Resumption and the silver question: embracing a sketch of the coinage and of the legal-tender currencies of the United States and other nations. A hand-book for the times

Front matter

HAmBoOK FORTmThiES.

3 1924 013 681 543

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Preface

The object of the following pages is to present in a concise manner the irreconcilable distinction between currencies of banks and bankers — of commerce — which are instruments arising out of production and trade ; which are essential to their operations on a large scale ; which are limited by their extent ; which represent a corresponding amount of existing capital, and are discharged by its use, and which are most beneficent in their result : and those of Government notes, which do not arise out of production and trade ; which have no relation to the extent of the latter ; which, instead of representing a corresponding amount of existing capital, represent its waste ; which do not disappear by their use ; and which, having the force of money by being legal tender, are necessarily highly maleficent in their result. The conclusions of the writer have been supported by illustrations drawn from the most memorable examples in history.

iii iv PREFACE.

His object is to appeal to the intelligence of every citizen in the land ; and will be accomplished if he can help to excite a wide discussion of the subject. He is confident that such discussion, conducted in a proper spirit, and by an adequate method, must lead to such uniformity of conviction of the disastrous effect of our legal-tender notes, that in place of any increase, the public will demand that steps be presently taken for their speedy and complete retirement.

Part I. "what Is Paper Money?

IN a recent work * I undertook to treat money 'as a subject coming within the range of the exact sciences. I now propose to apply the laws there unfolded to the various financial propositions before the country for the resumption of specie payments, and especially to that of Mr. Secretary Sherman.

Should a bank — the American Exchange, for example — cease upon a given day to make further issues of notes and credits,, its whole capital, with such of its deposits as had been loaned, would, without action or effort on its part, be returned to it in coin (assuming it to -be on a specie basis) within, say, ninety days, provided its bills were to mature within such period, and were paid. Its

* " Money and its Laws," embracing a History of Monetary Theories and a History of the Currencies of the United States, by Henry V. Poor. New York : H. V. & H. W. Poor, 68 Broadway. 1877. I I

RESUMPTION AND THE SILVER QUESTION.

accumulations of coin would from day to day be in ratio as they were paid. Equally without action or effort on its part would all its liabilities be taken in. The process, which would simply be one of liquidation, would convert all, or nearly all, of its assets into coin. The following statement may be assumed to show approximately the condition of the bank, when it ceased to make further issues :

Assets.

Bills receivable $10,000,000

Coin Reserves 3,500,000

Real Estate 350,000

Due from other Banks 3,150,000

Liabilities.

Share Capital $5,000,000

Note Circulation 5t)0,000

The following statement would show approximately its condition after its bills and other dues were fully paid :

Assets. Liabilities,

Real Estate 350,000

Share Capital $5,ooo,oSdo

Balance (surplus) 1,000,000

Should its deposits, or a portion of them, be drawn, its coin would be correspondingly reduced.

The capital of the bank in the outset might have consisted wholly of coin, or of the notes and credits of other banks, or of bills receivable given for

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merchandise, a sufficient amount of coin in addition being held to serve as reserves. If its capital were paid in wholly in coin, the process of discount, till this was paid out, would consist of an actual exchange of coin — of capital, for the bills of its customers. When this was paid out (less an amount sufficient to serve as reserves), loans would be made by an issue of the notes and credits of the bank for bills given in the purchase of merchandise fitted, and in demand, for consumption. The greater part of loans at bank are made in this manner, the process of discount being ordinarily a mutual exchange of obligations. The" parties in whose favor the discounts are made pay out the notes and credits received, for labor and material to be used in the prosecution of their industries — in the production of merchandise similar to that already put upon the market — and for which the bills discounted were given. Those to whom the notes and credits are paid use them, as a rule, as money, for the purpose of reaching some one of the articles of merchandise held by the makers of the bills. They are received by the consumers of such merchandise equally with coin, for the reason that they are received by the holders in its sale equally with coin, these using such notes and credits in the payment of their bills; the bank in such payments making no distinction between its notes and credits and coin. No sooner, therefore, are its notes and credits issued than they immediately enter upon a circuit which is to bring them back to it, automatically, and in full volume. The time ordinarily consumed in making such circuit — that is, for the distribution for consumption of the merchandise which the bills represent, averages, say, ninety days. Such, consequently, . is the proper limit as to time of discountable paper, which should always mature before or simultaneously with the return of the notes and credits issued in its discount, in order that the one may be discharged by the other. If the notes and credits return previous to the maturity of the bills, the former have to be taken in by the bank by the payment of a corresponding amount of coin. So soon as the notes and credits return to the bank, they are functus officio, so far as relates to the transactions in which they were issued, and only appear when new ones are entered into.

