Extra sheets from Spaulding's History of legal tender paper money issued during the great rebellion ; legal tender act ..

Front matter

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EXTRA SHEETS FROM SPAULDING'S HI-S j?.0;BY

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Introduction

THE LEGAL TENDER ACT.— FUNDING ITS ORIGINAL OBJECT.— LIOW IT HAS BEEN ABUSED AND PERVERTED.— RESUMPTION OF SPECIE PAYMENTS.— * SUB-TREASURY ACT, &c.

In the publication of a further edition of the “ Financial His¬ tory of the War,” prepared by me in the winter of 1869, I may be indulged in a few words in vindication of the Legal Tender act as originally passed, and some criticisms on the general man¬ agement of the Finances, especially the mistakes of the Treasury department in its administration of that act, and of other laws authorizing the issue of bonds and treasury notes.

As chairman of the sub-committee of ways and means, having charge of this subject, I became very much identified with this legislation, as well as with the bank bill passed during the second year of the war.

The first material mistake in the management of the finances, occurred when Secretary Chase discarded the use of the bank check, and the clearing house, in the fall of 1861. The Secretary of War might, With the same propriety, have rejected the rail¬ road, the locomotive, and the telegraph. The modern invention of the bank check and the clearing house for the transaction of large financial operations with facility, are quite as useful as are railroads and telegraphs in carrying on military operations with success. The Secretary of War did not fail to make use of the railroads and the telegraph, but the Secretary of the Treasury, by sticking to the sub-treasury, and rejecting the bank check and clearing house, committed a great blunder at the commencement of the war. This mistake occurred under the following circum¬ stances :

Two important loan acts were passed at the extra session of Congress in July and August, 1861. The first act was approved July 17th, and the second August 5th. By section six of the last

QJ C mentioned act,* the sub-treasury act passed in 1846, was so far susended as to allow the Secretary of the Treasury

/ “To deposit any of the moneys obtained on any of the loans now authorized by law, to the credit of the Treasurer of the United States, in such solvent specie paying banks as he may select ; and the said moneys, so deposited, may be withdrawn from such deposit, for deposit with the regular author- • ized depositories, or for the payment of public dues , or paid in the redemption of the notes authorized to be issued under this act, or the act to which this is supplementary, payable on demand, as may seem expedient to, or be directed by the Secretary of the Treasury.”

The primary object, which Mr. Appleton and myself had in view, in preparing this section, was to relax the rigid require¬ ments of the sub treasury act, in regard to the receipt and dis¬ bursement of coin, and instead of paying solely from coin deposits in the treasury, to allow all the money obtained on these loans to be deposited in solvent banks; the United States Treasurer to draw his checks directly on such deposit banks in payment of war expenses, which checks would be paid in state bank notes then redeemable on demand in gold, or in the ordinary course of busi¬ ness, to a large extent, they would pass through the Rew York clearing house, and the clearing houses of other cities, and be settled and cancelled by offset, without drawing large amounts of specie. This mode of payment would have enabled the Secretary more easily to effect such loans, and make his large disburse¬ ments, without materially disturbing the coin reserves held by the banks, which were then w'ell protected by these reserves in their vaults.

This mode of making the disbursements for the large war expenses was regarded by me at that early period of the war as of vital consequence to the stability of the finances of both government and people; hence the preparation and adoption of the sixth sec¬ tion of the act of August 5, 1861, giving the Secretary of the Treasury discretionary power to suspend the sub -treasury law' in respect to these loans.

