THE SILVER QUESTION IN THE UNITED STATES
[16]Such was the singular combination of events after the peace of 1865
that almost at the moment when a million citizens were turned from
organised destruction to pursuit of peaceful industry, the avenues of
American employment and production were widened in a degree
unprecedented in the history of trade. Within eight years after Lee's
surrender, the railway mileage of the United States was literally
doubled. Only a fraction of this increase belonged to the
transcontinental lines which linked the two oceans in 1869. Quite aside
from the 1,800 miles of the Pacific railways, upwards of 30,000 miles of
track were laid in the United States between 1865 and 1873. Four
noteworthy economic developments accompanied this extension of the
transportation system. A fertile interior domain, hitherto untouched,
was opened up to industry. With the rush of population to these Western
districts, not only did the disbanded army resume production without
industrial overcrowding such as followed the Napoleonic wars, but
provision was made for three or four hundred thousand immigrants
annually. European capital in enormous volume was drawn upon to provide
the means for this development. Finally, the United States rose from the
position of a second- or third-class commercial State to the first rank
among agricultural producers and exporters. Each of these several
phenomena had its special influence on the period.
Not less immediately connected with this opening up and settlement of
our agricultural West was still another phenomenon, of peculiar interest
to the study of the ensuing period. The average price of grain had
advanced with great rapidity during the Civil War. In 1867, the price of
wheat, even on the Chicago market, reached the remarkable level of
$2.85 per bushel; nor was this price very greatly above the annual
maximum of the period. In a large degree, this advance resulted from
inflation of the American currency. But the upward movement was
world-wide; in 1867 and 1868 the average price, even in England, was
close to the equivalent of two dollars a bushel. That any such abnormal
market could be maintained in the face of the new American supplies was
at least improbable. The increase in cereal production was twice as
rapid as the country's increase in population; the United States became
therefore the leading figure in the world's export markets; and this was
certain to have important influence on prices.
As in America, so in Europe, production received immediate stimulus.
While American capital was opening up the Mississippi Valley, European
capital was similarly busy along the fertile river basins of the Dnieper
and the Danube. The Russian railway system grew during this period from
something like 2,000 miles to upwards of 13,000. In Austria-Hungary the
percentage of increase was almost equally large. All of these new
transportation lines, like our own new Granger railways, were at once
engaged in carrying to the seaboard supplies of grain which never before
had reached an export market. The problem of an earlier generation had
been how to feed the constantly increasing population; a wholly new
problem was presently to arise, based on the question how to find a
ready and profitable market for the year's output of breadstuffs.
Prices, in short, which rose almost continuously throughout the world
during the period of slack production from 1858 to 1873, receded almost
as continuously in the ensuing generation. Nowhere was this phenomenon
destined to have more immediate importance, economically, socially, and
politically, than in the United States.
The opinion is more or less widely held that the decline in prices,
notably of grain, has resulted from legislation on the currency. Without
for the present arguing that proposition, it may be affirmed with entire
safety that a good share of the period's currency legislation has
resulted from the decline in the price of grain. The fall in wheat has
been the typical argument for arbitrary increase of the silver or paper
currency in almost every Congressional debate since 1872. What is
perhaps even more significant, the division in almost every
Congressional vote upon these subjects has been, not political but
geographical--the commercial East against the agricultural West.
AGITATION FOR SILVER AND THE PASSAGE OF THE BLAND BILL
[17]In the summer session of 1876, several bills had been introduced,
providing for increased silver coinage and for remonetization of the
silver dollar. None of these propositions came to anything; they were
chiefly remarkable from the fact that they first gave vogue to the
theory of the "crime of 1873"--a theory which assumed that the dropping
of the silver dollar from the list of coins in the statutes of that year
was the outcome of a conspiracy which carried its legislation through in
secret. The entire baselessness of this assertion has been demonstrated
often enough and in convincing detail; this very provision regarding the
silver dollar was a subject of public discussion in the House, and met
with no serious opposition. The assertion in itself is so patently
absurd that I shall not pause to discuss it. The truth is that silver in
1873, and during a generation before that date, was worth more to its
owner in the form of bullion than in the form of coin. In 1872 the
silver requisite to coin a dollar at the established ratio was worth
$1.02. For years, therefore, nobody thought of bringing his silver to
the mint for coinage; he sold it in the commercial markets. The total
silver-dollar coinage of the United States, between 1789 and 1873, was
barely eight million dollars, and when, in 1873, the law provided that
except for the so-called trade dollar coined for export, "no deposit of
silver for other coinage shall be received," no one had interest enough
in the matter to offer criticism.
But in 1874 and 1875 came one of those curious coincidences which render
possible for all time conflicting theories of an economic event.
Germany, having adopted the gold standard of currency in July, 1873,
began to sell its old silver coin as bullion. At exactly the same time,
Mackay and Fair, in the heart of the Nevada Mountains, were opening up
the Great Bonanza. The Pacific Coast was in fact going wild over the
rise in mining shares while the East was financially and industrially
paralysed.
The statute dropping the silver dollar from this country's coinage list
was enacted February 12, 1873; the German law for retirement of silver
coinage was adopted July 9, 1873; and a year later the news of the rich
Nevada "ore-finds" became public property. Between the German sales and
the sales at Nevada City, the price of silver yielded. In 1874, for the
first time in a generation, 412-1/2 grains of standard silver would have
been worth more when coined into a legal-tender dollar than when sold in
the bullion market. The motive of the mining interest in the free-silver
coinage agitation of 1876 and 1877 was not mysterious.
The motive of the anti-Administration party in Congress was somewhat
different. There is not the slightest question that the silver-coinage
movement, in the agricultural West particularly, had the same origin and
the same following as the paper inflation movement of a few years
before. Mr. Bland himself, the author of the silver bill, declared that
the question was presented as between what he called "honest resumption"
with silver coinage, "or on the other hand a forced unlimited inflation
of paper money." In the heat of debate on the silver bill, the same
statesman declared in Congress that if his coinage plan could not be
passed, he was "in favour of issuing paper money enough to stuff down
the bondholders until they are sick." The point of these remarks lies in
their frank assumption that the free-silver sentiment and the fiat-money
sentiment were interchangeable.
So much, then, for the origin and nature of the silver movement. The
Bland Bill passed the House on November 5, 1877, under the previous
question and without debate, by a vote of 164 to 34, and the resumption
operations of the Government came to an instant halt. The market price
of silver then was such that the legal-tender dollar of the Act would
have been worth intrinsically less than ninety cents. Foreign
subscribers to our resumption bonds suspected instantly that payment of
the Government debt in a depreciated coin was planned by Congress; their
suspicions were confirmed by a resolution introduced December 6th by
Stanley Matthews, Mr. Sherman's own successor in the Senate, and passed
by both houses. The resolution explicitly declared that in the opinion
of Congress, all the bonds of the United States, "issued or authorized
to be issued," were payable in the silver dollars of the Bland Law. The
extraordinary character of this resolution may be judged from the fact
that it was proposed and passed in both houses while the Coinage Act was
still pending, and while, therefore, there was not in existence the coin
which was duly declared a legal tender for settlement with public
creditors. To the conservative portion of the public, the resolution
seemed a piece of financial lunacy; to the Treasury, it was not only
embarrassing but humiliating. Hardly a month before, in his annual
report to Congress, the Secretary had repeated his official statement,
previously made to bond subscribers, that payment of the bonds in gold
might safely be anticipated. The publication of this statement in New
York and London had been followed by greatly increased subscriptions to
the bonds, in payment of which gold was required by the Government. The
Matthews resolution amounted, so far as Congress was concerned, to
repudiation of a formal bargain of which the Government had already
obtained the fruits. The debate was such as might have been expected on
a measure of the sort. It centred repeatedly on denunciation of
Government bond investors. Foreign subscribers were treated with
especial scorn; indeed, our foreign customers in general were not
spared. It was this debate which drew forth Senator Matthews's somewhat
celebrated query: "What have we got to do with abroad?"--a remark which
was perhaps as typical of the session's deliberations as any utterance
made from the floor of Congress.
