Part II, The University of Chicago Press, 1903.

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READINGS IN MONEY AND BANKING

* * * * *

THE MACMILLAN COMPANY

NEW YORK . BOSTON . CHICAGO . DALLAS

ATLANTA . SAN FRANCISCO

MACMILLAN & CO. LIMITED

LONDON . BOMBAY . CALCUTTA

MELBOURNE

THE MACMILLAN CO. OF CANADA. LTD.

TORONTO

* * * * *

READINGS IN MONEY AND BANKING

Selected And Adapted

by

CHESTER ARTHUR PHILLIPS

Assistant Professor of Economics in Dartmouth College

and Assistant Professor of Banking in the Amos

Tuck School of Administration and Finance

New York

The Macmillan Company

1921

All rights reserved

Printed in the United States of America

Copyright 1916

By the Macmillan Company

Set up and electrotyped. Published September, 1916.

Ferris Printing Company

New York City

PREFACE

Designed mainly for class room use in connection with one of the

introductory manuals on the subject of Money and Banking or of Money and

Currency, this volume, _in itself_, lays no claim to completeness. Where

its use is contemplated the problems of emphasis and proportion are,

accordingly, to be solved by the selection of one or another of the

available texts, or by the choice of supplementary lecture topics and

materials. The contents of the introductory manuals are so divergent in

character as to render possible combinations of text and readings that

will include, it is hoped, matter of such range and variety as may be

desired.

Fullness of treatment has been attempted, however, in the chapters

dealing with the important recent developments in the "mechanism of

exchange," and my aim has been throughout to select and, in many

instances, to adapt with a view to meeting the wants of those who are

interested chiefly in the modern phases of the subject.

For valuable suggestions in the preparation of the volume I am greatly

indebted to Professors F. H. Dixon and G. R. Wicker and Mr. J. M.

Shortliffe of Dartmouth, Professor Hastings Lyon of Columbia, Professor

E. E. Day of Harvard, and to my former teacher, Professor F. R.

Fairchild of Yale. I desire also to mention my great obligation to

authors and publishers who alike have generously permitted the

reproduction of copyrighted material.

CHESTER ARTHUR PHILLIPS.

Dartmouth College,

Hanover, N. H., July, 1916.

TABLE OF CONTENTS

CHAPTER PAGE

I THE ORIGIN AND FUNCTIONS OF MONEY 1

II THE EARLY HISTORY OF MONEY 10

III QUALITIES OF THE MATERIAL OF MONEY 18

IV LEGAL TENDER 26

V THE GREENBACK ISSUES 33

VI INTERNATIONAL BIMETALLISM 71

VII THE SILVER QUESTION IN THE UNITED STATES 82

VIII INDEX NUMBERS 115

IX BANKING OPERATIONS AND ACCOUNTS 121

X THE USE OF CREDIT INSTRUMENTS IN PAYMENTS

IN THE UNITED STATES 150

XI A SYMPOSIUM ON THE RELATION BETWEEN MONEY

AND GENERAL PRICES 159

XII THE GOLD EXCHANGE STANDARD 213

XIII A PLAN FOR A COMPENSATED DOLLAR 229

XIV MONETARY SYSTEMS OF FOREIGN COUNTRIES 246

XV THE NATURE AND FUNCTIONS OF TRUST COMPANIES 256

XVI SAVINGS BANKS 270

XVII DOMESTIC EXCHANGE 290

XVIII FOREIGN EXCHANGE 305

XIX CLEARING HOUSES 355

XX STATE BANKS AND TRUST COMPANIES SINCE THE PASSAGE

OF THE NATIONAL BANK ACT 381

XXI THE CANADIAN BANKING SYSTEM 406

XXII THE ENGLISH BANKING SYSTEM 435

XXIII THE SCOTCH BANKS 474

XXIV THE FRENCH BANKING SYSTEM 488

XXV THE GERMAN BANKING SYSTEM 526

XXVI BANKING IN SOUTH AMERICA 559

XXVII AGRICULTURAL CREDIT IN THE UNITED STATES 575

XXVIII THE CONCENTRATION OF CONTROL OF MONEY AND CREDIT 606

XXIX CRISES 627

XXX THE WEAKNESSES OF OUR BANKING SYSTEM PRIOR TO

THE ESTABLISHMENT OF THE FEDERAL RESERVE SYSTEM 672

XXXI THE FEDERAL RESERVE SYSTEM 723

XXXII THE EUROPEAN WAR IN RELATION TO MONEY,

BANKING AND FINANCE 797

APPENDICES 830

READINGS IN MONEY AND BANKING

CHAPTER I

THE ORIGIN AND FUNCTIONS OF MONEY

[1]In order to understand the manifold functions of a Circulating

Medium, there is no better way than to consider what are the principal

inconveniences which we should experience if we had not such a medium.

The first and most obvious would be the want of a common measure for

values of different sorts. If a tailor had only coats, and wanted to buy

bread or a horse, it would be very troublesome to ascertain how much

bread he ought to obtain for a coat, or how many coats he should give

for a horse. The calculation must be recommenced on different data,

every time he bartered his coats for a different kind of article; and

there could be no current price, or regular quotations of value. Whereas

now each thing has a current price in money, and he gets over all

difficulties by reckoning his coat at L4 or L5, and a four-pound loaf at

6_d._ or 7_d_. As it is much easier to compare different lengths by

expressing them in a common language of feet and inches, so it is much

easier to compare values by means of a common language of pounds,

shillings, and pence. In no other way can values be arranged one above

another in a scale: in no other can a person conveniently calculate the

sum of his possessions; and it is easier to ascertain and remember the

relations of many things to one thing, than their innumerable cross

relations with one another. This advantage of having a common language

in which values may be expressed, is, even by itself, so important, that

some such mode of expressing and computing them would probably be used

even if a pound or a shilling did not express any real thing, but a mere

unit of calculation. It is said that 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 unit, for

the more convenient comparison of things with one another.

This advantage, however, forms but an inconsiderable part of the

economical benefits derived from the use of money. The inconveniences of

barter are so great, that without some more commodious means of

effecting exchanges, the division of employments could hardly have been

carried to any considerable extent. A tailor, who had nothing but coats,

might starve before he could find any person having bread to sell who

wanted a coat: besides, he would not want as much bread at a time as

would be worth a coat, and the coat could not be divided. Every person,

therefore, would at all times hasten to dispose of his commodity in

exchange for anything which, though it might not be fitted to his own

immediate wants, was in great and general demand, and easily divisible,

so that he might be sure of being able to purchase with it, whatever was

offered for sale. The primary necessaries of life possess these

properties in a high degree. Bread is extremely divisible, and an object

of universal desire. Still, this is not the sort of thing required: for,

of food, unless in expectation of a scarcity, no one wishes to possess

more at once than is wanted for immediate consumption; so that a person

is never sure of finding an immediate purchaser for articles of food;

and unless soon disposed of, most of them perish. The thing which people

would select to keep by them for making purchases, must be one which,

besides being divisible, and generally desired, does not deteriorate by

keeping. This reduces the choice to a small number of articles.

By a tacit concurrence, almost all nations, at a very early period,

fixed upon certain metals, and especially gold and silver, to serve this

purpose. No other substances unite the necessary qualities in so great a

degree, with so many subordinate advantages. Next to food and clothing,

and in some climates even before clothing, the strongest inclination in

a rude state of society is for personal ornament, and for the kind of

distinction which is obtained by rarity or costliness in such ornaments.

After the immediate necessities of life were satisfied, every one was

eager to accumulate as great a store as possible of things at once

costly and ornamental; which were chiefly gold, silver, and jewels.

These were the things which it most pleased every one to possess, and

which there was most certainty of finding others willing to receive in

exchange for any kind of produce. They were among the most imperishable

of all substances. They were also portable, and containing great value

in small bulk, were easily hid; a consideration of much importance in an

age of insecurity. Jewels are inferior to gold and silver in the quality

of divisibility; and are of very various qualities, not to be accurately

discriminated without great trouble. Gold and silver are eminently

divisible, and when pure, always of the same quality; and their purity

may be ascertained and certified by a public authority.

Accordingly, though furs have been employed as money in some countries,

cattle in others, in Chinese Tartary cubes of tea closely pressed

together, the shells called cowries on the coast of Western Africa, and

in Abyssinia at this day blocks of rock salt; though even of metals, the

less costly have sometimes been chosen, as iron in Lacedaemon from

ascetic policy, copper in the early Roman republic from the poverty of

the people; gold and silver have been generally preferred by nations

which were able to obtain them, either by industry, commerce, or

conquest. To the qualities which originally recommended them, another

came to be added, the importance of which only unfolded itself by

degrees. Of all commodities, they are among the least influenced by any

of the causes which produce fluctuations of value. They fluctuate less

than almost any other things in their cost of production. And from their

durability, the total quantity in existence is at all times so great in

proportion to the annual supply, that the effect on value even of a

change in the cost of production is not sudden: a very long time being

required to diminish materially the quantity in existence, and even to

increase it very greatly not being a rapid process. Gold and silver,

therefore, are more fit than any other commodity to be the subject of

engagements for receiving or paying a given quantity at some distant

period. If the engagement were made in corn, a failure of crops might

increase the burthen of the payment in one year to fourfold what was

intended, or an exuberant harvest sink it in another to one-fourth. If

stipulated in cloth, some manufacturing invention might permanently

reduce the payment to a tenth of its original value. Such things have

occurred even in the case of payments stipulated in gold and silver; but

the great fall of their value after the discovery of America, is, as

yet, the only authenticated instance; and in this case the change was

extremely gradual, being spread over a period of many years.

When gold and silver had become virtually a medium of exchange, by

becoming the things for which people generally sold, and with which they

generally bought, whatever they had to sell or to buy; the contrivance

of coining obviously suggested itself. By this process the metal was

divided into convenient portions, of any degree of smallness, and

bearing a recognized proportion to one another; and the trouble was

saved of weighing and assaying at every change of possessors, an

inconvenience which on the occasion of small purchases would soon have

become insupportable. Governments found it their interest to take the

operation into their own hands, and to interdict all coining by private

persons; indeed, their guarantee was often the only one which would have

been relied on, a reliance however which very often it ill deserved;

profligate governments having until a very modern period seldom

scrupled, for the sake of robbing their creditors, to confer on all

other debtors a licence to rob theirs, by the shallow and impudent

artifice of lowering the standard; that least covert of all modes of

knavery, which consists in calling a shilling a pound, that a debt of a

hundred pounds may be cancelled by the payment of a hundred shillings.

It would have been as simple a plan, and would have answered the purpose

as well, to have enacted that "a hundred" should always be interpreted

to mean five, which would have effected the same reduction in all

pecuniary contracts, and would not have been at all more shameless. Such

strokes of policy have not wholly ceased to be recommended, but they

have ceased to be practised; except occasionally through the medium of

paper money, in which case the character of the transaction, from the

greater obscurity of the subject, is a little less barefaced.

Money, when its use has grown habitual, is the medium through which the

incomes of the different members of the community are distributed to

them, and the measure by which they estimate their possessions. As it is

always by means of money that people provide for their different

necessities, there grows up in their minds a powerful association

leading them to regard money as wealth in a more peculiar sense than any

other article; and even those who pass their lives in the production of

the most useful objects, acquire the habit of regarding those objects as

chiefly important by their capacity of being exchanged for money. A

person who parts with money to obtain commodities, unless he intends to

sell them, appears to the imagination to be making a worse bargain than

a person who parts with commodities to get money; the one seems to be

spending his means, the other adding to them. Illusions which, though

now in some measure dispelled, were long powerful enough to overmaster

the mind of every politician, both speculative and practical, in Europe.

It must be evident, however, that the mere introduction of a particular

mode of exchanging things for one another, by first exchanging a thing

for money, and then exchanging the money for something else, makes no

difference in the essential character of transactions. It is not with

money that things are really purchased. Nobody's income (except that of

the gold or silver miner) is derived from the precious metals. The

pounds or shillings which a person receives weekly or yearly, are not

what constitutes his income; they are a sort of tickets or orders which

he can present for payment at any shop he pleases, and which entitle him

to receive a certain value of any commodity that he makes choice of. The

farmer pays his laborers and his landlord in these tickets, as the most

convenient plan for himself and them; but their real income is their

share of his corn, cattle, and hay, and it makes no essential difference

whether he distributes it to them directly or sells it for them and

gives them the price; but as they would have to sell it for money if he

did not, and he is a seller at any rate, it best suits the purposes of

all, that he should sell their share along with his own, and leave the

laborers more leisure for work and the landlord for being idle. The

capitalists, except those who are producers of the precious metals,

derive no part of their income from those metals, since they only get

them by buying them with their own produce: while all other persons have

their incomes paid to them by the capitalists, or by those who have

received payment from the capitalists, and as the capitalists have

nothing, from the first, except their produce, it is that and nothing

else which supplies all incomes furnished by them. There cannot, in

short, be intrinsically a more insignificant thing, in the economy of

society, than money; except in the character of a contrivance for

sparing time and labor. It is a machine for doing quickly and

commodiously, what would be done, though less quickly and commodiously,

without it: and like many other kinds of machinery, it only exerts a

distinct and independent influence of its own when it gets out of order.

The introduction of money does not interfere with the operation of any

of the Laws of Value.... The reasons which make the temporary or market

value of things depend on the demand and supply, and their average and

permanent values upon their cost of production, are as applicable to a

money system as to a system of barter. Things which by barter would

exchange for one another, will, if sold for money, sell for an equal

amount of it, and so will exchange for one another still, though the

process of exchanging them will consist of two operations instead of

only one. The relations of commodities to one another remain unaltered

by money: the only new relation introduced, is their relation to money

itself; how much or how little money they will exchange for; in other

words, how the Exchange Value of money itself is determined. And this is

not a question of any difficulty, when the illusion is dispelled, which

caused money to be looked upon as a peculiar thing, not governed by the

same laws as other things. Money is a commodity, and its value is

determined like that of other commodities, temporarily by demand and

supply, permanently and on the average by cost of production.

In the foregoing,[2] attention has been directed mainly to the two

functions of money known (1) as the Standard or Common Denominator of

Value, and (2) as the Medium of Exchange. Concerning transactions begun

and ended on the spot nothing more need be said; but the fact of

contracts over a period of time introduces an important element--the

time element. Whenever a contract is made covering a period of time,

within which serious changes in the economic world may take place, then

difficulties may arise as to what is a just standard of payments.

Various articles might serve equally well as a standard for exchanges

performed on the spot, but it is not so when any one article is chosen

as a standard for deferred payments. Without much regard to theory, the

world has in fact used the same standard for transactions whether

settled on the spot, or whether extending over a period of time.