As the process of discount is a mutual exchange of obligations, the process of payment is ordinarily their mutual cancellation. If the bills are paid, the notes and credits issued in their discount will, as a rule, be the instruments of such payment. So far as the latter are deposited in banks, these making no distinction between their own notes and those' issued by others, they are daily presented for redemption through the operations of clearing houses, the process being too familiar to require further description. Whatever, therefore, is issued, so soon as it has performed its function, returns regularly and necessarily to the

WHAT IS PAPER MONEY I issuer in one of the ways described. When not retired by direct payment into the bank, or by mutual offset at the clearii% house, it must, for the want of merchandise, the ordinary subjects of consumption, be discharged in the universal equivalent — in coin. No credit is ever given between issuers of currency. Their issues are always assumed to be the equivalent of coin, and are treated as such equivalent. The slightest evidence that they are not, as far as their constituent is concerned, is the signal for their instant presentation to the issuer for coin. The law, therefore, which compels the redemption of paper money of all kinds, so soon as it has performed its office and function, is an inexorable one. The best that an issuer can hope for is that his issues shall serve as money — that is, remain for ninety days in the channels of circulation. He has constantly to fear that they will not so remain, but will be immediately presented for payment. In such case he is compelled to suspend, as no issuer of currency is able, as a rule, to take in all his liabilities upon the instant. Each one, therefore, is most scrupulous to maintain his credit, and is always eager to strengthen his position by drawing in coin all the balances that may be found in his favor.

Such is a brief description of the money of banks — of commerce. It is, through the bills discounted by its issue, the symbol of capital, of merchandise.

and is discharged by its use. Such merchandise may be in the hands of the pubHc, or in the vaults of the bank in the form of coin. So far as currency is symboHc, a corresponding amount of capital, in the form of coin, is discharged from the work of distribution, reducing in like ratio the cost of such merchandise to the consumer, and increasing at the same time the profits of the producer ; each sharing alike in the saving effected. The very object of such symbols is to furnish convenient and inexpensive, in the place of inconvenient and expensive, instruments of distribution. They belong to the class of mechanical contrivances, which by supplanting old and cumbrous processes by new and simple ones, have changed the whole face of modern society. The effect of such currencies is to reduce prices precisely as the application of steam to production reduces prices. The tendency of all commercial countries is to their use by the sale, on credit, of merchandise in gross, ■the bills given laying the foundation therefor. The means of distribution, and consequently, the money of the country, would be ideally perfect when every article entering into consumption was represented by a symbol by which it could be reached. Such a result, however, cannot be realized from the tendency always existing, and which can never be fully restrained — to issue symbols without a constituent. The best corrective of such an abuse is to forbid the discount of bills having

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more than ninety days to run, and to provide that no symbols shall be issued of denominations less than ten dollars. In England, where their use is carried to a greater extent than in any other country, no notes of banks are issued of less denominations than five pounds, or twenty-five dollars.

It will be seen from what has preceded that the capital which is to retire a banking currency is ordinarily merchandise in the hands of the public. The bank holding the bills given for it is entitled to their proceeds. As a rule, however, such proceeds come into its possession only when it goes into liquidation. By the time its notes and credits ordinarily return to it, the merchandise represented by them has reappeared in new forms, represented by new bills, which are discounted in manner described ; the notes and credits issued serving for its distribution, the reserves being held as security for new transactions precisely as they were held for the old. In this way whatever is produced is distributed, coin interposing only when the notes and credits do not represent their proper constituent. As they will, whether they represent it or not, return regularly and automatically to the issuer, they must, so far as they lack such constituent, be paid in coin. This is held for the purpose of supplying the lack of such constituents, the ordinary subjects of consumption. It is never intended to part with it, but to hold it as reserves against any sudden or unforeseen contingency. A proper proportion must always be maintained between reserves and liabilities. If a bank with coin reserves equaling $1,000,000 may safely have notes and credits in circulation representing merchandise to the amount of $4,000,000, it must reduce its issues to $2,000,000, if from any cause its reserves are reduced permanently to $500,000. It is no part of the office of a bank to lend coin, but to supply instruments of distribution in its place. It is weakened just in ratio as it parts with coin, and strong just in proportion as its liabilities are provided for without its use. A bank having liabilities of $10,000,000, with reserves in coin equaling $5,000,000, and with no other means of discharging its liabilities, would be immediately put into liquidation. The courts would interpose upon the mere suggestion of its condition. On the other hand, a bank with equal liabilities, with only $1,000,000 of reserves, but with $10,000,000 in good bills, would be entirely solvent and beyond the reach of legal interposition. All it would have to do to convert all its assets into coin, would be to call in its bills receivable, the amount of the latter equaling the excess of indebtedness to it on the part of the public.