The situation, during the early months of 1878, was extremely critical.
For the time the three direct assaults on the public credit were warded
off. The Matthews resolution was "concurrent," and hence a mere
expression of opinion without binding force. The bill repealing the
Resumption Act of 1875 was killed by disagreement in the Senate.
Meantime the Silver-Coinage Act was modified by the Senate into a
compromise requiring purchase and coinage by the Government of two to
four millions' worth of silver monthly. Even thus modified, it
encountered the veto of the President, but was passed over his veto,
without a day's delay, by the requisite two-thirds majority. Executive
conservatism seemed to be fruitless; nevertheless, there is no doubt
whatever that the steadfast policy of Mr. Hayes did much to stem the
current of reaction.
Congress adjourned on June 19th. Even before Congressional adjournment,
the canvass for the November State elections had begun. The State
Convention platforms in the summer of 1878, were not in all respects
such as the session's work in Congress would have suggested.
The opposition had gone too far in Congress, and popular opinion to that
effect was expressed with sufficient emphasis in November, 1878. The
Administration party gained what amounted to a decided victory. There
were but four States, East or West, where opposition majorities were
increased in 1878 or Administration majorities diminished, and these
were agricultural States, where the season's sharp decline in wheat had
stirred up discontent. There was not much danger from the closing
session of a Congress whose earlier ventures had received this response
from the people.
PROVISIONS OF THE ACT OF 1878
[18]Although the silver dollar of which the coinage was resumed in 1878,
dates back as a coin to the earlier days of the Republic, its reissue in
that year marks a policy so radically new that the experience of
previous years throws practically no light on its working. The act of
1878 provided for the purchase by the Government, each month, of not
less than two million dollars' worth, and not more than four million
dollars' worth of silver bullion, for coinage into silver dollars at the
rate of 412-1/2 grains of standard silver (or 371-1/4 grains of fine
silver) for each dollar. The amount of the purchases, within the
specified limits, was left to the discretion of the Secretary of the
Treasury. As every Secretary of the Treasury, throughout the period in
which the act was in force, kept to the minimum amount, the practical
result was a monthly purchase of two million dollars' worth of silver
bullion.
The act is sometimes described as having called for a monthly issue of
two million silver dollars; but this was not the exact situation. The
amount of silver obtainable with two million dollars obviously varies
according to the price of the metal in terms of the dollars with which
the purchases are made. In February, 1878, when the first purchases were
made, those dollars were the inconvertible United States notes, or
greenbacks, worth something less than their face in gold. The amount of
silver bullion obtainable with two million such dollars depended, on the
one hand, on the price of silver bullion in terms of gold, and on the
other hand on the value of the dollars themselves in terms of gold. When
specie payments were resumed, on the first of January, 1879, and the
greenbacks became redeemable in gold, the measure of value in the United
States became gold, and the extent of the coinage of silver dollars
under the act of 1878 became simply a question of how much silver
bullion could be bought with two million dollars of gold. The price of
silver in 1878 was, in terms of gold, not far from a dollar for an ounce
of standard silver. Since 1878 it has gone down almost steadily, and ...
in 1889 was barely above 80 cents an ounce.[19] The silver dollar of
412-1/2 grains contains less than an ounce (480 grains) of standard
silver. The monthly purchase of two million dollars' worth of silver has
therefore always yielded more than two million silver dollars, the
amount being obviously greater as the price of silver went lower. On the
average, the monthly yield [was] not far from two million and a half of
silver dollars.... Thirty millions of silver dollars a year was roughly
the addition to the currency of the community from the act of 1878.
SILVER CERTIFICATES
[20]An important provision of the act of 1878 was that authorising the
issue of silver certificates against the deposit of silver dollars. This
authority was limited at the time to certificates in denominations only
of ten dollars and upward: a restriction which ... proved to be of great
importance. At the time it does not seem to have been expected that the
silver certificates would enter directly into the circulating medium; we
may infer from the restriction to large denominations that no such
expectation was entertained. But in fact, it has been chiefly in the
form of certificates that the silver has entered into circulation. These
certificates, it is true, are not, like the dollars themselves, a legal
tender; but they are receivable for all public dues, customs included,
and they pass from hand to hand at least as readily as the bulky pieces
which they represent.
CAUSES OF THE ACT
[21]The passage of that act was due to causes easily described. It was
part of the opposition to the contraction of the currency and the
resumption of specie payments which forms the most important episode in
our financial history between 1867 and 1879. The resumption of specie
payments had been provided for by the act of 1875, and was to take place
on January 1, 1879. In the meanwhile, the long-continued depression
which followed the crisis of 1873 intensified the demand for more money
and higher prices. That demand led to the inflation bill passed by both
Houses of Congress in 1878, and killed by the veto of President Grant.
The same feeling led to the silver act. The great fall in the price of
silver, beginning in 1873, and showing itself markedly in 1876, made
silver, at the old ratio, a cheaper currency than gold, and so caused
the opponents of the return to specie payments to prefer silver to gold,
as they preferred paper to either. No doubt some additional force was
given to the movement in favor of the use of silver from the desire of
the silver-mining States and their representatives, that the price of
the metal should be kept up through a larger use of it for coinage....
WHEREIN PECULIAR
[22]Although the specific measure passed in 1878 thus rested on a long
train of historical causes, it contained details that were essentially
new, not only in our own experience, but in that of the world at
large.... It ... provided for a regular mechanical addition of large
amount to the general circulating medium. No precise experiment of this
kind had ever been tried. It is true that Germany and the countries of
the Latin Union possess, in their circulating medium, large quantities
of overvalued thalers and five-franc pieces which are exactly like our
silver dollars. They also are legal tender without limit; their total
quantity is limited; and it is only by this limitation of the quantity
that their value is kept above that of the bullion contained in them.
But the thalers and francs in these countries are not new additions to
the currency. They are remnants from an earlier period, when Germany had
a silver standard, and the Latin Union a complete bimetallic standard.
