Principles of Political Economy

by Arthur Latham Perry

The United States also sold its bonds at 3% for a small premium in 1882. It had borrowed of its own citizens in 1862-65, both inclusive, about $2,500,000,000 on its bonds at different rates of interest and at different times of repayment: some of these bore gold interest at 6% annually, Government reserving the right to pay the principal in five years and pledging itself to pay it twenty years from date, and so these bonds were called "Five-twenties"; others bore gold interest at 5%, becoming payable at ten and demandable at forty years, and so were called "Ten-forties"; and still others bore greenback interest at 7 ³⁰⁄₁₀₀%, the principal payable in greenbacks at three years, or fundable in gold sixes, at the option of the holders, and these were named "Seven-thirties." Over $90,000,000 of this last kind of bonds were subscribed for by the American people in the course of a single week in the spring of 1865. The whole of our national debt issued prior to 1865 was made payable on a day certain; the so-called "consols" of 1865 and 1867 and 1868 were payable not more than forty years from date; while all the bonds authorized from 1870 to 1882 were Consols proper, whose peculiarity is, that they never fall due so as to become a claim for the principal against the Government, but after a day fixed or on a condition fixed are payable "at the pleasure of the United States."[7]

The separate States of our Union, as sovereign in their own sphere quite as much as the national Government is sovereign in its sphere, have unlimited power to contract debts for State purposes through their regularly constituted authorities; and consequently to issue promissory notes or bonds to liquidate such debts. New York commenced in this way in 1817 the magnificent enterprise of the Erie Canal, to connect the great Lakes with the city of New York by an inland water-way for commerce, and the completion of this in 1825 made the State the "Empire State," and the city the undisputed commercial metropolis of the Union. In a similar way Massachusetts undertook in 1862 the completion of the Hoosac Tunnel for a railway lengthwise of the State; and although the process became unduly expensive, and great abuses sprang up in connection with it, no one now questions that the pecuniary and moral resources of the State have been augmented, on the whole, by contracting the debt and providing by taxation for the liquidation of both interest and principal. The credit of Massachusetts, that is, the ability to borrow money at low rates of interest, has been at times greater than that of the United States; mainly because the State in 1862 and onwards refused to avail itself of a depreciated national paper-money (greenbacks) made legal tender for all debts, with which to pay the interest on its then existing State debt, but persisted throughout (alone of the States) to pay that interest so soon as due in gold coin. On the other hand, several of the States of the Union at different times, and under more or less of provocation and justification, have made a partial or entire repudiation of certain portions of their public debts, justly damaging to their individual credit, and even to the good name abroad of the whole people of the United States.

Counties and cities and towns may also issue interest-bearing bonds for public improvements, which have a quasi governmental character, but only under conditions and to a maximum amount prescribed by a law of the State.

c. Bank Bills. These are a form of promissory notes not on interest, and thus differ from the notes of ordinary corporations, and from the bonds of nations and states and municipalities; but the issuing Bank offers, as a sort of compensation for the privilege of circulating notes not on interest, to convert them into coin, that is, to pay them instantly on the demand of any holder. It is this proffered and immediate convertibility into coin that enables the promissory notes of a bank to circulate as money, while the notes of other corporations and individuals equally solid and solvent do not circulate as money. It must be borne in mind, however, that this offer to convert them into the legal and ultimate coin-money does not essentially alter the nature of Bank Bills; they are a form of commercial credit; and although they are commonly issued against another form of such credit, namely, against the interest-bearing promissory notes of individuals and corporations who resort to the bank for discount, this only complicates the exchange without changing its nature. It is a common instance of exchanging one form of credit for another form which happens to have a greater currency or validity than the first, and for this superiority of the bank credit the individual credit pays an interest, in other words, is discounted; and such exchanges of one form of paper credit for another, with or without a premium, may go on indefinitely; especially as credit-money in the form of bank bills, such paper may serve as a medium in many exchanges; but ultimately, and before the entire series of transactions is closed, such bank bills are to be redeemed in coin, or taken in by the banker in payment of some debt due to him, in both which cases they are extinguished as an instrument of Credit.

The Bank of England keeps out in circulation on the average £25,000,000 in bank bills. It has been computed, that the average length of life of a Bank of England bill between its issue and redemption is about three days; and no bill once redeemed or received back over the counters of the Bank is ever issued again. It is then placed on file for record only. The joint-stock and private banks of England and Wales circulate on the average rather more than £4,000,000 of bank bills of their own; and no bank bill of any kind is legal in England and Wales of a less denomination than £5. The ten Scotch banks and their branches keep out in bills about £5,000,000; six out of the nine Irish banks and their branches issue on the average not far from £10,000,000; but both the Scotch and Irish banks are allowed to put out £1 bills.

