduced prices, and sell at the next advaiioe. The risk of such fluctuations renders a large capital necessary to transact business with success. Credit also comes in to add to the inequality. The greater the risks of commerce, the more difficult does it become for those whose credit is not established to obtain the EFFECTS OF AN INCONVERTIBLE CUERENCT. 211 requisite advances ; wMle those wbose credit is of high standing are enabled to profit by every fluctuation. Hence, under an inconvertible currency, capital tends more and more to become aggregated. It concentrates itself in the hands of a few extremely rich men. The effects of a mixed currency in producing such a con- centration of riches (pointed out in a former chapter), are insignificant compared with this power of green- backs. It is at the stock-exchange that this tendency is most plainly visible, A few great operators have swallowed up successive shoals of small ones, until many of the railway corporations of the country have become the property of a few men who have thus been rendered more powerful than the hereditary nobles of other lands. The same tendency has been equally manifested in other departments of business. At the commercial centres the strong houses have constantly become stronger, while the weak ones have been swallowed up by the former, or have perished and disappeared. The tendency in commerce has been steadily toward the aggregation of a few immense fortunes, whose pos- sessors can crush out their weaker competitors at a blow. This tendency is inseparable from paper money, with its risks and fluctuations. These necessarily pro- duce an usequal distribution of wealth, and thus divide society into separate classes. But this inequality is not the worst result of such a currency. Those who gain the most wealth from its use are those who render no equivalent services in re- turn. The speculators are the ones who are enriched ; those who use their capital and credit as instruments 212 PAPER MONEY. for gamMing, and not as a means for adding to the production of the country. Under such a system, they receive the largest share of the products of labor who assist the least in creating those products. !N"ot only do the speculators thrive on the natural fluctuations of prices inseparable from a fluctuating standard of values, but they are enabled also to create fictitious fluctuations, and thus to prey upon the rest of the community. As the amount of legal-tender paper money in the country is a known quantity, and cannot be increased by importations from neighboring countries, they can, sometimes, by withdrawing from circulation a few millions of greenbacks, at those sea- sons of the year when money is in active demand, pro- duce an artificial stringency in the loan market, and a consequent decline in the prices of securities, to their own profit, and to the derangement of the commerce of the country to its remotest extremities. When the efiects of contraction, and a general de- cline of prices, are compared with inflation, and a gen- eral advance of prices, the same results are observed. It is still the speculators who gain the most. Capital which is used as an instrument for gambling has greater advantages over capital employed in legiti- mate commerce, on a falling, than on a rising market. The merchant who buys goods, when contraction is steadily forcing prices downward, is sure to lose before his stock is disposed of in the regular course of trade; while the speculator who stakes his capital on a bet that prices will be lower at some future day, stands a chance of gaining. The latter has the further advan- tage of always being able to wait until the bottom is reached, and of then buying for a reaction. Specula- EFFECTS OF AN INCONVERTIBLE CUERENCT. 213 tors can take advantage of a falling, as well as of a ris- ing market. They thrive on fluctuations. Paper money nourishes them as much by contractions as by expan- sions. If, therefore, the policy of contraction is ever established in the United States, it will be for the in- terest of every merchant to close out his stock of goods, and, keeping his capital in cash or on call, enter the markets only as a speculator. If his business is conducted in part on borrowed capital, he can escape bankruptcy in no other way. If, on the other hand, his capital is all his own, he can, by simply waiting, add to it not merely the premium on gold, but the amount of the appreciation of the value of money. But, while speculators will gain, and legitimate business will be destroyed, by the adoption of such a policy, it should be remembered that those who were shrewd enough to enrich themselves by speculation during the inflation, are the ones who will be most likely to display similar sagacity during the contrac- , tion. Not only will their paper fortunes be increased thirty or forty per cent, without any further effort on their part, but they will have another opportunity for successful speculation. The injustice of transferring the largest share of the products of labor to those who render to society no equivalent services in return, would thus be doubled. The crime of inflation would be logically consummated by the crime of contraction. If such a course is pursued, it will be found that ten years of paper money are equal to a century of the law of primogeniture in producing an unequal distri- bution of wealth. Already the cry against a privileged class is begin- ning to be heard. It is called the bond-holding aris- 214 PAPER MONEY. tocracy. To exempt a particiilEir species of pi-operty from taxation is undotilbtedly to give to the holders of Such property a special privilege! The exemption of United States bonds from state taxation, howevei*, has comparatively little influence in producing the un- equal and unjust distribution tif wealth now going on. The most active agent at work is paper money. Not only is the tendency of capital to concentrate increased by the fluctuations of prices, but an incon- vertible currency has^ like convertible bank-notes, but in a higher degree, the same effect on the condition of the mass of the people as indirect taxation. When taxes are imposed directly on property^ the rich and poor contribute respectively according to their means. When taxes are imposed indirectly upon consumption, all are taxed according to what they consume. The poor inan is then taxed on his whole inc&me, or the greater pftrt of it ; while the rich man escapes taxa- tion on the surplus which he adds eaeh year to his principal. A diminution of the purchasing power of wage^i it is evident, has the same efiect on the lalDorer, whether it is caused by a tax on consumption^ or by an iinperfect instrument of distribution. It makes no difierence to him whether the price of an article is increased by a duty on the raw material of which it is made, or by an insurance imposed by the middle-man in order to protect hiiaself against' the fluctuations of the currency. In either case he can afford to buy less of it than before. But, contemporaneously with greenbacks, a system of indirect taxation has been put in operation, which, by diffusing taies over an immense number of articles, instead of concentrating them on a few, has been ren- EFFECTS OP AN INCONVERTIBLE CURRENCY. 215 dered needlessly oppressive. It is not strange, there- fore, that with two such Systems of indirect taxation in operation at the sanie time, the mass of consumers should hegia to feel that the holders of property are having an unjust advantage in the accumulation of wealth. The remedy for the first of these evils is a speedy return to specie payments. The remedy for the second is not so much to make United States bonds subject to state taxation, as to reform the system of Federal taxation, and concentrate taxes on a few leading articles. A system of direct taxation is impossible. The provision of the Constitution which provides " That no capitation, or other direct tax, shall be laid, unless in prOpoirtion to the census or enumeration hereinbefore directed to b6 taken," precludes the Fed- eral government from direct taxation. Population is not a test of the wealth of a country. The newer States possess much less accumulated capital in pro- portion to the number of their inhabitants than the older States, and any attenapt to apportion to each its share of Federal taxes in accordance with the census must fail. The only direct tax possible is that on incomes, which, though a direct tax in political econ- omy, is not in Court. As Federal taxation then will necessarily be pro- portioned to Consumption, instead of to wealth, it becomes doubly important to diminish its effects by lessening its amount. A situation has been reached where strict eoonolny, in administering the govern- ment, has become the necessary means for alleviating the condition of the people. But, until specie pay- ments are enforced, economy can only be talked of, 216 PAPER MONEY. ■without being practised. Greenbacks and economy cannot coexist. Tlie product of tbe printing-press is always parted with more easily than the product of labor ; and, -when the currency is of fluctuating and uncertain value, a close calculation of expenditures is diflScult. Nothing -will bring the expenses of govern- ment within the limits of strict economy so surely as to dispel the illusions of paper money, and reinstate that which can be obtained only in return for an equivalent in value. De Tocqueville has predicted * that if ever a per- manent inequality of conditions and aristocracy again penetrate into the world, the channel by which they will enter is manufactures. The tendency which exists in a country, where manufacturing is the chief industry, for society to become divided into separate classes, consisting of a few employers and many employed, between whom there is seldom any sympathy, and often ill-concealed hostility, is un- doubted. But when to this tendency, unmitigated by any application of the principle of cooperation, is added that of a financial system equally powerful in- producing the same result, society divides itself into separate classes with great rapidity. The units of which the favored class is composed, it is true, are con- stantly shifting, but to the mass of the people who never enter that class this circumstance is of no ben- efit; while, as it prevents any concentration of heredi- tary culture, the community experiences all the evils of an aristocracy without any of its corresponding advantages. Universal suffrage then ceases to be * " Democracy in Ataerioa," Part II., Book II., chap. xx. EFFECTS OF AN INCONVERTIBLE CURRENCY. 217 the means of producing equality, and TDecomes a blind for concealing a fraud. The principle upon which our government purports to he founded is equality. A Republic which is to exist permanently as a Republic, cannot well be founded on any other. A financial system, therefore, whose most direct effect is to pro- duce inequality of conditions must be reformed, or it will change our institutions. The tyranny of capital over labor at the South has been destroyed by our armies. But against this gain must be set off the unjust advantage which capital at the North has obtained over labor. Already, in the older States, the inequalities of European society are in process of being reproduced. While on the other side of the Atlantic the march is toward equality, on this side we are marching away from it. In these Northern States alone has the course of modern civil- ization beeja turned backward. A necessary prelim- inary to restoring its progress is a speedy return to specie payments. 11 CHAPTER XL THE EFFECTS OF AN IKCOITrEETlBLE CTJBEENCT OK FOEEIGN TEADE, AND THE INTEENATIONAL EX- CHANGES, It has been maintained by some WTiters, that the emission of inconvertible paper does not affect the for- eign trade of the country in which such a circulating medium is used. The opinion, and the reason for it, h&ve been stated by Mill in these words : " When the paper begins to exceed in quantity the metallic currency which it superseded, prices of course rise ; things which were worth £5 in metallic money become worth £6 in inconvertible paper, or more, as the case may be. But this rise of price will not, as in the cases before examined, stimulate import and dis- courage export. The imports and exports are deter- mined by the metallic prices of things, and not by the paper prices; and it is only when the paper is ex- changeable at pleasure for the metals, that paper prices and metallic prices must correspond. " Let us suppose that England is the country which has the depreciated paper. Suppose that some Eng- lish production could be bought, while the currency was still metallic, for £5, and sold in France for £5 EFFECTS OP AN INCONVEKTIBLE COERENCT. 219 lOs., the difference covering the expense and risk, and affording a profit to the merchant. On account of the depreciation, this commodity will now cost in England £6, and cannot be sold in France for more than £5 10«., and yet it will be exported as before. Why? Because the £5 10s. which the exporter can get for it in Prance is not depreciated paper, but gold or silver ; and since in England bullion has risen in the same proportion with other things, if the merchant brings the gold or silver to England, he can sell his £5 10s. for £6 12s., and obtain, as before, 10 per cent, for profit and expenses. " It thus appears, that a depreciation of the cur- rency does not affect the foreign trade of the country ; this is carried on precisely as if the currency main- tained its value." * The conclusion follows logically from the premise which is assumed. If the premium on gold were a correct measure of the depreciation of the currency, and rose " in the same proportion with other things," foreign trade would be carried on in the manner de- scribed. While paper would be used for internal com- merce, coin would continue to be the only money used in transactions with other nations. The premium on gold would be added to the quotations for bills of exchange, and the increased prices at which the importers would sell tlleii- goods would be exactly equalled by the increased cost of bills of exchange ; or if the practice prevailed of dealing in exchange for coin only, as has happened in this country, the im- porter would pay for the coin with which to buy his * " Principles," etc., Book in., chap, xxii., sec. 3. 220 PAPER MONET. exchange, a premium exactly equal to the increased price at which he had disposed of his goods, and the trade balances would be unaffected by the substitution of paper for gold. But the experience of the United States since 1862 proves that the premise assumed by Mill is an error. Since the issue of greenbacks, gold has never risen nor fallen "in the same proportion with other things." The premium on it has never at any time been a cor- rect measure of the depreciation of the currency, as marked by the prices of commodities in general. The reasons for this conclusion have been given in the chapter devoted to the subject. It remains to show the effect of the differences between the price of gold and general prices, upon foreign trade and the interna- tional exchanges. When the premium on gold has risen more rapidly and higher than the prices of commodities, importar tions of foreign merchandise are diminished. In that case the importer sells his goods at increased prices in paper ; but, as he is compelled to buy the gold to remit for them at very much higher rates, his profits are wholly cut off in making the remittance. On the other hand, one exporting goods for which he has paid in paper, and selling them for gold, is enabled to dispose of the gold at home for a large profit in paper; or a foreigner bringing gold thither to buy goods sells it for paper, and with the latter buys a larger amount of commodities than before. When, therefore, the premium on gold has risen above the average of general prices, the country where" the in- convertible paper is used becomes a good country in which to buy. Its importations are then lessened, EFJFECTS OF AN INCONVERTIBLE CUKKENCT. 221 and if it has a surplus of products for export, its ex- portations are increased. But, when the premium on gold has fallen below the average of general prices, the process is reversed. One importiog merchandise into such a country sells it for high prices in paper, and, huying the gold for remittance at a much lower rate, finds a broad margin for profit. In such case, the country using the inconvertible , paper becomes a good country in which to sell. Foreigners forthwith take advantage of the market opened to them, and ship their products thither in increased quantities, while the products which are shipped thence for sale abroad are diminished. It has become customary to attribute the present derangement of manufactures in this country to the depressing efiects of internal taxation, and an oppres- sive tariff", overlooking the more serious evil of paper money. Such money, by increasing the cost of pro- duction, becomes a burden on all manufactures ; but, in treating of the effect of the currency on the interna- tional exchanges, it is its influence on the production of those articles that come into competition with for- eign-made goods which calls for particular attention. This competition may take place either in the home markets, or in foreign markets. Our manufacturers may be undersold, either in attempting to supply their own countrymen, or in supplying the wants of distant lands. When the field of competition is a foreign market, the disadvantages imposed upon them by the currency become very" obvious. When a fluctuating and uncertain medium of ex- change is used, every dealer, as before stated, is compelled to add to the prices of the commodities he 222 PAPEK MONET. sells, a sum sufficient to insure himself against the risks of loss. The manufacturer, accordingly, pays this increase of price for every article he uses in his business, and the cost of production for him is in- creased. A general enhancement of wages also takes place. The laborer must receive a greater nominal sum, that he may live as -well as before. This general advance of nominal wages will be another item to be added to the cost of production. But a manufacturer who works with a fluctuating currency, is compelled, also, to add to the prices of his products a sum suffi- cient to protect himself from loss by sudden deprecia- tion. In addition to his ordinary profit, he must obtain an extraordinary profit as an insurance against the fluctuations of prices, or, when shipping his pro- ducts abroad, against the fluctuations of the premium on gold. His standard of profits, therefore, is raised, as well as the cost of production. But, when manu- facturers are engaged in underselling one another in foreign markets, the smallness of the profit they can respectively afford to accept, determines which must withdraw. A minute variation in., the margin for profits will frequently drive one of the competitors out of the market. Our manufacturers, consequently, whose necessary standard of profits, and cost of pro- duction, have been raised by a fluctuating currency, are disqualified from competing in foreign markets on equal terms with those who have never been com- pelled to include in their calculation of profit an allow- ance for an uncertain medium of exchange. But while a fluctuating currency, by thus increas- ing the cost of production, and raising the standard of necessary profits, diminishes the capacity of our EFFECTS OF AN INCONVERTIBLE CURRENCY. 