No addition whatever to the thalers is made in Germany; and if some
coinage of five-franc pieces takes place in France and in other
countries of the Latin Union, the additions are meant merely to fill the
place of abraded coins, to provide for the ordinary losses from daily
use, and to make any additions to the supply which may be needed for
convenience in making small change. No other country has ever entered on
an addition of overvalued coin to its circulating medium having the
object and extent of that made by our silver act of 1878. This
characteristic of the measure, it need hardly be said, was the result
not of any deliberate intention to try a new experiment, but of the
spirit of compromise which explains so many anomalies in the legislation
of democratic communities. The silver act, as passed by the House of
Representatives, provided for complete bimetallism--for the free and
unlimited coinage of the silver dollar at the old ratio of 16 to 1. In
the Senate, it was amended by the substitution of the provisions for a
limited coinage, which were finally enacted. The compromise was meant to
satisfy both those who objected to the cheaper standard and those who
wanted more money; and it afforded a welcome escape to the legislators
who were trying to satisfy all parties. At the time, no one probably
expected that the measure would remain in force for any great length of
time. The conservative element hoped that it would be repealed after a
short trial; the inflationists (for by that name they might, then at
least, fairly be called) believed that it would soon be superseded by
the free and unlimited coinage of silver. As it happened, the act
remained in force, unamended, and indeed without very serious attempt at
amendment, for over twelve years; and the measure which succeeded it in
1890, though different in many details, followed the same method of
forcing a large regular injection into the circulating medium of money
based on silver purchases by the Government.
LIMITED CIRCULATION OF THE SILVER DOLLARS
[23]The Government has made every effort to get the dollar coins out of
its hands.... But the great bulk of the coins thus got out of the
treasury return to it almost at once. The degree of favor which they
meet with of course ... varies in different parts of the country,
apparently reflecting in a curious way the popular feeling as to the
desirability of having silver currency at all. They circulate very
little east of the Alleghanies, but are used more freely and permanently
in the Mississippi Valley. Among the negroes of the South the big pieces
are said to be favorites, and to find a permanent lodgment. Their
greatest circulation ... was reached in 1886; after that time the change
in the denominations of silver certificates caused a decline in the
amount used.
PROVISIONS OF THE ACT OF 1890
[24]The act of July 14, 1890, is[25] more remarkable than that of 1878.
It is unique in monetary history. It provides that the Secretary of the
Treasury shall purchase each month at the market price four and a half
million ounces of silver bullion. In payment he shall issue Treasury
notes of the United States, in denominations of between one dollar and
one thousand dollars. These Treasury notes, unlike the old silver
certificates, are a direct legal tender for all debts, public or
private, unless a different medium is expressly stipulated in the
contract. They differ from the silver certificates in another respect;
they are redeemable either in gold or silver coin, at the discretion of
the Secretary of the Treasury. The indirect process of redemption
which,... was applied to the silver certificates, is replaced for the
new notes by direct redemption. The avowed object is to keep the silver
money equal to gold, for it is declared to be "the established policy of
the United States to maintain the two metals at a parity with each other
on the present legal ratio, or such ratio as may be provided by law."
The act of 1878 is repealed; but the coinage of two million ounces of
silver into dollars is to be continued for a year (until July 1, 1891).
Thereafter it is directed that only so many silver dollars shall be
coined as may be needed for redeeming any Treasury notes presented for
redemption. Practically this means that the coinage shall cease;
redemption in silver dollars will not be called for under present
conditions. The coinage of silver dollars accordingly was suspended by
the Treasury on July 1, 1891; a change which was the occasion of some
vociferous abuse and equally vociferous praise, but which in reality was
of no consequence whatever.
AMOUNT OF MONTHLY ISSUES
[26]The monthly issues of the new Treasury notes vary, like those of the
old silver certificates, with the price of silver. But the new issues
vary directly with the price of silver, while as we have seen, the old
issues varied inversely with the price. The volume of Treasury notes
issued is equal to the market price of four and one-half million ounces
of silver. For a month or two after the passage of the act, the price of
silver advanced rapidly, and at its highest, on August 19, 1890,
touched $1.20. After September a steady decline set in....
THE POLICY OF THE BANKS
[27]Shortly after the passage of the act [of 1890], some sort of
understanding seems to have been reached between the Treasury Department
and the banks of New York. The banks came to an agreement that the new
notes were to be treated as "current funds," receivable in all payments,
clearing-house settlements included....
The fact that the new notes were received by the banks from the
Sub-Treasury in settlement of clearings, was of sensible advantage to
the Government. The success of the Government in maintaining its nominal
willingness to pay gold to all comers was due to the forbearance of the
banks. Gold was called for by them only when needed for export.
THE ARGUMENT FOR SILVER
THE BIMETALLIST ARGUMENTS
[28]... Is it desirable that we should have more money? Does the
maintenance of the gold standard involve injustice or hardship to
debtors, or to any class in the community? Does it have any ill effects
in hampering industry or checking the advance of production? Is the free
coinage of silver, or any measure leading ultimately to a silver basis,
fairly open to the objections commonly urged against it on the grounds
of dishonesty and injustice?...
In considering these questions, we must look to the ultimate and
permanent results of the silver standard. The details ... as to the mode
in which the silver issues circulate and the degree of promptness with
which they will affect prices, are here of no great importance. Under a
silver standard the rise in prices will take place in the end; and we
are concerned with the social consequences of such an eventual
result....
I propose here to take up chiefly one set of serious arguments--those
which rest on the changes in general prices which have taken place
throughout the civilised world in the last twenty years. The conclusions
in favor of a wider use of silver, drawn from such changes, have been
maintained by distinguished economists. It is true that the particular
plans for the use of silver which are now in vogue in the United States
have generally been opposed by these economists. They have urged
international agreements for the wider use of silver, and have
deprecated independent action by any one nation. But the more
thoroughgoing advocates of free silver in the United States say,
certainly with much force, that an international agreement has proved to
be simply impracticable, and that if the wider use of silver is to be
deferred until there is concerted action by the great nations, it will
never come. If anything in this direction is to be done, some one
country must be courageous enough to take the lead, trusting that others
will follow in due time. And certainly it is true that the scheme for
international bimetallism has practically no prospect of adoption;
while, on the other hand, the serious arguments urged by its advocates
tell, in some degree, in favor of any scheme for enlarging the use of
silver as money. These arguments, moreover, are of weight, and deserve a
more painstaking consideration than is often admitted by those who
oppose the silver legislation of the United States.
The serious and important arguments, then, among those who, both in this
country and in Europe, advocate a greater use of silver as money, are
derived from the general fall in prices which has been so conspicuous
among the economic phenomena of the last twenty years. To that fall they
ascribe two evils: first, an unjust increase in the burdens of debtors;
and, second, a check to enterprise and to the efficient working of the
productive machinery of the community. The increase in the burdens of
debtors is one which all economists have pointed to as the result of a
general fall in prices, or rise in the value of the circulating medium.
The debtor who borrows a hundred dollars now, and repays them five years
hence, when all prices have fallen, gives back more than he received. On
debts running for short periods of time, changes in general prices are
not likely to be great enough to cause serious hardship; but on debts
running over long periods the loss to debtors and the gain to creditors
will be great and continuing. But such a steady and continuous fall, it
is urged, has taken place since 1873; and the fall is likely to continue
further, and to renew its hardships on each new act of borrowing,
because its cause is a permanent one. That cause is found in the growing
scarcity of gold, which has been selected as the sole standard of value
among civilised countries. The production of gold, after having
increased with great rapidity in the twenty years following the
Californian and Australian discoveries in 1850, has gone on but slowly
since 1870. Meanwhile, the population of the civilized countries, their
wealth, their production of commodities to be exchanged, have increased
with extraordinary rapidity; while the adoption of the gold standard by
Germany in 1873, and the resumption of specie payments by the United
States in 1879 and by Italy in 1883, have added to the demands for which
the scanty annual supply of gold must suffice. Hence the general fall in
prices; in other words, the appreciation of gold.