After the battle of Bull Run, which occurred on the twentyfirst of July, of that year, the necessities of the government in clothing, arming and feeding troops — in providing munitions of W'ar and building a navy — became so urgent that the banks in New York, Boston and Philadelphia most patriotically came for¬ ward and made arrangements in several negotiations with Secre¬ tary Chase, to loan to the government $150,000,000 under the provisions of the two loan acts passed at the extra session. Of this sura $105,000,000 was apportioned to the associated banks in the city of New York payable by instalments. The banks were then in good condition, transacting their business on a specie basis, and paid coin for all balances at the clearing house, and redeemed their circulating notes in coin, and the loan to the government was made with the expectation that the money would be deposited in the banks, and be checked out under the direction of the Secre¬ tary, in pursuance of the sixth section above referred to. The Secretary of the Treasury refused to use the discretionary power conferred upon him by that section, and would not check on the banks for the expenses of the war, so that current bank notes could be paid or balances settled through the clearing house, but in¬ sisted that the banks should pay the money loaned into the sub¬ treasury in gold^or gold treasury notes, and from thence it was distributed for war purposes and scattered in different parts of the country. By far the greater part of this loan was paid in gold coin, taken from the reserves of the banks commencing on the nineteenth of August, 1861. This unnecessary mode of re¬ quiring the payment of the loans, so weakened the banks, that it brought on a general suspension of specie payments, during the last days of December, 1861. Notwithstanding the banks com¬ menced making advances to the government about the nineteenth of August, 1861, yet none of the securities to be issued by the government for the loans were turned over to them until the four¬ teenth of January, 1862.

The banks having been committed to making the loans, and having made partial advances on account of the same, were obliged to complete the loan notwithstanding the Secretary of the Treasury deemed it incompatible with his views of duty, and the traditions of the sub-treasury law, to use such banks as dis¬ bursing agents of the government, even under the extraordinary exigency under which the loans were made. The call upon theA banks for payment into the government depository of the remain¬ ing instalments of the loan, either in coin or gold treasury notes, was persistently urged by the Secretary until the final closing of the transaction on the third of February, 1862. This was the first material mistake of the Secretary of the Treasury, and was the first step in the wrong direction, wThich, combined with other im¬ portant events, led to the necessity of passing the legal tender act. The Secretary in breaking the banks, at the same time broke the sub-treasury, and both were discredited together. Under the policy pursued, the state bank bills which wrere local in character and credit, became uncurrent money, and the available gold in the country was wholly inadequate to meet the gigantic expenses . of the war.

“ A meeting of bank officers was held at the American Exchange Bank in the city of New York, December 28, 1861. One of the bank Presidents in a well considered speech delivered on that occasion, criticising the course of Secretary Chase in regard to those loans, said that

“ ‘ He (Secretary Chase) was urged to draw directly on the banks. Coin being the basis of credits it was only in that way the increased financial operations of the government could be conducted ; for it is impossible to maintain the superstructure of credit when the basis is withdrawn, for in destroying the basis the superstructure is also swept away. He refused to draw directly upon the banks for the proceeds of the ^oan taken by each. We are informed that the act of Congress was passed expressly for the pur¬ pose of authorizing him to do so, but he gave it a different interpretation which may be the correct one, although I do not think so.’ ”

The failure of the Secretary to recognize the suspension' of the sub-treasury law, fully demonstrates the truthfulness of the re¬ mark made by Disraeli, that “upon a perfect knowledge and right appreciation of details the settlement of great questions mainly depends.” The Secretary was intent upon having the gold for disbursement, without fully comprehending the effect this large drain was to have upon the banks and the general finances of the | country.

LEGAL TENDER ACT.

The suspension of specie payments by the banks and the treas¬ ury of the United States occurred on the twenty-eighth of De¬ cember, 1861, and two days later, on the thirtieth of the same month, I prepared and introduced the legal tender act, into the House of Representatives. The histoiy of this measure in its passage through both houses is fully set forth in the text. The speeches and votes of members on both sides of the question are given in detail in this book, commencing at page six. The meas¬ ure was prominently discussed before the people and in Congress for mors than six weeks. It passed both houses and received the approval of President Lincoln February 25, 1862.