In order to work with perfection as a standard for deferred payments,

the article chosen as that standard should place both debtors and

creditors in exactly the same absolute, and the same relative, position

to each other at the end of a contract that they occupied at its

beginning; this implies that the chosen article should maintain the same

exchange value in relation to goods, rents, and the wages of labour at

the end as at the beginning of the contract, and it implies that the

borrower and lender should preserve the same relative position as

regards their fellow producers and consumers at the later as at the

earlier point of time, and that they have not changed this relation, one

at the loss of the other. This makes demands which any article that can

be suggested as a standard cannot satisfy. And yet it is a practical

necessity of society that some one article should in fact be selected as

the standard. The business world has thus been forced to find some

commodity which--while admittedly never capable of perfection--provides

more nearly than anything else all the essentials of a desirable

standard.

The causes which may bring about changes in the relations between goods

and labor, on the one side, and the standard, on the other, are

various. We may, for instance, compare wheat with the existing gold

standard. The quantity of gold for which the wheat will exchange is its

price. As wheat falls in value relatively to gold, it exchanges for less

gold, that is, its price falls; or, _vice versa_, gold exchanges for

more wheat, and relatively to wheat gold has risen. As one goes up, the

other term in the ratio necessarily goes down; just as certainly as a

rise in one end of a plank balanced on a log necessitates a fall in the

other end of the plank. Therefore, changes in prices can be caused by

forces affecting either the gold side or the wheat side of the ratio; by

forces affecting either the money standard or the goods compared with

that standard. Consequences of importance follow from this explanation.

First suppose that commodities and labor remain unchanged in their

production and reward, respectively; then, anything affecting the supply

of and demand for gold will affect in general the value of gold in

comparison with goods and labor. Or, second, if we suppose an

equilibrium between the demand for and supply of gold, then, prices and

wages can be affected also by anything affecting the cost of obtaining

goods or labor. It is one-sided to look for changes in prices solely

from causes touching gold, or one term of the price ratio. If, however,

it should be desired that prices should remain stationary, then this can

be brought about only by finding for the standard an article that would

automatically move in extent, and in the proper compensating direction,

so as to meet any changes in value arising not only from causes

affecting itself, but also from causes affecting labor and the vast

number of goods that may be quoted in price. No commodity ever existed

which could thus move in value.

During long periods of time--within which gains in mechanical skill and

invention, revolutions in political and social habits, changes in taste

or fashion, settlement of new countries, opening of new markets, may

take place--great alterations in the value of the standard may occur

wholly from natural causes affecting the commodity side of the price

ratio. And yet, in default of a perfect standard, persons who borrow and

lend create debts and obligations expressed in terms of that article

which has been adopted as the standard by the concurring habits of the

commercial community of which they form a part. It should be understood,

whenever men enter into obligations reaching over a period of time, that

a necessary part of the risks involved in this undertaking is the

possibility of an alteration in the exchange values of goods, on the one

hand, and in the standard metal on the other, due to industrial changes

and natural causes. This is one of the risks which belong to individual

enterprise, differing in no way from other possibilities of gain and

loss. For instance, prices rose, as indicated by an index number of 100

in 1860 to an index number of 216 in 1865. Therefore, in the United

States, in this period of rising prices the creditor lost and the debtor

gained. On the other hand, from 1865 to 1878, prices fell from 216 to

101, and in this period of falling prices the creditor gained and the

debtor lost. It is to be observed, however, that these figures refer to

actual quotations of prices during the fluctuations of our paper money.

But it is evident in such movements as these, that parties to a

time-contract must take their own chances of changes; and indeed it is

much more wholesome that they should do so.

It should be kept well in mind that it is not a proper function of

government to step in and save men from the ordinary risks of trade and

industry. It goes without saying that if changes in the value of the

standard due to natural causes take place during the continuance of a

contract, it is not the business of government to indemnify either party

to the contract. This is a matter on which every individual who enters

into time obligations must bear his own responsibility.

FOOTNOTES:

[1] John Stuart Mill, _Principles of Political Economy_, Vol. II, pp.

17-23.

[2] Adapted from _The Report of the Commission of the Indianapolis

Convention_, pp. 92, 93, 103, 104. The University of Chicago Press,

1898.

CHAPTER II

THE EARLY HISTORY OF MONEY

[3]Living in civilized communities, and accustomed to the use of coined

metallic money, we learn to identify money with gold and silver; hence

spring hurtful and insidious fallacies. It is always useful, therefore,

to be reminded of the truth, so well stated by Turgot, that every kind

of merchandise has the two properties of measuring value and

transferring value. It is entirely a question of degree what commodities

will in any given state of society form the most convenient currency,

and this truth will be best impressed upon us by a brief consideration

of the very numerous things which have at one time or other been

employed as money. Though there are many numismatists and many political

economists, the natural history of money is almost a virgin subject,

upon which I should like to dilate; but the narrow limits of my space

forbid me from attempting more than a brief sketch of the many

interesting facts which may be collected.

CURRENCY IN THE HUNTING STATE

Perhaps the most rudimentary state of industry is that in which

subsistence is gained by hunting wild animals. The proceeds of the chase

would, in such a state, be the property of most generally recognized

value. The meat of the animals captured would, indeed, be too perishable

in nature to be hoarded or often exchanged; but it is otherwise with the

skins, which, being preserved and valued for clothing, became one of the

earliest materials of currency. Accordingly, there is abundant evidence

that furs or skins were employed as money in many ancient nations. They

serve this purpose to the present day in some parts of the world.

In the book of Job (ii, 4) we read, "Skin for skin, yea, all that a man

hath will he give for his life"; a statement clearly implying that skins

were taken as the representative of value among the ancient Oriental

nations. Etymological research shows that the same may be said of the

northern nations from the earliest times. In the Esthonian language the

word _raha_ generally signifies money, but its equivalent in the kindred

Lappish tongue has not yet altogether lost the original meaning of skin

or fur. Leather money is said to have circulated in Russia as late as

the reign of Peter the Great, and it is worthy of notice, that classical

writers have recorded traditions to the effect that the earliest

currency used at Rome, Lacedaemon, and Carthage, was formed of leather.

We need not go back, however, to such early times to study the use of

rude currencies. In the traffic of the Hudson's Bay Company with the

North American Indians, furs, in spite of their differences of quality

and size, long formed the medium of exchange. It is very instructive,

and corroborative of the previous evidence to find that even after the

use of coin had become common among the Indians the skin was still

commonly used as the money of account. Thus Whymper says, "a gun,

nominally worth about forty shillings, bought twenty 'skins.' This term

is the old one employed by the company. One skin (beaver) is supposed to

be worth two shillings, and it represents two marten, and so on. You

heard a great deal about 'skins' at Fort Yukon, as the workmen were also

charged for clothing, etc., in this way."

CURRENCY IN THE PASTORAL STATE

In the next higher stage of civilization, the pastoral state, sheep and

cattle naturally form the most valuable and negotiable kind of property.

They are easily transferable, convey themselves about, and can be kept

for many years, so that they readily perform some of the functions of

money.

We have abundance of evidence, traditional, written, and etymological,

to show this. In the Homeric poems oxen are distinctly and repeatedly

mentioned as the commodity in terms of which other objects are valued.

The arms of Diomed are stated to be worth nine oxen, and are compared

with those of Glaucos, worth one hundred. The tripod, the first prize

for wrestlers in the 23rd Iliad, was valued at twelve oxen, and a woman

captive, skilled in industry, at four. It is peculiarly interesting to

find oxen thus used as the common measure of value, because from other

passages it is probable, as already mentioned, that the precious metals,

though as yet uncoined, were used as a store of value, and occasionally

as a medium of exchange. The several functions of money were thus

clearly performed by different commodities at this early period.

In several languages the name for money is identical with that of some

kind of cattle or domesticated animal. It is generally allowed that

_pecunia_, the Latin word for money, is derived from _pecus_, cattle.

From the Agamemnon of Aeschylus we learn that the figure of an ox was the

sign first impressed upon coins, and the same is said to have been the

case with the earliest issues of the Roman _As_. Numismatic researches

fail to bear out these traditions, which were probably invented to

explain the connection between the name of the coin and the animal. A

corresponding connection between these notions may be detected in much

more modern languages. Our common expression for the payment of a sum of

money is _fee_, which is nothing but the Anglo-Saxon _feoh_, meaning

alike money and cattle, a word cognate with the German _vieh_, which

still bears only the original meaning of cattle.

In the ancient German codes of law, fines and penalties are actually

defined in terms of live-stock. In the Zend Avesta, as Professor

Theodores ... informs me, the scale of rewards to be paid to physicians

is carefully stated, and in every case the fee consists in some sort of

cattle. The fifth and sixth lectures in Sir H. S. Maine's most

interesting work on _The Early History of Institutions_, which has just

been published, are full of curious information showing the importance

of live-stock in a primitive state of society. Being counted by the

head, the kine was called capitale, whence the economical term capital,

the law term chattel, and our common name cattle.

In countries where slaves form one of the most common and valuable

possessions, it is quite natural that they should serve as the medium

of exchange like cattle. Pausanias mentions their use in this way, and

in Central Africa and some other places where slavery still flourishes,

they are the medium of exchange along with cattle and ivory tusks.

According to Earl's account of New Guinea, there is in that island a

large traffic in slaves, and a slave forms the unit of value. Even in

England slaves are believed to have been exchanged at one time in the

manner of money.

ARTICLES OF ORNAMENT AS CURRENCY

A passion for personal adornment is one of the most primitive and

powerful instincts of the human race, and as articles used for such

purposes would be durable, universally esteemed, and easily

transferable, it is natural that they should be circulated as money. The

_wampumpeag_ of the North American Indians is a case in point, as it

certainly served as jewellery. It consisted of beads made of the ends of

black and white shells, rubbed down and polished, and then strung into

belts or necklaces, which were valued according to their length, and

also according to their color and luster, a foot of black _peag_ being

worth two feet of white _peag_. It was so well established as currency

among the natives that the Court of Massachusetts ordered in 1649, that

it should be received in the payment of debts among settlers to the

amount of forty shillings. It is curious to learn, too, that just as

European misers hoard up gold and silver coins, the richer Indian chiefs

secrete piles of wampum beads, having no better means of investing their

superfluous wealth.

Exactly analogous to this North American currency, is that of the cowry

shells, which, under one name or another--_chamgos_, _zimbis_, _bouges_,

_porcelanes_, etc.--have long been used in the East Indies as small

money. In British India, Siam, the West Coast of Africa, and elsewhere

on the tropical coasts, they are still used as small change, being

collected on the shores of the Maldive and Laccadive Islands, and

exported for the purpose. Their value varies somewhat, according to the

abundance of the yield, but in India the current rate used to be about

five thousand shells for one rupee, at which rate each shell is worth

about the two-hundredth part of a penny. Among our interesting

fellow-subjects, the Fijians, whale's teeth served in the place of

cowries, and white teeth were exchanged for red teeth somewhat in the

ratio of shillings to sovereigns.

Among other articles of ornament or of special value used as currency,

may be mentioned yellow amber, engraved stones, such as the Egyptian

scarabaei, and tusks of ivory.

CURRENCY IN THE AGRICULTURAL STATE

Many vegetable productions are at least as well suited for circulation

as some of the articles which have been mentioned. It is not surprising

to find, then, that among a people supporting themselves by agriculture,

the more durable products were thus used. Corn has been the medium of

exchange in remote parts of Europe from the time of the ancient Greeks

to the present day. In Norway corn is even deposited in banks, and lent

and borrowed. What wheat, barley, and oats are to Europe, such is maize

in parts of Central America, especially Mexico, where it formerly

circulated. In many of the countries surrounding the Mediterranean,

olive oil is one of the commonest articles of produce and consumption;

being, moreover, pretty uniform in quality, durable, and easily

divisible, it has long served as currency in the Ionian Islands,

Mytilene, some towns of Asia Minor, and elsewhere in the Levant.

Just as cowries circulate in the East Indies, so cacao nuts, in Central

America and Yucatan, form a perfectly recognized and probably an ancient

fractional money. Travellers have published many distinct statements as

to their value, but it is impossible to reconcile these statements

without supposing great changes of value either in the nuts or in the

coins with which they are compared. In 1521, at Caracas, about thirty

cacao nuts were worth one penny English, whereas recently ten beans

would go to a penny, according to Squier's statements. In the European

countries, where almonds are commonly grown, they have circulated to

some extent like the cacao nuts, but are variable in value, according to

the success of the harvest.

It is not only, however, as a minor currency that vegetable products

have been used in modern times. In the American settlements and the West

India Islands, in former days, specie used to become inconveniently

scarce, and the legislators fell back upon the device of obliging

creditors to receive payment in produce at stated rates. In 1618, the

Governor of the Plantations of Virginia ordered that tobacco should be

received at the rate of three shillings for the pound weight, under the

penalty of three years' hard labor. We are told that, when the Virginia

Company imported young women as wives for the settlers, the price per

head was one hundred pounds of tobacco, subsequently raised to one

hundred and fifty. As late as 1732, the legislature of Maryland made

tobacco and Indian corn legal tenders; and in 1641 there were similar

laws concerning corn in Massachusetts. The governments of some of the

West India Islands seem to have made attempts to imitate these peculiar

currency laws, and it was provided that the successful plaintiff in a

lawsuit should be obliged to accept various kinds of raw produce, such

as sugar, rum, molasses, ginger, indigo, or tobacco....

The perishable nature of most kinds of animal food prevents them from

being much used as money; but eggs are said to have circulated in the

Alpine villages of Switzerland, and dried codfish have certainly acted

as currency in the colony of Newfoundland.

MANUFACTURED AND MISCELLANEOUS ARTICLES AS CURRENCY

The enumeration of articles which have served as money may already seem

long enough for the purposes in view. I will, therefore, only add

briefly that a great number of manufactured commodities have been used

as a medium of exchange in various times and places. Such are the pieces

of cotton cloth, called _Guinea pieces_, used for traffic upon the banks

of the Senegal, or the somewhat similar pieces circulated in Abyssinia,

the Soulou Archipelago, Sumatra, Mexico, Peru, Siberia, and among the

Veddahs. It is less easy to understand the origin of the curious straw

money which circulated until 1694 in the Portuguese possessions in

Angola, and which consisted of small mats, called _libongos_, woven out

of rice straw, and worth about 1-1/2_d._ each. These mats must have had,

at least originally, some purpose apart from their use as currency, and

were perhaps analogous to the fine woven mats so much valued by the

Samoans, and also treated by them as a medium of exchange.

Salt has been circulated not only in Abyssinia, but in Sumatra, Mexico,

and elsewhere. Cubes of benzoin gum or beeswax in Sumatra, red feathers

in the Islands of the Pacific Ocean, cubes of tea in Tartary, iron

shovels or hoes among the Malagasy, are other peculiar forms of

currency. The remarks of Adam Smith concerning the use of hand-made

nails as money in some Scotch villages will be remembered by many

readers, and need not be repeated. M. Chevalier has adduced an exactly

corresponding case from one of the French coalfields.

Were space available it would be interesting to discuss the not

improbable suggestion of Boucher de Perthes, that, perhaps, after all,

the finely worked stone implements now so frequently discovered were

among the earliest mediums of exchange. Some of them are certainly made

of jade, nephrite, or other hard stones, only found in distant

countries, so that an active traffic in such implements must have

existed in times of which we have no records whatever.