The second effect of the appreciation of gold, in checking industrial
progress and promoting industrial depression, has been less insisted on
in the United States than in European countries. The classic economists
had generally reasoned that a general rise or fall in prices was
indifferent, except in regard to the relations of debtor and creditor.
If money became scarce, if its value rose and all prices fell, every
producer, to be sure, would receive a smaller money income than before,
and would have a smaller money capital. But he would be able to buy as
many commodities and as much labor as before, and would be in reality
just as rich and prosperous. In the middle of the eighteenth century,
when economic thought was just beginning to assume its modern form,
David Hume had argued that though a fall in prices is at bottom
indifferent to everybody (except as debtor or creditor), it would yet,
in its effects on men's spirits and expectations, which are all
connected with money and with terms of money, exert a depressing
influence on industry, and would so be harmful; while rising prices,
though also really indifferent to all, would stimulate hope and
confidence, and so arouse to more active exertion and more plentiful
production. The younger Mill, in his _Political Economy_, thought it
worth while to enter on a careful refutation of Hume's reasoning. But
the bimetallists of our time are disposed to agree with the shrewd
Scotchman. They say that the active manager of industry, the business
man or _entrepreneur_, in the first place is always more or less in
debt; in the second place, is always buying labor, or materials, or
goods, with the intention of selling a product at a later date at an
advance in price. He habitually measures his gains in terms of money,
and not in terms of the commodities he can buy with the money. In times
when prices are falling, he finds it harder to meet his debts, and to
dispose of his goods in hand at a money advance over what they cost him.
But the business man, or entrepreneur, in our day is the director and
initiator of industry. He employs labor, borrows capital, sets the
wheels of industry in motion; it is his expectations and fears and hopes
which determine primarily whether the investment of capital shall take
place in large or small amount, and whether the machinery of production
shall move smoothly and effectively, or slowly, hesitatingly,
inefficiently. The argument certainly does not lack plausibility; nor
can it be said to have often been squarely met. No doubt it takes the
form, in the United States, more frequently of confused encomiums on the
inspiriting effects of plentiful money, than of direct reasoning as to
the ill effects of too little money, such as I have endeavored to state
with fairness in the preceding sentences. Yet it does not lack weighty
backing. So eminent an economist as President Francis A. Walker has ...
insisted on the evils of a deficient supply of money as strangling the
arteries of industrial life.
On the whole, however, the other argument, bearing on the increase in
the burdens of debtors under falling prices, has been more often heard
in the United States, and certainly has been of more effect. Prosperity,
activity, general industrial advance, have been in this country so great
and so obvious that the argument as to any check to industry could take
serious hold only in occasional periods of depression or slackened
advance. The burden on American debtors from falling prices has
therefore been much more steadily complained of, chiefly in regard to
the debts of the farmers and other borrowers on a comparatively small
scale. No doubt there are other debtors whose burdens are affected at
least as much, notably the railways, among whom the practice of
borrowing heavily on long time has sometimes had its serious effects.
But it is the farmer whose case has received most attention, and in some
ways doubtless has deserved it most.
The discussion of the relations of debtors and creditors under the gold
standard has led to some further conclusions as to the "honesty" of the
gold and silver standards. Those who oppose a silver basis speak of the
silver dollar as a "dishonest" coin. But those who attack the gold
standard retort that the really dishonest dollar is that of gold. It is
pointed out by them that the fall in the price of silver which has taken
place since 1873 has not been greater than that in the prices of
commodities generally. As compared with commodities, therefore, silver
has been more steady in value than gold. The fall in the gold price of
silver, which is adduced by the mono-metallists to show that silver is
not a good standard of value, is said to be the very thing which proves
it to be a good standard of value; for a given amount of silver will buy
the same amount of commodities, roughly, as it would twenty years ago,
while a given amount of gold will buy more. If debts had been expressed
in terms of silver, the debtor would have had to repay the creditor the
same amount of commodities that he received--not more commodities, as he
has had to do, with debts measured and repaid in terms of gold. So far
as the attainment of the closest possible approach to ideal justice is
concerned, a silver standard would have served the purpose better than a
gold one.
THE EFFECT OF IMPROVEMENTS IN PRODUCTION
The bimetallist agitation for a return to the wider use of silver
concurrently with gold first became prominent in the years of depression
which followed the crisis of 1873. For some time those who opposed it
took the ground that the alleged evils did not exist--that in fact there
had been no permanent fall in general prices. The decline in the years
after 1873 was supposed to be simply the usual reaction from the rise
in prices which marks a period of speculative activity. It was expected
that the upward movement of the next period of activity would bring the
average range of prices as high as it had been before. The general
revival which set in after 1879 in all civilized countries did indeed
check the downward tendency, and in some countries brought about an
appreciable rise. But this counter-movement by no means offset the
marked fall which had preceded it; and in any case it soon came to an
end, and was followed by a new fall, which has continued with no
considerable interruption to the present time (1891). It is true that
some part of the fall is no more than a recoil from the abnormally high
prices of the years 1871-73. It is true, also, that some commodities
have shown a tendency to rise, and that in one very important
respect--in money incomes and the money rate of wages--there has been a
striking exception to the general movement. Further, it must be borne in
mind that even the lowered level which has now been reached cannot be
described as abnormally low, being still as high as that which obtained
at the middle of the present century. But on the whole, the fact of a
general fall in the prices of commodities during the last fifteen or
twenty years cannot be denied. The fall has not been uninterrupted; it
has not been so rapid or general as to bear on the face of it proof of
harmful results; but it has been steady, and, in the opinion of the
present writer at least, is likely to continue slowly and steadily for
some time to come.
Recently, therefore, those who combat the bimetallist reasoning have
taken a different position. They have reasoned that while prices may in
fact have gone down, the fall is not due, as the bimetallists allege, to
an appreciation of gold. It is to be accounted for, they say, by other
causes, notably by the extraordinary improvements in the production of
commodities. New inventions and the perfecting of old ones have
cheapened almost all manufactured articles. Raw materials and food
products have been cheapened partly by the discovery of new sources of
supply, and partly by that improvement which has been transforming the
industrial situation more radically than any other--the wonderful
cheapening of transportation by railways and steamships, which has made
the resources of the plains of our West and of the sheep-runs of
Australia available for the supply of the markets of London and New
York.
