The proposition of the Committee is further embarrassed by the provision for the cancellation each month of the three per cent. certificates to an amount equal to the aggregate of new notes issued during the previous month. In order to judge the expediency of this measure we must understand the origin and character of these certificates.
The Secretary of the Treasury, desiring to avoid the further issue of greenbacks, conceived the idea of a note which could be used in the payment of Government obligations, but in such form as not to enter into and inflate the currency. This resulted in an interest-bearing note payable three years after date, with six per cent. interest compounded every six months and payable at the maturity of the note in its redemption. This anomalous note was made legal-tender for its face value only.[214] It was not doubted that such notes, on the accumulation of interest, would be withdrawn as an investment. Being legal-tender, if they were allowed to be used by the banks as part of their reserves, they would become, contrary to the original purpose, part of the national circulation, while the Government would be paying interest on bank reserves, which no bank could demand. But the ipse dixit of the Secretary could not prevent their use by the banks as part of the reserves. The intervention of Congress was required, which, by the second section of the Loan Act of June 30, 1864, provided as follows:—
“Nor shall any Treasury note bearing interest, issued under this Act, be a legal tender in payment or redemption of any notes issued by any bank, banking association, or banker, calculated or intended to circulate as money.”[215]
From this statement it seems clear that neither the Secretary originating these compound-interest legal-tender notes, nor the Act of Congress authorizing them, nor the banks receiving them, contemplated their employment as part of the bank reserves. How they reached this condition remains to be told.
The whole issue of the compound-interest legal-tender notes amounted to upward of two hundred and seventeen millions.[216] These were funded at or before maturity, except some fifty millions, which as they matured were exchanged for certificates to that amount bearing three per cent. interest, and constituted part of the bank reserves.[217] Here was an innovation as improvident as new, being nothing less than bank reserves on interest. This improvidence was increased by the manner of distribution, which, instead of being ratable, seems to have been according to the rule of “Who speaks first?” Of course the banks within easy access of Washington had peculiar opportunities, by which they were enabled to secure these notes, and thus obtain interest on part of their reserves, while banks at a distance, and especially in the country, were not equal in opportunity. Besides its partiality, this provision operates like a gratuity to the banks having these notes.
Obviously these three per cent. certificates ought to be withdrawn; but I do not like to see their withdrawal conditioned on the extension of banking facilities. Their case is peculiar, and they should be treated accordingly. Nor should their accidental amount be made the measure of banking facilities. They constitute a part of the national debt, and should be considered in the refunding and consolidation of this debt, and not on a bill to provide banking facilities.
I think I do not err, if I conclude that the first part of the pending measure is inadequate, while the cancellation of the three per cent. certificates in the manner proposed is inexpedient. All this is more observable when it is considered that there is another way, ample and natural.
From the first part of the pending measure I pass to the second part, being sections three, four, and five, which, if I am not mistaken, authorize free banking, with coin notes as a declared basis of coin. This is plausible, but to my mind illusory and impracticable. The machine will not work; but if it does work, its first and most obvious operation will be to create a new currency, adding a third to the greenbacks and bank-notes already existing, besides creating a new class of banks. Here I put the practical question, Can any national bank issue and maintain a circulation of coin notes with a reserve of only twenty-five per cent., so long as gold commands a premium? How long would the reserve last? It is easy to see that until specie payments this idea is impracticable. It will not work. In proportion to the premium on gold would be the run on the banks, until their outstanding notes were redeemed or their vaults emptied.
But the measure is not only impracticable,—it is inexpedient, as multiplying, instead of simplifying, the forms of currency. We have now two paper currencies, distinct in form and with different attributes. Everybody feels that this is unfortunate; and yet it is now proposed to add another. Surely it is the dictate of wisdom, instead of creating a third paper currency, to disembarrass the country of one of those now existing and make the other convertible into coin, so that we may hereafter enjoy one uniform currency. I confess my constant desire for measures to withdraw our greenbacks and to make our present bank-notes coin notes. Coin notes should be universal. Under any circumstances the conclusion is irresistible, that the proposed plan, if not utterly impracticable, is a too partial and timid experiment, calculated to exercise very little influence over the great question of specie payments.