There are some obscure allusions in classical authors to a wooden money

circulating among the Byzantines, and to a wooden talent used at Antioch

and Alexandria, but in the absence of fuller information as to their

nature, it is impossible to do more than mention them....

THE INVENTION OF COINING

The date of the invention of coining can be assigned with some degree of

probability. Coined money was clearly unknown in the Homeric times, and

it was known in the time of Lycurgus. We might therefore assume, with

various authorities, that it was invented in the mean time, or about 900

B. C. There is tradition, moreover, that Pheidon, King of Argos, first

struck silver money in the island of Aegina about 895 B. C., and the

tradition is supported by the existence of small stamped ingots of

silver, which have been found in Aegina. Later inquiries, however, lead

to the conclusion that Pheidon lived in the middle of the eighth century

B. C., and Grote has shown good reasons for believing that what he did

accomplish was done in Argos, and not in Aegina.

The mode in which the invention happened is sufficiently evident. Seals

were familiarly employed in very early times, as we learn from the

Egyptian paintings or the stamped bricks of Nineveh. Being employed to

signify possession, or to ratify contracts, they came to indicate

authority. When a ruler first undertook to certify the weights of pieces

of metal, he naturally employed his seal to make the fact known, just

as, at Goldsmiths' Hall, a small punch is used to certify the fineness

of plate. In the earliest forms of coinage there were no attempts at so

fashioning the metal that its weight could not be altered without

destroying the stamp or design. The earliest coins struck, both in Lydia

and in the Peloponnesus, were stamped on one side only....

FOOTNOTES:

[3] W. Stanley Jevons, _Money and the Mechanism of Exchange_, D.

Appleton and Company, New York, 1902, pp. 19-28, 54, 55.

CHAPTER III

QUALITIES OF THE MATERIAL OF MONEY

[4]Many recent writers, such as Huskisson, MacCulloch, James Mill,

Garnier, Chevalier, and Walras, have satisfactorily described the

qualities which should be possessed by the material of money. Earlier

writers seem, however, to have understood the subject almost as well....

Of all writers, M. Chevalier ... probably gives the most accurate and

full account of the properties which money should possess, and I shall

in many points follow his views.

The prevailing defect in the treatment of the subject is the failure to

observe that money requires different properties as regards different

functions. To decide upon the best material for money is thus a problem

of great complexity, because we must take into account at once the

relative importance of the several functions of money, the degree in

which money is employed for each function, and the importance of each of

the physical qualities of the substance with respect to each function.

In a simple state of industry money is chiefly required to pass about

between buyers and sellers. It should, then, be conveniently portable,

divisible into pieces of various size, so that any sum may readily be

made up, and easily distinguishable by its appearance, or by the design

impressed upon it. When money, however, comes to serve, as it will at

some future time, almost exclusively as a measure and standard of value,

the system of exchange, being one of perfected barter, such properties

become a matter of comparative indifference, and stability of value,

joined perhaps to portability, is the most important quality. Before

venturing, however, to discuss such complex questions, we must proceed

to a preliminary discussion of the properties in question, which may

thus perhaps be enumerated in the order of their importance:

1. Utility and value.

2. Portability.

3. Indestructibility.

4. Homogeneity.

5. Divisibility.

6. Stability of value.

7. Cognisability.

1. UTILITY AND VALUE

Since money has to be exchanged for valuable goods, it should itself

possess value and it must therefore have utility as the basis of value.

Money, when once in full currency, is only received in order to be

passed on, so that if all people could be induced to take worthless bits

of material at a fixed rate of valuation, it might seem that money does

not really require to have substantial value. Something like this does

frequently happen in the history of currencies, and apparently valueless

shells, bits of leather, or scraps of paper are actually received in

exchange for costly commodities. This strange phenomenon is, however, in

most cases capable of easy explanation, and if we were acquainted with

the history of every kind of money the like explanation would no doubt

be possible in other cases. The essential point is that people should be

induced to receive money, and pass it on freely at steady ratios of

exchange for other objects; but there must always be some sufficient

reason first inducing people to accept the money. The force of habit,

convention, or legal enactment may do much to maintain money in

circulation when once it is afloat, but it is doubtful whether the most

powerful government could oblige its subjects to accept and circulate as

money a worthless substance which they had no other motive for

receiving.

Certainly, in the early stages of society, the use of money was not

based on legal regulations, so that the utility of the substance for

other purposes must have been the prior condition of its employment as

money. Thus the singular _peag_ currency, or _wampumpeag_, which was

found in circulation among the North American Indians by the early

explorers, was esteemed for the purpose of adornment, as already

mentioned.... The cowry shells, so widely used as a small currency in

the East, are valued for ornamental purposes on the West Coast of

Africa, and were in all probability employed as ornaments before they

were employed as money. All the other articles [previously] mentioned

... such as oxen, corn, skins, tobacco, salt, cacao nuts, tea, olive

oil, etc., which have performed the functions of money in one place or

another, possessed independent utility and value. If there are any

apparent exceptions at all to this rule, they would doubtless admit of

explanation by fuller knowledge. We may, therefore, agree with Storch

when he says: "It is impossible that a substance which has no direct

value should be introduced as money, however suitable it may be in other

respects for this use."

When once a substance is widely employed as money, it is conceivable

that its utility will come to depend mainly upon the services which it

thus confers upon the community. Gold, for instance, is far more

important as the material of money than in the production of plate,

jewellery, watches, gold-leaf, etc. A substance originally used for many

purposes may eventually serve only as money, and yet, by the demand for

currency and the force of habit, may maintain its value. The cowry

circulation of the Indian coasts is probably a case in point. The

importance of habit, personal or hereditary, is at least as great in

monetary science as it is, according to Mr. Herbert Spencer, in morals

and sociological phenomena generally.

There is, however, no reason to suppose that the value of gold and

silver is at present due solely to their conventional use as money.

These metals are endowed with such singularly useful properties that, if

we could only get them in sufficient abundance, they would supplant all

the other metals in the manufacture of household utensils, ornaments,

fittings of all kinds, and an infinite multitude of small articles,

which are now made of brass, copper, bronze, pewter, German silver, or

other inferior metals and alloys.

In order that money may perform some of its functions efficiently,

especially those of a medium of exchange and a store of value, to be

carried about, it is important that it should be made of a substance

valued highly in all parts of the world, and, if possible, almost

equally esteemed by all peoples. There is reason to think that gold and

silver have been admired and valued by all tribes which have been lucky

enough to procure them. The beautiful lustre of these metals must have

drawn attention and excited admiration as much in the earliest as in the

present times.

2. PORTABILITY

The material of money must not only be valuable, but the value must be

so related to the weight and bulk of the material, that the money shall

not be inconveniently heavy on the one hand, nor inconveniently minute

on the other. There was a tradition in Greece that Lycurgus obliged the

Lacedaemonians to use iron money, in order that its weight might deter

them from overmuch trading. However this may be, it is certain that iron

money could not be used in cash payments at the present day, since a

penny would weigh about a pound, and instead of a five-pound note, we

should have to deliver a ton of iron. During the last century copper was

actually used as the chief medium of exchange in Sweden; and merchants

had to take a wheelbarrow with them when they went to receive payments

in copper _dalers_. Many of the substances used as currency in former

times must have been sadly wanting in portability. Oxen and sheep,

indeed, would transport themselves on their own legs; but corn, skins,

oil, nuts, almonds, etc., though in several respects forming fair

currency, would be intolerably bulky and troublesome to transfer.

The portability of money is an important quality not merely because it

enables the owner to carry small sums in the pocket without trouble, but

because large sums can be transferred from place to place, or from

continent to continent, at little cost. The result is to secure an

approximate uniformity in the value of money in all parts of the world.

A substance which is very heavy and bulky in proportion to value, like

corn or coal, may be very scarce in one place and over-abundant in

another; yet the supply and demand cannot be equalised without great

expense in carriage. The cost of conveying gold or silver from London to

Paris, including insurance, is only about four-tenths of one per cent.;

and between the most distant parts of the world it does not exceed from

2 to 3 per cent.

Substances may be too valuable as well as too cheap, so that for

ordinary transactions it would be necessary to call in the aid of the

microscope and the chemical balance. Diamonds, apart from other

objections, would be far too valuable for small transactions. The value

of such stones is said to vary as the square of the weight, so that we

cannot institute any exact comparison with metals of which the value is

simply proportional to the weight. But taking a one-carat diamond (four

grains) as worth L15, we find it is, weight for weight, 460 times as

valuable as gold. There are several rare metals, such as iridium and

osmium, which would likewise be far too valuable to circulate. Even gold

and silver are too costly for small currency. A silver penny now weighs

7-1/4 grains, and a gold penny would weigh only half a grain. The pretty

octagonal quarter-dollar tokens circulated in California are the

smallest gold coins I have seen, weighing less than four grains each,

and are so thin that they can almost be blown away.

3. INDESTRUCTIBILITY

If it is to be passed about in trade, and kept in reserve, money must

not be subject to easy deterioration or loss. It must not evaporate like

alcohol, nor putrefy like animal substances, nor decay like wood, nor

rust like iron. Destructible articles, such as eggs, dried codfish,

cattle, or oil, have certainly been used as currency; but what is

treated as money one day must soon afterwards be eaten up. Thus a large

stock of such perishable commodities cannot be kept on hand, and their

value must be very variable. The several kinds of corn are less subject

to this objection, since, when well dried at first, they suffer no

appreciable deterioration for several years.

4. HOMOGENEITY

All portions of specimens of the substance used as money should be

homogeneous, that is, of the same quality, so that equal weights will

have exactly the same value. In order that we may correctly count in

terms of any unit, the units must be equal and similar, so that twice

two will always make four. If we were to count in precious stones, it

would seldom happen that four stones would be just twice as valuable as

two stones. Even the precious metals, as found in the native state, are

not perfectly homogeneous, being mixed together in almost all

proportions; but this produces little inconvenience, because the assayer

readily determines the quantity of each pure metal present in any ingot.

In the processes of refining and coining, the metals are afterwards

reduced to almost exactly uniform degrees of fineness, so that equal

weights are then of exactly equal value.

5. DIVISIBILITY

Closely connected with the last property is that of divisibility. Every

material is, indeed, mechanically divisible, almost without limit. The

hardest gems can be broken, and steel can be cut by harder steel. But

the material of money should be not merely capable of division, but the

aggregate value of the mass after division should be almost exactly the

same as before division. If we cut up a skin or fur the pieces will, as

a general rule, be far less valuable than the whole skin or fur, except

for a special intended purpose; and the same is the case with timber,

stone, and most other materials in which reunion is impossible. But

portions of metal can be melted together again whenever it is desirable,

and the cost of doing this, including the metal lost, is in the case of

precious metals very inconsiderable, varying from 1/4_d._ to 1/2_d._ per

ounce. Thus, approximately speaking, the value of any piece of gold or

silver is simply proportional to the weight of fine metal which it

contains.

6. STABILITY OF VALUE

It is evidently desirable that the currency should not be subject to

fluctuations of value. The ratios in which money exchanges for other

commodities should be maintained as nearly as possible invariable on the

average. This would be a matter of comparatively minor importance were

money used only as a measure of values at any one moment, and as a

medium of exchange. If all prices were altered in like proportion as

soon as money varied in value, no one would lose or gain, except as

regards the coin which he happened to have in his pocket, safe, or bank

balance. But, practically speaking, as we have seen, people do employ

money as a standard of value for long contracts, and they often maintain

payments at the same variable rate, by custom or law, even when the real

value of the payment is much altered. Hence every change in the value of

money does some injury to society.

It might be plausibly said, indeed, that the debtor gains as much as the

creditor loses, or vice versa, so that on the whole the community is as

rich as before; but this is not really true. A mathematical analysis of

the subject shows that to take any sum of money from one and give it to

another will, on the average of cases, injure the loser more than it

benefits the receiver. A person with an income of one hundred pounds a

year would suffer more by losing ten pounds than he would gain by an

addition of ten pounds, because the degree of utility of money to him is

considerably higher at ninety pounds than it is at one hundred and ten.

On the same principle, all gaming, betting, pure speculation, or other

accidental modes of transferring property involve, on the average, a

dead loss of utility. The whole incitement to industry and commerce and

the accumulation of capital depends upon the expectation of enjoyment

thence arising, and every variation of the currency tends in some degree

to frustrate such expectation and to lessen the motives for exertion.

7. COGNISABILITY

By this name we may denote the capability of a substance for being

easily recognised and distinguished from all other substances. As a

medium of exchange, money has to be continually handed about, and it

will occasion great trouble if every person receiving currency has to

scrutinize, weigh, and test it. If it requires any skill to discriminate

good money from bad, poor ignorant people are sure to be imposed upon.

Hence the medium of exchange should have certain distinct marks which

nobody can mistake. Precious stones, even if in other respects good as

money, could not be so used, because only a skilled lapidary can surely

distinguish between true and imitation gems.

Under cognisability we may properly include what has been aptly called

_impressibility_, namely, the capability of a substance to receive such

an impression, seal, or design, as shall establish its character as

current money of certain value. We might more simply say, that the

material of money should be coinable, so that a portion, being once

issued according to proper regulations with the impress of the state,

may be known to all as good and legal currency, equal in weight, size,

and value to all similarly marked currency....

FOOTNOTES:

[4] W. Stanley Jevons, _Money and the Mechanism of Exchange_, pp. 29-39.

D. Appleton & Company, New York, 1902.

CHAPTER IV

LEGAL TENDER[5]

The essential idea of "legal tender" is that quality given to money by

law which obliges the creditor to receive it in full satisfaction of a

past debt when expressed in general terms of the money of a country. A

debt is a sum of money due by contract, express or implied. When our

laws, for instance, declare that United States notes are legal

tender--and this is the only complete designation of a legal-tender

money--for "all debts public and private," it must be understood that

this provision does not cover any operations not arising from contract.

Current buying and selling do not make a situation calling for legal

tender; a purchaser cannot compel the delivery of goods over a counter

by offering legal-tender money for them, because, as yet, no debt has

been created.[6]

Contracts made in general terms of the money units of the country must

necessarily often be interpreted by the courts. The existence of

contracts calling for a given sum of dollars and the necessity of

adjudicating and enforcing such contracts, require that there should be

an accurate legal interpretation of what a dollar is. As every one

knows, the name, or unit of account, is affixed to a given number of

grains of a specified fineness of a certain metal. This being the

standard, and this having been chosen by the concurring habits of the

business world, it is fit that the law should designate that, when only

dollars are mentioned in a contract, it should be satisfied only by the

payment of that which is the standard money of the community.