Bank bills, as a form of paper credit not on interest, but ostensibly redeemable in coin on demand of the holder, have been issued in the United States by more parties and to a larger extent and with more recklessness as to redemption than in any other country. Omitting all reference to Colonial issues, and confining the outlook to the first century under the Constitution, let us note, that when the present national government went into operation in 1789, the "Bank of North America" in Philadelphia and the "Bank of New York" in New York and the "Bank of Massachusetts" in Boston had been opened for business, and all three were State banks issuing bills convertible into coin, though each confined its business mostly to the city in which it was located. Two years later under the auspices of Alexander Hamilton, then Secretary of the Treasury, the first "United States Bank" went into operation at Philadelphia under a charter from Congress that was to run twenty years with a capital stock of $10,000,000. At first no bills were issued by this bank of a less denomination than $10; the money was popular and was converted on demand; the Bank was prosperous, and paid dividends to stockholders never falling below 8% and frequently rising to 10% annually; as the time approached for the charter to expire, the stockholders were anxious for a renewal of their privileges; but the opposition to them in Congress was now strong, owing mainly to the increase in the number of State banks from 3 to 88; and accordingly the recharter was defeated in the House by one vote, and in the Senate also, by the casting vote of the Vice-President, and the Bank was obliged to wind up its affairs in 1811.

Then came in a sort of mania for the creation of new State banks, under the hope that these, now there was no National Bank, might obtain the Custody and temporary use of the national funds, and especially might furnish the country with paper money in the shape of State bank bills. The number of banks went up to 246 in 1816. So many bank bills were put out, and became so much distrusted, and so many were presented for redemption, that the banks could not respond in coin, and in the fall of 1814, there was a general stoppage of specie payment in all the banks of the Country excepting those in New England. General resumption of specie payment by the banks did not take place till 1819. New York bank bills went down to 90%, those of Philadelphia to 82%, those of Baltimore to 80%, and those of Pittsburg to 75%.

Under these circumstances the Second Bank of the United States went into operation in January, 1817, also with a charter to run twenty years, with a capital stock of $35,000,000, of which the national Government subscribed one-fifth. The new Bank helped indeed the State banks to resume specie payments, as was a part of the purpose, but it pushed its own bills into circulation with such eagerness, that it is thought $100,000,000 of them were in the hands of the people, before the first year was out. In this way the Bank fell into difficulties. Its bills were distrusted. Coin came to bear a premium over them of 10%. President Jackson began his famous contest with the Bank seven years before its charter was to expire, and took care that it went out of being the same year that he went out of office, in 1837, namely.

The next year the State banks increased in number to 675, and continued to increase till 1862, when there were over 1500 of them, and when the issue of the "Greenbacks" by the national Government interfered with what had been their exclusive issuing of the paper money after 1837. In 1857, before the commercial panic of that year, the aggregate of their bills stood at $214,000,000, the largest it ever reached. These bills were nominally convertible into coin at the will of the holders, but they were never actually so convertible for any great length of time. The ratio of their volume to the specie reserved to redeem it was always a very high ratio. For instance, the average for the whole country in January, 1863, was 4:1; in Rhode Island 12:1; and in Vermont 28:1. Such a paper money can be called convertible only by a stretch of courtesy.

It was wisely determined by the People to abandon this loose form of paper money, and in 1863 went into operation the present national banking system, under which originally $300,000,000 of bank bills were authorized to be issued in the aggregate, but this limit was extended in 1870 to $354,000,000, and the Act of 1875 removed all restrictions on the total amount, while there have always been restrictions on the amount that can be issued by any one bank in the system. By the law of 1882, national banks may withdraw their bills by depositing lawful money in the Treasury to take them up, and then take back the proportionate amount of the bonds held for the security of the bills. There were outstanding Dec. 26, 1883, $341,320,256 of these national bank bills, but their volume declined under the law of 1882 to $151,702,809 on Oct. 4, 1888. These bills were from the first redeemable in greenbacks, which were themselves, however, irredeemable in gold and silver till New Year's, 1879, since which time till the present all the paper money of the United States of both kinds has been convertible into coin at the will of the holder.