223 mamifaeturers to enter tlie foreign markets, the exces- sive depression of the premium on gold since 1865 has been a still greater disadvantage to them in competing with their foreign rivals. Their whole business is con- ducted on a basis of inconvertible paper, by which general prices, including, of course, wages and mate- rials, have been largely enhanced. But the goods they export they sell for gold, and the gold they convert into greenbacks, at the current rate of premium. If, however, the price of gold has only advanced forty per cent., while the average prices of commodities have advanced sixty or seventy per cent., or if gold has advanced ten per cent., and commodities twenty- five or thirty per cent., American-made goods, with the exception of those in the manufacture of which we have peculiar advantages, can only be sold in foreign markets at a loss. In that case, the price of the fin- ished product, as reduced to paper, has not advanced with the cost of production. The statistics of our trade, particularly as collected by Mr. Welles in his several reports, show that our exports of manufactured articles have fallen off, in a marked manner, since the decline of the gold premium in 1865 ; and whatever opinion may be held as to the connection of cause and effect between these two facts, it cannot be denied that the United States do not succeed in competing, in the markets of the world, with the products of skilled labor. The causes which have driven our manufacturers out of the foreign markets have, at the same time, en- dangered their possession of the home markets. For- eign producers, having no such disadvantages to con- tend with, are enabled to manufacture more cheaply 224 PAPER MONEY. than American producers, and thus undersell them at their own doors. The main thing iu favor of the for- eign manufacturers is the low premium on gold. The difference between the price of gold and the increase of the cost of production in this country is to them a source of profit, and constantly enables them to sell their goods at a less price in greenbacks than the American manufacturers can afford to take. Not all this increase of the cost of production is due to the currency. A portion of it comes from oppressive tax- ation. The heavy duties on imports, it is true, have always been intended to protect home manufactures. How far this intention has been successful, it is not necessary to. consider here. Our protective tariffs evidently have wholly failed to protect our producers against the disadvantages of the currency. To have that effect, the tariff must be high enough to make up for the low premium on gold, as well as the heavy tax- ation, and such a tariff would tend strongly to defeat itself. Another way of protecting our manufactures would be to concentrate all indirect taxes on a few arti- cles, and then, if possible, to raise the premium on gold above the level of general prices, and keep it there. The discussion of such a policy, however, may well be postponed until it has been finally determined to retain greenbacks as a permanent, instead of a temporary, currency. It is sufficient to observe that a rise of the gold premium would carry with it the prices of all raw materials which are imported, but would have much less effect on wages, and on most home products; while it would cause the prices of articles which are kept down by foreign competition to advance by the full percentage of the rise, and, as no increase of gen- EFFECTS OF AN INCONVERTIBLE CURRENCY. 225 eral prices could be caused Tby it, part of the currency now used in speculative operations would be with- drawn, and a stringency iu the loan market would en- sue. Such a policy might enable our manufacturers again to enter successfully the foreign markets with their products ; while a protective tariff, so far from having such an effect, ignores the fact that there can be a foreign market for our manufactured products. ' The effect of the currency on our commerce has been even more disastrous than on manufactures. The decline of over fifty per cent, in the tonnage of Amer- ican sailing-vessels registered for foreign commerce, it is true, is not due altogether to this cause. Steam- vessels have largely superseded sailing-vessels in for- eign commerce. But the causes which prevent us from building ships of wood equally prevent us from building them of iron. Nor can it be said that, in a natural state of prices, American builders of iron ves- sels cannot equal their British competitors; for, in 1859, ocean steamships of iron were built in Boston harbor, away from the centre of our iron industry, as cheap as they could be built on the Clyde in 1871.* It is usual to attribute the stagnation in this branch of industry to the tariff on raw materials. The tariff, undoubtedly, is more severely felt in ship-building than in any other employment. But, after estimating at the highest this disadvantage, the currency is still found to inflict severer injuries. Ship-building is the branch of manufactures most sensitive to the adverse influences of inconvertible paper. Our ships are brought into immediate competition, at the commer- * D. A. Welles. 228 PAPKB MONEY. cial centres of the world, with ships btiiit on a gold basis ; and our ship-huilders, working on the basis of paper, do not find the increased cost of production it causes equalled by the preniium they receive on the gold for which their vessels sell, or which is taken as freight money. The reform of the tariff, therefore, im- portant as it is, unaccompanied by a refiDrm of the currency, would do but little toward restoring pros- perity to our ship-yards. But it is not simply by transferring the American carrying-trade to foreign bottoms that the currency has injured our commerce. It has materially dimin- ished the amount of commodities we are able to ex- port. Our manufacturers find themselves handicapped when they attempt to furnish goods for foreign coun- tries, and the greater portion of the articles left for exportation consists of the raw materials of agriculture. Our importations of coffee, tea, spices, and other com- modities we cannot produce at home, are paid for with bills on London, which we buy with our agricultural products, gold, and bonds, and the markets for manu- factured articles, throughout the world, are thus left open to the EngHsh without our competition. We very nearly fill, in general commerce, the same place as our semi-civilized neighbors of South America — as exporters of the products of unskilled labor. The great bulk of our exports consists of five articles of raw produce, cotton, petroleum, bread-stuffs, tobacco, and provisions, including, in the latter, "hog prod- ucts," and cheese. By a barbarous tariff, and worse currency, the most inventive and skilful people that exists is shut out from competing successfully with its manufactures in the markets of the world. EFFECTS OF AN INCONVERTIBLE CURRENCY. 227 If the commerce of the United States is ever to ex- pand to the proportions Nature has marked out for it, the products of the loom and the forge must be- come articles of export. Commerce and manufactures must expand together. Our manufacturers, no longer pent up within the narrow limits of their own land, must seek the markets of the world, and, in so doing, furnish our merchants with cargoes for their ships. English commerce is founded on English manufac- tures. American commerce will one day build on a similar foundation. But it will not be until after spe- cie has once more become the current money of the land. The following table of our exports of manufac- tured articles at gold values, with fractions of millions omitted, shows but little progress since 1854, and a material decline if measured per capita of population : Year. Value. 1854 $36,000,000 1856 35,000,000 1856 36,000,000 1857 36,000,000 1858 35,000,000 1859 39,000,000 I860.... 48,000,000 1861 43,000,000 1862 32,000,000 Year. Value. 1863 $37,000,000 1864 24,000,000 1865 23,000,000 1866 29,000,000 1867 36,000,000 1868 37,000,000 1870 33,000,000 1871 43,000,000 The apparent increase in the last year is wholly due to shipments of arms and ammunition, a large part of which came from the government arsenals. The following table shows the imports of dry goods at gold values, and, with the preceding, demon- strates the effects of our present system on the pro- ductions of skilled labor, and on the diversification of . home industry : 22S PAPER MONEY. Tear. lavoicea Value. 18B4 $80,000,000 1855 64,000,000 1856 98,000,000 1857 90,000,000 1858 60,000,000 1859 113,000,000 1860 103,000,000 1861 43,000,000 1862...' 50,000,000 Tear. Invoiced Value. 1863 $67,000,000 1864 71,000,000 1865 94,000,000 1866 126,000,000 1867 86,000,000 1868 80,000,000 1869 94,000,000 1870 108,000,000 1871 132,000,000 The lowest amount, it ■will be observed, is that for 1861, when the stagnation that preceded actual hos- tilities had. diminished our capacity for consumption. From that time till 1864 the premium on gold, being in advance of general prices, acted as a most effectual protective tariff. In July of that year gold touched 285^, the highest quotation given. It ranged gener- ally above 200 for the remainder of 1864, and, the first two months of 1865, declining steadily through March and April of the latter year, until in May it had fallen below 130. The effect of this sudden decline of the premium on gold is marked most visibly by the impor- tations for the year lS66, the great increase having commenced in August of the preceding year. Since that time gold has constantly declined faster than other commodities, stimulating importations on a large scale, so that the value of foreign dry goods brought into the country was more than three times greater at the end of thp decade than at its begin- ning. That the theory is correct which ascribes the de- rangement of our foreign trade chiefly to the circum- stance that the gold premium does not equal the de- preciation of the currency, as measured by the ad- vance of prices, can be shown by several facts collected EFFECTS OF AN INCONVERTIBLE CURRENCY. 229 by Mr. WelleS; In his report of December, 1868, an apt illustration of the effect of our inconvertible cur- rency on foreign trade is given. "The statement," he says, " is ^ furnished to the Commissioner, by a manufacturer of furniture in one of the Middle States, who previous to the war had built up an extensive export business to the West Indies, Central and South America, of a variety of ' cane-seated ' and ' cane-backed ' furniture suited to warm latitudes. "Thus, on the 1st of March, 1861, gold and currency being at par, $1,000 in gold possessed a purchasing power sufficient to obtain for the South American importer 111-J- dozen of what are termed in the trade, 'ordinary square-post cane-seated chairs.' About the 1st of January, 1862, gold began to com- mand a premium, and advanced during the next three years with great rapidity. This movement, however, was not participated in at first, to any considerable extent, by either labor or commodities, and, in con- sequence, the purchasing power of gold greatly in- creased; so much BO, that on the 1st of July, 1864, the $1,000 gold which in 1861 bought 111^ dozen chairs, then bought 143 dozen. Under these circum- stances, as was to be expected, trade increased, as the foreign purchaser found the American market by far the best for his interest ; but from July, 1864, a move- ment commenced in an exactly opposite direction, gold receding, and labor and commodities advancing in very unequal ratios. Thus, in January, 1865, the $] ,000 gold, which four years previous had a purchas- ing power of 111^ dozen chairs, and on the 1st of July, 1864, of 143 dozen, then commanded but 126f 230 PAPER MONET. dozen; in February, 1866, a still smaller number, viz., 91-J- dozen, and ultimately attained its minimum in January, 1867, when the purchasing power of the sum named was only 89| dozen. From this point the purchasing power has gradually increased, and for the past year, 1868, has remained at the rate of about lOi' dozen, or nine dozen less than could be bought with the same money in 1861. " The result has been that the foreign purchaser now goes to France or Germany, while the products of American industry, in the form of furruture, being no longer available to exchange for sugars, spices, or dyewoods, gold has necessarily been substituted." As gold could only be used to purchase the chairs byl)eing first turned into greenbacks, it is evident that the principal cause in determining these variations of its purchasing power has been the amount of the pre- mium. The lower the prenjium on gold, the less is the purchasing power of gold in our markets. Thus, on July 1st, 1864, gold was quoted at 250, In Janu- ary, 1865, it fell below 220. In February, 1866, it ranged a little below 140, and in January, 1867, just below 135. During the last year mentioned, 1868, it averaged about 140. In the same report he makes the following state- ment, showing that a similar state of affairs exis'ted in other trades : " There is hardly a single domestic article or pro- duct, agricultural or manufactured, in behalf of which the claim, either directly or indirectly, has not been made within the last two years, that the same could be produced to greater advantage or profit in some- other country than the United States ; increased pro- EFFECTS OF AN INCONVIIRTIBLE CUKRENCr. 231 tection even being demanded for oil paintings, rough building stone, Indian corn, firewood, Bibles, and ice — ^the latter to the extent of fifteen per cent, gold; and this claim the Commissioner is obliged to admit is to a very great extent in exact accordance with the truth." In his report for December, 1869, he shows that he has learned that the trouble with our foreign trade is the fact that prices are too high in this country as measured by gold. He says : "Gold would still remain what it is now, the cheapest commodity in the country, and for that reason, as now, would continue to be taken by foreign countries in preference to our other domestic products. That this now is the case, proves that gold is relatively the cheapest commodity we have to export. That gold also is relatively cheaper than the products of our domestic manufactures, can also be shown by a more specific illustration. Thus, in 1860, $1,000 in gold would purchase for export 111 dozen cane-seat chairs. The same amount of gold will purchase at the present time the same number in almost any part of Europe ; but in the United States it will now pur- chase but 102 dozen, thus proving that, as measured by this commodity, gold is cheaper with us than it was in 1860, and cheaper also with us than it is in other countries. It is therefore sent to the points where it is most highly esteemed, and where it can be used to the greatest advantage; and the chairs, in common with the cotton cloth, furniture, tools and implements, nails, hardware,' hats, wagons, etc., of domestic manu- facture, are allowed to remain at home and depress the market with an excess of competition." 232 PAPER MONEY. In Ms speech made at Chicago in May, ISVl, he ascribes the perturbations in our exports and imports to the true cause. He says : " And there was another incident connected with this period, which, I think, is especially worthy of notice, and that is, that the export of many of our domestic products was stimulated during the year 1864 and a part of 1865, to a very great degree, by the increase of the premium upon gold, which, often rising* from 50 to 100 or 150 per cent, above the advance which had been experienced in labor and wages, in- creased, as it were, the purchasing power of the for- eign consumer, or decreased the relative cost in our own markets of such articles of domestic product as were available for exportation and sale in foreign markets. For example, the export of bacon rose in the year 1864, as compared with 1860, from 4 to 10 millions; of tobacco, from 15 to 40; of cheese, from 2^ to 12 ; of butter, from 1^ to 7 ; while of many other articles, the increase of our exports was from 50 to 100, and sometimes 300 per cent. And the lesson, I think, which we can draw from this fact is, that the reduction of the premium upon gold without, at the same time, measures being taken to reduce also the cost of the production of articles of labor, brings no benefit whatever to the country ; a lesson which, being not comprehended, or certainly not regarded by those who have the control of financial affairs at Washing- ton, has, I think, cost the country, in the past year alone, certainly not less than one hundred millions of dollars." If by reducing the cost of production he means re- vising the tarifi" and taxation, his remedy will not EFFECTS OF AN HSTCONVEKTIBLE CUKEENCT. 