So far as this train of reasoning undertakes to explain the mode in
which the fall in prices has been brought about, it seems to me
impregnable. But in so far as it endeavors to disprove the appreciation
of gold, or to show that the general fall is not due to this
appreciation, I have never been able to see its force. In truth, both
the bimetallists and their opponents seem to confuse the question when
they speak of the appreciation of gold as causing lower prices. The
appreciation of gold _is_ the general fall in prices. The two are not
related as cause and effect; they are simply two names for one and the
same thing--namely, a different rate of exchange between gold on the one
hand and commodities in general on the other, by which the same amount
of gold buys more commodities than before. When the general fall in
prices is admitted, the case of the bimetallists as to the appreciation
of gold is established once for all. Improvements in the production of
commodities may explain how it happens that they are more abundant, and
exchange on less favorable terms with gold, of which the quantity has
not been increased by new rich mines or great improvements in
production; but the fact of the depreciation of commodities, or of the
appreciation of gold, is not thereby explained away.
Nevertheless, the improvements in production do seem to me to have an
important bearing on the question in hand: a bearing not on the simple
fact of the appreciation of gold, but on the social consequences which
are said to flow from it, and therefore on the questions of policy which
are here under consideration. A moment's thought will show, for example,
that a general increase in the efficiency of labor affects very
materially the mode in which a fall in prices acts on the relations of
debtor and creditor. If A borrows from B a hundred dollars, repayable in
five years, and if at the end of the five years prices in general have
fallen to one-half of the previous rates, B, in paying back to A the one
hundred dollars, clearly returns twice as many commodities as he got.
But if, at the same time, the efficiency of labor has been doubled by
improvements in production, B can produce with the same labor twice as
many commodities as before; and he returns to A the product of the same
quantity of labor as he received. The classic economists and the
socialists (at least some schools of socialists) have maintained alike
that the ideally perfect standard of justice in the exchange of
commodities and services is equality of sacrifice or labor; that if
things so exchanged for each other that equal sacrifice got the same
reward, complete justice would be attained. Applying this test to the
relations of debtor and creditor in the case supposed, we find it not
one of hardship to the debtor, but apparently one of justice to both
parties. It is true the creditor gets more commodities than he gave; but
he gets the product of the same amount of labor as he devoted to the
commodities originally lent; and why should he not share with the rest
of the community the benefits of a general increase in the
productiveness of labor?
This line of reasoning will become simpler and more concrete if we
approach it from another point of view. Reference has already been made
to the most striking and important exception to the general tendency of
prices to fall, namely, that money wages and incomes in all civilized
countries have shown a tendency not to fall, but to rise. Whether the
incomes of the rich have increased faster than those of the poor, or
whether the movement has shown itself with rough uniformity for all
classes, is immaterial for the present discussion. The admitted fact of
a general upward movement alike among rich, middle class, and poor is
the significant thing. In other words, there has been an inverse
movement of money wages and of the prices of commodities, the one going
up while the other went down. Now, such an inverse movement is what must
take place in case of any real improvement in material welfare. The only
concrete way in which civilized people can become better off, is by
being able to buy more--by their money incomes going further in the
purchase of commodities. The improvement may take the form either of
higher money incomes, with stationary prices; or that of stationary
incomes, with lower prices; or the intermediate form which in fact seems
to have occurred, of money incomes rising somewhat and prices at the
same time falling somewhat. If we assume a monetary supply that is
limited, or does not increase as fast as improved means of production
cause the quantities of commodities to increase, one or the other of the
two forms last mentioned must be found.
In such a state of things there can hardly be said to be any real
hardship for the debtor. It is true that prices have fallen, and that
the money he repays the creditor will buy more goods than it did when
the loan was contracted; but his own money income has risen, or at least
has not fallen, and the repayment of the loan can cause him no special
hardship--none greater than he must have expected. The case clearly
differs fundamentally from that of a simple rise in the value of money,
or general fall in both prices and wages.... The fall in prices in the
United States since 1879, and that in European countries in the period
since 1873, are the result, on the whole and in the long run, of ... the
general improvements in production; they have not been accompanied by a
fall in money incomes, and they cannot be said to have caused an
increase in the burden of debtors.
The reasoning of the preceding paragraphs bears also on the second part
of the bimetallist indictment--that, namely, as to the depressing
effects of falling prices on industrial enterprise. Whether a simple
rise in the value of money, unaccompanied by any other circumstance,
would have the depressing effects which the bimetallists predict and the
classic economists deny, is a question radically different from that
which in fact presents itself. It may be that in this simple case the
bimetallists might prove to be, in some degree at least, in the right,
and that the classic reasoning, here as on many other subjects, while
sound in the long run, would need some qualifications and correction. In
the long run, no doubt, it is immaterial whether prices are high or low,
whether money returns fall or rise; and yet it might turn out that the
habitual association of gain or loss with "making money" would cause a
period of simple falling prices to be one of hesitating investment of
capital and unenterprising conduct of business. But what the world in
fact has seen has been the complex case of a fall in prices accompanied
by great improvements in production. The business man and capitalist has
had, to be sure, to deal with falling prices; but the same amount of
capital and labor has turned out more commodities than before; and his
total money returns, so far from declining, have generally increased.
The money incomes of the managers of industry have shown the same upward
movement as the money incomes of the other classes in society. So long
as this is the case, it is idle to talk of a depressing effect on
enterprise from the fall in prices, or of a strangling of the industrial
organism from insufficiency of the circulating medium. In fact, the
immediate cause of the fall in prices has been the pushing on the market
for sale of larger and larger quantities of commodities, produced with
profit at lower and lower cost: a state of things fortunate for the
community, and surely not depressing for the business man....
This effect on the entrepreneur of improvements and of falling prices
combined, doubtless accounts for the failure of the bimetallist
agitation to secure any appreciable hold in the business world. The
bimetallists, both in England and on the Continent, have labored
zealously to engage support among the business men, but never with a
degree of success at all proportionate to the energy displayed. The
simple reason is that the business world has not been in any state of
chronic depression. In the ups and downs of industrial activity there
have been periods which seemed to confirm the pessimistic accounts of
the bimetallist and of other persons malcontent with the present order
of things; but in due time the tide has always turned....
On the whole, then, the fall in prices, when considered in connection
with the other great changes which have accompanied it, does not afford
so much countenance to the bimetallist proposal as at first sight it
seems to. The rise in money incomes and the improvements in production
disprove any intolerable burden on debtors, and make it highly
improbable that the change has had any general depressing effect on
industry.
THE CASE OF THE FARMER
Nevertheless, there is something more to be said, in explanation and
justification of the discontent with falling prices, and of the silver
agitation which rests on that discontent. While the effects of the fall
in prices on debtors as a class and on producers as a whole have not
given real grounds for complaint, certain particular debtors and
producers have undoubtedly been injured. The case of these latter have
given plausibility to the general arguments of the bimetallists, and,
what is more important at the present juncture, has given strength to
the movement in the United States for more money and more silver.
The situation will be best understood if we contrast for a moment the
different modes in which the improvements in production have been
brought about in manufacturing industries on the one hand, in
agriculture on the other hand. In manufactures the improvements have
been better machinery, new processes, labor-saving inventions, the
conduct of business on a larger scale, and so the greater and more
effective division of labor. In agriculture the main cause of cheaper
production has been different: it has been the opening up of new lands
and new sources of supply. No doubt there are important exceptions to
these general statements. In agriculture there have been advances in the
arts--new plants, better fertilizers, improved implements, more
effective ways of cultivating the soil. In manufactures, on the other
hand, there have been important changes due to the discovery of new and
rich mines of materials, such as coal, iron, copper. But on the whole,
the difference holds good. In agriculture undoubtedly the opening of new
lands through the improvements in transportation has been the most
important single cause at work. The cheapening of agricultural products
has been due not so much to the more effective use of the soil already
under cultivation, as to the development of soil not formerly available
for the supply of the market.