Such are the nature, object, use, and mode of retirement of bank money. It is simply the instrument by which capital is reached. Metallic — intrinsic — money, gold and silver, serves three great uses. It is the highest form of capital, and consequently

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is the instrument of reaching by direct exchange all other kinds of capital. As the desire for its possession is uniform from age to age, an attribute possessed in an equal degree by no other kind of property, it forms the reserves of society. When not wanted for exchange or reserves, it is used in the arts, such use constituting, in fact, the basis of its value. A bill of exchange drawn upon London may have the value of coin to a person owing debts in that city, for the reason that its conversion into money there will pay such debts. It is its capacity for such conversion that gives it its value. The issues of banks break up the bills drawn in the sale of merchandise in gross, into denominations suited to the convenience of the public. To those in want of such merchandise such issues serve all the purposes of coin. There will, however, always be holders of them who may wish to convert them into coin for export, to serve as reserves, or for use in the arts. To such wants the issuers of currency must respond. So far as they are able to do this, their issues will have the value of coin to their holder, as they will enable him to reach the constituent in any form desired. It is such a provision that gives to the notes and credits of banks the value of coin. If not available for the purpose of reaching every kind of merchandise, they instantly fall to a discount from the price of coin.

Let us see how far the paper money of governments corresponds to the money of banks — to the money of commerce. Should the United States, an issuer of notes to serve as currency, cease to make any issues for a period of three months, there would be returned to it within such period such portion of its notes as equaled the revenues collected — say $60,000,000, or a little more than one-sixth of the notes at present outstanding, assuming all the revenues to be collected in them. By such return, the indebtedness of the public in the form of taxes would be discharged in an equal degree. A corresponding amount of the indebtedness of government would be taken in, but not an additional dollar added to its means. Should it cease to make further issues for a period of one and a half years, its notes would (assuming the revenues to amount to $240,000,000 annually) be wholly taken in. In such event it would not be in the possession of a dollar in coin, in consequence of its ceasing to be an issuer of currency.

Such different results, following an action precisely similar in the two cases, mark the wide difference between the position of banks and the currency they issue, and that of the government and the currency it issues. The notes of the former when properly issued are always the evidence of a capital which is to provide the means for their retirement. Such provision is the necessary condition of their circulation. They are payable on demand in order that- their constituent may always

]VHAT IS PAPER MONEY? n

be available to the holder. They circulate at the par of coin for the reason that their constituent has a value in coin equal to their nominal amount. For every note and credit issued, two parties at least — the maker and indorse;- of the bill discounted — undertake to save the issuer harmless on account thereof. Interest is always charged to their receiver for such period as the bills discounted have to run, for the reason that they secure to him a corresponding amount of capital of the value of coin. They are never made competent to discharge the indebtedness of the issuer. Such provision would be fatal to their circulation, as it would be considered as discharging him wholly from the obligation of payment. Their use largely increases the amount of coin in a country, from the powerful influence they exert in enlarging its production and trade ; the coin, and paper representing merchandise of equal value, circulating side by side in proportions to suit the public convenience. The notes of a government, on the other hand, are never issued as the evidence of capital and as the instruments of its distribution, but always to supply the lack of it to the issuer. It alone undertakes their retirement. They are never issued in the discount of bills. Interest is never charged to the parties to whom they are paid, for the reason that they represent no immediately available constituent. The means for their retirement are never provided previous to their issue.