233 reach the root of the evil. It is good as far as it goes ; hut to diminish taxation will not increase the pur- chasing power of gold in our markets. It will not af- fect general prices. After its estahlishment gold will buy more of some articles, and less of others than be- fore, but its general purchasing power will not be al- tered. While, therefore, some manufactured articles could be afforded cheaper, we would not be enabled, thereby, to regain our lost commerce. His other remedy, contraction, would tend for a time, at least, to depress the premium on gold faster than the prices of commodities, and would still fur- ther lessen the purchasing power of gold in our mar- kets. It would aggravate the evil rather than cure it, untU universal bankruptcy had reduced prices to a specie level. There is one practical result of the effect of our in- convertible currency on the international exchanges that deserves particular attention, on account of its bearing on the practicability of resuming specie pay- ments. While the emission of greenbacks was in progress, distrust prevailed. No limit to their depreciation was visible. Prices were steadily rising, and a want of confidence in the paper money spread throughout the land. A tendency to hoard gold was thus created, and, as importations were lessened at the same time, it is probable that until 1864-'6, notwithstanding the fact that gold had taken the place of cotton as an ar- ticle of export, our due share of the precious metals remained in the country, stored away, in part at least, in private hoards. Since 1865, however, a different process has been going on. The price of gold has 234 PAPER MONEY. constantly ranged below the average of general prices, rendering it the cheapest article of export. At the same time the importations have been on a large scale, and the balance of trade to be paid in gold has been against this country. United States bonds, it is true, have in part taken the place of specie for shipment abroad. But it is j^robable, nevertheless, that the amount of the precious metals left in the country has fallen to a lower point than for many years. It is from the hoards of coin in private hands that, under ordinary circumstances, any sudden demand for it is filled. If these private hoards have been thoroughly deplete)! in the United States, the resumption of specie payments will be found a task, the real difficulty of which has been as yet but faintly realized. That a comparatively small amount of specie is held by the banks, appears from their statements. The amount in the vaults of the Sub-treasury is known. But there are no facts on which to base an estimate of that stored away in secret hiding-places, ready to be called forth whenever real money again becomes current. Any estimates deduced from the statistics of the exportation of gold are unreliable. It can be shown, however, that the causes most likely to diminish the amount of coinield by individuals have long been and are still actively at work. The idea has been persistently impressed upon the public mind that, th« war having been brought to a successful termination, greenbacks would speedily be raised to the level of gold. The process of contracting the currency was long persisted in, and it has been made to appear for the interest of every man to sell his gold in order to realize the premium before it dis- EFFECTS OF AN INCONVERTIBLE CUKEENCY. 235 appears. In the mean time there has been no use for gold. The courts for a long time refused to uphold contracts payable in coin ; and, except in Wall Street, there has been no means of making it pay interest, and even there it has generally been necessary to pay for having it "carried." It has become, in short, the most unprofitable property in the country. When, therefore, a person hag once sold his gold there is no motive for him to replace it. He can only obtain it by buying it of a broker. But one not a speculator, who has sold his gold in order to realize the premium, is not apt to buy it back again. There is no means by which the hoards of the precious metals in private hands, once broken in upon, can be readily replenished. The greater portion of the gold now in private hands, therefore, has been held since the suspension of specie payments. The amount held by the banks at the statement of June, 18V1, was $19,924,955 against $83,594,537 in 1860. The same motives which in- duced -the banks to turn their specie into greenbacks have acted with equal force on individuals, and it is probable that the amount left in private hands at the present time, as compared with 1860, has been dimin- ished in a similar proportion. There are other circumstances which strengthen this inference. It is known that a portion of the silver coin, which formerly circulated in this country, has found its way to Canada. The discount on Amer- ican silver in that country marks its excessive supply. It is evident that the small change, which formerly circulated here through the channels of retail trade, has been sent thither to be made useful. The late excessive accimiulations of gold coin and bullion in 236 PAPER MONET. the Bank of England and the Bank of France may he attrihuted in part to the same cause. The disuse of the precious metals in this country has driven our share of them to countries where they can fill their proper office, and the stock in European countries, accordingly, has become over-ahundant. It is safe to conclude that a large portion of our share of the precious metals is held in foreign lands. In Sunfs Merchants' Magazine for January, 1869, the stock of coin and bullion then " in the States where resumption is to take eflfect " is computed at $150,000,- 000 ; which accords with the above a priori conclu- sions. It appears, further, that this stock was dimin- ishing at about the rate of $20,000,000 a year, though exports of government and railway bonds are delaying the drain of specie. So long as paper remains our only circulating medium, it is better for us to exchange gold for commodities which can be used, rather than to let it lie idle. But, before specie payments can be fully resumed, some way must be discovered for regaining our share of the stock of precious metals. The policy pursued at the Treasury Department for the last few years is the least likely to produce that result of any that can be devised. Gold will not remain in a country where, commercially, it is the cheapest article bought and sold for paper. It flows from the country where prices are high to the countries where prices are low. The law of the circulation of the precious metals acts with greater force when the currency is inconvertible than when it is purely metallic. Gold prices, then, are regulated by the premium on gold, and, when that is depressed below the general average, gold EFFECTS OF AN INCONVERTIBLE CUKRENCT. 237 prices are high. Gold; accordingly, is exported, and commodities imported, -with the double effect of ren- dering specie payments more difficult, and of embar- rassing manufactures and paralyzing commerce. The full force of this law has not yet been felt, as it has been neutralized in part by the flow of capital to this country for investment in railway securities and gov- ernment bonds. But that a day of reckoning must come at last would seem to be in the ordinary course of human events. A singular effect of our present currency is seen in the relation of the manufacturers of the Pacific States to those of the rest of the country. The difference in the money used in the different portions of the Union is equivalent to a protective tariff in favor of the manufacturers of the States where coin is the only money current. The cost of production has been increased in the Eastern States by the use of green- backs ; while in California, where specie is the only standard, it has remained unaffected by the currency, and has tended to diminish, on account of the accumu- lation of capital and partial decline of the rates of interest. At the same time, the premium on the gold, for which the Eastern manufacturers sell their prod- ucts in the California markets, falls considerably short of the increased cost of production to them, caused by our inconvertible currency. The discrimi- nation in favor of the manufacturers of the Pacific States, however, is not so great as that in favor of the European manufacturers ; for the former are harassed by the same system of taxation as the rest of their countrymen. The advantage of using a stable cur- rency nevertheless operates strongly in their favor, 238 PAPER MONEY. and has already stimulated manufactures to some extent, narrowing thereby the markets for the prod- ucts of the Eastern States. The greatest material benefit conferred by the Federal Union is free trade over a whole continent. That benefit has been par- tially weakened by the use of different currencies, whereby the trade with the Pacific States has been assimilated to foreign trade. Instead of attempting to force an inconvertible currency upon a people who have had sufficient saga- city to decline it, the East will act the part of wisdom when it follows the example of those States in escaping the efiect of the legal-tender act. CHAPTER XIL THE RELATIVE EFFECTS OF THE TARIFF AND THE CUEBENCT ON PRICES. In the numerous discussions of financial questions evoked by the wrongs -which a barharous system is inflicting on the country, it is usually taken for grant- ed that the prevailing enhancement of prices is due as much to excessive taxation as to a redundant cur- rency. It is claimed that the amount of the deprecia- tion which our paper money has undergone in excess of the percentage represented by the premium on gold, must be ascribed to the accumulation and duplica- tion of taxes. Prices of commodities, in general, it is inferred, have been enhanced by the increased cost of production which results from increased taxation. This view is erroneous. Taxes, no matter how im- posed, cannot add one iota to general, or average prices. Taxation changes the natural relations of prices to one another. It causes a redistribution of prices, but it cannot increase them in the aggregate. This follows from the theory of money heretofore ex- plained, and from the incidence of taxes, or the man- ner in which they are distributed. A given amount of money can only effect a given amount of exchanges. A general rise of prices in- 240 PAPER MONEY. creases the amount of exchanges, and requires a cor- responding increase of money. If certain commodities, being taxed, rise in price without any diminution of the quantity on sale, more money must he obtained to exchange them in the ordinary course of trade. This money is set free for the purpose by a decline in the prices of other commodities. The rise of those taxed is offset by a decline of those not taxed, and the aver- age of prices is unchanged. If a tax is imposed on profits, or, what is equivalent, on raw materials, prices of the manufactured products rise, that the manufac- turer may gain the customary rate of profit of his busi- ness. The enhancement of prices naturally attracts merchandise from abroad, which must be paid for with specie. If the currency is convertible, the shipment of specie causes a contraction of its amount, and a decline of prices, in which the commodities affected by the tax participate but partially. If the currency is inconverti- ble, the effect is the same, but differently reached. The exportation of specie, in such case, affects prices only through the medium of the premium on gold. If the taxes are imposed while the issue of the paper is in pro- gress they are immediately added into the prices of commodities, and, in the final adjustment of prices to the amount of the circulating medium, the articles af- fected by the tax are enhanced in price so as to leave the average rate of profit to the producers of them. The increased currency must be absorbed in price. If no taxes were imposed, it would still be so disposed of; but a different class of commodities would be affected by it. In either case general, or average prices would be the same. Taxation simply causes a different distri- bution of them. RELATIVE EFFECTS OF THE TARIFF, ETC. 241 The same conclusion is reached when the incidence of taxation is considered. The whole produce of human labor is allotted to those who are entitled to it in the form of either rent, wages, or profits. Out of these three all taxes must be paid. If every man could add his share of taxes into his rent, wages, or profits, no one would be taxed. But to suppose, that taxes increase general prices is to suppose that every man does add his taxes into his source of income.. If a system of taxation could be devised, by which every one would pay his just pro- portion according to his means, taxes would have no efieot whatsoever on prices. It is the attempt of each member of the community to' shift the share of the public burdens, allotted to him under an imperfect system, to the shoulders of his neighbors, that] causes taxation to disturb prices. The redistribution of prices which results from in- direct taxation is aggravated, and still further com- plicated, when the currency is inflated simultaneously with the imposition of taxes. To estimate the effect of this disturbing element it is necessary to trace the manner in wl^ich taxes are diffused. It was pointed out by Ricardo that, if a tax in pro- portion to profits is laid on all trades, the prices of commodities will rise in different proportions, accord- ing to the amount of fixed and circulating capital used in their production. Their values, relative to one an- other, will be changed in proportion as the capital em- ployed is expended in wages, or in wages and machin- ery combined. "When the capital is laid out in paying wages only, the price of the finished: product must equal the money so expended, with the usual profit 12 242 PAPER MONEY. added. If the ca'pixal employed is $10,000, and is all laid out in wages, and the profit is twenty per cent;, the price of the finished product will be $12,000. When the capital is expended, partly in wages and partly in machinery, the price of the finished product will be equal to the amount of the wages, and the amount necessary to pay for the use of machinery, in- cluding wear and tear, with the usual profit on capital added. If, in this case, the capital and rate of profit are the same, the wages paid are $5,000, the cost of machinery $5,000, and $500 will cover the wear and tear of the latter, the finished product must sell for $7,500. The profit left ia each case is, by the supposi- tion, $2,000. But, if a tax on it of ten per cent, be laid, the price of the finished product will rise in the first case to $12,200, and in the other to $'7,'700. The percentage of advance is difierent in the two cases. . The values of the two commodities relative to one an- other have changed. But a duty on imports, whenever it is imposed on the material used in the manufacture of any article, increases the cost of production. It operates, there- foije, as a tax on profits ; and, if all duties were equal and in exact proJ)ortion to the values of commodities, they would have the same effect on relative values as an equal tax on profits in the cases above supposed. But duties are not levied equally or in proportion to values. Those levied on the raw materials of one trade are higher than those levied on the raw ma- terials of another. An article, moreover, that in one stage is a finished product, is, with reference to some other branch of industry, a raw material. The effect, therefore, of a tariff diffused over a great number of RELATIVE EFFECTS OP THE TARIFF, ETC. 243 articles is to redistribute tbeir prices in la most compli- cated manner, and to change completely their values relative to one another. In a natural state of values three pairs of shoes may exchange for five hats ; but, after prices are disturbed by indiscriminate duties, the diiferent quantities of those commodities which will exchange for each other will be materially changed without regard to natural values. But here again the currency comes in to increase the perturbation. The excessive issue of paper money causes all prices to advance. If no taxation were in force, all prices would tend to rise in the same propor- tion, and relative values would not be changed. But when prices are deranged by taxation, the rise pro- ceeding from the inflation is unequally distributed. If commodities taxed rise in the same proportion as those not taxed, the part of the price which represents the tax rises also. There is, then, greater profit in producing an article that is taxed, than one that is not taxed, and capital would thus be attracted from one employment to another, until prices and- profits were equalized. But all commodities are not taxed equally, which has the same efiect as if one were taxed and an- other not. The rise of prices, caused by the increase of money in circulation, tends, therefore, to distribute itself in some sort of proportion to the effects of taxa- tion on prices, that profits may be equalized ; while the effect of the currency and the tariff combined is to cause a new and irregular distribution of prices, and this cause acts independently of any thing affecting the values of commodities themselves. This disturbance of relative values changes the em- ployments of capital, and renders the industry of the 244 PAPER MONEY. country less effective. In the long run, it must mate- rially diminish the production of wealth. But to compare the effects of the tariff and cur- rency on manufactures, and to determine which is the more pregnant with evil, it is requisite to trace still further the effect of duties on prices. A duty on a commodity that is imported is a tax. It increases the cost of the article on which it is im- posed, but not necessarily by the whole amount of the duty. Foreign manufacturers, producing for this mar- ket, must keep it, or diminish their business ; and, to keep it, they are frequently obliged to share in the - duty. They must sell their products in this market at a price, with the duty added, thatf will not materially diminish consumption. Yet the cases when this hap- pens with manufactured articles are few and tem- porary. When the foreign producer, to meet a mar- ket, must accept a profit less than the usual rate in his country, he will abandon that market. Duties, there- fore, not high enough to be prohibitive, increase, in the long run,..the price of the article on which they are imposed by the amount of the duty, or near it. When the article is produced in part at home, and the deficiency is made up from abroad, the price of the whole supply is increased by the amount of the duty, as there cannot be two prices for the same commodity. But the increase of price does not stop with the article on which the duty is imposed. Every one is trying to shift his share of indirect taxes to his neighbor. The merchant, of course, adds the duty in the price of Ms merchandise, and charges a profit on it. The manu- facturer pays the duty in the prices of his ravv mate- rials, and charges it in the price of his finished product RELATIVE EFFECTS OF JHE TARIFF, ETC. 245 with a profit. Raw materials, in our tariff, are not put on the free list. They are selected as special sub- jects of taxation. Iron, wool, hides, leather, lumber, coal, chemicals, dye-stuffs, and the like, are all subject to duty. But a tax on a raw material is a tax on eyery thing produced -from it, and an article which in one stage is a finished product, is the raw material for another, and that the raw material of something else. Duties, consequently, are diffused in the prices of all articles of consumption, and go into the cost of pro- duction and of living. The manufacturer pays bis share of them in the increased prices of the things he and his family consume. He may pay also another share. Taxes, as we have seen, cannot affect general prices. They must come out of profits. But, when duties are so numerous and widely distributed, they lower the general rate of profit on capital. Of this loss also the manufacturer must stand his share. But the workman also finds the duties included in the prices of the things he consumes. A duty on raw materials operates as a tax on wages. To obtain the same reward for his labor, therefore, he must receive a greater nominal sum. His wages rise, as estimated in dollars, that they may retain their former purchasing power. A general advance, not of real, but of nomi- nal wages, takes place. This expense comes out of the manufacturer's profits. It does not follow, how- ever, that the workman can compel such a rise of wages as will wholly indemnify him for the taxation. He cannot escape his share of taxes on consumption. He is fortunate, indeed, if he does not pay a greater share of them, in proportion to his means, than any other member of society. 