Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

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.