It is a fundamental principle, which I think I fully compre¬ hended when I introduced this act into Congress, that not one dollar of paper money ought ever to be issued by the government, or by any bank, without at the same time, making ample provision for its prompt redemption, on demand. The best re¬ demption, and the best attainable standard of value, is gold coin, and the only admissible standard in time of peace. It was an utter impossibility for our government at that time to redeem the legal tender notes in gold, because it could not be had on any terms; it was not in the country in sufficient amount to meet the great emergency; but the government could redeem (fund) the legal tender notes in six per cent, twenty years gold bonds. And here I may say, most emphatically, that if these six per cent, bonds could then have been negotiated for any funds available, and in adequate amount, for war expenses, not one dollar of legal tender notes would have been issued. This could not be done, and the act was framed with the express agreement that the legal tender notes issued under it should be redeemed in the six per cent, gold bonds. The second section of the act authorized the issue of $500,000,000 bonds for that purpose.

The leading object of the legal tender act, was to create a cur¬ rency national in character, which could be used for liquidating war expenses, and, to prevent any plethora or redundency of such currency, provide at the same time for funding it in the six per cent, bonds. The leading object was to fund the debt. This pro¬ vision for funding, also, in a great measure, relieved the act of the apparent injustice of compelling people, by the legal tender clause, to receive this currency on ordinary debts and invested securities when they could immediately upon its receipt, convert it into six per cent, gold bonds at par.

In the opening speech which I made soon after I presented the bill to the House, (see History, page 29) I said

“ The bill before us is a war measure, a measure of necessity , and not of choice, presented by the committee of Ways and Means to meet the most pressing demands upon the treasury to sustain the army and navy until they can make a vigorous advance upon the traitors and crush out the rebellion. These are extraordinary times and extraordinary measures must be resorted to, in order to save our Government and preserve our nationality.”

•

After a full presentation of the scope and object of the bill, and an argument in favor of its constitutionality, as a war meas¬ ure, and as a means of carrying into full effect the war power, granted in the constitution, substantially as has since been decided by the U. S. Supreme Court, I closed my first presentation of the bill to the House as follows:

“It is plainly within the scope of the constitution that the government should maintain itself; that the army should be supported; that the navy should be maintained. The ways dnd means of doing this are left to Con¬ gress to provide. Congress may do this entirely by taxation. It may pro¬ vide by law to levy and collect taxes enough every year to pay the whole expenses of the war, during each current year, and so ‘pay as we go.’ It may issue six per cent, bonds and sell them on the market for what they will bring — even if they will not sell for over fifty cents on the dollar — to raise money to carry on the war. It may issue treasury notes payable on demand, and make them a legal tender in payment of debts. Either one or all of these modes of paying the expenses of the government is left to the discre¬ tion of Congress. Either mode is constitutional; and it is left to the sound discretion of Congress to decide which m6de it will adopt, or whether it will adopt a part of each, as being the best in the present crisis. My own im¬ pression is, that it will be best for us to adopt, in part, all of these modes for providing the means:

“ 1. Raise by taxation, the current year, over and above the amount re¬ ceived from duties on imports, the sum of $150,000,000.

“2. Issue $100,000,000 of demand treasury notes in addition to the $50,000,000 authorized in July, making them legal tender in payment of debts, and exchangeable at any time for six per cent, twenty years’ bonds; with a further issue of demand notes, if Congress shall hereafter deem it necessary.

“3. Provide for the issue of all the twenty years’ six per cent, bonds that may be necessary to fund the demand treasury notes, and other fundable treasury notes, that may be issued (say $500,000,000 six per cent, twenty years’ coupon bonds), and pledge $30,000,000 of the annual taxes to pay the interest halt-yearly thereon, and pledge $25,000,000 more as a sinking fund to redeem the principal in twenty years.

“4. This tax of $150,000,000 would afford an ample basis on which to rest the credit of the government for this large issue of treasury notes and bonds, and would insure th* punctual payment of the interest to the capital¬ ists who might hold them.