246 PAPEK MONEY. But •while the cost of production to our home producer is thus ■wantonly raised by duties on raw materials, his foreign competitor labors under no such disadvantage. When, therefore, the two meet in the markets of the world, our manufacturer finds himself undersold, and is obliged to withdra-w. A tariff, -which by taxing every thing seeks to protect every thing, ignores' the fact that there can be such a thing as a foreign market for our -wares. It imprisons our manu- facturers -within the home market, -without any po-wer of expansion. It destroys our foreign trade. At the same time, it fails to give our producers the expected monopoly of their o-wn market. The increased cost of production, -which the tariff causes, is offset by a duty on the finished, product. But this duty, in many instances, and particularly in the case of the finer products of skilled labor, barely equals this in- creased cost of production. The British manufacturer, accordingly, hampered -with no such burden, can pay the duty, and still undersell our manufacturers in our o-wn markets. ^ The effect, then, of indiscriminate duties imposed on the whole list of imports is to shut our goods out of the foreign markets, and to give them no better hold, on the average, on the home market ; to which must be added the fact that increased prices diminish con- sumption. There can be no such thing as a tariff generally protective. The idea that, by imposing duties on every thing imported, home industry will be fostered, is utterly fallacious. History records no more stupid hallucination. The test of a duty is, how far is its subject a raw RELATIVE EFFECTS OF THE TARIFF, ETC. 247 material? Does the duty affect the prices of any- other articles than of the one upon which it is im- posed ? Is it confined to the price of that commodity, or is it distributed in other prices ? The best duties are those on wines, liquors, and certain articles of luxury, which affect only the prices of the articles upon which they are originally placed. The next best are those on tea, coffee, sugar, and the like, which affect other prices, if at all, only to an infinitesimal extent, through the efforts of those who are taxed in the consumption of them to shift the burden. The most objectionable of all duties is that on iron. A tax on iron is a tax on the tools of the mechanic and the implements of the farmer. It is a tax on the machinery of every manufacturer, and, worst of all, it is a tax on locomotion and transporta- tion. Iron is the great raw material. The air we breathe and the water we drink are as fit subjects for taxation as the iron that vivifies all industry. No- thing protects home manufactures so effectively as cheap iron. The direct loss from the duty on pig-iron far out- measures the gain. If the home supply is not sufficient, the price wiU rise until the deficiency can be supplied 'from abroad, and the duty will be added to the price of the whole. If, however, the duty is so high as to be prohibitive, the price will be enhanced, but not necessa- rily, by the full amount of the duty. The furnaces are differently situated with reference to advantages for cheap production. Some can produce much more cheaply than others; and, if no iron is imported, then the price will rise until enough furnaces have been built to supply the demand. Those most favorably 248 PAPER MONEY. situated will realize extraordinary profits. Those least favorably situated -will realize only the ordinary rate of profit on capital. The value of the whole supply of pig-iron will he detennined, in that case, hythe cost of production at the furnaces least favorably situated, and the price will be enhanced, but not by the full amount of the duty. The greater part of this enhance- ment will be total loss. Those furnaces which, by reason of their natural advantages, make profits above the usual rate will gain this excess. Those which make only the usual rate will enrich the country no more than if the capital had been employed in any other kind of production. If by the efiect of the duty the price of all the pig-iron made in one year is enhanced fifteen millions of dollars, a part, say five millions, goes to the favorably-situated furnaces as extra profit, and the remaining ten millions are as conipletely lost to the country as if they had been sunk in the sea. Worse than this. The enhancement of iron increases the cost of production of every thing made of or with it, and is distributed in the prices of other commodities until it is doubled or quadrupled. Part of this loss is equivalent, practically, so far as the American people are concerned, to a bounty paid annually by them to the consumers of British exports, to enable the British manufacturers to undersell us. We formerly had a large export trade in steam-engines, machinery, agricultural implements, and the like. But since a tariff has been devised, which is equivalent to paying a bounty to those who purchase these articles of the English makers, we have naturally lost a part of this trade. If the duty on pig-iron were repealed, its price RELATIVE EFFECTS OF THE TARIFF, ETC. 249 probably would not decline by the whole amount of the duty. The consumption would be stimulated, and the price would advance in foreign markets. But this great advantage would result : the prices of pig-iron in this country and in England would be equalized. The prices in Liverpool and New York would differ only by the cost of transfer from one city to the other. Our manufacturers would be placed on an equality with their British rivals, and we would cease to pay a bounty to their customers. All this is true of wool and of many other articles. By a repeal of the duties, our manufacturers would get their raw materials as cheap as their competitors, and would find cheapened production much more protective than a duty on the finished product. The present tariff violates the theory of protection as much as that of fi-ee trade. The arguments in favor of a protective tariff, usually urged, are two: the desirableness of diversifying home industry, and the advantage of turning the balance of trade in our favor. The tariff now in force, so far from accom- plishing these results, has the opposite effect. The object of diversifying employments is to pro- duce social and intellectual progress. Civilization cannot expand if all men are engaged in rude laboi-. It is sought, therefore, to diversify industry by encour- aging skilled labor, and putting a premium on intelli- gence. Our present tariff, however, does the reverse of this. It encourages labor in its rudest form at the expense of skilled labor. Raw materials are taxed, and the production of the finer and more costly articles of manufacture languishes. Crude labor finds em- ployment in making pig-iron, in growing y<-ool, and 250 PAPER MONET. in boiling salt. WMle sMlled artisans find no increase in tlie manufacture of machinery and of textile fabrics ; and ship-building has almost ceased. The effect of the tariff on our foreign exchanges is equally violative of the protective theory. If it be admitted that it is desirable to turn the balance of trade in our favor by legislative enactments, an idea now happily exploded, it is evident that a tariff which, by taxing all raw materials, increases the cost of pro- duction, can have only the opposite effect. The pro- tectionists of the last century were wiser than their ignorant imitators of the present day. The advocates of the Mercantile System, while favoring protective duties, admitted that there were exceptions required by the system itself. "The materials and instruments of production were the subject of a contrary policy, directed, how- ever, to the same end ; they were freely imported, and , not permitted to be exported, in order that manufac- turers, being more cheaply supplied with the requisites of manufacture, might be able to sell cheaper, and therefore to export more largely." * ' The protective effect of a tariff cannot be measured by the average rate of duties imposed. As the cost of production is increased by it, those articles the duty on which is below the average rate are not protected, those on which it is at the average may be protected somewhat, while it is only those commodities, such as carpets and blankets, the duties on which are so high as to be nearly prohibitive, that are fully protected. The idea of making a t&riff generally protective seems to have resulted from our democratic equality. * Mill ; Book V., chap, x., pco. 1. RELATIVE EFFECTS OF THE TAEIFF, ETC. 251 A dijty was supposed to be a blessing of itself, which every producer was entitled to. Duties were bestowed accordingly on all, and the present practical reductio dd absurdum of the protective system is the result. A protective tariff cannot be made to respect equal rights. Its essence is monopoly. To the question " Does protection protect ? " * it can be answered, therefore, that our present tariff, so far from protecting the aggregate industry of the country, has the opposite effect, but that a protective tariff can be devised. One, for instance, which would put all raw materials on the free-list, and impose duties on the finished products of the finer kinds of manufactures, silks, fine cottons, broadcloth, and the like, would give the favored producers of those articles an advantage over their foreign competitors. Such is the tariff Prof. Bowen,f, representing the Massa- chusetts school, advocates. When the claims of the active protectionists are narrowed to that point, it will be time enough to discuss them. From this, investigation, it is plain that our present tariff well deserves all the reprobation heaped upon it. It ought to meet with as much opposition from a con- sistent protectionist as from the most ultra free-trader. It is unfortunate, however, that all the light of discus- sion has thus far been concentrated upon it, leaving in the background that greater source of evil, the currency. Bad as is the effect of the tariff on our commerce and manufactures, that of the currency is worse. Pa- per money with its fiuctuations, and its power over * Grosvenor, " Does Protection Protect ? " Appletons, IS'Tl. , \ Bowen, " American Political Economy." Soribner, 1870. 252 PAPKK MONEY. retail prices, increases the cost of production "far more than any tariff. It has also a peculiar effect stUl more disastrous. It causes an enhancement of general prices, leaving the price of gold helow the general average. The increased cost of production and the increase of paper prices are not measured bj the gold- premium. In most instances, the tariff duty and the gold-premium added together, fail to measure them. Gold, consequently, after being converted into paper, •will exchange for less of manufactured articles in our markets than in others, that is, manufactured articles will exchange for more gold here than else- where. Foreign producers, accordingly, are making the exchange as fast as we can consume their commodi- ties. We are importing finished products, and confine our exports to raw produce. Our commerce is all one-sided, and our manufactures have lost all power of expansion. To revise the tariff will not remedy the evil. It will leave our producers laboring under all the disad- vantages the currency inflicts upon them. It will not restore the cost of production to a normal state, nor increase the purchasing power of gold in our markets. Indeed, our home producers might claim that the defects of the currency impose upon them a burden from which their foreign rivals are free, and that they are entitled to a duty to _ offset this disadvantage. Even the gatherers of ice might claim with reason that the expenses of their business have been increased thirty per cent, by the use of paper money, and that, as the premium on gold only makes good ten per cent, of this difference, they are-entitled to a duty of five to ten per cent., sufiicient, when added to the cost of RELATIVE EFFECTS OF THE TARIFF, ETC. 253 transportation, to prevent their Canadian neighbors from underselling them. The same claim might be made with equal reason by any of our producers who are subject to foreign competition. The -tariff troubles them the least. Paper money is the root of the evil. The true way to protect and diversify our home industry is to cheapen the cost of production, as meas- ured in coin; to increase the value of gold in ex- change; to let prices seek their natural relations, so that our merchandise will be cheaper than gold, and not gold cheaper than our merchandise. If we desire to foster our commerce and manufactures we must make it an object to foreigners to exchange their com- modities for our commodities, and not their commodi- ties for our gold and bonds. We must learn the les- son our British cousins know so well, how to undersell at gold prices. There are two things needed to cheapen the cost of production in this country, as measured in gold. The first and most important is to make gold, or its equivalent, our only money ; to restore specie pay- ments in fact as well as in name, and then to restrain the issues of bank-notes within natural limits. The second and less important is to confine the tariff to a few leading articles, and leave all raw ma- terials on the free list. But the first remedy should precede the other. To enlarge the free list to its proper proportions while paper money is giving to foreign manufacturers an advantage of twenty to thirty per cent, over home manufacturers would bring free trade into disrepute. On the other hand, when both of these measures are 254 PAPER MONEY. adopted, the surpassing natural resources of our coun- try, and the greater efficiency of our more intelligent labor, wiU enable us to so completely undersell all competitors, not only in our own markets, but in the markets of the world, that a protective tariff will never again be mentioned save in derision. The law of the circulation of the precious metals is at the bottom of the tariff, as well as of the cur- rency question. When we have learned to obey it, we shall gain the leadership of the commerce and manufactures of the world, and make England as much a commercial appendage of the United States as Canada now is. When the effect of the tariff is contrasted with that of paper money in diminishing the profits of those engaged in agriculture, the latter is still found to be the greater source of evil. In this country the agriculturist is unable to escape his taxes by adding them to the prices of his products, whether the taxes are imposed directly on his land, or indirectly in the prices of what he consumes. There are conditions under which he can do so. Thus, in a country where agricultural products are neither exported nor im- ported, the value of such products will be regulated by the cost of producing them on the least favorable lands, in accordance with Ricardo's theory of rent. In that case, all taxes, being additions to the cost of production, are charged in the prices of the produce. But in the United States a surplus of agricultural prod- ucts has always been raised, and is likely to be for many generations tO come. But when the price of a whole crop must come down to that of the exported surplus, the producers evidently cannot add their RELATIVE EFFECTS OP THE TARIFF, ETC. 255 taxes to the prices of their produce. In addition to this, the opening of new lands, which follows the ex- tension of railways at the West, is equivalent, so far as the Eastern farmers are concerned, to the importa- tion of supplies from a country where the cost of pro- duction is less, and deprives them of the power to en- hance prices in their own markets. It is only when supplying the local market of some great city that they can increase the prices of those articles which are too bulky for distant transportation. Our farm- ing class consequently has the least power of shifting the burden of taxation of any portion of the commu- nity, and the tariff, so far as it is a tax on consump- tion, bears more heavily on that class than on any other.