Government is never the lender, but always the borrower of capital. Its notes are never made payable presently, from its inability to pay them presently. As they are always the last resort of exhaustion and incompeteocy, they are always made legal tender in the discharge of contracts equally with coin as a necessary condition of getting them into circulation. Otherwise no one would receive them as money. Such provision may for a time give them a high value, but can never raise them to the value of coin, for the reason that they can serve only one function of coin — the payment of debts. They cannot be exported as money, held as reserves, nor can they be used in the arts. They lose a considerable portion of their value so soon as the debts existing at the time of their issue are discharged, as no one will contract to receive them at a future day as the equivalent of. coin. Their value, consequently, comes to depend upon the time that, in public opinion, is to elapse before they are paid. Having the same legal competency, they always speedily drive the more valuable currencies out of circulation, as two currencies of unequal value will never circulate side by side. But such competency has force only so long as confidence is felt that the notes will eventually be redeemed. When it is seen that they will not, it will have no force or effect whatever. They always inflate prices for the reason that, instead of being the symbols of capital, they are always instruments in excess of

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the means of consumption. They are promises to pay without provision for payment, and are necessarily subject to excessive fluctuations in price, due to the uncertainty as to the time of their payment, a matter wholly within the discretion of the issuer. As a banking currency, so far as it is symbolic, is wholly beneficent in. its effects, discharging from use a corresponding amount of capital in the form of coin, and reducing in equal ratio the cost of distribution, a currency of government notes is wholly maleficent in its effects. It is, in whatever light viewed, a pure and unmitigated evil. The issues of banks are made the basis of industries which reproduce merchandise equal in amount at least to that consumed. The greater the amount, consequently, of bank-money properly issued, the greater both production and consumption. No matter what its amount, there can be no inflation, as the symbol never exceeds, and always disappears with, the constituent. A government currency, on the other hand, is always in inflation to its full extent. As it becomes, being legal tender, the reserves of all other issuers, there is necessarily a vast increase of currency in addition to its amount. The immediate and necessary effect is an excess, in ratio to the inflation, of consumption over production. From the increased demand, vast commercial and industrial enterprises are presently set on foot, for the products of which there is no corresponding power on the part of the public to consume. The injurious effects begin to show themselves long before the currency has reached its maximum. The old loses a portion of its power, while the increasing wants of the public can no longer be supplied by new issues. Those who have embarked in industrial enterprises, seduced by an apparent abundance of capital, are without demand for their products, or means to sustain the immense outlay they have made, or to which they are subject. As very large numbers, from being thrown .out of employment, are compelled to live upon their past accumulations, the money of the country gradually flows to the com'mercial centers, and into the hands of the wealthy few ; the great mass of consumers coming in time to be almost wholly wanting in means of support. The condition of the United States to-day is a striking illustration of the effect of the use of a currency which is neither capital nor the evidence of capital. There is a vast abundance of products of all kinds, but no demand for them, even at rates far below cost. All are sellers — none buyers. Those who possess money do not dare, in the general uncertainty, to attempt to put it to any productive use, in the utter stagnation which prevails in all the departments of commerce and trade.

That which has preceded has only epitomized the results of experience common to the whole race from the moment that money has been used in any

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form. No banking or government currency was ever maintained at the value of coin unless full provision was made, or supposed to be made, for its conversion into coin or its equivalent. Money, like merchandise, is accepted only at its real or supposed value. Otherwise no distinction would be made between a half and the whole. Mankind in their transactions with each other deal in realities, not in fictions ; in substantial things, not in shadows. There never was a currency of government notes of the character of those of the United States that was not, from its very nature, at a discount from the par of coin. I am well aware that very different accounts of money are laid down in the books. In all it is confidently stated that the most worthless substances, by being declared by government to be money, may be maintained at the par of coin, provided their nominal amount does not exceed that of the coin supplanted by them ; and that such worthless substances, after they are declared money, may, by reducing their amount, be raised to any possible pitch of value. All such statements are the dreams of theorists or of schoolmen, and are without the least support in reason, or in the experience of mankind.

Part II. Resumption Of Specie Payments

IT is now proposed to raise the value of the government notes of the United States to the par of coin. The provision necessary, in the opinion of Mr. Sherman, Secretary of the Treasury, was fully set forth by him in recent conferences with the Committee of the Senate on Finance, and the Committee of the House of Representatives on Banking and Currency. The conference with the Senate Committee was held on the 19th of March, 1878. At this conference several interrogatories were proposed to the Secretary by members of the Committee which, and their answers, were, with some abbreviations, as follows : *

The Chairman. Ought the Resumption Act to be repealed, and if not, why not ?