Since prices and contracts are expressed in terms of the standard

article, it is clear that the legal-tender quality should not be equally

affixed to different articles having different values, but called by the

same name. This method would be sure to bring confusion, uncertainty,

and injustice into trade and industry. No one who had made a contract

would know in what he was to be paid. The legal-tender quality, then,

should be confined to that which is the sole standard. And it is also

obvious that when a standard is satisfactorily determined upon, and when

various effective media of exchange, like bank notes, checks, or bills

of exchange, have sprung up, the legal-tender quality should not be

given to these instruments of convenience. They are themselves expressed

in, and are resolvable into, the standard metal; so the power to satisfy

debts should be given not to the shadow, but to the substance, not to

the devices drawn in terms of the standard, but only to the standard

itself, even though, as a matter of fact, nine-tenths of the debts and

contracts are actually settled by means of these devices. So long as

these instruments are convertible into, and thus made fully equal to,

the standard in terms of which they are drawn, they will be used by the

business community for the settlement of debts without being made a

legal tender. And whenever they are worth less than the standard they

certainly should not be made a legal tender, because of the injustice

which in such a case they would work.

Having shown that the legal-tender quality is only a necessary legal

complement of the choice of a standard, it will not be difficult to see

that the state properly chooses an article fit to have the legal-tender

attribute for exactly the reasons that governed the selection of the

same article as a standard. The whole history of money shows that the

standard article was the one which had utility to the community using

it. As the evolution of the money commodity went on from cattle to

silver and gold, so the legal-tender provisions naturally followed this

course.

A state may select a valueless commodity as a standard, but that will

not make it of value to those who would already give nothing for it; and

so, it may give the legal-tender quality to a thing which has become

valueless, but that will not of itself insure the maintenance of its

former value. This proposition may, at first, appear to be opposed to a

widely-spread belief; but its soundness can be fully supported. It

should be learned that a commodity, or a standard, holds its value for

reasons quite independent of the fact that it is given legal

recognition. It has happened that legal recognition has been given to it

because it possessed qualities that gave it value to the commercial

world, and not that it came to have these qualities and this value

because it was made a legal tender.

A good illustration of this truth is to be found in international trade.

Money which is not dependent on artificial influences for its value, and

which is not redeemable in something else, is good the world over at its

actual commercial value, not at its value as fixed by any legal-tender

laws. It is not the legal-tender stamp that gives a coin its value in

international payments. A sovereign, an eagle, a napoleon, is constantly

given and received in international trade not because of the stamp it

bears, but because of the number of grains of a given fineness of gold

which it contains--the value of which is determined in the markets of

the world. And an enormous trade among the great commercial countries

goes on easily and effectively without regard to the legal-tender laws

of the particular country whose coins are used.

By imposing the attribute of legal tender, however, upon a given metal

or money, it may be believed that thereby a new demand is created for

that metal, and that its value is thus controlled. And in theory there

is some basis for this belief. It is, of course, true that, in so far as

giving to money a legal-tender power creates a new demand for it (which

without that power would not have existed) an effect upon its value can

be produced. But this effect is undoubtedly much less than is usually

supposed. It must be remembered that the value of gold, for instance, is

affected by world influences; that its value is determined by the demand

of the whole world as compared with the whole existing supply in the

world. In order to affect the value of gold in any one country, a demand

created by a legal-tender enactment must be sufficient to affect the

world-value of gold. Evidently the effect will be only in the proportion

that the new demand bears to the whole stock in the world. It is like

the addition of a barrel of water to a pond; theoretically the surface

level is raised, but not to any appreciable extent.

It may now be permissible to examine into the extent to which a demand

is created by legal-tender laws. If the article endowed with a

legal-tender power is already used as the standard and as a medium of

exchange, it is given no value which it did not have before. The customs

and business habits of a country alone determine how much of the

standard coin will be carried about and used in hand-to-hand purchases,

and how much of the business will be performed by other media of

exchange, such as checks or drafts. The decision of a country to adopt

gold--when it had only paper before, as was the case in Italy--would

create a demand for gold to an extent determined by the monetary habits

of that country; and this demand has an effect, as was said, only in the

proportion of this amount to the total supply in the world. This

operation arises from choosing gold as the standard of prices and as the

medium of exchange. To give this standard a legal-tender power in

addition does not increase the demand for it, because the stamp on the

coin does not in any way alter the existing habits of the community as

to the quantity of money it will use.

But in case an equal power to pay debts is given to fixed quantities of

two metals, while each quantity so fixed has a different metallic value

but the same denomination in the coinage, Gresham's law is set in

operation with the result that the cheaper metal becomes the standard.

After this change has been accomplished, the legal tender has no

value-giving force. When the cheaper metal has become the standard, its

legal-tender quality does not raise the value of the coin beyond the

value of its content. This cheaper standard, in international trade,

would be worth no more in the purchase of goods because it bore the

stamp of any one country. Prices must necessarily be adjusted between

the relative values of goods and the standard with which they are

compared. If the standard is cheaper, prices will be higher,

irrespective of legal-tender acts. Where two metals are concerned, then,

the only effect of a legal-tender clause is an injurious one, in that

the metal which is overvalued drives out that which is under-valued.

The example of an inconvertible paper, such as our United States notes

(greenbacks) in 1862-1879, is still more conclusive. Although a full

legal tender for all debts public and private, their value steadily sank

until they were at one time worth only 35 cents in gold. In California,

moreover, these notes, although legal-tender, were even kept out of

circulation by public opinion. In short, the value of inconvertible

paper can be but little affected by legal-tender powers. Its value is

more directly governed, as in the case of token coins, by the

probabilities of redemption.[7] As bearing on the point that the value

of the paper was more influenced by the chances of redemption than by

legal-tender laws, we may cite the sudden fluctuations in the value of

our United States notes during the Civil War. With no change in the

legal-tender quality and no change in the indebtedness which might be

paid with such notes, their value frequently rose or fell many per cent.

in a single day owing to reports of Federal successes or defeats in

battle, which had a tendency to affect one way or the other the public

estimate of the probabilities of an early resumption of specie payments.

The fact that they were legal tender evidently had no effect whatever in

maintaining their value.

In view of the evident fact that legal-tender acts do not preserve the

value of money, it is clear that the demand created by such legislation

must be insignificant. And this must be so in principle as well as in

fact.

There is but one thing which the legal-tender quality enables money to

do which it could not equally well do without being a legal tender; that

is, to pay past debts. An examination, however, shows that this use of

money is very small compared with its other uses. The amount of past

debts coming due and which might be paid in any year, month or day is

insignificant when compared with the total transactions of that year,

month or day--so very small as to lose all measurable value-giving

power. In other words, the one thing which legal-tender money can surely

do in spite of the habits, wishes or prejudices of the business

community in which it exists, namely, cancel past debt, is

infinitesimally small when compared with those other things which man

wishes money to do for him. It is for this reason that it ceases to give

value, and this is why history has shown so many instances where money

endowed with legal-tender power has become utterly valueless. The

legal-tender money is no longer money if it will not secure for man the

things which are most important for his welfare, if it will not buy

food, clothes and shelter; for it performs none of the functions of

money except the subsidiary one of cancelling past debts.

Moreover, the obligatory uses of legal-tender money are in fact very

inconsiderable. A law requiring a past debt to be satisfied with money

of a certain kind has for its essence only the payment of something of a

definite value, or its equivalent; in practice, it does not even bring

about the actual use of a legal money, since the monetary habits of the

community will not necessarily require the debt to be paid in such

money. Take the extreme case of a judgment by a court against a

defendant for fulfilment of a contract; in such an example, of all

others, it would be supposed that legal money would be exacted. But even

here, the judgment would most probably be satisfied by the attorney's

check, or at most by a certified check. If such media of exchange are of

common usage in the community they will be resorted to in practice even

for legal-tender payments.

The necessity of paying that which would be mutually satisfactory to

payer and payee also makes clear why the existence of a legal-tender

money does not necessarily cause its actual use in payments. The

business habits of the community are stronger than legislative powers.

Business men will not as a rule take advantage of a legal-tender act to

pay debts in a cheaper money, if they look forward to remaining in

business. For, if, by taking advantage of legal devices they defraud the

creditor, they cannot expect credit again from the same source; and

since loans are a necessity of legitimate modern trade, such action

would ruin their credit and cut them off from business activity in the

future. Gold was not driven out of circulation by paper money during the

years 1862-1879 in California, because the sentiment of the business

public was against the use of our depreciated greenback currency; and a

discrimination was made against merchants who resorted to the use of

paper.

Explanation has been given of the principles according to which

legal-tender laws should be applied, if at all. It is not wholly clear

that there is any reason for their existence. It may now be well to

indicate briefly the origin of legal-tender provisions. It can scarcely

be doubted that their use arose from the desire of defaulting monarchs

to ease their indebtedness by forcing upon creditors a debased coinage.

Having possession of the mints, the right of coinage vesting in the

lord, the rulers of previous centuries have covered the pages of history

with the records of successive debasements of the money of account. The

legal-tender enactment was the instrument by which the full payment of

debts was evaded. There would have been no reason for debasing coins, if

they could not be forced upon unwilling creditors. It is, therefore,

strange indeed that, in imitation of monarchical morals of a past day,

republican countries should have thought it a wise policy to clothe

depreciated money with a nominal value for paying debts. Although the

people are now sovereign, they should not embrace the vices of mediaeval

sovereignty for their own dishonest gain in scaling debts.

FOOTNOTES:

[5] _Report of the Monetary Commission of the Indianapolis Convention_,

pp. 131-7. The Hollenbeck Press, Indianapolis, 1900.

[6] "A contract payable in money generally is, undoubtedly, payable in

any kind of money made by law legal tender, at the option of the debtor

at the time of payment. He contracts simply to pay so much money, and

creates a debt pure and simple; and by paying what the law says is money

his contract is performed. But, if he agrees to pay in gold coin, it is

not an agreement to pay money simply, but to pay or deliver a specific

kind of money and nothing else; and the payment in any other is not a

fulfilment of the contract according to its terms or the intention of

the parties." 25 California 564, Carpenter _vs._ Atherton.

[7] For a contrary view, see Joseph French Johnson, _Money and

Currency_, Chapter 13.--EDITOR.

CHAPTER V

THE GREENBACKS

THE GREENBACK ISSUES

[8]The greenbacks were an outgrowth of the Civil War. Soon after the

opening of the struggle the Secretary of the Treasury negotiated a loan

of $150,000,000 with Eastern banks. Partly because of Confederate

successes and partly because of the failure of Secretary Chase to adopt

a firm policy of loans supported by taxation, public credit greatly

declined, and Government bonds became almost unsaleable. The outlook

became alarming and depositors withdrew gold from the New York banks in

such large amounts that specie payments were suspended, December 30,

1861. In February, 1862, Congress provided for the issue of $150,000,000

in United States notes or greenbacks. Bond sales proceeded slowly and a

second issue of $150,000,000 of notes was authorised in July of the same

year. As a result of "military necessity" a third issue of $100,000,000

was authorised January 17, 1863, and temporarily increased March 3 to

$150,000,000. Provision was made for the reissue of the greenbacks and

$400,000,000 were outstanding at the close of the war.

THE FLUCTUATING PREMIUM ON GOLD

Depreciation of the greenbacks occurred at once and the value of gold as

expressed in greenbacks was subject to almost constant change. During

the year 1862 the premium varied from 2 to 32; in 1863 from 25 to 60;

and in 1864 from 55 to 185. Among the most important political and

economic factors which caused these fluctuations may be mentioned:

(1) The increase in the amount of the greenbacks. Each new issue was

reflected in a rise in the premium.

(2) The condition of the treasury. The annual reports of the Secretary

of the Treasury were anxiously awaited and their appearance caused a

rise or fall of the premium according as the condition of the finances

seemed gloomy or hopeful.

(3) Ability of the Government to borrow. The fate of a loan indicated

public confidence or distrust.

(4) Changes in the officials of the treasury department. Secretary

Chase's resignation, July 1, 1864, depressed the currency decidedly.

(5) War news. Every victory raised the price of currency and every

defeat depressed it.

From 1862 to 1865 the premium on gold and the median of relative prices

correspond so well that one cannot resist the conclusion that these

changes were mainly due to a common cause, which can hardly be other

than the varying esteem in which the notes of the Government that

constituted the standard money of the country were held. If this

conclusion be accepted, it follows that the suspension of specie

payments and the legal-tender acts must be held almost entirely

responsible for all the far-reaching economic disturbances following

from the price upheaval which it is our task now to trace in detail.

THE EFFECTS OF GREENBACKS UPON WAGES

Statistical evidence supports unequivocally the common theory that

persons whose incomes are derived from wages suffer seriously from a

depreciation of the currency. The confirmation seems particularly

striking when the conditions other than monetary affecting the labour

market are taken into consideration. American workingmen are intelligent

and keenly alive to their interests. There are probably few districts

where custom plays a smaller and competition a larger role in

determining wages than in the Northern States. While labor organisations

had not yet attained their present power, manual laborers did not fail

to avail themselves of the help of concerted action in the attempt to

secure more pay. Strikes were frequent. All these facts favored a speedy

readjustment of money wages to correspond with changed prices. But more

than all else, a very considerable part of the labor supply was

withdrawn from the market into the army and navy. In 1864 and 1865 about

one million of men seem to have been enrolled. About one-seventh of the

labor supply withdrew from the market. But despite all these favoring

circumstances, the men who stayed at home did not succeed in obtaining

an advance in pay at all commensurate with the increase in living

expenses. Women on the whole succeeded less well than men in the

struggle to readjust money wages to the increased cost of living.

It is sometimes argued that the withdrawal of laborers from industrial

life was the chief cause of the price disturbances of the war period.

This withdrawal, it is said, caused the advance of wages, and greater

cost of labor led to the rise of prices. The baselessness of this view

is shown by two well established facts--first, that the advance of wages

was later than the advance of prices, and second, that wages continued

to rise in 1866 after the volunteer armies had been disbanded and the

men gone back to work.

Wage-earners, however, seem to have been more fully employed during the

war than in common times of prosperity. Of course, the enlistment of so

many thousands of the most efficient workers made places for many who

might otherwise have found it difficult to secure work. Moreover, the

paper currency itself tended to obtain full employment for the laborer,

for the very reason that it diminished his real income. In the

distribution of what Marshall has termed the "national dividend" a

diminution of the proportion received by the laborer must have been

accompanied by an increase in the share of some one else. Nor is it

difficult to determine who this person was. The beneficiary was the

active employer, who found that the money wages, interest, and rent he

had to pay increased less rapidly than the money prices of his products.

The difference between the increase of receipts and the increase of

expenses swelled his profits. Of course, the possibility of making high

profits provided an incentive for employing as many hands as possible.