‘ ‘ The demand notes put in circulation would meet the present exigencies of the government in the discharge of its existing liabilities to the army, navy and contractors, and for supplies, materials and munitions of war. These notes would find their way into all the channels of trade among the people; and as they accumulate in the hands of capitalists they would exchange them for the six per cent, twenty years’ bonds.

“ These circulating notes in the hands of the people would enable them to pay the taxes imposed, and would facilitate all business operations between farmers, mechanics, commercial business men and banks, and be equally as good as, and in many cases better , than the present irredeemable circulation is¬ sued by the banks.

“ Tlie $500,000,000 six per cent, twenty years’ bonds in the hands of the Secretary of the Treasury ready to be issued would afford ample opportunity tor funding the treasury notes as fast as the capitalists might desire to exchange treasury notes, not bearing interest, for coupon bonds of the United States, bearing six per ceent. interest, and amply secured by a tax upon the people ami all their property.

“ In this way the government will be able to get along with its immediate and pressing necessities without being obliged to force its bonds on the market at ruinous rates of discount; the people, under heavy taxation, would be shielded against high rates of interest; and the capitalists will he afforded a fair compensation for the use of their money during the pending struggle of the country for national existence .”

From this brief statement of the inception of the legal tender act, it will be seen that it was a temporary war measure; that this greenback curiency was recei'veable for internal taxes and all other dues, except customs duties and interest on the funded debt; that a sinking fund was provided of one per cent, each year of the entire debt of the United States after July 1, 1862, and the whole of this temporary currency and all the floating debt of the United States was, by the second section of the act, fundable (redeemable) in six per cent, gold bonds. The title of the act was very expressive. “ An act to authorize the issue of United States notes and for the redemption or funding thereof and for funding the floating debt of the United States.” The govern¬ ment could not redeem in gold, but could redeem in bonds issued on its credit. These legal tender notes were in substance and effect, certificates of debt given for war expenses redeemable on demand in these bonds. Thus, the fundamental principal, that no paper currrency should ever be issued, without providing at the same time, for its prompt redemption, was provided for in the best mode in which, under the unparalled emergency, the govern¬ ment was able to provide for it.

The first legal tender notes issued under the act bore date March 10, 1862, and had printed on the back of them these words:

“This note is a legal tender for all debts public and private, except duties bn imports and interest on the public debt, and is exchangeable for U. 8. six per cent, bonds redeemable at the pleasure of the United States , after five years”

These notes in the form of greenback currency were immedi¬ ately issued by Secretary Chase and disbursed for war expenses, and the treasury of the United States was very soon relieved of the pressing demands that were made upon it. The army and navy were paid, and supplies and materials of war obtained on these paper promises in sufficient quantity to prosecute the war with vigor.

The first edition of legal tender notes were by the gigantic war expenses very soon exhausted. On the seventh of June, 1862, Secretary Chase sent an official communication to the Committee of Ways and Means asking for a further issue of $150,000,000 of legal tender notes, and that a part of this emission should be in one dollar notes, the previous emission having all been issued in notes of five dollars and upwards. (Legal tender History, page 154.) In this communication Mr. Chase urged in favor of small bills, and said “it may further be properly observed that since the United States notes are made a legcd tender and maintained at near the par of gold by the provision for their conversion into bonds bearing six per cent, interest payable in coin , it is not easy to see why small notes may not be issued as wisely as large ones.”

This quotation is made for the purpose of showing how im¬ portant it was deemed at that time, that all the greenback cur¬ rency should be redeemable in gold bonds.

I made the opening speech on the bill in favor of this further issue of the legal tender notes. In the course of my remarks I said:

“ The soldiers and s ^lors give their services, risk their lives and endure all the hardships, sickness and privations of the campaign, and cheerfully take these notes in payment. Supplies, subsistence and material of war of every kind is eagerly furnished, and these greenbacks taken in exchange for the same. This kind of loan is so popular with the people, and being without interest, is so advantageous to the government, it is desirable that it should be extended so far as it can be done safely, and without unduly stimulating speculations to such an extent as to cause an unfavorable reaction to the le¬ gitimate business of the country. But when bonds can be negotiated at par 1 think it will be safer to have bonds negotiated than to issue legal tender notes .”