Secretary Sherman. The question is a very general and is rather a legislative than an executive question ; but I

* The Committee on Finance of the Senate consists of Mr. Morrill of Vermont, Chairman ; Messrs. Dawes of Massachusetts, Ferry of Michigan, Jones of Nevada, Allison of Iowa, Bayard of Delaware, Kernan of New York, Wallace of Pennsylvania, and Voorhees of Indiana.

16 * have no objections to answering. I think the Resumption Act ought not to be repealed, * » * and now I am fully convinced that we are able to do what we have so often promised to do and ought to do.

Chairman. Do you think resumption is practicable under the present law ?

Secretary Sherman. The best evidence that we are able to resume on the ist of January next is the progress that has already been made. When the Resumption Act was passed, the premium on gold was about loj^ per cent. Since that time it has been reduced to a nominal rate. It is now a little over i. Since that time we have accumulated in preparation for resumption a large sum of gold. I have taken some pains to get the figures, which I will give you :

Gold bullion 7,937, 300 11

$125,088,755 73

Less amount to credit of disbursing officers and outstanding checks 6,189,626 60

Gold-certifiqates actually outstanding 44,498,500 00

Called bonds and interest 6,818,677 29

Interest due and unpaid 4,909,705 21

62,416,509 10

Available gold coin and bullion 62,672,246 63

Available silver coin, fractional 5,972,895 42

Available silver bullion 3,130,718 31

Total available gold and silver $7i,775,86o -36

* * * Now, in regard to another point pertinent to your question, we have, in the process of preparation for resumption, reduced the volume of United States notes.

The precise figures are familiar to you. The amount was $382,000,000 at the time of the passage of the Resumption Act, and the amount now is $348,618,024. Again, the amount of outstanding bank-notes has been reduced. On December 31, 1875, the amount was $346,479,756; on December 31, 1877, $321,672,505, and on February 28, 1878, the amount of banli-notes outstanding was $321,989,991 ; but the amount of bank-notes of banks in existence, not in process of liquidation, was $299,240,475, and the difference between these two sums being the notes of banks in process of liquidation, although the notes are in circulation, yet an equal amount of greenbacks are in the Treasury as a special deposit to redeem them.

The decline in the price of gold, compared with government notes, may be due to causes which have no relation whatever to their relative value. The impression is now almost universal that the Nation is on the eve of resumption ; that time only is wanting to bring about the perfect coincidence of notes and gold. Did this conviction rest upon any well-assured foundation, a contract to pay gold, say at the end of one year, would, deducting the present premium, be as readily entered into as a contract to pay a corresponding amount of greenbacks. There is, however, no person of ordinary sense, were the two kinds of money offered him — the gold at an interest of three per cent, and the greenbacks at six — who would not elect to pay the higher rate, from the excessive losses which the gold loan might involve. This fact marks the wide distinction that still exists between the two. At one time greenbacks

RESUMPTION OF SPECIE PA YMENTS. ig

circulated at only a very small discount. At another they were at a discount of 65 per cent. At the present time they are at a discount of only i per cent, below- the price of gold. Their relative value at the present time, as in the past, is simply a matter of opinion, of sentiment, which, as will be shown in the progress of the discussion, may be as wide of the mark as it has been at any previous time. A depreciation of the notes, and perhaps an excessive one, is certain to take place when the future discloses the entire inadequacy of the proposed provision for resumption. The present price of greenbacks does not depend upon the proposed provision for their payment, but upon a value to be derived from the uses, as currency, to which they may be applied.

Chairman. What effect has the silver bill had, or is likely to have upon resumption ?

Secretary Sherman. I do not want to tread on delicate ground in answering that question, Mr. Chairman. I shall have to confess that I have been mistaken myself. Now, as to the silver bill, I have watched its operation very closely. I think the silver bill has had some adverse effects, and it has had some favorable effects, on the question of resumption. Perhaps the best way for me to proceed would be to state the adverse effects first. It has undoubtedly stopped refunding operations. Since the agitation of the silver question, I have not been able largely to sell bonds, although I have made every effort to do so. * * * Now, another adverse effect the silver bill has had is to stop the accumulation of coin. Since the ist of January we have accumulated no coin, except for coin-certificates, and except the balance of revenue over expenditure. The revenues in coin being more than enough to pay the interest of the debt and coin liabilities, we accumulate some coin.

Another effect that the silver bill has had is to cause the return of our bonds from Europe. Although the movement of our bonds in this direction has been pretty steady for more than a year, yet it is latterly largely increased ; how much I am not prepared to say.