* It has also a direct effect of its own in depressing the prices of agricultural products. This foUows from the nature of money. As the amount of exchanges which can be effected with a given amount of money is limited, taxation cannot affect general prices. It causes a redistribution of prices enhancing certain commodities, and depressing others. Under a tariff oh raw materials, the commodities enhanced are manu- factured articles into which raw materials enter, and * The statement contained in the report made in 1871 by the New York commissioners on local taxation, that taxes " if placed upon land will constitute an element of the cost of that wliich the land produces," has been sharply criticised. The correct explana-"' ation of the efifect of such taxation seems to be that above given. It is worth remarking, also, that the test proposed for duties is the one by which all taxes should be tried. What effect does the tax have on prices ? As undej a perfect system, taxation would have no effect on prices, so that tax is the best which affects prices the least. 256 PAPER MONEY. those depressed, to make the money equal to the ex- changes to be effected with it, are agricultural prod- ucts, coal, and petroleum, into which raw materials do not enter. Grosvenor, in his late work on protection, has collected the statistics showing that, in every period of high duties, the goods which the farmer con- sumes have ruled high, while his crops have ruled low.* TJnahle to account for the latter fact, he simply remarks that "high tariffs in some way deprive the , farmer of a fair price for his products." The explana- tion is plain. A high tariff widely diffused causes a redistrihution of prices to make the money equal to the circulation, enhancing the prices of what the far- mer buys, and depressing the prices of what he sells'. But our present currency has precisely the same effect, and in a far higher degree. It inflates paper prices and lowers gold prices ; while the farmer buys only for paper, and sells really at gold values. Paper money, by increasing the cost of production in manu- factures, and by its effect on retail prices, is a far greater tax on consumption than any tariff ever de- vised. But, as articles of export must follow the price of gold, the farmer is helpless against this tax, and, as gold has been made one of the cheapest commodities in the country, the currency has a power in depress- ino- the prices of agricultural products in comparison with which that of the tariff is infinitesimal. In promoting an unequal distribution of wealth also, paper money is a more powerful agent than the present or any other tariff. When men are taxed ac- cording to their wants, instead of according to their abilities; when taxes are propTjrtioned to consump- * " Does Protection Protect ? " p. 264. EELATIVE EFFECTS OF THE TARIFF, ETC. 257 tion instead of to -wealth, the poor man finds Ms wants as pressing as those of his richer neighbor ; and, un- like the latter, can make no savings upon which to found a competency. Not only is paper money a greater tax on consumption than the tariflf", but it has also a peculiar effect of its own in rendering the dis- tribution of wealth unequal. It increases the cost of production, causes prices to fluctuate, and renders credit less accessible. , Greater capital is thus made necessaiy in business operations, and the natural ad- vantages of the larger capitalist over the smaller are doubled. Paper money makes it more easy to swell great fortunes, and less easy to found small ones. It benefits only the rich. It is the poor man's curse. CHAPTER Xm. -THE IimOBALITIES OF AN INCOISrVEBTIBLE CUEEENCY. The questions to which an inconvertible currency gives rise are peculiarly questions of morality. "When, by force of law, the standard which measures every pecuniary obligation is made to fluctuate continually, one of the parties to every such obligation is licensed to rob the other. Disastrous as is the effect of such a currency on the material prosperity of a country, the manner in which it thus violates good morals is a still stronger objection to it. But, as this immorality can only be made apparent by a slight process of reason- ing, it is often overlooked, or the conclusions arrived at in respect to it are diametrically opposite. Yet the moral questions growing out of an inconvertible cur- rency are of simple solution, and any differences of opinion about them arise more from self-interest than from the intrinsic difficulties of the subject. The primary use of money is to be a standard of values, as invariable as the uncertainty of all things earthly will permit. Hence the thing which is the most stable in value of any known commodity is se- lected for the office. To this thing, for the sake of convenience, a name is given. The name, however, does not affect its value. A certain number of grains IMMORALITIES OP INCONVEETIBLE CURRENCY. 259 of gold are called a dollar. If a less number receive the name, the value of the gold is the same, though the thing called a dollar is changed. But, in measur- ing value, it is the thing, and not the name, which is used as the standard. When a plough is sold for a given number of dollars, it is the intention of the par- ties to exchange it for a known commodity, as much as if it were bartered for a given quantity of wheat. It is in substituting the name dollar for the thing dol- lar that morality is violated. A smaller measure takes the place of the real measure, and the party to whom money is paid receives less value than is his due. It is from the same source that the differences of opinion, as to the moral obligations of contracts made with reference to such a standard, arise. One party to a discussion means by the word dollar the thing. Another party means the name, or a thing of less value, to which the name has been temporarily given. The same person also, at one time means by dollar the name merely ; but, when his interest in the question is changed, insists that a dollar is one particular thing, to wit : a certain amount of gold, and that the name can mean nothing else. In a country where paper dollars, convertible on demand into real dollars, have always been used as money, it is easy to substitute the name for the thing as the standard of values, without shocking the public sense of justice. The quality of convertibility may then by law be taken from the paper money, without the immorality of the measure being perceived. The habit of looking upon the paper dollar as a mere sym- bol becomes so inveterate that it is not understood 260 PAPER MOiTBT. that, when it is in fact made a symbol, it is also made an instrument of robbery. If an Act of Congress were passed authorizing every man who owed a thousand dollars to be acquitted of his debt by paying five hun- dred dollars, a universal outcry would arise against legalized robbery. But when, in 1862, by substituting the name dollar for the thing dollar, a free license was given to debtors throughout the United States to rob their creditors, the objectors met only with derision. Creditors, it was answered, received all the dollars their contracts called for, and, though robbed of half their property, were said not to be wronged ; for " a dollar is whatever the law makes a doUar." The ter- rorism of public opinion was used to suppress the sug- gestions of morality, and the supposed necessities of the occasion silenced justice. Several circumstances attending the issue of green- backs not only added to the immorality of the meas- ure, but tended also to diminish the public apprecia- tion of it. If Congress had expressly restricted the effect of the legal-tender act to contracts made after its pas- sage, the violation of justice would have been less, and the difference between gold and paper would have been brought home to all. But, by specifically except- ing past debts from the operation of the law, the ob- ject of passing it would have been in part defeated. Greenbacks were issued in order to borrow money by a forced loan. They obtained immediate and general currency, because by their use debtors transferred less value to their creditors in paying their debts, and were none the less acquitted in full. But, demoralizing as was the action of Congress in IMMORALITIES OF INCONVERTIBLE CURRENCY. 261 passing the legal-tender act, that of the courts in in- terpreting it was still more so. Law was never more completely divorced from justice than in the judicial decisions which have grown out of this act. The courts of every State where greenbacks circulate have not only sustained the legality of such money, but in so doing have needlessly violated the principles of morality. The judges who have upheld the legal-tender act have not endeavored to restrict its eifect, as if enfor- cing with reluctance an odious law, but, on the con- trary, have seemed eager to extend it to cases which might well have been considered beyond its scope. Thus no distinction has been made between debts contracted prior to, and those contracted subsequent to, the passage of the act. Yet it does not, in express terms, refer to past debts, and a way was left open to the Courts to diminish the immorality of the law without annulling it. For the questions, whether Congress has power to make paper a legal tender, and whether it has power to make it a legal tender in payment of debts already incurred, are wholly inde- pendent of one another. If Congress has the first power, it certainly has no right, by a retroactive enactment, to deprive men of their property without due process of law, and no law ought to be construed so as to have that effect, when it does not, in express terms, include the case.* Yet it has been held by * Since the above was written, the Supreme Court, in Hepburn vs. Griswold, has held that the legal-tender act by its terms was intended to apply to debts contracted before its passage. That decision, made before , the Court had forfeited respect, de- serves consideration. The reasons given are not convincing. The 262 PAPER MONEY. the highest Court of the leading State of the ITnion, not in the first excitement of the -war, when the plea of necessity ruled, but after peace had given reason an opportunity to resume its sway, that a contract made in 18B1 to pay $1,400 " in gold and silver coin, rule of construction is well settled, that no law will be construed to have a retroactiye eiTect, so as to injure vested rights or to deprive men of their property, unless the retroactive intent is ex- pressly specified in the law. But if it is assumed that the legal- tender act, when construed, retroactively, deprives men of their property, it must be assumed, also, that the Congress which passed it knew that such would be its eflfebt, and had In mind, at the time of passing it, the rule of construction above mentioned. The legal inference is, that having, with this knowledge, omitted to make the act specifically retroactive, the intent was, that such a construction should not be given to it. It may be said that Congress, being ignorant of these rules of law, in fact intended the reverse. Very true. But ignorance of the law excuses no man. It excuses neither the legislators who make our laws, nor the judges who construe them. The other reason assigned is equally lame. It is inferred that, because interest and duties only are excepted from the legal-tender clause, therefore no other debts can be included within the excep- tions. Very true again. But whether preexisting debts are in- cluded within the exceptions, and whether the law was intended to apply to preexisting debts at all, are distinct questions. To settle the first negatively, does not settle the other affirmatively. When, things intrinsically different are included in the same classification, a quality belonging to part of the class ought not to be predicated of the whole. To classify debts according to their subject-matter, as, for instance, duties on imports, interest on the public debt, and , principal of the public debt, and to infer that, because the first two are excepted irom the legal-tender clause, and the last one is not, therefore, duties and interest are payable in coin, and the principal in legal tender, would be strictly logical. But, to classify debts according to the time when made, and to determine that the mem- bers of this class are without or within the legal-tender clause, IMMOEALITIES OF INCONVERTIBLE CURRENCY. 2G3 lawful money of the United States," was fully satisfied by a tender of treasury-notes, the niaxket value" of which, at the time of the tender, as compared with gold, was as one to two and twenty-five hundredths.* Similar decisions have been made in fifteen other States, and finally in the Supreme Court of the "United States ; and this is now the settled law of the land. No one will deny that it is a plain principle of jus- tice that a law changing the standard of weights or measures ought not to be applied to obligations al- ready incurred. When the statutes of the State of New York were revised, so as to afiect the standard of weights and measures, the operation of the law was expressly restricted to future transactions.! I* ^^^ provided that " all contracts thereafter to be exe- cuted" should be construed to be made according to the new standard. Now, the effect of changing the measure of value is the same as the effect of changing any other measure. One who agrees to sell a bushel of wheat for a dollar is equally robbed un- der color of law if, before the agreement is fulfilled, the quantity of wheat which legally constitutes a bushel is increased, or the quantity of gold which legally constitutes a dollar is diminished. It would be as easy to give the name bushel to one hundred pounds of wheat, instead of sixty, as to give the name according as they are included or not in the exceptions of the other class, is bad in logic, whatever it may be in law. If, therefore, it be admitted that money is always a commodity, it follows, from the accepted canons of construction, that the legal- tender clause was not intended to embrace debts dated before its * Rodes vs. Bronson, 34 New York Rep., 649. f Revised Statutes, 3d edition, p. '111. 264 PAPER MONET. dollar to fifteen grains of gold, instead of twenty-five' and eight-tenths grains, and it would be as immoral to apply the new standard to obligations already in- curred in the one case as in the other. When individuals attempt to defraud the commu- nity by using false -weights and measures, the ofience is punished as a crime. But when the government, by establishing a false standard of value, makes fraud a part of every pecuniary obligation, the judges throughout the land hasten to extend the operation of the law. Yet, in the one case, it is only a few retail- ers who cheat their customers, white, in the other, every debtor is enabled to rob his creditors. In the kind of immorality the transactions are identical. But in degree the petty frauds of the shops cannot be compared with robbery that covers a continent. But the most immoral decisions to which the legal-tender act . has , led are those invalidating spe- cific agreements to pay in coin. When the parties to a contract agree, with full knowledge of the difference in value between treasury-notes and coin, and in con- sideration of that difference, that the debt shall be paid in coin only, a decision which enables the debtor to violate his covenant by paying in paper, wrongs the creditor as much as the act of the thief who filches his pocket-book. No substitution of a name for a thing can cover its immorality ; for the parties have distinctly specified what they understand by the word dollar. Nor have these decisions the poor excuse of necessity. When two things of unequal value are made by law a legal tender,' the only way to give full efiect to both laws is to permit individuals to specify under which law their agreements are made. IMMORALITIES OF INCONVEETIBLE CUKEENCT. 265 The premise from which all these expositions of the legal-tender act are deduced is too plainly false for argument. A dollar is not only a name, but it is also a thing, and the invariability of the thing to which the name is given is the most essential quality of money. Yet it is gravely asserted that value is purely an ideal thing ; that it is a quality of money which the law does not recognize, and that the parties to every contract take the risk of any change in the value of the thing called money, before the contract is completed. It is decided that, if a creditor receives the number of dollars agreed upon, although the value of his claim has been reduced "by the agency of paper money, or by simply debasing the gold and sil- ver coin of the country," the contract, nevertheless, has been literally complied with. That such a pro- ceeding is robbery seems never to have dawned upon the judicial mind. Yet it is only in treating of the standard of value that a name is mistaken for a thing. If the name bushel were given to thirty pounds of wheat instead .of sixty, any attempt to apply the new standard to agreements already entered into would be speedily suppressed. There is no magic in a name which can work the miracle of turning thirty bushels of wheat into sixty. Yet the opinion prevails in our courts that the name dollar can work a similar mira- cle with gold. The same opinion seems to have invaded the pul- pits of the country. Whatever may be the theoretical morality of theologians, n(j case is known where any have hesitated to avail themselves of the legal-tender act to pay, in depreciated paper, debts contracted be- fore its passage. On the contrary, when greenbacks 13 266 PAPER MONEY. were producing the greatest .exhilaration, appeals re- sounded through the land from , pastors to parishion- ers, entreating them to pay the mortgages on their churches while money was plenty. What greater in- consistency than for one, professing to believe in " a higher law" relieving him from obedience to human laws, which conflict with morality, to preface with such an appeal a sermon from the text, " a false bal- ance is abomination to the Lord ; but a just weight is his delight ! " When Congress, the courts, and the pulpits, were so demoralized by paper money, it would have been strange if the, people had not been similarly affected. Such was the case. The money provided by the legal- tender act was generally accepted as a means of pay- ing past debts. In transactions between individuals, this was per- haps unavoidable. But there was no necessity ioi paying in greenbacks public debts contracted in gold ; for taxes could have been increased, in nominal amount, to correspond with the depreciation of the money in which, they were paid, without .thereby in- creasing their real amount. Nevertheless, every State where greenbacks were forced into circulation, with one exception, : repudiated a portion of its funded debt by paying its creditors in depreciated paper. To Massachusetts alone belongs the .distinguished honor "of simple honesty. The amount saved by these acts of repudiation was hardly worth the stain they left. The time for the payjnent of the principal of all the State debts could have been easily extended, and it was only foreign creditors who asked for payment of their interest in gold. Yet when an honorable 'IMMOEALITIES OP INCONVERTIBLE CUEEENCT. 