After an examination of the change in the condition of the great mass of

wage-earners, it may seem surprising that few complaints were heard

from them of unusual privations. This silence may be due in part to the

fact that a considerable increase of money income produces in the minds

of many a fatuous feeling of prosperity, even though it be more than

offset by an increase of prices. But doubtless the chief reason is to be

found in the absorption of public interest in the events of the war. The

people both of the South and North were so vitally concerned with the

struggle that they bore without murmuring the hardships it entailed of

whatever kind. Government taxation that under other circumstances might

have been felt to be intolerable was submitted to with cheerfulness. The

paper currency imposed upon wage-earners a heavier tax--amounting to

confiscation of perhaps a fifth or a sixth of real incomes. But the

workingmen of the North were receiving considerably more than a bare

subsistence minimum before the war, and reduction of consumption was

possible without producing serious want. Accordingly the currency tax,

like the tariff and the internal revenue duties, was accepted as a

necessary sacrifice to the common cause and paid without protest by

severe retrenchment.

RENT

URBAN RENTS

In studying the influence of depreciation upon rent, it is necessary to

use that term in its popular rather than in its scientific sense. This

fact is less to be lamented, because the theorist himself admits that

the distinction becomes sadly blurred when he attempts to deal with

short intervals of time. Capital once invested in improvements can

seldom be withdrawn rapidly. In "the short run," therefore, it is

practically a part of the land, and the return to it follows the analogy

of rent rather than of interest.

The renting landlord found that the degree in which he was affected by

the fluctuations in the value of the paper money depended largely upon

the terms of the contract into which he had entered. It is clear from a

careful examination that the landlord who before suspension had leased

his property for a considerable period without opportunity for

revaluation must have suffered severely if paid in greenbacks. The

number of "dollars" received as rental might be the same in 1865 as in

1860, but their purchasing power was less than one-half as great.

Somewhat less hard was the situation of the landlord who had let his

property for but one or two years. At the expiration of the leases he

had opportunities to make new contracts with the tenants.

In his capacity as special commissioner of the revenue, Mr. David A.

Wells devoted some attention to the rise of rent. His report for

December, 1866, says:

The average advance in the rents of houses occupied by

mechanics and laborers in the great manufacturing centres of

the country is estimated to have been about 90 per cent.; in

some sections, however, a much greater advance has been

experienced, as for example, at Pittsburgh, where 200 per

cent. and upward is reported. In many of the rural

districts, on the other hand, the advance has been much

less. Mr. Wells later modified this estimate somewhat.

The advance in rents was greater in cities than in minor towns. In some

cities--_e. g._, Cincinnati and Louisville--owners of workingmen's

tenements appear to have been able to increase their money incomes

rather more rapidly than prices advanced, but in Boston, Philadelphia,

St. Louis, and in smaller towns, their money incomes appear to have

increased more slowly than living expenses. These conclusions rest,

however, on a narrow statistical basis.

FARM RENTS

The rural landowner suffered serious injury from the paper currency when

he let his land for a money rent. But renting farms for a fixed sum of

money has always been less common in the United States than renting for

a definite share of the products. It is probable that at the time of the

Civil War more than three-quarters of the rented farms were let "on

shares." Inasmuch as no money payments entered into such arrangements,

the pecuniary relations of landlord and tenant were not directly

affected by the change in the monetary standard. Farm owners who had let

their places on these conditions escaped the direct losses that weighed

so heavily on the recipients of money rents. But even they did not avoid

all loss. For the price of agricultural products for the greater part

of the war period lagged considerably behind the price of other goods.

This difference, of course, meant loss to men whose incomes were paid in

bushels of grain.

INTEREST AND LOAN CAPITAL

THE PROBLEM OF LENDERS AND BORROWERS OF CAPITAL

The task of ascertaining the effect of the greenback issues upon the

situation of lenders and borrowers of capital is in one respect more

simple and in another respect more complex than the task of dealing with

wage-earners. It is simpler in that there are not different grades of

capital to be considered like the different grades of labor. But it is

more complex in that the capitalist must be considered not only as the

recipient of a money income, as is the laborer, but also as the

possessor of certain property that may be affected by changes in the

standard money.

The problem is further complicated by the fact that the relative

importance of these two items--rate of interest and value of

principal--is not the same in all cases. Whether a lender is affected

more by the one item or the other depends upon what he intends to do

with his property at the expiration of existing contracts. A widow left

in 1860 with an estate of say $10,000, who expected to keep this sum

constantly at interest and to find new borrowers as soon as the old

loans were paid, could neglect everything but the net rate of interest

received. On the other hand, if this estate had been left to a youth of

twenty who intended to invest his property in some business after a few

years, the rate of interest would be of relatively less importance to

him than the purchasing power of the principal when the time came to set

up for himself.

Of course, the same difference exists in the case of different

borrowers. Those borrowers who expected to renew old loans on maturity

would have to consider little beyond the interest demanded by lenders,

while borrowers who expected to pay off the loans out of the proceeds of

their ventures would be interested primarily in the amount of goods that

would sell for sufficient money to make up the principal.

Although these two classes of cases are by no means independent of each

other, the following discussion will be rendered clearer by observing

the broad difference between them. Accordingly, attention will first be

directed to the effect of the price fluctuations upon the purchasing

power of the principal of loans, and afterward to changes in the rate of

interest.

PURCHASING POWER OF THE PRINCIPAL OF LOANS

Most persons who made loans in the earlier part of the Civil War and

were repaid in greenbacks must have suffered heavy losses from the

smaller purchasing power of the principal when it was returned to them.

But while this general fact is clear, it is difficult to make a

quantitative statement of the degree of the loss that will be even

tolerably satisfactory.

In the case of almost all loans made before the middle of 1864 and

repaid prior to 1866, the creditor found that the sum returned to him

had a purchasing power much less than the purchasing power that had been

transferred to the borrower when the loan was made. This decline varied

from 1 to more than 50 per cent. On loans made in the middle of 1864 or

later, on the contrary, the creditor gained as a rule. In the case of

loans made in January, 1865, and repaid six months later, the increase

in purchasing power was over 40 per cent.

THE RATE OF INTEREST

In turning to study the fortunes of men who have no thought of employing

their capital for themselves, but expect to seek new borrowers as

rapidly as old loans are repaid, one finds it necessary to distinguish

between cases where loans have been made for short and for long terms;

between the cases, that is, where there is and where there is not an

opportunity to make a new contract regarding the rate of interest. The

latter cases may be dismissed with a word. The capitalist who lent

$10,000 for five years in April, 1862, at 6 per cent. interest, would be

in relatively the same position as the workingman who received no

advance in money wages; while his money income remained the same, the

rise of prices would decrease his real income in 1864 and 1865 by about

one-half. Of course, this loss to the creditor is a gain to the debtor;

for to the business man using borrowed capital the advance of prices

means that he can raise his interest money by selling a smaller

proportion of his output.

More interesting is the case of loans maturing and made afresh during

the period under examination. The important question is: How far did the

lender secure compensation for the diminished purchasing power of the

money in which he was paid by contracting for a higher rate of interest?

The advance in the rate of interest was comparatively small--much too

small to compensate for the increased cost of living. While prices rose

approximately 85 per cent. and money wages somewhat less than 60 per

cent. during the years 1860-65, rates of interest on call and time loans

increased less than 15 per cent. during the same period.

The conclusion is not only that persons who derived their income from

capital lent at interest for short terms were injured by the issues of

the greenbacks, but also that their injuries were more serious than

those suffered by wage-earners.

To explain this state of affairs is not easy. The first reason that

suggests itself to the mind considering the problem is that both lenders

and borrowers failed to foresee the changes that would take place in the

purchasing power of money between the dates when loans were made and

repaid. No doubt there is much force in this explanation. If, for

instance, men arranging for loans in April, 1862, to be repaid a year

later, had known that in the meantime the purchasing power of money

would decline 30 per cent., they would have agreed upon a very high rate

of interest. Men able to discern the future course of prices would not

have lent money at the ordinary rates, and if the rates prevailing in

the New York market throughout all 1862 and 1863 were less than 7 per

cent., it must have been because the extraordinary rise of prices was

not foreseen by borrowers and lenders.

Nor is it surprising that business men failed to see what was coming;

for the course of prices depended chiefly upon the valuation set upon

the greenbacks, and this valuation, in turn, depended chiefly upon the

state of the finances and the fortunes of war--matters that no one could

foresee with certainty. Indeed, there was much of the time a very

general disposition to take an unwarrantedly optimistic view of the

military situation and the chances of an early peace. Many members of

the business community seem to have felt that the premium on gold was

artificial and must soon drop, that prices were inflated and must

collapse. To the extent that such views prevailed borrowers would be

cautious about making engagements to repay money in a future that might

well present a lower range of prices, and lenders would expect a gain

instead of a loss from the changes in the purchasing power of money.

But the full explanation of the slight advance in interest cannot be

found in this inability to foresee the future--at least not without

further analysis of what consequences such inability entailed.

Workingmen are commonly credited with less foresight than capitalists,

and nevertheless they seem, according to the figures, to have succeeded

better in making bargains with employers of labour than did lenders with

employers of capital. The explanation of this less success seems to be

found in the difference between the way in which depreciation affected

what the capitalist and the laborer had to offer in return for interest

and wages. There is no reason for assuming that an artisan who changed

employers during the war would render less efficient service in his new

than in his old position, or that a landlord who changed tenants had

less advantages to put at the disposal of the incoming lessee. In both

these cases the good offered to the active business man remained

substantially the same, and it may safely be assumed that, other things

being equal, this business man could afford to give quite as much for

the labor and the land after as before suspension. From the business

man's point of view, therefore, there seems to have been room for a

doubling of money wages and rent when the purchasing power of money had

fallen one-half. But in the case of the borrower of capital the like was

not true. The thousand dollars which Mr. A offered him in 1865 was not,

like the labour of John Smith or the farm of Mr. B, as efficient for his

purposes as it would have been five years before. For, with the thousand

dollars he could not purchase anything like the same amount of

machinery, material, or labor. And since the same nominal amount of

capital was of less efficiency in the hands of the borrower, he could

not without loss to himself increase the interest which he paid for new

loans in proportion to the decline in the purchasing power of money, as

he could increase the wages of laborers or the rent for land.

It should also be pointed out that on one important class of loans

capitalists suffered comparatively little even during the war. Interest

on many forms of Government bonds was paid in gold. Capitalists who

invested their means in these securities consequently received an income

of almost unvarying specie value. If the person who made these

investments were an American, he would be able to sell his gold-interest

money at a high premium, but he would also have to pay correspondingly

high prices for commodities, so that upon the whole his position would

not be greatly different from that of the foreign investor. That such

opportunities for investment as these securities offered should exist

when men were most of the time loaning money for short terms at 7 per

cent. or less, is perhaps the most emphatic proof that could be offered

of the inability of the public to foresee what the future had in store.

PROFITS

Laborers, landlords, and lending capitalists are all alike in that the

amount of remuneration received by them for the aid which they render to

production is commonly fixed in advance by agreement, and is not

immediately affected by the profitableness or unprofitableness of the

undertaking. It remains to examine the economic fortunes of those men

whose money incomes are made up by the sums left over in any business

after all the stipulated expenses have been met.

A very important part of the solution of the problem of profits has

already been contributed by the preceding studies of wages, rent, and

interest. The evidence has been found to support the conclusion that in

almost all cases the sums of money wages, rent, and interest received by

laborers, landlords, and capitalists increased much less rapidly than

did the general price level. If the wording of this conclusion be

reversed--the prices of products rose more rapidly than wages, rent, or

interest--we come at once to the proposition that as a rule profits

must have increased more rapidly than prices. For, if the sums paid to

all the other co-operating parties were increased in just the same ratio

as the prices of the articles sold, it would follow that, other things

remaining the same, money profits also would increase in the same ratio.

But if, while prices doubled, the payments to labourers, landlords, and

capitalists increased in any ratio less than 100 per cent., the sums of

money left for the residual claimants must have more than doubled. In

other words, the effect of the depreciation of the paper currency upon

the distribution of wealth may be summed up in the proposition: The

shares of wage-earners, landowners, and lenders in the national dividend

were diminished and the share of residual claimants was increased.

Two other general propositions respecting profits are suggested. First,

other things being equal, profits varied inversely as the average wage

per day paid to employees. This conclusion follows directly from the

fact that the money wages of men earning $1-$1.49 per day before the

perturbation of prices increased in higher ratio than those of men

earning $1.50-$1.99; that the wages of the latter class increased more

than the wages of men in the next higher wage class, etc. Second, other

things being equal, profits varied directly as the complexity of the

business organization. By this proposition is meant, for example, that a

farmer who paid money rent, used borrowed capital, and employed hired

labourers, made a higher percentage of profits than a farmer of whom any

one of these suppositions did not hold true. If, as has been argued, the

increase of profits was made at the expense of laborers, landlords, and

capitalists, it follows that that _entrepreneur_ fared best whose

contracts enabled him to exploit the largest number of these other

persons.

PROFITS IN AGRICULTURE

The farmers of the loyal states were among the unfortunate producers

whose products rose in price less than the majority of other articles,

and from this standpoint they were losers rather than gainers by the

paper currency. Of course, it is possible that the farmer's loss from

this inequality of price fluctuations might be more than offset by his

gains at the expense of labourers, landlord, and lending capitalist.

But there is good reason for believing that the increase of the

_entrepreneur's_ profits in the latter fashion was less in farming than

in any other important industry. This conclusion seems to follow from

the proposition that, other things being equal, profits varied directly

as the complexity of business organization. The American farmers of the

Civil War were in a large proportion of cases their own landlords,

capitalists, and laborers. So far as this was true, they had few

important pecuniary contracts with other persons of which they could

take advantage by paying in depreciated dollars. Of those farmers who

hired labor very many paid wages partly in board and lodging--an

arrangement which threw a considerable part of the increased cost of

living upon them instead of upon their employees. Finally, the renting

farmer probably gained less on the average from the contract with his

landlord than tenants of any other class, because in a majority of cases

the rent was not a sum of money, but a share of the produce. While,

then, the general effect of the paper standard was in the direction of

increasing profits, it seems very doubtful whether farmers as a whole

did not lose more than they gained because of the price disturbances.

STATISTICAL EVIDENCE REGARDING PROFITS

It would be highly desirable to test our general conclusions by means of

direct information regarding profits made in various branches of trade,

but the data available for such a purpose are very meager. What scraps

of information are available, however, support the view that profits

were uncommonly large. Mr. David A. Wells, for example, in his reports

as special commissioner of the revenue, has stories of "most anomalous

and extraordinary" profits that were realized in the paper, woolen,

pig-iron, and salt industries. A more general indication of the

profitableness of business is afforded by the remark in the annual

circular of Dun's Mercantile Agency for 1864, that "it is generally

conceded that the average profits on trade range from 12 to 15 per

cent."

But the most important piece of evidence is found in the statistics of

failures compiled by the same agency. The following table shows Dun's

report of the number of bankruptcies and the amount of liabilities in

the loyal States from the panic year 1857 to the end of the war:

_Year_ _Number_ _Liabilities_

1857 4,257 $265,500,000

1858 3,113 73,600,000

1859 2,959 51,300,000

1860 2,733 61,700,000

1861 5,935 $178,600,000

1862 1,652 23,000,000

1863 495 7,900,000

1864 510 8,600,000

1865 500 17,600,000

The very great decrease both in the number and the liabilities of firms

that failed is the best proof that almost all business enterprises were

"making money."