The act for this additional issue of greenback currency was passed and approved by President Lincoln, July 11, 1862. It pro¬ vided that the notes should be redeemed on demand in the six per cent, gold bonds. «

SECOND MISTAKE.

The great mistake — greater than all other mistakes in the man¬ agement of the war — was the abrogation of the right to fund the greenback currency in gold bonds, as provided for in the two preceeding acts.

All the other mistakes, civil and military, which occurred during the war were of slight consequence when compared with the mis¬ chievous and grave consequences resulting from this one mistake. Taking away from the holder of this paper money the right to have it redeemed on demand in gold bonds, besides being manifestly unjust to the holders, let the government and the whole country — banks and people — down into the slough of an irredeemable paper currency, where we have remained for over eleven years. From 1864 to 1875 it has been a dead weight on the business and industry of the country, without elasticity, and without any provision whatever being made for its redemp¬ tion or payment. Its redundency and consequent depreciation has operated very injuriously to the legitimate business of thecountry. It was an instrument of expenditure representing the waste of war, and not possessing the essential elements of a com¬ mercial currency. A majority of the people, however, have been deluded into the belief that those broken promises, representing the waste of war, were money, and a proper standard of value as a basis for doing business, and have plunged headlong into all sorts of speculations, unprofitable enterprises, extravagance in living general abuse of credit, idleness, and consequent demoralization.

If the right to fund the greenbacks into the six per cent, gold bonds had not been abrogated, no financier or practical business man, whose opinion is worth quoting, can doubt that we would have gone to specie payment within two or three years after the close of the war, in spite of ourselves. The individual indebted¬ ness at the close of the war in 1865 wras small. Every one was comparatively free from debt. The six per cent, gold bonds were sought for as an investment. They soon appreciated to par in gold, and if the right to fund had been continued, the greenback currency wrould have appreciated to par in gold along with bonds. The legal tender act would have served its purpose as a war measure, and we would have returned to the specie standard without ma¬ terial detriment to the legitimate business of the country. In this way we would have avoided a large part of the extravagance and demoralization that has been so reckless since the close of the war.

The circumstances leading to this mistake are fully set forth in the Financial History of the War, pages 188 to 198, but I will briefly recapitulate the facts. The $900,000,000 loan act was passed and approved by the President March 3, 1863. At the urgent request of Secretary Chase a clause was inserted in the act, taking away the absolute right of the holders of greenbacks to fund them into six per cent, gold bonds after July 1, 1863, and leaving it discretionary with the Secretary to allow them to be funded or not, as he might deem best for the public interest. Under this discretionary power the Secretary allowed them to be funded up to January 21, 1864. The legal tender act had worked well and all of the $500,000,000 six per cent, bonds authorized by the first act had been taken up at par. The Secretary then de¬ cided that he would not allow any more funding in the six per cent, bonds, but would allow the holders of the greenbacks to fund them in a five per cent. bond. This mistake of the Secretary arrested the funding of the greenbacks into bonds, and materially depreciated and lowered the standard of this currency.

This attempt of the Secretary to float five per cent, bonds made it necessary, in order to meet the enormous war expenses, to issue and keep out large amounts of currency in the form of green¬ backs, interest bearing notes, certificates of indebtedness, frac¬ tional currency and national bank notes, besides the irredeemable currency issued by state banks. Gold and commodities continued to advance in price. On the fifteenth of January, 1864, gold was $1.55, on the fifteenth of April, $1.78, on the fifteenth of June, $1.97, and on the twenty-ninth of June, $2.35 to $2.50, which showed that the legal tender notes were then only worth forty cents on the dollar in gold. The next day, the thirtieth of June, 1864, Mr. Chase resigned the office of Secretary of the Treasury. At this time the inflating paper issues outstanding were over $1,100,000,000, and in a few days thereafter gold reached its highest quotation, $2.85, or more accurately speaking greenbacks depreciated until they were only worth in gold thirty-five cents on the promised dollar, at the Board of Brokers, in the city of New York. (History, page 198.)