The changes in production and prices have consequently affected the
producers in these two branches of production in very different ways. In
manufactures all alike have felt them, and have been able to accommodate
themselves to the effects. No doubt the shrewder producers adopt
improvements and new inventions first, and, so long as they keep in the
lead, have the advantage of their competitors. They gain by doing a
large business at lower prices, while for the time being their slower
competitors lose. But new processes and new inventions spread over the
whole field in no long time. The opening of a new source of supply, on
the other hand, cheapens production through a process which the holders
of the old source of supply cannot avail themselves of. If wheat is
raised in large quantities in Dakota, the price goes down as effectively
as if the wheat fields of England and New York had suddenly become more
fertile; but as those wheat fields produce no more than before, the
farmer or land owner on the old soil has nothing to offset the lower
price. This is the explanation of the agricultural distress of which so
much has been heard in Europe in recent years, and which has been the
main occasion of the revival of protectionist feeling in France,
Germany, and other countries of the Continent. The farmer on the old
lands does not find in improvements in production any compensation for
lower prices. If he owns the land, he must pocket the loss, and perhaps
in the end abandon his land and turn to something else; such has been a
common case in New England. If he is a tenant on the land, he will
probably, after a period of struggle and hardship, get lower rents,
leaving the landlord as the permanent sufferer; such has been the
outcome in old England. If he was in debt before the change took place,
he will find his debts growing more burdensome as his money income goes
down; such has been the result with many a Western farmer.
It is in causes of this sort that we find the explanation, in part at
least, of the restlessness among the Western farmers of which the silver
agitation is one sign. The fall in the prices of wheat, corn, and other
staples has been due to enormously increased production in regions which
were formerly out of reach of the market: in India, Australia, Russia,
as well as in California, Dakota, Washington, Oregon, and the Far West
generally....
It is probable that some of the complaints in regard to the burden of
debt on the farmers are simply a legacy from the old days of inflated
paper money. Not a few of the debts of the present [1891] go back to the
years before 1870, when we had prices high in terms of over-issued paper
money. These debts have been renewed and continued, in whole or in
part; and the fall in prices has made them heavier and heavier to bear.
The evil here again is real, and a remedy is now hard to find. The only
conclusion which can be laid down with perfect conviction is that we
should make sure of preventing the recurrence of a new era of excessive
paper money.
... Another important circumstance is the general transition in
agricultural methods inevitable in those western states which have been
settled for a generation or more. When new land is first taken into
cultivation the most effective use of it is found in the continuous
production of some staple crop like wheat and corn, which can be grown,
so long as the cream of the soil is not exhausted, year after year with
large returns. After a while, however, the land begins to show signs of
exhaustion. The staple crops do not yield as largely as before, and less
crude methods of using the soil must be resorted to. Manures have to be
applied, and the rotation and selection of crops practised. Meat and
dairy products, vegetables, fruits, and the miscellaneous agricultural
articles, must take their place in rural economy. This change has been
carried through very largely in states like New York, Pennsylvania, and
Ohio. In the heart of the Mississippi Valley it is now under way; but
the transition is trying, and to some of the farmers it is impossible. A
good share of the American agricultural population has been so steadily
bred to the easy and careless use of virgin soil that it cannot
accommodate itself to more intensive methods. It is constantly moving
westward; settling for a generation in one spot, and then, as the land
shows signs of exhaustion, moving farther west. The more intelligent and
versatile stay behind, adapt themselves to new conditions, and in time
prosper under them. The least active also stay behind, and flounder
hopelessly in the old ways. But a large number are always moving west.
In every state between the Alleghanies and the Missouri river there are
large tracts formerly cultivated by native settlers, who have sold their
lands, as they showed signs of giving out, to German or Swedish
immigrants. These latter have not infrequently paid good prices for the
lands: but they have been bred to intensive farming, to careful and
varied use of the soil, and they have prospered where their native
predecessors have been unwilling or unable to adapt themselves to the
new conditions. The period of transition is a hard one for all of the
native farmers, whether they stay behind or move on, and the lesson of
using the soil with more skill and care is learned only under the
pressure of necessity. In such periods all sorts of remedies for hard
times make their appearance and have their run.
THE REPEAL OF THE SHERMAN SILVER PURCHASE ACT AND THE FINANCIAL AND
ECONOMIC CONSEQUENCES OF SILVER LEGISLATION
[29]For fourteen years, 1878-1892, only an insignificant amount of gold
was paid out of the Treasury in the redemption of legal-tender notes;
the total amount of gold in the Treasury increased almost steadily and
continuously from $140,000,000 on January 1, 1879, to $300,000,000 in
1891. In 1890 the new issue of Treasury notes, together with a change in
commercial conditions, placed heavy burdens upon the reserve, the rapid
diminution of which is shown in the following figures:
_Date_ _Net gold reserve_
June 30, 1890 $190,232,405
June 30, 1891 117,667,723
June 30, 1892 114,342,367
June 30, 1893 95,485,413
June 30, 1894 64,873,025
The reasons for the fall in the gold reserve are too various and
complicated to be treated here: the failure of the great English
banking-house of Baring Brothers in 1890 brought about a considerable
withdrawal of English capital invested in the United States; and an
unhealthy and inflated industrial development in this country was
stimulated by the new tariff. To outward appearances the country was
very prosperous; expenditures were large, imports increased, and a
failure of the crops in Europe in 1891 enlarged our grain exports. For a
brief season only, were the natural effects of the Sherman law delayed:
Europe soon recovered, American exports fell, and in the six months
ending June 30, 1893, the balance of trade against the United States
was $68,800,000. The tariff of 1890 was followed by diminished customs
receipts. The revenue from customs was as follows:
1890 $229,668,000
1891 219,522,000
1892 177,452,000
1893 203,355,000
1894 131,818,000
... Fortunately the internal revenue receipts maintained their customary
level with something to spare; but increased appropriations, due largely
to the passage of a dependent pension bill in 1890, cut deep into the
funds of the Treasury. In 1890 the surplus was $105,344,000; in 1891,
$37,239,000; in 1892, $9,914,000; in 1893, $2,341,000; but in 1894
appeared a deficit amounting to $69,803,000. The Treasury had been
weakened by the reluctance of Secretary Windom to deposit government
funds in national bank depositories, and by his preference to rely
entirely upon the purchase of bonds for getting money back into
circulation. In the earlier years of Harrison's administration, bonds
were purchased freely--too generously in view of the impending strain
upon the resources of the Treasury.
Another element of concern was due to the change in the kind of money
received by the Government in the payment of revenue. Before the passage
of the Sherman Act nine-tenths or more of the customs receipts at the
New York custom-house were paid in gold and gold certificates; in the
summer of 1891 the proportion of gold and gold certificates fell as low
as 12 per cent., and in September, 1892, to less than 4 per cent. The
use of United States notes and Treasury notes of 1890 correspondingly
increased....
