Twenty Years of Congress, Vol. 1 / From Lincoln to Garfield, with a Review of the Events Which Led to the Political Revolution of 1860

by James Gillespie Blaine

SECRETARY CHASE'S RECOMMENDATION.

Secretary Chase had grasped the situation earlier than the experienced financiers who assumed to be his special advisers, and while he was, in the opinion of unjust critics, completely in the hands of the State banks, he surprised the country by recommending in his report of December, 1861, the establishment of a National system that should give the General Government complete control of the currency. The State bank circulation in the loyal States he estimated at $150,000,000. "The whole of it," he regarded as "a loan without interest from the people to the banks." The secretary thought "it deserves consideration whether sound policy does not require that the advantages of this loan be transferred from the banks, representing the interest of stockholders, to the government representing the aggregate interest of the whole people." Attention was called to the fact that "the existing circulation depends on the laws of thirty-four States and the character of some sixteen hundred private corporations." It was somewhat startling to learn that "the circulation is usually furnished in greatest proportion by institutions of least actual capital and is commonly in the inverse ratio of solvency."

The bold and comprehensive recommendation of Mr. Chase was favorably received by many of the leading men in Congress and by many of the ablest financiers of the country. The committees of both Senate and House were well disposed, but preferred time for consultation and deliberation. The Secretary of the Treasury, with the aid of Mr. E. G. Spaulding, Mr. Sherman, and Mr. Samuel Hooper, engaged in the preparation of a bank bill which in due time was submitted to the Committee of Ways and Means. The committee was at that moment engaged on the Internal-revenue Bill, the important character of which absorbed the attention of Congress. The adjustment of the tariff duties to the excise taxes was also a serious labor which left no adequate time to mature a bank bill in season for its consideration at that session. Indeed the committee was not able to report the bill to the House until the 12th of July, 1862, when five thousand extra copies were printed for distribution among the financial institutions of the country. It was deemed wise to give the people time to consider so important a measure, and with that end in view all further action was postponed to the next session.

Meanwhile the bill was published in the leading papers of the loyal States and elicited the most diverse opinion. It was however received with favor by the public. Those interested in the State banks were at first exceedingly hostile to it. The proposition to tax their circulation two per cent. in addition to the three per cent. imposed upon incomes by the new law was considered harsh and unjust. The object was to compel the retirement of the State bank circulation. In no other way could a national system be at once generally instituted. The courts had repeatedly held the authority of the States to charter banks with power to issue and circulate notes as money, to be constitutional. Congress could not abridge this right in any way by direct legislation. Its power to tax was however undoubted. The friends of the State bank system claimed that the indirect method of destroying the institution by taxing its notes out of existence was an arbitrary exercise of questionable power.

The advocates of a uniform and stable system of banking to cure the manifold evils then prevailing, admitted that the prerogative of the States could not be questioned, but urged that the exercise of it had invariably increased and often produced the financial troubles which had afflicted the country in the past. If the States would not surrender their prerogative, the National Government would be compelled to exercise its larger prerogative embodied in the power to tax. The right of the nation to do this had been asserted by the head of the Treasury under a Democratic administration some years before. Recognizing as he did the necessity of a reform in the system of banking, Secretary Guthrie in his report to Congress in 1855 declared that "if the States shall continue the charter and multiplication of banks with authority to issue and circulate notes as money, and fail to apply any adequate remedy to the increasing evil, and also fail to invest Congress with the necessary power to prohibit the same, Congress may be justified in the exercise of the power to levy an excise upon them, and thus render the authority to issue and circulate them valueless."

THE SYSTEM OF NATIONAL BANKS.