267 effort was made to save the good name of the State of New York, by paying the interest on its debt accord- ing to contract, the offer was rejected with scorn. Not to support greenbacks was then to be an object of suspicion. To sustain robbery became a test of " loyalty." But a more disgraceful act of repudiation transpired as late as 1868, after necessity could no longer be used as a shield for crime. When the for- eign holders of stock of the State of Pennsylvania, which had been negotiated in coin many years before, protested through their agent against " the injustice of the action of that State in forcing its creditors to accept payment in a depreciated currency," the State Treasurer replied : " Your complaints about the injus- tice of our not paying you in gold may seem just to you, but to us they seem ridiculous." If this man had spoken for himself alone, his act might have been passed over as a mere sporadic case of moral obliquity. But he claimed to speak for others, and subsequent events have rendered it proba- ble that he had measured correctly the opinions of those whom he represented. It is certainly a fact that the moral sense of the country, has been so de- bauched by paper money that a transaction which ought to have forever disgraced every one approving of it, hardly excited remark. But immorality of a still more inexcusable kind has resulted in this country from tampering with the standard of value. It is beginning to be generally understood at the present time that to lower the stand- ard is to transfer property from one person to another without the consent of the loser, and without any merit 'of the gainer. Greenbacks are beginning to be recog- 268 PAPER MONEY. nized in their true character as instruments of rob- bery. Yet the advance in morality is small. Those who are loudest in asserting that greenbacks are in- struments of robbery are endeavoring to remedy the wrong by making them the instruments of a far greater robbery than any yet committed. It is seriously pro- posed .by the first men of the nation to add a percent- age to every debt in the country by enhancing the standard of value ; and the best reason that can be given to justify the wrong is, that, because creditors have been robbed, it is now the turn of debtors to meet the same fate. Those who style themselves bull- ionists now faU to practice the fundamental "idea of their creed, and refuse to accept the fact that gold has never ceased to be the standard by which the value of the false standard has been measured. One who really believes that a dollar is only a name can be- excused for wishing to tamper with the value of the thing which bears the name. But one who be- lieves that value only can measure value, ought to know that to increase the value of the dollar, so as to affect debts already incurred, is to rob every one who has debts to pay. Yet the bullionists of the country, instead of opposing, Tiave favored this wrong. The policy of resuming specie payments, by elevating the currency to the standard of coin, has met with many opponents. Merchants have feared the bankruptcy it would cause ; politicians have trembled at the loss of votes that would follow. But the more fundamental objection to that policy, the fact that it is a crime, has been avoided by all, and by none more than by bull- ionists. No argument is necessary to prove that to elevate IMMORALITIES OF INCONVERTIBLE CDEEENCY. 269 the standard by ■whidi values are measured, with no exception of past obligations, is as immoral as it is to lower it^ As one who has agreed to sell a bushel of wheat for a dollar is robbed if, before the completion of the contract, by operation of law the quantity of wheat in a bushel is iacreased, or the amount of gold in a dollar is diminished ; so one who has agreed to buy a bushel of wheat for a dollar is in like manner robbed if, before the agreement is fulfilled, the quan- tity of wheat in a bushel is diminished, or the amount of gold in a dollar is increased. As a creditor who hol4s a note for one thousand dollars would be robbed of five hundred dollars, if compelled by law to receive one half the amount of the debt in full satisfaction of it, so the debtor would be equally robbed of five hun- dred dollars if compelled by law to pay fifteen hun- dred dollars on his note. The rule works both ways. Debtors may be wronged as well as creditors by changing the standard of value. Whether the wrong is committed by directly changing the weight of gold in the coined dollar, or by changing the amount of gold its paper representa- tive will realize, is immaterial. If it were decreed by law that the word bushel in all the wheat certificates current on the Chicago' Board of Trade should mean one hundred pounds instead of sixty, not only would the warehousemen be robbed, but also every seller of an option for future delivery. Yet to change the mean- ing of the word dollar in a coin certificate is in effect the same as to change the meaning of the word bushel in a wheat certificate. When the paper used as money is inconvertible, the effect is still the same. The note then becomes a stamped counter, and is worth what it 270 PAPER MONEY. will bring in real money. To change the latter amount is like changing the number of grains of gold in a coined dollar, or the number of pounds in a- bushel. The plan of resuming specie payments by turning greenback debts into gold at their face is more im- moral than to change the measure of wheat from bush- els into centals without excepting past contracts ; for the latter would affect only those who had agreed to buy or sell wheat, while the former would affect the parties to every contract to pay money. But, while the immorality of debasing and that of appreciating the standard of value are the same in kind, in degree the latter is the worse. It could hardly fail to bring commerce to a stand-still, and bankrupt every one in debt. Some writers argue that merchants, having fuU notice of the change, could ar- range their liabilities accordingly ; as if giving a man notice that you intend to rob him lessens the crime. It is also claimed that the process being gradual, the suffering would be less ; as if a series of petty larcenies from many would be less wrong than a grand larceny from a few. But neither notice to all the world, nor any protraction of the operation, can remove its -wick- edness. One of the foundations of our social organiza- tion is credit. It pervades commerce. Our banks are founded on it, from the bills they issue to the de- posits they receive and the notes they discount. Credit enters into all mercantile operations, however much it may at times be curtailed. Nearly all our States, cities, counties, and towns, have funded debts contracted during the war. Our public works are built on credit. The bonds of railroads and other corporations arc counted by millions. But wherever IMMORALITIES OF INCONVEETIBLE CURRENCY. 271 there is credit there must he a contract of indehted- ness and two parties to it. To elevate the standard of value in which dehts are paid, is to transfer the property of one of these parties to the other by a trick of legislation. If all the obligations to pay money existing at any one time in this country (not including the public debt of the United States) are estimated as low as three thousand millions of dollars, then to suddenly elevate the value of the greenback dollar from eighty cents to one hundred cents, is to fraudulently transfer six hundred millions of dollars from debtor to creditor ; and, though there are many persons who are both debtors and creditors, the wrong of such transfer would be slightly alleviated, but not removed by that fact. If the operation should be pro- longed through a series of years, the transfer would take place none the less, though the loss would be distributed among a greater number of debtors, but, as the amount of the exchanges effected with the ad- vancing standard would be larger, the aggregate amount of the robbery would probably be greater. Not only would the losers he robbed under color of law, but the property of the poor would be trans- ferred to the rich. The heaviest loss would fall upon the active and enterprising. The young men strug- gling to start in the world would be crushed, while those whose fortunes are already made would be fur- ther enriched without effort. But, in order to resume specie payments, something more would be necessary than to elevate treasury notes to the standard of coin. There must be a de- cline in the prices of every thing bought and sold. The purchasing power of the greenback currency 272 PAPER MONET. must be made equal to that of a purely metallic cur- rency, and as the loss of purchasing power, which greenbacks have undergone, as measured by general prices, is considerably greater than the apparent loss represented by the premium on gold, the loss to the debtor class by increasing the purchasing power of the present currency to the' level of a metallic cur- rency, would be more accurately represented by con- sidering greenbacks worth seventy to eighty cents on the dollar, instead of ninety. That is to say, the amount of property which debtors would be obliged to sell in order to realize a given sum of money would be increased by a percentage considerably greater than that represented by the premium on gold, Now, there would be no way by which debtors could protect themselves against this loss. Those whose obligations are already incurred would be com- pelled to pay fi'om twenty to thirty per cent, more value than they received when the debts were con- tracted. Those whose indebtedness will be incurred while the process of appreciation is going on, will not have the same means of defence which capitalists could use while the inflation was in progress. A spe- cific contract law would enable creditors to avoid any loss from, a depreciation of the currency, but it would not protect debtors against loss from its appreciation. Capitalists holding treasury notes, soon to become equal to gold by operation of law, would not sacri- fice the premium by converting them into gold imme. diately. On the contrary, they would turn gold into greenbacks, and loan the latter, in order to obtain a transfer to themselves, under color of law, of the property of their debtors. Measured by its effects, IMMORALITIES OF INCONVEKTIBLE CURRENCY. . 273 the policy of elevating a depreciated currency to the standard of gold is more immoral than the opposite policy of depreciating it. Nor can the immorality of such a policy be pallia- ted by "the tyrant's plea." ISTeoessity is made to answer for the original issue of greenbacks. But important as is a speedy resumption of specie pay- ments to the prosperity of the country, there is no ne- ■ cessity of reaching that end by increasing the- value of the present depreciated currency to an equality with gold. The easiest way to resume specie payments is to abandon the policy of appreciation, and to with- draw greenbacks, by funding them without enhancing their market value in gold. Even in that way it would be difficult to prevent creditors from having the advantage. Greenbacks were made an instrument of robbing creditors on the plea of necessity. That plea cannot be used when it is proposed to make them an instrument for robbing debtors. For, in this case, the path of honesty is the easiest to follow. That any other has ever been suggested, results from the illu- sions of paper money. If the value of the coin had been dii'ectly debased, it would never have been seriously proposed to restore it to the ancient standard, so as to add a percentage to every pecuniary obligation. A law commanding every one, who had agreed to pay one thousand grains of gold for a certain quantity of property, to pay in- stead twelve hundred grains, could not be enforced in this age. Giving the same name to the different amounts of gold would deceive nobody. Hence it has followed that, where despotic princes have debased their coin, in order to rob their creditors, the original 274 PAPER MONEY. staaflard has not been restored. A pound sterling, as its name implies, contained in tlie reign of Edward I. one pound troy of standard silver. To-day it contains a little less than one-third of the original amount. The coin of England at the present time, as compared with that of Edward I., is as 20 to 66^. The French lirre, likewise, has undergone successive debasements, until the corresponding coin now contains but one- seventy-eighth part of its original pound of silver. These fraudulent changes of the standard of value have usually been in one direction. Creditors only have been robbed by them. It was reserved for the des- potism of a free government to rob first creditors, and then debtors. By means of the transparent illusion of paper money, the attempt is now making to perpe- trate the most gigantic swindle that ever found honest advocates. But the plan of increasing the amount of gold which constitutes a dollar, and that of raising the greenback dollar to the par of specie, are so plainly identical that the scheme is not likely to succeed. It ~ is easier, and more honest, to continue to follow the precedent of debased coin ; to let the paper dollar remain at the point of debasement it has reached, and resume specie payments by settling past debts accord- ing to the value of the money in which they were contracted. But, while the honesty of such a policy is admitted in general, it is claimed that there is one class of debt- ors whose obligations, though contracted in depreciated paper, can be turned into gold, dollar for dollar, with- out any violation of morality, namely, the tax-payers. Yet the right of one generation to hand down to its successors a mortgaged government, is at best a IMMOEALITIES OF INCONVERTIBLE CUKEENCY. 2 '7 5 matter of doubt. The modern funding system, with its accompaniment of indirect taxation, is as surely calculated as the land tenures of the feudal system, but in a less degree, to produce inequality of condi- tions and an unjust distribution of wealth. It is one of the agencies by which fraud has been substituted for force in modern times, as a means for enabling the few to bestride the many. To encumber any country, then, with an enormous debt, is a proceeding which ought to undergo the severest scrutiny, and every step of which ought to be beyond suspicion. The consideration which the United States received for the present debt, at a gold valuation, has been variously estimated. It is prob- able, however, that the purchasing power of the money in which the debt was contracted, had fallen, on an average, owing to the improvident issues of paper, to sixty cents on the dollar. To pay the debt in gold, then, will be to defraud the tax-payers of the country of one thousand millions of dollars. Of the immoral- ity of such a transaction there can be no doubt. The only question would be to decide from what time the immorality should be dated. If there is a valid agree- ment to pay the debt in gold, the agreement must be carried out according to its terms. For one genera- tion has a legal right, under our laws, to bind its suc- cessors. In that case, the wrong would date from the time of incun-ing the debt. The wrong-doers would be those who were so weak or ignorant as to contract a debt in depreciated paper, and agree to pay it in gold. If, on the other hand, there is no legal obligation to pay the debt in gold, the immorality has not yet been committed, and may be prevented. In that case. 276 PAPER MONEY. those who advocate immorality are those who would rob posterity, by adding, without any new considera- tion, a thousand millions of dollars to the burdens of the tax-payers. If, therefore, a promise to pay gold did not enter into the contract at its" inception, to make such a promise, without any new consideration, would be to taint the whole debt with fraud. No examination of the immorality of an inconvert- ible currency would be complete, without mention of its more general effects in demoralizing society. "When, by fluctuations of the value of the standard by which values are measured, the prices of all com- modities vary incessantly, the element of gambling enters into all business transactions, and the commer- cial morality of the nation is undermined. The desire to acquire riches suddenly, and without labor, then becomes contagious. Honest toil, with its slow re- turns, gives place to speculation, amid the excite- ment of which the stem requirements of morality are forgotten. Men naturally honest, who, treading the firm foundation of specie, would never have gone astray, deluded by paper money, are enticed into haz- ardous ventures, and find themselves defaulters before, they are conscious of wrong. The bank defalcations, so common as no longer to excite surprise, the count- less peculations and forgeries, which have taken place during the era of greenbacks, show the corruption they produce. Specie payments are desirable, if for no other reason, to revive honesty in those filling places of trust. This haste to be rich is at the bottom of the politi- cal corruption of the times. When speculation per- vades all business, it stalks boldly into the public IMMOKALITIES OF INCONVERTIBLE CUERENCY. 