From one point of view the small number of failures is surprising. An

unstable currency is generally held to make business unsafe, and seldom

has the standard money of a mercantile community proven so unstable,

undergone such violent fluctuations in so short a time, as in the United

States during the Civil War. Yet, instead of being extremely hazardous,

business seems from the statistics of failures to have been more than

usually safe.

The explanation of the anomaly seems to be that the very extremity of

the danger proved a safeguard. Business men realized that the inflation

of prices was due to the depreciation of the currency, and that when the

war was over gold would fall and prices follow. They realized very

clearly the necessity of taking precautions against being caught in a

position where a sudden decline of prices would ruin them. They did this

by curtailing credits. So long as prices continued to rise such

precautions were really not needed by the man in active business except,

in so far as he was a creditor of other men; but when prices commenced

to fall prudence had its reward. Such a sudden and violent drop of

prices as occurred between January and July, 1865, would have brought a

financial revulsion of a most serious character upon a business

community under ordinary circumstances. But so well had the change been

prepared for, that the number of failures was actually less than it had

been in the preceding year of rapidly rising prices.

The whole situation can hardly be explained better than it was by a New

York business man writing in _Harper's Monthly Magazine_: "When the war

ended," he said, "we all knew we should have a panic. Some of us, like

Mr. Hoar, expected that greenbacks and volunteers would be disbanded

together. Others expected gold to fall to 101 or 102 in a few days.

Others saw a collapse of manufacturing industry, owing to the cessation

of Government purchases. But we all knew a 'crisis' was coming, and

having set our houses in order accordingly, the 'crisis' of course never

came."

THE PRODUCTION AND CONSUMPTION OF WEALTH

PRODUCTION

What influence did the greenback currency have as one of the many

factors that affected the production of wealth? In the first place, the

paper standard was responsible in large measure for the feeling of

"prosperity" that seems from all the evidence to have characterized the

public's frame of mind. Almost every owner of property found that the

price of his possessions had increased, and almost every wage-earner

found that his pay was advanced. Strive as people may to emancipate

themselves from the feeling that a dollar represents a fixed quantity of

desirable things, it is very difficult for them to resist a pleasurable

sensation when the money value of their property rises or their incomes

increase. They are almost certain to feel cheerful over the larger sums

that they can spend, even though the amount of commodities the larger

sums will buy is decreased. Habit is too strong for arithmetic.

But, more than this, "business" in the common meaning of the word was

unusually profitable during the war. The "residual claimant" is in most

enterprises the active business man, and, as has been shown, his money

income did as a rule rise more rapidly than the cost of living. In other

words, "business" was, in reality as well as in appearance, rendered

more profitable by the greenbacks. There is therefore no error in saying

that the business of the country enjoyed unwonted prosperity during the

war. And it may be added that the active business man is probably a more

potent factor in determining the community's feeling about "good times"

and "bad times" than is the workingman, the landlord, or the lending

capitalist.

The effect of high profits, however, is not limited to producing a

cheerful frame of mind among business men. Under ordinary circumstances

one would say that when the great majority of men already in business

are "making money" with more than usual rapidity they will be inclined

to enlarge their operations, that others will be inclined to enter the

field, and that thus the production of wealth will be stimulated. But

the circumstances of the war period were not ordinary and this

conclusion cannot be accepted without serious modifications.

1. It has been shown that business men realised the precariousness of

all operations that depended for their success upon the future course of

prices--and nearly all operations that involved any considerable time

for their consummation were thus dependent. So far did this disposition

prevail that it produced a marked curtailment in the use of credit. The

prudent man might be willing to push his business as far as possible

with the means at his own disposal, but he showed a disinclination to

borrow for the purpose. Thus the uncertainty which all men felt about

the future in a large measure counteracted the influence of high profits

in increasing production.

2. The foregoing consideration of course weighed most heavily in the

minds of cautious men. But not all business men are cautious. Among many

the chance of winning large profits in case of success is sufficient to

induce them to undertake heavy risks of loss. On the whole, Americans

seem to display a decided propensity toward speculative ventures and are

not easily deterred by having to take chances. To men of this type it

seems that the business opportunities offered by the fluctuating

currency would make a strong appeal. But, while the force of this

observation may be admitted, it does not necessitate a reconsideration

of the conclusion that the instability of prices tended to diminish the

production of wealth. For in a time of great price fluctuations the

possibilities of making fortunes rapidly are much greater in trade than

in agriculture, mining, or manufactures. Every rise and fall in

quotations holds out an alluring promise of quick gain to the man who

believes in his shrewdness and good fortune, and who does not hesitate

to take chances. The probable profits of productive industry in the

narrower sense might be larger than common, but this would not attract

investors in large numbers if the probable profits of trading were

larger yet; and such seems clearly to have been the case during the war

when the paper currency offered such brilliant possibilities to

fortunate speculators in gold, in stocks, or in commodities. Instead,

then, of the greenbacks being credited with stimulating the production

of wealth, they must be charged with offering inducements to abandon

agriculture and manufactures for the more speculative forms of trade.

This tendency of the times did not escape observation. On the contrary,

it was often remarked and lamented in terms that seem exaggerated. Hugh

McCulloch, for instance, in his report as Secretary of the Treasury for

1865, said:

There are no indications of real and permanent prosperity

... in the splendid fortunes reported to be made by skilful

manipulations at the gold room or the stock board; no

evidences of increasing wealth in the facts that railroads

and steamboats are crowded with passengers, and hotels with

guests; that cities are full to overflowing, and rents and

the necessities of life, as well as luxuries, are daily

advancing. All these things prove rather ... that the number

of non-producers is increasing, and that productive industry

is being diminished.

In one of his reports as special commissioner of the revenue, Mr. Wells

said:

During the last few years large numbers of our population,

under the influence and example of high profits realized in

trading during the period of monetary expansion, have

abandoned employments directly productive of national

wealth, and sought employments connected with commerce,

trading, or speculation. As a consequence we everywhere find

large additions to the population of our commercial cities,

an increase in the number and cost of the buildings devoted

to banking, brokerage, insurance, commission business, and

agencies of all kinds, the spirit of trading and speculating

pervading the whole community, as distinguished from the

spirit of production.

Within the period under review, then, it seems very doubtful whether the

high profits had their usual effect of leading to a larger production

of raw materials or to an increase in manufactures. The prudent man

hesitated to expand his undertakings because of the instability of the

inflated level of prices; the man with a turn for speculative ventures

found more alluring opportunities in trade.

CONSUMPTION

No one can read contemporary comments on American social life of the

later years of the war without being impressed by the charges of

extravagance made against the people of the North. Newspapers and

pulpits were at one in denouncing the sinful waste that, they declared,

was increasing at a most alarming rate. The "shoddy aristocracy" with

its ostentatious display of wealth became a stock subject for

cartoonists at home, and earned a well-merited reputation for vulgarity

abroad.

In trying to account for this unpleasant phase of social development,

men usually laid the blame upon the paper standard. High prices were

said to make every one feel suddenly richer and so to tempt every one to

adopt a more lavish style of living than his former wont. Thus the view

gained general credence that the greenbacks were ultimately responsible

for a great increase in the consumption of wealth.

However, such a view regarding the consumption of wealth can be but

partially true. The enormous profits of _entrepreneurs_ made possible

the rapid accumulation of an unusual number of fortunes, and the

families thus lifted into sudden affluence enjoyed spending their money

in the ostentatious fashion characteristic of the newly rich. It is

therefore true that the monetary situation was largely responsible for

the appearance of a considerable class of persons--of whom the fortunate

speculator and the army contractor are typical--who plunged into the

recklessly extravagant habits that called down upon their heads the

condemnation of the popular moralist.

But if the greenbacks were in the last resort a chief cause of the

increased consumption of articles of luxury by families whom they had

aided in enriching, they were not less truly a cause of restricted

consumption by a much larger class of humbler folk. The laboring man

whose money wages increased but one-half, while the cost of living

doubled, could not continue to provide for his family's wants so fully

as before. He was forced to practise economies--to wear his old clothing

longer, to use less coffee and less sugar, to substitute cheaper for

better qualities in every line of expenditure where possible. Similar

retrenchment of living expenses must have been practised by the families

of many owners of land and lenders of capital. In other words, the war

time fortunes resulted in a very large measure from the mere transfer of

wealth from a wide circle of persons to the relatively small number of

residual claimants to the proceeds of business enterprises. The enlarged

consumption of wealth which the paper currency made possible for the

fortunate few was therefore contrasted with a diminished consumption on

the part of the unfortunate many on whose slender means the greenbacks

levied contributions for the benefit of their employers.

That the diminished consumption of wealth by large numbers of poor

people escaped general notice, while the extravagance of the newly rich

attracted so much attention, need not shake one's confidence in the

validity of these conclusions. The purchase of a fast trotting-horse by

a Government contractor, and the elaborateness of his wife's gowns and

jewelry, are much more conspicuous facts than the petty economies

practised by his employees. The same trait that leads fortunate people

to flaunt their material prosperity in the eyes of the world leads the

unfortunate to conceal their small privations. Even an attentive

observer may fail to notice that the wives of workingmen are still

wearing their last year's dresses and that the children are running

barefoot longer than usual.

But though the newspapers were not full of comments on the enforced

economies of the mass of the population, wholesale dealers in staple

articles of food and clothing noticed a decrease in sales. In reviewing

the trade situation in September, 1864. when real wages were near their

lowest ebb, Hunt's _Merchants' Magazine_ remarked that "the rise in the

prices of commodities has ... outrun the power of consumption and the

fall trade has been almost at a stand. Those articles such as coffee,

sugar, low grade goods, which form the staple products of the great mass

of the people in moderate circumstances, have reached such high rates

that the decline in consumption is very marked, amounting almost to a

stagnation of the fall trade." The consumption of many articles of

luxury increased very greatly, while the consumption of many staple

articles declined.

THE GREENBACKS AND THE COST OF THE CIVIL WAR

The reader who goes back to the debates upon the legal-tender bills will

find that most of the unfortunate consequences that followed their

enactment were foretold in Congress--the decline of real wages, the

injury done creditors, the uncertainty of prices that hampered

legitimate business and fostered speculation. But a majority of this

Congress were ready to subject the community to such ills because they

believed that the relief of the treasury from its embarrassments was of

more importance than the maintenance of a relatively stable monetary

standard.

GREENBACKS AND EXPENDITURES

What effect had the greenbacks upon the amount of expenditures incurred?

Few questions raised by the legal-tender acts have attracted more

attention than this. Even while the first legal-tender bill was being

considered its critics declared that if made a law it would increase the

cost of waging the war by causing an advance in the prices of articles

that the Government had to buy. As the war went on the soundness of this

view became apparent.

When the war was over and the divers reasons that had deterred many men

from criticizing the financial policy of the government were removed,

competent writers began to express similar views with freedom. For

example, Mr. C. P. Williams put the increase of debt at one-third to

two-fifths; S. T. Spear, at a billion dollars; L. H. Courtney, an

English critic, at nearly $900,000,000. Of later discussions that of H.

C. Adams has attracted the most attention. He estimated that of the

gross receipts from debts created between January 1, 1862, and

September 30, 1865, amounting to $2,565,000,000 the gold value was but

$1,695,000,000--a difference of $870,000,000 between value received and

obligations incurred.

A detailed consideration of the elements that enter the problem would

seem to warrant a reduction of the estimates given to $791,000,000. It

is hardly necessary to insist strenuously that this is but a very rough

estimate.

THE GREENBACKS AND RECEIPTS

The total increase of receipts was approximately $174,000,000, as shown

in the following table:

(In millions of dollars)

_1862_ _Fiscal Year_ _1866_

_(Six Months) 1863 1864 1865 (Two Months)_

Current receipts:

From customs 33.5 69.1 102.3 84.9 31.3

From sales of public lands .1 .2 .6 1.0 .1

From direct tax 1.8 1.5 .5 1.2 .0

From miscellaneous sources .5 3.0 47.5 33.0 12.3

From internal revenue ... 37.6 109.7 209.5 64.4

---- ----- ----- ----- -----

35.9 111.4 260.6 329.6 108.1

Estimated actual increase 0 10 39 106 19

The caution is hardly necessary that the above results are to be

accepted subject also to a wide margin of error.

There were other financial consequences of the shift from the specie to

the paper standard, however, that were not unimportant, though they were

indirect and difficult to gauge. Two of the most prominent must be

indicated.

1. It is probable that not a little of the lavishness with which public

funds were appropriated by Congress during the war can be traced to the

paper-money policy.

2. If the paper currency tempted the Government to reckless

expenditures, it also predisposed the people to submit more willingly to

heavy taxation. It has been remarked several times that the advance of

money wages and of money prices made most people feel wealthier, and,

feeling wealthier, they were less inclined to grumble over the taxes.

While these indirect effects of the paper currency on expenditures and

receipts could not by any system of bookkeeping be brought to definite

quantitative statement, it is probable that their net result was

unfavorable to the treasury.

CONTRACTION AND INFLATION OF THE LEGAL TENDERS[9]

The policy of a permanent currency of government legal-tender paper at

the close of the Civil War was unknown. Upwards of four hundred million

notes of the United States were, it is true, in circulation at the

return of peace. There were doubtless many individuals who approved the

continuance of exactly this form of currency. But no such proposition

had been advanced by any public man of influence or by any political

organization. That the resort to legal-tender powers was an evil

justified only by extreme emergency, and that the circulation of

government notes in any form was a purely temporary measure, were the

unanimous convictions of the statesmen who contrived the system. The

logical inference that these Government notes would be paid off and

cancelled, as soon as the war deficiency had ended, was publicly

accepted.

Such was the theory and purpose of the public men through whom the

Legal-Tender Act was constructed and applied. Nor is the general

position of our statesmen, at the close of the Civil War, any more

obscure than their original position. The first financial resolution

adopted by Congress, in December, 1865, was an explicit promise to

retire the legal tenders. The first legislation of that Congress gave

discretionary powers to the Secretary of the Treasury for continuous

contraction. Very few legislative victories are won without at least a

temporary popular endorsement, and the votes of December, 1865, and of

March, 1866, were no exceptions. But the popular approval of contraction

in that year, exception as it was to all our subsequent legislation, is

readily enough explained. Public opinion, when the war ended, was

governed by impatience with inflated prices; inflation far beyond the

European level, and properly ascribed to the condition of the currency.

The cost of living reached during 1865 the highest point recorded in

this country's history. From 1860 to 1865, inclusive, the average of

European prices rose only 4 to 6 per cent.; average prices in the

United States advanced, in the same period, no less than 116 per cent.

With flour at $16 a barrel, butter at 55 cents a pound, coal at $10 a

ton, and wages and salaries advanced since 1860 hardly one-third as far

as prices, the demand for currency reform obtained ready endorsement

from the people.