During the autumn of 1862 the bank question was subjected to a thorough discussion among the people. The legal-tender notes had already become popular, and were evidently preferred by the public to the notes of local banks. The depression naturally incident to continued reverses in the field led to the defeat of the Administration in many of the State elections, but despite the operation of all adverse causes the general trade of the country was good. The crops had been abundant and prices were remunerative. All that had been claimed for the legal-tender bill by its most sanguine advocates had been realized in the business of the country. The one disappointment was their failure to keep at par with gold; but even this, in the general prosperity among the people, did not create discouragement. The Internal-revenue system had but just gone into operation, and the only feature embarrassing to the people was the requirement that the taxes should be paid in the legal- tender paper of the government. No provision of law could have operated so powerfully for a system of National banks. The people were subjected to annoyance and often to expense in exchanging the notes of their local banks for the government medium. The internal fiscal machinery of the government evidently required places of deposit. The tax-collectors could not intrust the funds in their hands to State banks except at their own risk. The money of the government was thus liable to loss from the absence of responsible agencies under the control of National power. The fact that the bills of State banks were not receivable for taxes tended constantly to bring them into disrepute. The refusal of the government to trust its funds in the keeping of the State banks was nothing less than the requirement of the Sub-treasury Act, but to the popular apprehension it was a manifestation of distrust which did the banks great harm. The total revenue of the National Government had before the war been collected at a few custom-houses on the coast, and the public had not been generally familiar with the mode of its safe-keeping. The system of internal taxes now reached the interior, and the people were made daily witnesses of the fact that the government would not trust a dollar of its money in the vaults of a State bank.

Under the influences thus at work, the friends of the State banks plainly saw that the National system was growing in favor, and they began to admit that its creation might facilitate the financial operations of the country. Many of them were willing to give it a fair trial. The advocates of the National system constantly pressed their cause among the people. The five-twenty six per cent. bonds, into which the legal tenders were convertible, offered, as they explained, an excellent basis for banking. Their absorption for that purpose would create not only a market for that class of securities but inevitably cause them to appreciate in value. The government would thus be largely benefitted, and its cause would be strengthened by the silent influence of self-interest which would certainly be developed by the general distribution of its bonds as the basis of a national currency. It was also urged that the existing banks could with great facility and without sacrifice re-organize under the proposed national law.

The popular mind having been thus favorably turned towards the system of national banks, the President specifically approved it in his message to Congress in December, 1862. Expressing his doubts "whether a circulation of United-States notes, payable in coin, and sufficiently large for the wants of the people, can be permanently, usefully, and safely maintained," Mr. Lincoln asked if there was "any other mode by which necessary provision for the public wants can be made, and the great advantage of a safe and uniform currency secured?" He declared that he knew of none "which promises so certain results, and is at the same time so unobjectionable, as the organization of banking associations under a general law of Congress well guarded in its provisions." Mr. Chase elaborated his recommendation of the preceding year to the same effect. He asked that "a tax might be imposed on the notes of existing banks such as would practically exclude them from circulation." In their stead the legal-tender notes would be used, but he preferred "a circulation furnished by the government but issued by banking associations organized under a general Act of Congress."

Mr. Chase said "the central idea of the proposed measure is the establishment of one uniform circulation, of equal value throughout the country, upon the foundation of national credit combined with private capital." He suggested that "these associations be entirely voluntary. Any persons desirous of employing real capital in sufficient amounts, can, if the plan be adopted, unite together under proper articles, and having contributed the requisite capital can invest such part of it, not less than a fixed minimum, in United- States bonds, and having deposited these bonds with the proper officer of the United States can receive United-States notes in such denominations as may be desired, and employ them as money in discounts and exchanges." As a further inducement, the secretary said "the stockholders of any existing banks can in like manner organize under the Act, and transfer, by such degrees as may be found convenient, the capital of the old to the use of the new associations. The notes thus put into circulation will be payable until resumption in United-States notes, and after resumption in specie, by the association which issues them, on demand, and if not so paid will be redeemable at the Treasury of the United States from the proceeds of the bonds pledged in security." The secretary thought it would be "difficult to conceive of a note circulation which will combine higher local and general credit than this. After a few years no other circulation would be used, nor could the issues of the national circulation be easily increased beyond the legitimate demands of business. Every dollar of circulation would represent real capital actually invested in national stocks, and the total amount issued could at all times be easily and quickly ascertained from the books of the Treasury."