277 offices, and our legislators and tax-gatherers, instead of laboring for the good of the people, make their po- sitions mere stand-points for jobbery and money-get- ting; while the public morals having fallen to the Spartan level, we blame our officers, not for stealing, but for being caught. From the same source proceed in part the evils of the " ring " formations of the day. In a country of Democratic equality, where, though individuality is preserved, individuals have ceased to be great, a tendency arises for those having some common interest to unite for promoting some common end, and, while the individuals remain at their former level, the union becomes great. This tendency is seen in the formation of corporations for every pur- pose, and in their tendency to consolidate after being formed. It appears also in the combinations of work- men to put up wages, of merchants to put up goods, of capitalists to put up stocks, and of politicians to se- cretly plunder the people, while openly abusing one another for falsity to public interests a thousand miles away. Much of the strength of these combinations, except of those of the workmen, is derived from paper money, and, though they would exist without it, they push to the utmost all its evil effects. Politicians take advantage of the preoccupation of business men in money-getting to transfer the government to the scum of a great city, and the frauds which are bred in one class are duplicated in the other. WhUe the leaders of "Wall Street make over-issues of stocks, the represen- tatives of the Five Points forge vouchers. It is on the stock exchange that the worst scandals have trans- pired. In the whirl of money-getting, nothing suc- ceeds like success. The means employed are immate- 2'78 PAPEll MONEY. rial. In the general corruption that prevails, courts and legislatures uphold the one who wins. He is the best " operator " who can steal a railway, and buy a judge. Nor are the Erie frauds without a parallel. Those who issued new stock so as to depreciate the value of that outstanding, merely followed the ex- ample of the United States, which by issuing legal- tender notes depreciated all outstanding debts. Ne- cessity compelled the directors of the Erie Railway to keep their offices by printing certificates to vote on, and thus robbing the other stockholders. An alleged necessity compelled the United States ■ to make a forced loan by printing legal-tender notes, and rob- bing every creditor in the land. But unfortunately the parallel does not end here. The " Erie Ring," it is alleged, tampered with our judges to sustain a fraud. But how has the legal-tender fraud been upheld? When the Supreme Court, following the teachings of political economy and of common sense, had decided that as a contract to pay dollars, made while coin was the only tender, was an agreement to deliver bullion of a certain weight and fineness, therefore a law com- pelling a creditor to accept depreciated paper in its place was void, two lawyers, who in the course of their business had announced a difierent opinion, were forthwith added to the judges on the bench, and these, instead of declining, as decency suggested, to review the question under such circumstances, proceeded to revive in our midst the realism of the twelfth century, and announced once more the crude absurdity that a dollar is only a name, that value is an ideal thing. Yet so drunk is the nation with money-getting, that neither the immorality of this decision, nor the shame- IMMORALITIES OF INCONVERTIBLE CURRENCY. 279 less manner of obtaining it, has shocked the public sense of right. There is but one way to revive in the public mind the distinctions between right and wrong in pecuniary transactions, and that is, by returning to a measure of values that does not fluctuate. If in the process finan- cial distress arises, and bankruptcy is widespread, such trials are needed to clear the moral atmosphere. Thus will men be taught to live by labor, instead of by their wits ; to try and get rich by slow accumula- tions, and not by a single stroke. Corruption, we may be sure, will diminish with speculation. Honest dol- lars will bring honest men. CHAPTER XIV. THE REMEDIES FOE AN INCONVERTIBLE CtTEEENCT. The reasons for the belief that a currency not con- vertible into coin on demand is a curse to the country in which it circulates having been given, it remains to examine the means by which such a currency may be replaced by the one Nature has provided. Of the seven great nations afflicted at the present time with irredeemable paper, all save one are prevented, by the necessities which involved them in the difSculty, from attempting to escape it. Fortunately, the resources of the United States are so unlimited that a resumption of specie payments in this country can be prevented only by a lack of will, and not of ability. But, while it is generally admitted that the evils of our present system ought to be removed, the chief difficulty in the way of effecting the change seems to be a dis- agreement as to. the proper method of bringing it about. Of the several measures proposed for effecting a resumption of specie payments, that known as con- traction is most worthy of consideration^ As the sus- pension of specie payments was caused by excessive REMEDIES FOE INCONVERTIBLE CURRENCY. 281 issues of paper, the conclusion is natural tKat resump- tion can be accomplished by the reverse process of di- minishing the amount of those issues. The effect of this measure in bringing^ production to a stand-still, and the immorality of enhancing the standard by ■which all values are measured, have already been stated. Whether the scheme is practicable remains to be considered. The possibility of replacing our inconvertible gov- ernment currency with a bank currency based on coin, by arbitrarily withdrawing treasury notes from circu- lation, will depend upon the amount of them it would become necessary to cancel before that result could be reached. It is customary in some quarters to deride all attempts to compute the amount of paper money which it is possible to keep convertible into coin on demand, and to assert that such computations are un- reliable and useless. A contrary opinion was ex- pressed by John Adams many years ago, in language worth repeating : " The amount of ordinary commerce, external and internal, of a country," he says, " may be computed at a fixed sum. A certain sum of money is necessary to circulate among the society in order to carry on their business. This precise sum is discoverable by calculation, and reducible to certainty. You may emit paper or any other currency for this purpose, imtil you reach this rule, and it will not depreciate. After you exceed this rule, it will depreciate, and no power or act of legislation hitherto invented can pre- vent it." * * Jolin Adams's Works, toI. vii., p. 195, cited by Eowen, p. 381 282 PAPER MONEY. K the functions of money and the laws that regu- late its circulation have heen heretofore stated with correctness, the data upon which this calculation must be based can be readily ascertained. Under the law of the circulation of the precious metals, the amount of specie which circulates in each country bears a fixed relation to the amount of specie which circulates in every other country with which it has commercial re- lations. No one country can permanently retain more than its share of the circulating medium of the world. The amount of paper money also convertible into coin on demand which can circulate in any country will just equal, or be but a trifle in excess of, the specie which would circulate in that country if paper money were not used. It is possible, therefore, to ascertain approximately the amount of paper convertible into coin on demand, which can be kept afloat in the United States. That amount will be found by taking the sum of that which circulated before the suspension of specie payments, and adding to it an allowance for the growth and development of the country since that time. It was shown in Chapter IV. that the converti- ble bank-notes, which were ordinarily in circulation during the generation preceding the war, were always fully equal to the natural specie circulation of the country, and frequently in excess of it. The United States always had as much and frequently more paper money afloat than it was possible to keep convertible into coin on demand. The following table shows the amount of paper money in circulation at the beginning of each year from 1834 to 1868, omitting the fractions of millions : REMEDIES rOK INCONVERTIBLE CURRENCY. 283 Tear. Value. 1834 $95,000,000 1835 104,000,000 1836 140,000,000 1837 149,000,000 1838 116,000,000 1839 135,000,000 1840 107,000,000 1841 107,000,000 1842. 84,000,000 1843 69,000,000 1844 75,000,000 1845 90,000,000 1846 105,000,000 1847 106,000,000 1848 129,000,000 1849 115,000,000 1850 131,000,000 1851 155,000,000 Year. Value. 1852 estimated $150,000,000 1853 146,000,000 1854 205,000,000 1856 187,000,000 1856 196,000,000 1857 ; .215,000,000 1858 135,000,000 1859 193,000,000 1860 207,000,000 1861 202,000,000 1862 218,000,000 1863 629,000,000 1864 636,000,000 1865 948,000,000 1866 919,000,000 1867 852,000,000 1868 767,000,000 Compound interest notes, and the three per cent, certificates used as part of the bank reserves, are in- cluded during the war years. The amount of paper in circulation has been nearly stationary since 1868, and no statistics are necessary for the subsequent pe- riod. The average bank circulation during tbe twenty-six years prior to 1860 was less than 1189,000,000. The amount of exchanges to be effected, and the money ne- cessary to effect them, are undoubtedly greater now than before the suspension of cash payments, so that there is need of a greater amount of money than ever before. But the increase is very much less than is commonly supposed. The above table does not show any enormous increase in periods of ten years. If to the circulation of 1861 fifty millions be added for the growth of the country in the intervening time, the sum would probably be above the amount of converti- ble paper which would readily circulate at the present 284 PAPER MONEY. day. If an expansion of bank-notes to two hundred and seventeen millions in 1857 ended in a panic and a general suspension of specie payments, it is prolbable that two hundred and fifty millions of convertible pa- per is all the country could use in 1872. But, if ad- vantage is taken of the occasion to suppress small bills and establish a bank-note circulation strictly con- vertible on demand, it is reasonable to set a lower limit, and to believe that the average bank-note circu- lation that the country could readily use is about two hundred millions of dollars. To avoid question, howa ever, the former may be assumed to be the true sum.' In all these amounts the money composing the bank reserves is included ; for that portion of it used as a reserve to meet deposits, though apparently idle, has, in fact, the greatest rapidity of circulation or effective power of any money in use. Bank deposits, on the other hand, are excluded ; for, although they are used as a medium of exchange, they are not used as a standard of value. They are currency, but not money ; an effect and not the cause, varying like prices with the amount of money in circulation. In any consid- eration of the means of resuming specie payments, the national bank-notes also must be included with the treasury notes as part of the circulating medium. Not only is the government liable for their ultimate redemption, but in their effect, in enhancing prices and disturbing the international exchanges, they differ in no manner from the inconvertible paper into which they are convertible. The legal-tender notes, how- ever, which are actually reserved for the redemption of bank-bills, but not those reserved to meet deposits, may be deducted, to avoid all question. In that case. REMEDIES FOR INCONVERTIBLE CURRENCY. 285 however, the coin and bullion used by the banks as a part of their reserves must be added. The total amount of the circulating medium now in use may be stated, then, in round numbers, at seven hundred mill- ions of dollars. The problem for the contractionists to solve is, how to reduce this seven hundred millions of inconvertible government paper to two hundred and fifty millions of bank paper convertible into specie on demand. The practical diiEculties in the way of every measure yet proposed for accomplishing this re- sult are insurmountable. 1. The first difficulty to be encountered, in carrying into effect such a policy, would come from the diminu- tion of the amount of the precious metals in the country, which has already taken place. The amount of coin in the United States, exclusive of the Pacific States, before the war, was from two hundred to two hundred and fifty millions. The former sum is prob- ably the nearer the truth. The additional amount necessary, at the present time, to effect the increased exchanges consequent on our growth would be about twenty-five millions more. The reasons for the belief that a very considerable portion of the precious metals has been driven out of the country by the use of a false standard, have been given. But it is clear that two hundred and fifty millions of paper money cannot be kept convertible into coin on demand, so long as the coin necessary for the purpose is not in the country. Yet the policy of contraction, so far from attracting back our due share of the precious metals, will drive off another part of that which remains. The premium on gold would be constantly depressed by the general belief that treasury-notes would soon 286 PAPEll MONEY. he raised to pjfl', even if the government ceased to apply artificial means to increase the depression, ■while, owing to the fact that the surplus currency in circulation must be absorbed, the prices of commodities in general would continue to be inflated. The pre- mium on gold would continue to range lower than general prices. Gold would be the cheapest article of export, and would so remain, until contraction, by bankrupting those in debt, had reduced general prices to panic rates. A preliminary, therefore, to a resump- tion of specie payments by contracting the currency, ought to be to send the premium on gold, if possible, above the average of general prices, in order to make it the most costly article of export, and a desirable article of import. But to increase the premium on gold is wholly contrary to the theory on which con- traction is founded, and would be fatal to the continued prosecution of that policy, by rendering its injustice too plain to be longer concealed by sophistry. A high premium would also keep up the prices of those articles whose prices foUow that of gold, and, as more money is necessary to effect exchanges at high than at low prices, the steady diminution of the volume of the currency would be more keenly felt in excessive stringency in the money market. It would follow, also, that, when a sufficient diminution of the currency had taken place to justify an attempt at resumption, a sudden decline of the premium on gold would be necessary, which would hardly fail to precipitate a panic that would cause gold to be hoarded and defeat the attempt. 2. But there is still another practical difficulty in the way of the policy of contraction, equally hard to REMEDIES FOR INCONVERTIBLE CURRENCY. 287 escape. The whole money in circulation in this coun- try before the war, including hoth coin and paper, was never much, if any, over four hundred millions of dollars. Allowing for an increase of fifty millions of paper and twenty-five millions of specie, the whole amoimt necessary at the present time would be from four hundred and seventy-five to five hundred millions. If, then, a contraction of our redundant currency should be enforced, when the present amount of seven hundred millions of paper had been reduced to four hundred and seventy-five or five hundred millions, it would just equal the natural and necessary circulation of the country, and there would be little or no pre- mium on gold. But it would none the less be impossi- ble to resume specie payments. For, the instant greenbacks became redeemable on demand, two hun- dred and seventy-five millions of coin would be added to the circulation, which would then amount to seven • hundred and seventy-five millions, being seventy-five millions more than before resumption was. attempted. It would be necessary, therefore, to continue the pro- cess of contraction until a considerably less amount than five hundred millions was left in circulation. But as the latter sum is the natural and necessary circulation of the country on a specie basis, when the inconvertible paper money was reduced below it, there would not be enough left to efiect exchanges, except at a very low range of prices. Prices would then necessarily fall even below the specie standard. This would, finally, have the efiect of attracting specie into the country from abroad. But any thing more than a momentary resumption of specie payments would even then be impossible. For 288 'PAPER MONEY. if the paper in circulation were reduced to four hun- dred and fifty millions, the addition of the necessary amount of specie, two hundred and seventy-five mil- lions, would still make the total circulation more than seven hundred millions, and specie payments could not he maintained. If the amount of paper money, which can he kept convertible, is two hundred and fifty millions, the pres- ent seven hundred millions must he contracted to that sum before resumption can become permanent. But when the .inconvertible paper falls below five hundred millions, the natural circulation of paper and specie combined, there would not be money enough left in circulation to effect the exchanges of the coun- try with ease. To continue the contraction till only two hundred and fifty millions remained in circulation would be plainly impossible. A reduction of the currency below its natural amount took place in Eng- land at the close of the Napoleonic wars, and, by' causing a decline of prices, it rendered possible the resumption of cash payments. The same phenomenon occurred in this country after the revulsion of 1837, and again after that of 1857, and was the cause, in part, of the stagnation which followed those years. But in the present case the amount of the inconverti- ble paper is so much more excessive, that a repetition of the process is not possible. It may be said, however, that the object could he accomplished, without thus reducing the amount of currency in circulation, by hoarding specie in the Sub- Treasury while the contraction was in progress, and after the treasury notes had been considerably re- duced in amount, and sufficient specie had been col- .REMEDIES FOR INCONVERTIBLE CURRENCY. _289 lected, the remainder of the notes could he redeemed in coin on demand. The notes, continuing in circula- tion until thus redeemed, would then be destroyed ; the coin exchanged for them would be restored to cir- culation, and specie payments would be established at once. The amount of specie, however, which this scheme would cause to be hoarded in the Sub-Ti*easury, would be fatal to it. It would be necessary for the government to possess enough specie to redeem and cancel all its treasury notes, and as the amount of national bank-notes is three hundred millions, the banks also would be compelled to redeem and can- cel at least fifty millions of their notes, and stand ready to redeem the rest on demand. There is no source from which such great accumulations of specie could be derived: and if it were possible to make them the whole supply of gold in the country would be tied up, and the premium would rise to unheard-of ^figures. This is simply a scheme to compel the Treas- ury to "corner gold." The effect on the policy of contraction of enhancing the premium on gold has al- ready been sufficiently considered. 