The reason for this substitution of notes for gold was partly due to a
reversal in Treasury practice. For many years it had been the custom of
the Sub-Treasury in New York to settle its clearing-house balances
almost exclusively in gold or gold certificates. For example, in the
fiscal year 1889-1890 the Sub-Treasury paid gold balances to the banks
of nearly $230,000,000, and in the next year $212,000,000. The banks
were thus daily supplied with gold which they in turn could furnish to
their customers either for customs purposes or export deliveries. In
August, 1890, the Treasury began the policy of using ... the new
Treasury notes in the settlement of New York balances, and in the year
ending June, 1891, Secretary Foster, apparently convinced of the need of
a larger gold reserve to support the credit of the Treasury notes,
increased the use of the older United States notes and held on to the
gold reserve. The unexpected result was that the banks, deprived of
their usual supply of gold for trade purposes, sought for it at the
Treasury by the presentation of government notes....
In March, 1893, Cleveland for a second time entered upon the presidency.
He demanded as the first condition of relief the suspension of silver
purchases. The silver advocates, however, were still powerful in both
parties, and President Cleveland was at a disadvantage in not having the
undivided support of his own party. Even the position of Secretary
Carlisle was ... doubted: it was publicly declared that he stood ready,
if expediency demanded it, to redeem the Treasury notes of 1890 in
silver instead of gold, and, while standing upon the letter of the law
which demanded their redemption in _coin_, practically to cut asunder
the parity of gold and silver which had thus far been maintained.
Although the President attempted by a specific declaration to make clear
the harmonious purpose of the administration that redemption would
continue in gold, public apprehension would not be allayed. Whatever
might be the wishes of the administration, it was feared that it would
not have power to carry them out; particularly when it was announced in
April, 1893, that the gold reserve had been drawn down to $96,000,000 by
redeeming the Treasury notes of 1890.
At this juncture of financial and commercial difficulties, in June,
1893, the British Government closed the mints in India to the free
coinage of silver. The price of silver bullion fell promptly and
rapidly, and, while such a decline might on another occasion have
produced no immediately serious consequences to the Treasury, it came at
a moment when public opinion, at least in the Eastern States, was
aroused to a belief that the entire financial problem was associated
with the coinage of silver; and it thus furnished one of the
contributory forces which drove the commercial community into a state
of panic.
It was not until June 30, 1893, when the panic was well under way, that
a special session of Congress was called for August 7; only by the most
strenuous efforts could an adequate support, composed of elements in
both political parties, be rallied to uphold the President's insistence
that purchases of silver by the Government should cease. The House
quickly acquiesced, and on August 21, by a vote of 239 to 108, passed a
bill for the repeal of the purchasing clause; but the Senate was
stubborn, and not until October 30 could a favorable vote, 43 to 32, be
secured. So far as the Treasury was concerned, the mischief had been
done; although the Government was relieved from further purchase of
silver which increased the volume of the obligations to be supported by
gold, the old burdens still were sufficiently heavy, in connection with
the low state of commerce and industry, to exhaust its immediate
revenues. Thus on December 1, 1893, the actual net balance in the
Treasury above the gold reserve, pledged funds, and agency accounts was
only $11,038,448. Trade and industry had been disorganized; the panic of
1893 extended into every department of industrial life. In December,
1893, the Comptroller of the Currency announced the failure during the
year of 158 national banks, 172 state banks, 177 private banks, 47
savings banks, 13 loan and trust companies, and 6 mortgage companies.
Some of these institutions afterwards resumed business, but the
permanent damage was great. The fright of depositors was general and the
shrinkage in deposits enormous; bank clearings were the lowest since
1885; clearing-house loan certificates were once more resorted to, this
time on a much larger scale than ever before, and extended to cities
throughout the country.
The production of coal, both anthracite and bituminous, fell off; the
output of pig-iron, which had been about 9,157,000 tons in 1892, fell to
6,657,000 tons in 1894; new railway construction almost ceased; in 1894
there were 156 railways, operating a mileage of nearly 39,000 miles, in
the hands of receivers; among these were three great railway
systems,--the Erie, Northern Pacific, and Union Pacific. The total
capitalization in the hands of receivers was about $2,500,000,000, or
one-fourth of the railway capital of the country. The earnings of
railroads and the dividends paid to stockholders were seriously
affected; securities fell to one-half and even one-quarter their former
value; commercial failures increased from 10,344 in 1892, with
liabilities of $114,000,000, to 15,242 in 1893, with liabilities of
$346,000,000. The problem of the unemployed became general; special
committees were organized in nearly all of the large cities to provide
food, and in many places relief work by public bodies was instituted. In
the spring of 1894 general want and distress led to labor strikes and
riots, as in Chicago, and even to more abnormal outbreaks, as seen by
the march of Coxey's army of unemployed from Ohio to Washington. The
distress was increased by the failure of the corn crop in 1894; the
demand for wheat in Europe fell off and wheat was sold on the Western
farm for less than fifty cents a bushel.
SALE OF BONDS FOR GOLD
Under these adverse conditions it was inevitable that the revenues of
the Government should continue to decline. In the six months, January to
June, 1893, the excess of expenditures over receipts was $4,198,000, and
during the fiscal year ending June 30, 1894, this excess increased to
$69,803,000. It was even necessary to encroach upon the gold reserve for
current expenses, and for months this fund was far less than caution and
prudence demanded. When the integrity of the gold reserve was first
assailed, both Secretary Foster, in the closing months of Harrison's
administration, and Secretary Carlisle, at the beginning of Cleveland's
term, endeavored, with some success, to tide over emergencies by
appealing to the banks to exchange gold for legal tenders. The banks
recognized that the instability of Government credit seriously affected
the value of all securities in which they were interested; and in
February, 1893, they handed over to the Treasury about $6,000,000 in
gold, and in March and April about $25,000,000 more. The expedient was
not enough to stop the continued drain upon the Treasury. At the very
moment that the Government was relieved of notes through the exchange
of gold by the banks, other notes were presented to the Treasury for
redemption, largely to draw gold for exportation in the settlement of
trade balances....
The only way to protect the fund of gold reserve under the circumstances
was borrowing--that is, the sale of bonds for gold--yet some people who
were opposed to the overthrow of the gold standard consistently urged
that borrowing be postponed until the last moment, so as to add as
little as possible to the resources available for purchases of silver.
Some of the gold party would even have permitted the drain to go on to
the end, notwithstanding the inevitable evils, in the belief that the
country could be convinced of its errors in no other way.
