On the 14th of July, Secretary Chase called the attention of Congress to the great evils arising from the issue by non specie-paying banks and unauthorized persons of depreciated currency, and the consequent disappearance of small coin. As a remedy an Act was passed, and approved July 17, for the use of postage and other stamps in payment of fractional parts of a dollar. These stamps were made exchangeable by assistant treasurers for United-States notes in sums not less than five dollars. Banks and persons were forbidden, from the first day of the ensuing August, to make or issue any note or token for a less sum than one dollar, intended to be used as money, under the penalty of a fine not exceeding $500, or imprisonment not exceeding six months, or both. "Shinplasters" had become almost like the frogs of Egypt for multitude. They were in every man's hand and were of all degrees of value. They were sometimes issued for purposes of fraud. Silver had become lost to view, and business houses resorted to the use of their own notes as a convenience. The government stamps were not well adapted to circulate as currency, and they soon gave way to notes of handsome design which came into universal use as the "small change" of the country.
The proper order of the leading measures of finance has always been a subject of contention. Grave differences of opinion exist, even to this day, concerning the necessity and expediency of the legal- tender provision. The judgment of many whose financial sagacity is entitled to respect is, that if the internal tax had been first levied, and the policy adopted of drawing directly upon the banks from the Treasury for the amounts of any loans in their hands, the resort by the government to irredeemable paper might at least have been postponed and possibly prevented. The premium on gold became the measure of the depreciation of the government credit, and practically such premiums were the charge made for every loan negotiated. In his report of December, 1862, Secretary Chase justified the legal-tender policy. He explained that by the suspension of specie payments the banks had rendered their currency undesirable for government operations, and consequently no course other than that adopted was open. Mr. Chase declared that the measures of general legislation had worked well. "For the fiscal year ending with June," he said, "every audited and settled claim on the government and every quartermaster's check for supplies furnished, which had reached the Treasury, had been met." For the subsequent months, the secretary "was enabled to provide, if not fully, yet almost fully, for the constantly increasing disbursements."
The political effects of the legal-tender bill were of large consequence to the Administration and to the successful conduct of the war. If it had been practicable to adhere rigidly to the specie standard, the national expenditure might have been materially reduced; but the exactions of the war would have been all the time grating on the nerves of the people and oppressing them with remorseless taxation. Added to the discouragement caused by our military reverses, a heavy financial burden might have proved disastrous. The Administration narrowly escaped a damaging defeat in 1862, and but for the relief to business which came from the circulation of legal-tender notes, the political struggle might have been hopeless. But as trade revived under the stimulus of an expanding circulation, as the market for every species of product was constantly enlarging and prices were steadily rising, the support of the war policy became a far more cheerful duty to the mass of our people.
This condition of affairs doubtless carried with it many elements of demoralization, but the engagement of the people in schemes of money-making proved a great support to the war policy of the government. We saw the reproduction among us of the same causes and the same effects which prevailed in England during her prolonged contest with Napoleon. Money was superabundant, speculation was rife, the government was a lavish buyer, a prodigal consumer. Every man who could work was employed at high wages; every man who had commodities to sell was sure of high prices. The whole community came to regard the prevalent prosperity as the outgrowth of the war. The ranks of the army could be filled by paying extravagant bounty after the ardor of volunteering was past, and the hardship of the struggle was thus in large measure concealed if not abated. Considerate men knew that a day of reckoning would come, but they believed it would be postponed until after the war was ended and the Union victorious.
The policy of the legal-tender measure cannot therefore be properly determined if we exclude from view that which may well be termed its political and moral influence upon the mass of our people. It was this which subsequently gave to that form of currency a strong hold upon the minds of many who fancied that its stimulating effect upon business and trade could be reproduced under utterly different circumstances. Argument and experience have demonstrated the fallacy of this conception, and averted the evils which might have flowed from it. But in the judgment of a large and intelligent majority of those who were contemporary with the war and gave careful study to its progress, the legal-tender bill was a most effective and powerful auxiliary in its successful prosecution.
THE INTERNAL-REVENUE SYSTEM.
Grateful as was the relief to the people from legal-tender notes, it was apparent to Congress that a government cannot, any more than an individual, maintain a state of solvency by the continuous issuing of irredeemable paper. Money must not merely be promised, it must be paid. The Government therefore required a strong, efficient system of taxation—one that would promptly return large sums to the Treasury. From customs, an increasing revenue was already enriching the Government vaults, but the amount derivable from that source was limited by the ability of the people to consume foreign goods, and wise economists did not desire an enlarged revenue the collection of which was at war with so many domestic interests. The country therefore turned by common instinct to a system of internal duties,—to incomes, to excise, to stamps. In the extra session of the preceding year, Congress had, by the Act of August 5, 1861, laid the foundation for a system of internal revenue by providing for a direct tax of twenty millions of dollars on the real estate of the country, and for an income tax of three per cent. on all incomes in excess of eight hundred dollars per annum. But the appointment of assessors and collectors under the bill had been postponed "until after the second Tuesday of February, 1862," which was practically remanding the whole subject to the further consideration of Congress before any man should be asked to pay a dollar of tax under the law. The intervening months had not decreased but had on the contrary largely developed the necessities of the National Treasury, and enhanced the necessity of a stable revenue system. The exigency had become so great that Congress was compelled for the first time in our history, to resort to the issue of government notes as a legal-tender currency. Promptness and decision were essential to the preservation of the National credit. The sources, the extent, the limitations of the taxing power were closely examined by Secretary Chase in his report and the subject was remanded to Congress for determination.
The Constitution gives to Congress to power to levy imposts, and prohibits it to the States. It gives also to Congress the power to levy internal taxes and excises, leaving to the States the right to do the same. It is one of the traditions of the Convention which met in Philadelphia in 1787 to frame the Federal Constitution, that Mr. Hamilton remarked in a conference of its leading members that if the power to levy impost and excise should be given to the new government, it would prove strong and successful. If the power were not to be given he did not desire to waste his time in repeating the failure of the old Confederation, and should return at once to New York. It was undoubtedly his influence which secured the wide and absolute field of taxation to the General Government. He well knew that direct taxes are onerous, and as the majority insisted on levying them in proportion to population, as in the old Confederation, their use as a resource to the General Government was practically nullified. Such a system involved the absurdity that men taken per capita average the same in respect to wealth, and that one hundred thousand people in New York should pay no more tax than the same number in Arkansas. Statesmen and financiers saw from the first that the direct tax clause in the Constitution would be valuable only in forcing the use of the excise. But for the dread of this, the States would not have yielded all the sources of indirect taxation to the National Government.
When appointed Secretary of the Treasury, Mr. Hamilton insisted upon the prompt levy of excises. He induced the first Congress to lay a tax on all distilled spirits. If made from molasses or sugar or other foreign substance, the tax should be from eleven to thirty cents per gallon according to the percentage above or below proof. If made from domestic products, the tax should be from nine to twenty-five cents per gallon. The first was practically a tax on rum, the second on whiskey. This excise was followed in subsequent years by duties on carriages, on snuff, on property sold at auction, on refined sugar, and by the sale of stamps. Other articles were in after years added to the list, and to aid the Treasury during the period of the second war with Great Britain, a heavy imposition of internal duties was resorted to as the most prompt and efficient mode of replenishing the hard pressed Treasury.