This popular sentiment was further strengthened by the Administration's

attitude at the opening of Lincoln's second term. Mr. McCulloch's first

official Treasury report, dated December 4, 1865, took positive ground

for the reduction of the legal-tender debt. He asked authority to issue

bonds in his discretion, at 6 per cent. or less, "for the purpose of

retiring not only the compound interest notes, but the United States

notes."

Two weeks after the publication of this report, on December 18, 1865,

the House of Representatives resolved, by a vote of 144 to 6,

that this house cordially concurs in the view of the

Secretary of the Treasury in relation to the necessity of a

contraction of the currency, with a view to as early a

resumption of specie payments as the business interests of

this country will permit; and we hereby pledge co-operative

action to this end as speedily as practicable.

This resolution of 1865, however, marked the climax of the movement.

Never thereafter did the policy of retiring the legal-tender notes even

approach success. The truth is, that the inflated prices had begun

already, during the three months after the resolution of December, to

recede. This was inevitable, from the very nature of the previous

expansion; and it was a welcome movement to consumers. But it

necessarily caused some derangement in the plans of trade, and

politicians began to ask, when they had to face the fulfilment of their

pledge through a formal act of Congress, how the contraction policy

would be greeted by producers. The bill, as originally introduced,

granted full powers to the Secretary of the Treasury to issue new bonds

for the retirement both of interest-bearing and of noninterest-bearing

debt. In the spring of 1866 this measure was defeated in the House of

Representatives by a vote of 70 to 64. Reconsidered and amended so as to

restrict contraction of the legal tenders to $10,000,000 in the first

six months and to $4,000,000 per month thereafter, the compromise

measure did indeed pass the House by 83 to 53, and the Senate by 32 to

7. But a victory thus won was ominous. Mr. McCulloch himself declared

the amended act to be awkward and ineffective. Still more significant

was the character of opposition developed in the course of the debate.

It had a dozen varying grounds of argument, most of them pretty certain

to appeal to popular prejudice later on. Some Congressmen objected to

the discretionary powers as revolutionary, and, while conceding Mr.

McCulloch's ability and conservatism, pointed out that a very different

Treasury Secretary might succeed him. Others pronounced the notion of

immediate resumption of specie payments to be "Utopian in the extreme."

Much was heard of the comfortable theory that if Congress would "allow

things to go on without active interference," the "natural development

of events" would automatically bring about resumption. More than one

legislator could not understand, "when we have $450,000,000 [debt]

bearing no interest, and which need bear no interest, why it is to be

taken up and put into bonds." The excellence of a circulating medium

"that rests on the property of the whole country, and has for its

security the faith and patriotism of the greatest and freest country on

the face of the globe," played its usual part in the discussion; so did

the argument that "the amount of legal tenders now outstanding is not

too much for the present condition of the country." In short, all the

arguments which have been made familiar by the twenty subsequent years

of controversy, cut a figure in this opening discussion.

As a matter of fact, even the restricted powers of note retirement

granted under the law of March, 1866, were revoked within two years.

Little or no progress had meantime been made towards resumption of

specie payments. The Secretary himself had officially pointed out that

two commercial influences must be removed before resumption would be

possible; the excessively high prices in the United States and the heavy

balance of foreign trade against us. But prices continued above the

European level, and, as a consequence, export of merchandise was checked

and imports greatly stimulated. The entire gold product of each year in

the United States was sent abroad.

Contraction of the inflated currency, even if pursued under the

limitations of the Act of 1866, would in time have brought about

conditions under which resumption might have been planned. But events

outside of the United States now moved in such a way as to turn the

entire financial community against the Secretary's policy. Hardly two

months after the vote of March came a wholly unexpected crisis in the

foreign money markets. The London collapse, precipitated by the

Overend-Gurney failure of May, 1866, was in some respects as complete as

any in the history of England. It affected every nation with which Great

Britain had commercial dealings; not least of all the United States, of

whose securities it was estimated that European investors even then held

$600,000,000. During three months the Bank of England kept its minimum

discount rate at the panic figure of 10 per cent.; the consequent sudden

recall of foreign capital put a heavy strain on the American markets.

With the familiar disposition of the trade community to lay the blame

for disordered markets on some move of public policy, the Treasury's

operations to reduce outstanding notes were made the scapegoat.

Politicians with an eye to popularity were quick to catch this drift of

public sentiment. Some of them honestly believed that McCulloch's action

in the currency was the cause of the trade distress; others, better

informed but equally politic, avoided personal declaration of opinion,

but characteristically announced that whether the theory was correct or

not, the public believed it, and that in deference to the public,

currency contraction ought to cease. The usual result ensued. Under the

previous question, and without debate, a measure revoking absolutely the

Secretary's power of contraction passed the House of Representatives in

December, 1867, by a vote of 127 to 32. In the Senate there was an able

show of opposition, but it was plainly put on the defensive, and on

January 22, 1868, the resolution passed both chambers in its original

and final shape.

This was the end of the McCulloch plan. It was the end of all serious

debate upon resumption, for at least six years. It was also, and very

logically, the beginning of the fiat-money party. The Republicans were

forced into open defence of sound financial principles by the very

recklessness of their opponents. Helped by the great personal prestige

of its candidate, General Grant, the Republican party won a sweeping

victory. President Johnson, who was then at open odds with his party,

had produced in his Annual Message of December 7, 1868, the

extraordinary suggestion that "the 6 per cent. interest now paid by the

Government" on its debt "should be applied to the reduction of the

principal in semi-annual instalments"; in other words, that the plan of

repudiating interest obligations--since adopted, with no agreeable

results, by Turkey and Greece--should be formally approved by the United

States. This remarkable utterance was first condemned by an overwhelming

vote in both House and Senate; next, by an almost equally decisive vote,

on March 3, 1869, Congress adopted the Public Credit Act, promising coin

redemption of both notes and bonds, solemnly pledging its faith "to make

provision, at the earliest practicable period, for the redemption of the

United States notes in coin."

The promise was as easily made as the similar pledge of December, 1865;

was still more easily broken. No such arrangement was made, nor any

serious attempt in that direction, until the matter was forced on the

party by the exigency of politics. Not only was no effort made to reduce

outstanding legal tenders, but the supply in circulation was heavily

increased; rising from $314,704,000 in the middle of 1869 to

$346,168,000 in 1872, and two years later, as a result of the Treasury's

weak experiments in the panic, to $371,421,000.

This period was congenial to such juggling with public credit and

legislative pledges. Socially, financially, and politically, it stands

out quite apart from any other decade of the century. Moral sense for a

time seemed to have deteriorated in the whole community; it was a sorry

audience, at Washington or elsewhere, to which to address appeals for

economy, retrenchment, and rigid preservation of the public faith. The

Government's financial recklessness was readily imitated by the

community at large; debt was the order of the day in the affairs of

both. As the period approached its culmination, foreign trade reflected

the nature of the situation. Merchandise imports in the fiscal year 1871

rose $84,000,000 over 1870; in 1872 they increased $106,000,000 over

1871. This movement was the familiar warning of an approaching crash;

but the warning fell on deaf ears, as it usually does. In 1873 the house

of cards collapsed.

The panic of 1873 left the country's financial and commercial structure

almost a ruin. It had, however, several ulterior results so valuable

that it is not wholly unreasonable to describe the wreck of credit as a

blessing in disguise. American prices, long out of joint with the

markets of the world, and thoroughly artificial in themselves, were

certain to be eventually brought down. This very liquidating process

served a useful double purpose; it disclosed the nation's true

resources, and it placed the United States on equal footing with the

commercial world at large. With the bursting of the bubble of inflated

debt and inflated prices, the excessive importations ceased.

Simultaneously the export trade, which had halted during 1872, in spite

of the continued agricultural expansion, rose to proportions never

before approached in our commercial history. In 1874, the balance of

foreign trade turned permanently in our favor. By 1876, even the

continuous outflow of gold was checked. In short, the two conditions

fixed by Hugh McCulloch, ten years before, as indispensable to

resumption of specie payments, had now been realized.

Congress was not by any means disposed, however, to seize the

opportunity. The first result of the money market crisis in 1873, as in

all similar years, was urgent public clamor for more currency. The

Supreme Court had decided finally, in 1871, for the constitutionality of

the legal tenders; the Secretary of the Treasury, in 1873, had so far

yielded to the prevalent excitement as to reissue legal-tender notes

already formally retired. The first response of Congress, therefore, was

an inflation measure. By a vote of 140 to 102 in the House of

Representatives, and of 29 to 24 in the Senate, a law was passed for the

permanent increase of the legal-tender currency, by $18,000,000. The

Republican party controlled Congress by unusually large majorities; but

60 per cent. of the party's vote in each chamber was cast in favor of

the bill. Only the interposition of Grant's Presidential veto prevented

this first positive backward step in the direction of fiat money.

It is reasonable to suppose that this curious vote of the Administration

party, which occurred in April, 1874, measured the party's political

desperation. They were about to receive, in the Congressional elections,

the usual chastisement experienced by a dominant party when the people

vote in a period of hard times; the inflation act was an anchor thrown

desperately to windward. The experiment was in all respects a failure.

Even the party's own State conventions failed to say a good word for the

inflation bill, and it gained no mitigation of sentence in the November

vote.

PASSAGE OF THE RESUMPTION ACT[10]

The Forty-third Congress had three months of existence left to it after

the vote of November, 1874. Already defeated overwhelmingly at the

polls, it had nothing to risk by a move in sound-money legislation, and

possibly much to gain. It used this three-months' period to enact a law

of the first importance, not only to the nation, but to the Republican

party's future history--a law which must fairly be described, however,

under the circumstances of the time, as an expression of death-bed

repentance. This was the Specie-Resumption Act, drawn up by a party

committee, and submitted to Congress, in December, 1874, by Senator John

Sherman. It fixed the date for resumption of specie payments at January

1, 1879, provided for the reduction of legal-tender notes from

$382,000,000 to $300,000,000, but made no provision for any further

retirement of the notes. It went through Congress on January 7, 1875. It

was contended by some that under the Resumption Act of 1875 there could

be no reissue of the greenbacks once received into the Treasury.

Inflationist successes of 1877-1878 settled this uncertainty, as

Congress, May 31, 1878, ordered that there be no further destruction of

greenbacks. The amount then outstanding was $346,681,000--the volume of

legal tenders still current.

THE STRUGGLE FOR RESUMPTION[11]

The Resumption Act is one of the most curious laws in financial history.

It was plain in its requirement that on and after January 1, 1879, the

Treasury should "redeem in coin the United States legal-tender notes

then outstanding, on their presentation for redemption"; but it left the

Treasury to make whatever arrangements it might choose. The law, it is

true, conferred ample powers. In order "to prepare and provide for the

redemption in this Act authorized or required," it empowered the

Secretary of the Treasury "to use any surplus revenues, from time to

time, in the Treasury not otherwise appropriated, and to issue, sell,

and dispose of bonds of the United States at not less than par in coin."

This power was perpetual.

The Law of 1875 involved the double problem of providing for resumption

at the stipulated date, and of maintaining it afterward. It is the first

of these undertakings, which we shall now sketch. There were, as we have

already seen, two influences at work in 1875, which made possible the

achievement as it would not have been in 1866. These influences--the

shifting of the foreign trade balance in favor of the United States and

the subsequent check to gold exports--were factors on which no finance

minister could have reckoned. Both in fact developed after the passage

of the Resumption Law. But even after allowing for these accidental

commercial advantages, the credit for the return to specie payments on

January 1, 1879, belongs individually and without dispute to John

Sherman.

As one of the authors of the Resumption Act, Mr. Sherman was responsible

both for its virtues and its vices. His appointment to the Treasury,

therefore, in the Administration under which resumption must by law be

carried out, was entirely logical. Yet the practical efficiency of Mr.

Sherman, in an administrative office, could not then have been foretold.

The Secretary's previous career, though useful and industrious, had been

marred by weaknesses which did not promise well. As a legislator, he

belonged to the school of compromisers who have indirectly been

responsible, in a score of critical emergencies, for the gravest

mischief in our history.

But Mr. Sherman was not the first of public men to show that the faults

or weakness of a legislator, whose purpose is to obtain enactment of a

policy, will sometimes disappear in the administrator, who presses

settled policies into execution. As Secretary he was unwavering in

pursuit of the resumption goal; practical, resolute, and adroit in the

means employed. It was in the face of the repudiation clamor that he

declared officially for payment of the Government bonds in gold. Equally

distinct was the Secretary's public declaration that the Act of 1875

conferred the power to issue bonds after, as well as before, resumption;

another precedent which did invaluable service sixteen years afterward.

To say that Secretary Sherman's management of the Treasury achieved

during his time precisely the results proposed, and achieved them

promptly, is to concede his administration's practical success. Nor were

these results attained through extravagance or waste. In his refunding

and resumption operations, Mr. Sherman placed the bonds of the United

States on better terms than any of his predecessors.

ARRANGEMENTS FOR RESUMPTION[12]

The Secretary of the Treasury now put the final touches on his

arrangements for resumption. Partly by accident and partly through

stress of circumstances, the Treasury gold reserve was defined, in later

years, at a fixed and arbitrary minimum. The theory adopted by Mr.

Sherman, however, in his early operations, was different and undoubtedly

better. Following probably the practice of the Bank of England, he fixed

his reserve at 40 per cent. of outstanding notes--"the smallest

reserve," he wrote to Congress, "upon which resumption could be

prudently commenced and successfully maintained." On this basis he held

in the Treasury, on December 31, 1878, $114,193,000 gold in excess of

outstanding gold certificates, which was a trifle over 40 per cent. of

the Government notes then circulating outside the Treasury. Of this gold

reserve, $95,500,000 had been obtained through sale of bonds, part of

the coin being procured in Europe.

There remained now to be settled only the formal machinery of exchange

between the Treasury and outside institutions. If the Treasury had left

the banks to pursue unchanged their policy of keeping special gold

deposits, the Government reserve would have been at once imperilled. If

the banks had continued to present their individual drafts for

redemption across the counter of the Sub-Treasury, any timid or

blundering banker might have started a general drain of gold. Against

these possibilities Mr. Sherman now took measures. He secured the

admission of the New York Sub-Treasury as a member of the

clearing-house. At New York and Boston the clearing-houses modified

their rules, agreed to abolish "gold deposits" after January 1st, and to

accept the legal tenders freely in discharge of balances against one

another and against the Government. At the same time, the requirement of

coin payment of customs duties was revoked, and public officers were

directed to receive coin or legal tenders at the payer's option--a move

of obvious propriety, since refusal to take notes in payment would

merely send the importer to the Treasury's redemption office to convert

them into coin. All these preliminaries had been formally and positively

settled before the close of 1878. On December 17th, the premium on gold

disappeared, for the first time since 1861; on January 1st, specie

payments were quietly resumed.

SHOULD THE GREENBACKS BE RETIRED?

[13]Let us now consider for a moment an issue which twenty years ago was

urgently pertinent, was in fact the very crux of so-called "currency

reform," and which still persists as a live issue in the minds of some

of the veteran "reformers" of those days, although the conditions which

then gave it point have long since disappeared.