Eventually, to prevent a suspension of specie payments in gold, the
Treasury Department made successive issues of bonds for the purchase of
gold. These issues are very interesting to the student of finance. No
administration wishes to add to public indebtedness in times of peace;
and Secretary Carlisle had scruples against selling bonds, except with
the authority of the Congress then sitting; hence the issue of bonds was
put off to the last possible moment. The only existing authority for
selling bonds was the resumption act of 1875; this provided only for
ten-year 5 per cent., fifteen-year 4-1/2, and thirty-year 4 per cent.
bonds, all of which would command a premium so high as to diminish their
attractiveness as an investment, and, taken in connection with the
length of time which they ran, to hamper the Treasury in purchasing or
refunding the debt when the crisis was over. The administration asked
for the issue of low-rate bonds, but Congress, inspired in part by free
silver arguments, and in part by political intrigues to discredit the
administration, paid no attention to the recommendation of the
Secretary. Finally, in January, 1894, without special legislation, but
under the ancient authority of the resumption act, $50,000,000 of 5 per
cent. ten-year bonds were sold, yielding $58,660,917; and again in
November an equal amount of bonds with like conditions were marketed,
yielding $58,538,500. The sale of the first issue was on the whole
creditable, considering that at about the same time the President was
obliged to veto a bill providing for coining the silver seigniorage,
and that an effort had been made in the courts to enjoin the Secretary
of the Treasury from selling bonds under the law of 1875.
In each case the sale of bonds called for subscriptions in gold, but the
new supplies were quickly exhausted by fresh redemption of notes. The
fluctuations in the volume of gold in the Treasury as a consequence of
the bond sales is seen in the following figures:
_Date_ _Gold in Treasury_
January 31, 1894 $65,650,000
February 10, " 104,119,000 _Bond issue._
November 20, " 59,054,000
November 30, " 105,424,000 _Bond issue._
February 9, 1895 41,393,000
The endless chain appeared to be in full and unceasing operation; not
only was gold being withdrawn for export but also for individual
hoarding, in fear of an impending suspension of gold payments. The
Treasury finally recognized the futility of selling bonds for gold, most
of which was drawn out of the Treasury itself, by the presentation of
legal-tender notes for redemption. A new device was tried: in February,
1895, the Secretary of the Treasury entered into a contract with certain
bankers for the purchase of 3,500,000 ounces of standard gold at the
price of $17.80441 per ounce, to be paid for by the delivery of United
States bonds having thirty years to run and bearing 4 per cent.
interest; not less than one-half of this gold was to be procured abroad,
and the parties with whom the contract was made stipulated that they
would "as far as lies in their power exert all financial influence and
make all legitimate efforts to protect the Treasury of the United States
against the withdrawals of gold, pending the complete performance of
this contract." An ounce of standard gold was worth $18.60465, and the
difference between that sum and the contract price represented the
premium received by the Government on the bonds, making the price at
which the bonds were accepted $104.4946. A condition was affixed to the
contract, by which, in case Congressional authority could be secured, a
3 per cent. _gold_ bond might be substituted, and for this the syndicate
agreed to pay a higher price.
In view of the unfavorable terms of the bargain imposed by this
contract, the administration hoped that Congress would promptly act and
authorize the issue of the lower and more remunerative bond. Faithful in
its adherence to silver, Congress could not be swerved; it defeated the
bill authorizing the sale of a low-rate gold bond, and then engaged in
an angry debate denouncing the Executive for his subserviency to the
gold standard banking interests in entering into a contract not only
disgraceful but illegal. In reply it could be shown that the New York
Sub-Treasury was within forty-eight hours of gold exhaustion....
At first the syndicate was successful, because of some slight
improvement in trade, but later it practically failed to control the
price of exchange. It once more became cheaper for merchants to ship
gold than to purchase bills, and gold continued to be withdrawn from the
Treasury. On December 3, 1895, the gold reserve stood at $79,333,000,
and after the commercial apprehension caused by President Cleveland's
Venezuelan message a fortnight later, the reserve was still further
reduced. Once more the administration resorted to a bond sale, and again
the action was preceded by a special message from the President to
Congress asking for a grant of authority to issue gold bonds instead of
coin bonds, and also for the retirement of the legal-tender notes which
continued in an endless chain their journey to the Treasury, and drove
off gold to the commercial market. As Congress still refused to act, the
Treasury resorted to a fourth issue of $100,000,000 4 per cent. bonds.
The Treasury now carefully avoided any appearance of dealing through a
syndicate and publicly advertised for offers, with the encouraging
result of 4,640 bids, amounting to $684,262,850. Seven hundred and
eighty-one bids were accepted and the premium yielded about $11,000,000.
The relief obtained by the Treasury, however, was meagre, for it is
estimated that $40,000,000 of the bonds were purchased with gold
withdrawn from the Treasury by the redemption of notes. This was the
Government's penalty for its endeavor to separate itself from all
dealings with a banking syndicate.
In spite of this sale of bonds the reserve remained near the traditional
danger line. In July, 1896, it fell to $90,000,000 because of hoarding
due to popular apprehension as to the success of the silver movement in
the November presidential election. Fearful that a new bond issue might
strengthen the claims of the silver advocates, bankers and dealers in
foreign exchange voluntarily combined to support the Treasury by
exchanging gold for notes. The effort succeeded, and the reserve was
placed in safety. After the elections in November gold came out from its
hiding-places, and was turned into the Treasury in large amounts.
Business and revenue improved and the difficulties of the Treasury
Department were tided over.
Many Republicans held the earnest conviction that the issue of bonds
would not have been necessary if the revenue had been sufficient. Not
only had industry and commerce been unsettled by the tariff act of 1894,
but the operations of the endless chain must certainly continue, it was
held, until there was a generous income in excess of expenditures,
whereby a considerable part of the credit currency might be covered into
the Treasury and thus lessen the possible claims for redemption. The
administration emphatically replied that at no time when bonds were
issued was there intention of paying the expenses of the Government with
their proceeds, and that the Treasury Department had no authority
whatever to issue bonds for such purposes. President Cleveland was
insistent that on each occasion of a bond issue there were sufficient
funds in the Treasury to meet the ordinary expenditures of the
Government. The proceeds of the bonds sold for the maintenance of the
national credit were, however, turned into the general fund of the
Treasury, and consequently, though not originally designed for that
purpose, employed to meet indiscriminately all demands made upon the
Government, whether for redemption of notes or the payment of debts....
There was a series of deficits beginning with 1894, but the deficit by
no means equalled the amounts of bonds sold.
FOOTNOTES:
[16] Adapted from A. D. Noyes, _Forty Years of American Finance_, pp.
2-6 G. P. Putnam's Sons, New York and London. 1909.
[17] _Ibid._, pp. 35-44.
[18] F. W. Taussig, _The Silver Situation in the United States_, pp. 8,
9. G. P. Putnam's Sons. New York. 1893.
[19] I have stated the price here, for simplicity, in terms of so much
per ounce of standard silver, _i. e._, silver containing 10 per cent. of
alloy. The usual quotation in the United States is per ounce of fine
silver. [Thus, the New York price, March 10, 1916, was 56-3/4 cents per
ounce of fine silver.]
[20] _Ibid._, pp. 9, 10.
[21] _Ibid._, pp. 10, 11.
[22] _Ibid._, pp. 11-13.
[23] _Ibid._, pp. 19, 20.
[24] _Ibid._, pp. 50, 51.
[25] [Present tense because written while the act was still in force.]
[26] _Ibid._, pp. 51, 52.
[27] _Ibid._, pp. 52, 59.
[28] _Ibid._, pp. 84-106.
[29] Davis R. Dewey, _Financial History of the United States_, pp.
442-455. Longmans, Green and Company, New York, 1915.