3. Whenever a contraction of the legal-tender notes is enforced, a triple contraction of the instru- ments-of exchange will take place. Greenbacks, bank- notes, and bank deposits, wUl be contracted together ; besides which, all the instruments of credit used as currency will be diminished. Bank loans and dis- counts would then nearly cease. All the resources of the banks would be required to protect their own notes and demand liabilities ; and even if it were in their power, they would be slow to make loans to merchants and business men, the majority of whom would be 14 290 PAPER MONEY. candidates for bankruptcy. Government bonds would afford an investment for all their loanable funds, -with high interest and no risks. If an ordinary bank con- traction of a few millions results in a panic and gen- eral ruin, it is difficult to estimate the ruin which a gov- ernment contraction of hundreds of millions, protracted through a series of years, would produce. The con- traction which took place in 1866-'68 is not a safe criterion by which to judge of the future. After the close of the war, the withdrawal of the government from the markets as a purchaser, the change of em- ployments, and the universal belief in a speedy return to specie, rendered a general decline of prices inevita- ble. By this decline a portion of money was thrown out of employment. The necessary exchanges could be effected without it. The contraction of the legal- tender, notes was made at this time, and merely ab- sorbed this surplus currency, for which there was no further use. The stagnation which that process caused resulted, not from any want of currency, but from the tendency to hoard treasury notes so as to se- cure the rise in their value. The contraction never was carried far enough to affect the circulation of the banks. The full limit of three hundred millions of na- tional bank-notes allowed by law was filled when the contraction of greenbacks cearsed. The banks had in- creased their issues during the process, instead of cur- tailing them. The full effect of the measure on busi- ness cannot be known until the contraction of treasury notes has been carried far enough to compel the banks to contract their notes, and consequently theii- loans. "Whenever that point is reached, the whole machinery of exchanges will come to a stand-still. The injustice KEMEDIES FOR INCONVERTIBLE CURRENCY. 291 of euhanoing the standard of value so as to affect past debts will become painfully manifest, and, in the reac- tion that would follow, creditors would be more likely to suffer than debtors. Since the repeal of the law authorizing the Secre- tary of the Treasury to contract the legal-tender notes, the policy of contraction has been apparently aban- doned; but among its advocates are still numbered nearly all the leading men of the nation, who claim to be versed in political economy and finance, and a re- turn to it may be forced, whenever the danger of losing elections seems sufficiently distant, unless, in the mean time, the illusions of paper money can be dis- pelled. Several schemes for bringing about specie pay- ments without contraction have been proposed. But it is unnecessary to refute the errors contained in them. If specie payments cannot be reached by means of contraction, they certainly cannot be reached without it. The authors of all these quack remedies for restor- ing the metallic medium, without regard to the amount of paper based on it, overlook the law of the circula- tion of the precious metals — as stupid a blunder as that of an astronomer who should commence the calcula- tion of an eclipse by denying the law of gravitation. The precious metals circulate from country to country, as if all trade were barter, and as if they had never left the form of bullion. Their use as money only makes the desire for them universal, and renders their movements through the channels of commerce more rapid than those of any other commodity. No one country can retain more than its due share of the me- 292 PAPER MONET. tallic medium. Whenerer sucli an excess exists, prices are enhanced, imports are increased, and the specie is sent abroad to pay for them. Whenever in- convertible paper is made convertible into specie on demand, or one portion of it (treasury notes) is made thus convertible, and another portion (bank-notes) is made convertible into the former, the effect on the in- ternational exchanges is the same as if the whole pa- per, less the reserve to meet bank-notes, were, in feet, transmuted into gold. If our seven hundred millions of paper were at once turned into gold, and the gold could be made to circulate as rapidly as paper, general prices would remain as high as they now are, and would be higher in our markets than in any other. Com- modities would be attracted hither as fast as we could consume them, and the specie would all be shipped back to pay for them. Gold flows to the counti-y where it will buy the most, and from the country where it will buy the least. There is another plan for reaching specie payments without trouble, as attractive as it is delusive. As the United States are increasing rapidly in population and wealth, it is popularly believed that by waiting long enough the countiy will "grow to" the currency now in circulation. Such would undoubtedly be the case. But the important question for consideration is, how long before specie payments would be reached by waiting until the growth of the country rendered ne- cessary a circulating medium of seven hundred mill- ions of dollars in paper. It is maintained by some, that, since inconvertible paper has come into circula- tion, the method of doing business has changed, owing to an alleged curtailment of the credit systen, so that REMEDIES FOR INCONVERTIBLE CURRENCY. 293 more money is necessary now to effect the exchanges than 'before the war. But it is not shown, that with a return to specie payments will not come also a return to former methods of doing business, and until this probability is disproved, no reason can be given for supposing that the amount of money required to effect the exchanges will increase faster in the future than in the past. On the contrary, as steam is rendering com- munication more easy from year to year, as population is tending to become more and more concentrated, and the use of the economizing expedients of credit is daily rendering less money necessary to effect the exchanges of commerce, it is reasonable to believe that the amount of paper money which the country will need will not increase as rapidly in succeeding generations as in that covered by the table given at the beginning of this chapter. Assuredly, if the currency is regu- lated by suppressing small bills and enlarging the spe- cie reserves, the amount of paper which can be kept convertible on demand will increase very much less rapidly than population and wealth. If the rate of increase is the same as that which appears from the table, say about fifty millions every ten years, it would take one hundred years from 1860 to raise the neces- sary paper circulation to seven hundred million* If the increase is geometrical, doubling every twenty years, it would requii-e nearly forty years from 1860 for the country to grow up to that amount. By gradu- ally contracting the currency, the end might be ac- complished sooner. Thus, by supposing the two im- probable things, that contraction would be submitted to, and that the need of paper money increases geo- metrically with population, the earliest day which could 294 PAPER MONET. be set for resuming specie payments by exchanging the present inconvertible government currency for a convertible bank-note currency would be twenty years distant. The disease requires a quicker remedy. The scheme iqi escaping, by further inflation, the injustice of enhancing the standard of value, is not -worthy of serious discussion. Though it is just to pay debts with money of the same value as that in which they were contracted, it is not just to still further de- preciate money already .depreciated. To pay a debt contracted in paper worth seventy cents on the dollar with paper worth fifty cents, is not to pay the debt with the currency in which it was contracted. Such a proceeding, however, would be strictly in accordance with " the theory of greenbacks," the decisions of the courts of fifteen States, ending with the Supreme Court of the United States, and the precedents estab- lished by all the States but Massachusetts in paying their funded debts. The citizens of the State of New York, for instance, could not reasonably object to a measure which would be in strict conformity to the decisions of their highest tribunal and their own prac- tice. The pretext on which the demand for a further is- sue of treasury notes is based, is wholly untenable. It is asserted that more currency is necessary to transact the business of the country. The error consists in mistaking an increase of paper money for an increase of capital. What is really needed is more loanable capi- tal. This, however, is a product, not of the printing- press, but of labor. A farmer who raises a thousand bushels of wheat, for which he receives a thousand dollars, adds two hundred dollars to the loanable capi- REMEDIES FOR INCONVERTIBLE CURRENCT. 295 tal of the country, if he saves that sum out of the pro- ceeds, to loan to his neighbor. But the goTemment, ■which increases its issues of inconvertible paper, adds nothing to the capital of the country. It simply causes prices to rise. An increase of the instruments of exchange is not of itself an increase of capital. It is an effect, and not a cause. As capital accumulates, the amount of it which takes the form of money is in- creased, and all the other instruments of exchange are necessarily increased in proper proportion ; for the reason that the amounts of the exchanges to be effect- ed, and of the instruments necessary to effect them, are greater than before. But no particular sum of moiiey, nevertheless, is necessary to effect the exchanges of any country. The amount required is purely a question of prices, the rapidity of circulation being considered constant. One hundred millions of dollars can be made the medium of effecting as many exchanges as one thousand millions, but at a lower range of prices. The matter of chief importance is, that prices in each coun- try should bear a proper relation to prices in every other country, in order that commerce may flow in its natu- ral channels. When gold is the basis of the currency, prices are regulated by the laws of trade, and of the circulation of the precious metals. When the order of Nature is not interrupted by foolish legislation, the amount of money in a country is self-adjusting. It adapts itself in accordance with natural laws to the capital of the country and the amount of exchanges to be effected. What is needed in the United States is not more inconvertible paper, but to return to the only money current in the markets of the world. The only honest, and the only practicable method 29^6 PAPER MONET. of returning to specie payments has already \)e6n al- luded to. The principle on which it is based is so simple and just that it is surprising that reasonahle men should ever have advocated any other. If a debtor owes one thousand dollars, payable in treasuiy notes worth eighty cents on the dollar, his creditor is equally well off, whether he receives eight hundred dollars in gold, or one thousand dollars in paper. The way to specie payments, then, is to settle all obligations incurred under the legal-tender act, according to the value of the money in which they were contracted, and to restore to contracts, made before the passage of that act, their original standard ; to abandon the at- tempt to elevate greenbacks to the level of gold, and to withdraw them &om circulation without increasing their value. That resumption, whenever it takes' place, will be based on this principle, is not doubtful. There is room, however, for a wide difference of opin- ion in respect to the practical measures to be adopted in carrying it into effect. The measures used, and the time of their application, will depend largely on the political and commercial events of the immediate fu- ture. To the probable course of the latter only can reference here be made. There is a possibility of the recun-ence within a few years of one of those periodical upheavals in com- merce which seem inevitable to nations in a progres- sive state of wealth. The cause at the bottom of com- mercial revulsions, as shown in a former chapter, is usually an accumulation of capital in the loan market, and a decline of rates of interest. This leads to vis- ionary investments in speculative enterprises in the course of which vast amounts of capital are either de- EBMEDIES FOR INCONVERTIBLE CURRENCY. 297 stroyed, or, being changed from the circulating to the fixed form, are no longer loanable. Another cause, which in the United States, at least, has always ap- peared on the surface of such occurrences, is a defect in the machinery for effecting exchanges, which has stimulated an increase of bank loans, and an expansion of bank-notes on a market already ripe for them. In the historical crises of 1837 and 1857, both of these causes were combined. At the present time they are both again at work. The production of wealth and accumulation of capital in this country have, it is true, been diminished by the losses of the war, and the need- less burdens imposed by a barbarous system of finance. But by these same causes the distribution of capital has been changed. It has been concentrated at the financial centres, and brought under the control of speculative operators to an extent never before wit- nessed. At the same time, in England and Germany, there seems to be an unusual accumulation of capital, and a consequent lack of paying investments at home. Bubble enterprises of various kinds are, of course, ready for the market, in addition to which large trans- fers of funds to this country are taking place. K a crisis in the London market should result, it would meet with a responsive echo in New York, marked by a I'ise of the gold premium. These transfei'S of foreign capital also are likely to stimulate our loan markets, while the defects in the machinery for effecting ex- changes are ready prepared to aggravate a speculative fever, and to make more fatal the resulting collapse. Our banks are freed from the restraint which paying specie imposes, and the legal restraints it has been at- tempted to substitute are of doubtful efiicacy. At the 298 PAPER MO>fEY. same time the decline of the premium on gold carry- ing with it the prices of large classes of commodities has set free currency which must he absorbed in use, and that use may be as a reserve for bank expansion. If these causes lead to excessive investments in min- ing shares, railway enterprises, or real estate at in- flated prices, the usual collapse will follow. Then the evil effects of inconvertible paper will be fully felt. The destruction of loanable capital and loss of confi- dence would cause excessive stringency in the loan market, which would probably be immensely aggra- vated by a rise of the gold premium, carrying with it the prices of many commodities. But the worst effect of the inconvertible paper would be the impediments it would place in the way of recovery from such a disaster. In 1857-'58, the decline of gold prices made this a cheap country in which to buy. Production was vast- ly stimulated thereby, and in the years 1859 and 1860 the results of labor in producing wealth were more satisfactory than in any other years of our history. But if such a crisis occurs during the era of green- backs, the increased cost of production, and the uncer- tainty of the future which they create, would seriously impair the efforts of capital to retrieve the disaster by engaging in legitimate production. Then would come a proper time for adopting meas- ures to enforce specie payments on the principle of paying debts according to the value of the money in which they were contracted. The prostration al- ready existing could not be greatly aggravated by such legislation, and its enforcement would leave the way open for an active union of capital and labor to restore prosperity to the country. REMEDIES FOE INCONVEKTIBLE CURRENCY. 299 But while the tendencies exist which may culmi- nate in a commercial revulsion, such contingencies as short crops, a European war, or repressive legislation, may counteract their effect. The likelihood of such an event, however, is one of the elements to be considered in examining the problem of the restoration of specie payments, and the possibility of its occurrence ought to teach that the road thereto has many turnings. But in the mean time the supposed near approach of paper to an equality with gold has led to dis- cussion of the merits of another form of paper money that deserves notice. It is maintained by some writers that the cheap- est and best money is paper not redeemable in coin on demand, but just equal to it, as tested by the absence of any premium on gold. All the plans now in vogue for restoring specie payments contemplate, not an actual return to convertible bank-notes, but merely the estabKshment of a currency of this kind. To elevate treasury notes to the level of specie, tem- porarily at least, might not be very difficult. If the natural circulation of this country be plaqeii p,t five hundred millions of dollars, of bank*notes and specie combined, then to contract our present circulatjion by two hundi;ed millions might be expected to bring down the premium on gold to par. But •'' r.'i'y. •*i\^'. ■i*i'J x>i. arm ;y.' : >^m '^l A:^^ .:»»v'i