Secretary Chase and myself differed materially in regard to the points herein stated in managing the finances. When the Finan¬ cial History of the War was published, I sent him a copy, and re¬ ceived from him the following reply :

“ Washington, July 15, 1869.

“ My dear sir: This morning I have received your book on the Finan¬ cial History of the War, promised in your letter, which came several days ago. I have had time to give only a very hasty glance at the contents. You adhere , I perceive , to your old views on the points where we differed; and I cannot say I have changed mine. But I shall read your connected account of what transpired both while and since I was Secretary of the Treasury, with attention and interest, and will write you by-and-by more in detail. Mean¬ time, I remain with that sincere regard and respect, which your abilities most honorably devoted to the welfare of our country inspired in me.

“ Faithfully yours, “ S. P. CHASE.

“Hon. E. G. Spaulding.”

No further communication was ever received from Mr. Chase on the subject. He commenced his administration of the Treas¬ ury in 1861, as a believer in hard money, and a firm advocate of the Sub-Treasury law, and without much practical knowledge of the credit machinery by which the great financial transactions of the country are carried on. Pie left the office with twice as much inflating paper outstanding as ought ever to have been issued, and with the promised dollar printed on the face of the greenback worth only from 35 to 40 cents in gold.

Plon. Wm. Pitt Fessenden was appointed Secretary of the Treasury in place of Mr. Chase, and entered upon the duties of the office July 5, 1864, and continued in the office performing the duties very acceptably about eight months, and until the second inauguration of President Lincoln, March 4, 1865, when Mr. McCulloch was appointed in his place.

Secretary McCulloch was one of best practical financiers in the country, and managed the Treasury Department with marked pru¬ dence and ability. His annual reports were based upon correct principles, and were very clear and able expositions of the finan¬ cial situation. If Congress had continued to give him proper support, instead of repealing the law for retiring greenbacks, it is my firm belief that he would have conducted us back to the spe¬ cie standard during the four years of his administration of the Treasury Department, and without materially affecting, in an un¬ favorable manner, the legitimate business of the country. The controlling majority in Congress was weak and vacillating in its course, and utterly failed to make any provision for redeeming the greenback currency.

After the surrender of the rebel armies to Gen. Grant and Gen. Sherman the volunteer army was mustered out of the service, and had to be paid in full. Secretary McCulloch obtained the means to pay them chiefly by the issue of 1.30 treasury notes. The amount required for that purpose was very large, and the amount of these notes outstanding in October, 1865, was $830,000,000, which were, by law, expressly fundable within three years into six per cent, gold bonds. The right to fund them was not abro¬ gated, and within three years they were all taken off the market and funded in those bonds. This shows conclusively how treasury notes may be retired from circulation by an efficient system of funding. The greenbacks would have been funded in the same way if the original contract for funding them had not been abrogated.

Upon the inauguration of President Grant on the fourth of March, 1869, Hon. George S. Bout well was made Secretary of the Treasury, and entered upon the duties of the office March 11. The President, in his inaugural address, expressed himself favora¬ ble to a return to specie payments at the earliest practicable mo¬ ment, and in his annual message, he said in reference to an irre¬ deemable currency, “ It is an evil which I hope will receive your most earnest attention. It is a duty, and one of the highest duties of the government to secure to the citizen a medium of exchange of fixed and unvarying value. This implies a return to a specie basis, and no substitute for it can be devised. It should he commenced now. * * * I earnestly recommend to