In the middle nineties, when it was estimated that the total gold stock

of the entire country was only about 600 million dollars and less than

200 millions of this was in the vaults of the treasury, the

Government's fiduciary currency, consisting of 346 millions of

greenbacks and 400 millions or more of overvalued silver, presented

beyond question a serious menace to the country's monetary standard. It

meant that the treasury had outstanding currency obligations payable in

gold to the extent of three or four times its own gold holdings, and

amounting to far more than all of the gold in the country, including the

holdings of the treasury, the banks, and the general public. At that

time fluctuations in the trade balance of a single year sometimes almost

equalled the treasury's gold holdings in amount, and it was quite

conceivable, in fact not improbable, that a sudden unfavorable change in

that balance might drain the treasury of all of its gold, and leave the

country with a currency standard of depreciated silver or paper. This

was the situation which continually menaced Mr. Cleveland's second

administration, causing great financial anxiety and forcing the treasury

during those years of peace and normal expenditures to borrow 262

million dollars in gold in order to replenish its continually dwindling

reserve. Such a situation inevitably led the advocates of monetary

legislation in the nineties to place first and foremost among their

proposals the necessity of getting rid of the precarious greenback, and

most of the plans proposed by bankers' associations, chambers of

commerce, and financial experts generally at that time emphasized the

urgency of this measure.

WHY RETIREMENT IS NOT IMPORTANT

It sometimes happens that, with the lapse of time and with changed

conditions, infirmities, long left untreated, cure themselves, and so it

has been with the one-time bothersome greenback. Twenty years ago, when

the outstanding greenbacks amounted to twice the gold holdings of the

treasury and to much more than half of the country's entire gold stock,

there was abundant reason for anxiety on account of their continued

circulation. The situation is utterly different to-day. Gold has

accumulated in the treasury beyond the wildest "dreams of avarice" of

the nineties. From less than 200 millions in the middle nineties the

treasury's gold holdings have grown to approximately 1,250 millions

to-day, and the estimated gold stock of the country has increased from

600 to more than 1,800 millions, despite the fact that the Director of

the Mint in 1907 reduced the estimate for gold in circulation by 135

millions as compared with the basis of previous years.

The greenback has thus become each year a relatively less important

element in our currency system, an element of ever less and less potency

for harm. Doubtless the absolute amount of outstanding greenbacks has

diminished considerably through loss and destruction during fifty years,

and is to-day far less than the $346,000,000 issued during the Civil

War, which are still carried as an obligation on the Government

books....

The greenbacks are less menacing to-day for the further reason that they

are being rapidly transformed into small denominations which are

absorbed in the general circulation, and which could only with great

difficulty be collected in sufficiently large amounts to cause a serious

drain upon the treasury through presentation for redemption.... So great

and continuous is the demand for notes of small denominations that one

may safely predict that in another decade practically all of the

greenbacks still in existence will be in small denominations in the

pockets of the people.

The "endless chain" with its ineffectual bond issues, the imminence of

specie suspension, and the fear of treasury bankruptcy will never again

result from the outstanding greenbacks. Their dangers, lurid and

nerve-racking though they were twenty years ago, are now only memories.

THE CONFEDERATE CURRENCY[14]

The financial system adopted by the Confederate Government was

singularly simple and free from technicalities. It consisted chiefly in

the issue of treasury notes enough to meet all the expenses of the

Government, and in the present advanced state of the art of printing

there was but one difficulty incident to this process; namely, the

impossibility of having the notes signed in the Treasury Department, as

fast as they were needed. There happened, however, to be several

thousand young ladies in Richmond willing to accept light and

remunerative employment at their homes, and as it was really a matter

of small moment whose name the notes bore, they were given out in sheets

to these young ladies, who signed and returned them for a consideration.

I shall not undertake to guess how many Confederate treasury notes were

issued. Indeed, I am credibly informed by a gentleman who was high in

office in the Treasury Department, that even the Secretary himself did

not certainly know. It was clearly out of the power of the Government

ever to redeem the notes, and whatever may have been the state of

affairs within the treasury, nobody outside its precincts ever cared to

muddle his head in an attempt to get at exact figures.

We knew only that money was astonishingly abundant. Provisions fell

short sometimes, and the supply of clothing was not always as large as

we should have liked, but nobody found it difficult to get money enough.

It was to be had almost for the asking. And to some extent the abundance

of the currency really seemed to atone for its extreme badness. Money

was so easily got, and its value was so utterly uncertain, that we were

never able to determine what was a fair price for anything. We fell into

the habit of paying whatever was asked, knowing that to-morrow we should

have to pay more.

Speculation became the easiest and surest thing imaginable. The

speculator saw no risks of loss. Every article of merchandise rose in

value every day, and to buy anything this week and sell it next was to

make an enormous profit quite as a matter of course. So uncertain were

prices, or rather so constantly did they tend upward, that when a cargo

of cadet gray cloths was brought into Charleston once, an officer in my

battery, attending the sale, was able to secure enough of the cloth to

make two suits of clothes, without any expense whatever, merely by

speculating upon an immediate advance. Naturally enough, speculation

soon fell into very bad repute, and the epithet "speculator" came to be

considered the most opprobrious in the whole vocabulary of invective.

The feeling was universal that the speculators were fattening upon the

necessities of the country and the sufferings of the people. Nearly all

mercantile business was regarded at least with suspicion, and much of it

fell into the hands of people with no reputations to lose, a fact which

certainly did not tend to relieve the community in the matter of high

prices.

The prices which obtained were almost fabulous, and singularly enough

there seemed to be no sort of ratio existing between the values of

different articles. I bought coffee at forty dollars and tea at thirty

dollars a pound on the same day. My dinner at a hotel cost me twenty

dollars, while five dollars gained me a seat in the dress circle of the

theatre. I paid one dollar the next morning for a copy of the

_Examiner_, but I might have got the _Whig_, _Dispatch_, _Enquirer_, or

_Sentinel_, for half that sum. For some wretched tallow candles I paid

ten dollars a pound. The utter absence of proportion between these

several prices is apparent, and I know of no way of explaining it except

upon the theory that the unstable character of the money had

superinduced a reckless disregard of all value on the part of both

buyers and sellers. A facetious friend used to say prices were so high

that nobody could see them, and that they "got mixed for want of

supervision." He held, however, that the difference between the old and

the new order of things was a trifling one. "Before the war," he said,

"I went to market with the money in my pocket, and brought back my

purchases in a basket; now I take the money in the basket, and bring the

things home in my pocket."

As I was returning to my home after the surrender at Appomattox Court

House, a party of us stopped at the residence of a planter for supper,

and as the country was full of marauders and horse thieves, deserters

from both armies, bent upon indiscriminate plunder, our host set a

little black boy to watch our horses while we ate, with instructions to

give the alarm if anybody should approach. After supper we dealt

liberally with little Sam. Silver and gold we had none, of course, but

Confederate money was ours in great abundance, and we bestowed the crisp

notes upon the guardian of our horses, to the extent of several hundreds

of dollars. A richer person than that little negro I have never seen.

Money, even at par, never carried more of happiness with it than did

those promises of a dead government to pay. We frankly told Sam that he

could buy nothing with the notes, but the information brought no sadness

to his simple heart.

"I don' want to buy nothin', master," he replied. "I's gwine to keep dis

always."

I fancy his regard for the worthless paper, merely because it was called

money, was closely akin to the feeling which had made it circulate among

better-informed people than he. Everybody knew, long before the

surrender, that these notes never could be redeemed. There was little

reason to hope, during the last two years of the war, that the

"ratification of a treaty of peace between the Confederate States and

the United States," on which the payment was conditioned, would ever

come. We knew the paper was worthless, and yet it continued to

circulate. It professed to be money, and on the strength of that

profession people continued to take it in payment for goods. The amount

of it for which the owner of any article would part with his possession

was always uncertain. Prices were regulated largely by accident, and

were therefore wholly incongruous.

In the winter of 1863-64 Congress became aware of the fact that prices

were higher than they should be under a sound currency. If Congress

suspected this at any earlier date, there is nothing in the proceedings

of that body to indicate it. Now, however, the newspapers were calling

attention to an uncommonly ugly phase of the matter, and reminding

Congress that what the Government bought with a currency depreciated to

less than one per cent. of its face, the Government must some day pay

for in gold at par. The lawgivers took the alarm and sat themselves down

to devise a remedy for the evil condition of affairs. With that

infantile simplicity which characterized nearly all the doings and quite

all the financial legislation of the Richmond Congress, it was decided

that the very best way to enhance the value of the currency was to

depreciate it still further by a declaratory statute, and then to issue

a good deal more of it. The act set a day, after which the currency

already in circulation should be worth only two-thirds of its face, at

which rate it was made convertible into notes of the new issue, which

some, at least, of the members of Congress were innocent enough to

believe would be worth very nearly their par value. This measure was

intended, of course, to compel the funding of the currency, and it had

that effect to some extent, without doubt. Much of the old currency

remained in circulation, however, even after the new notes were issued.

For a time people calculated the discount, in passing and receiving the

old paper, but as the new notes showed an undiminished tendency to still

further depreciation, there were people, not a few, who spared

themselves the trouble of making the distinction.

I am sometimes asked at what time prices attained their highest point in

the Confederacy, and I find that memory fails to answer the question

satisfactorily. They were about as high as they could be in the fall of

1863, and I should be disposed to fix upon that as the time when the

climax was reached, but for my consciousness that the law of constant

depreciation was a fixed one throughout the war. The financial condition

got steadily worse to the end.

The Government's course in levying a tax in kind, as the only possible

way of making the taxation amount to anything, led speedily to the

adoption of a similar plan, as far as possible, by the people. A

physician would order from his planter friend ten or twenty visits'

worth of corn, and the transaction was a perfectly intelligible one to

both. The visits would be counted at ante-war rates, and the corn

estimated by the same standard. In the early spring of 1865 I wanted a

horse, and a friend having one to spare, I sent for the animal, offering

to pay whatever the owner should ask for it. He could not fix a price,

having literally no standard of value to which he could appeal, but he

sent me the horse, writing, in reply to my note:

"Take the horse, and when the war shall be over, if we are both alive

and you are able, give me as good a one in return. Don't send any note

or due-bill. It might complicate matters if either should die."

A few months later I paid my debt by returning the very horse I had

bought. I give this incident merely to show how utterly without

financial compass or rudder we were.

How did people manage to live during such a time? I am often asked; and

as I look back at the history of those years, I can hardly persuade

myself that the problem was solved at all. A large part of the people,

however, was in the army, and drew rations from the Government. The

country people raised upon their plantations all the necessaries of

life, and were generally allowed to keep enough of them to live on, the

remainder being taken by the subsistence officers for army use.

In the cities, living was not by any means so easy as in the country.

Business was paralyzed, and abundant as money was, it seems almost

incredible that city people got enough of it to live on. Very many of

them were employed, however, in various capacities, in the arsenals,

departments, bureaus, etc., and these were allowed to buy rations at

fixed rates, after the post-office clerks in Richmond had brought

matters to a crisis by resigning their clerkships to go into the army,

because they could not support life on their salaries of nine thousand

dollars a year. For the rest, if people had anything to sell, they got

enormous prices for it, and could live a while on the proceeds. Above

all, a kindly, helpful spirit was developed by the common suffering, and

this, without doubt, kept many thousands of people from starvation.

Nobody formed any plans or laid by any money for to-morrow or next week

or next year, and indeed to most of us there really seemed to be no

future. We were not used to think of ourselves as possible survivors of

a struggle which was every day perceptibly thinning our ranks. The

coming of ultimate failure we saw clearly enough, but the future beyond

was a blank.

The reader may find it difficult to believe that with gold at a hundred

and twenty-five for one, or 12,400 per cent. premium; when every day

made the hopelessness of the struggle more apparent; when our last man

was in the field; when the resources of the country were visibly at an

end, there were financial theorists who honestly believed that by a mere

trick of legislation the currency could be brought back to par. I heard

some of these people explain their plan during a two days' stay in

Richmond. Gold, they said, is an inconvenient currency always, and

nobody wants it, except as a basis. The Government has some

gold--several millions in fact--and if Congress will only be bold enough

to declare the treasury notes redeemable at par in coin, we shall have

no further difficulty with our finances. So long as notes are redeemable

in gold at the option of the holder, nobody wants them redeemed.... The

gold which the Government holds will suffice to satisfy a few timid

ones, and there will be an end of high prices and depreciated currency.

I am not jesting. This is, as nearly as I can repeat it, the utterance

of a member of the Confederate Congress.

The matter of prices was frequently made a subject for jesting in

private, but for the most part it was carefully avoided in the

newspapers. As with the accounts of battles in which our arms were not

successful, necessary references to the condition of the finances were

crowded into a corner, as far out of sight as possible. The _Examiner_,

however, on one occasion denounced with some fierceness the charges

prevailing in the schools; and I quote a passage from Prof. Sidney H.

Owens's reply, which is interesting as a summary of the condition of

things in the South at that time:

"The charges made for tuition are about five or six times as high as in

1860. Now, sir, your shoemaker, carpenter, butcher, market man, etc.,

demand from twenty, to thirty, to forty times as much as in 1860. Will

you show me a civilian who is charging only six times the prices charged

in 1860, except the teacher only? As to the amassing of fortunes by

teachers, spoken of in your article, make your calculations, sir, and

you will find that to be almost an absurdity, since they pay from twenty

to forty prices for everything used, and are denounced exorbitant and

unreasonable in demanding five or six prices for their own labor and

skill!"

There were compensations, however. When gold was at 12,000 per cent.

premium with us, we had the consolation of knowing that it was in the

neighborhood of one hundred above par in New York, and a Richmond paper

of September 22, 1864, now before me, fairly chuckles over the high

prices prevailing at the North, in a two-line paragraph which says, "Tar

is selling in New York at two dollars a pound. It used to cost eighty

cents a barrel." That paragraph doubtless made many a five-dollar

beefsteak palatable.

FOOTNOTES:

[8] Adapted from Wesley Clair Mitchell, _A History of the Greenbacks_,

Part II, The University of Chicago Press, 1903.

[9] Adapted from A. D. Noyes, _Forty Years of American Finance_, pp.

7-20. G. P. Putnam's Sons, New York and London, 1909.

[10] _Ibid._, pp. 21-22.

[11] _Ibid._, pp. 23-31.

[12] _Ibid._, pp. 44-47.

[13] A. Piatt Andrew, The Essential and the Unessential in Currency

Legislation, in _Questions of Public Policy_, Addresses delivered in the

Page Lecture Series, 1913, before the Senior Class of the Sheffield

Scientific School, Yale University, pp. 55-59. Yale University Press,

New Haven, Connecticut. 1913.

[14] Adapted from George Gary Eggleston, _A Rebel's Recollections_, pp.

78-107. Hurd and Houghton. Boston, 1875.