Twenty Years of Congress, Volume 2 / From Lincoln to Garfield, with a Review of the Events Which Led to the Political Revolution of 1860

by James Gillespie Blaine

—Mr. Garrett Davis offered an amendment, "that the just and equitable measure of the obligation of the United States upon their outstanding bonds, is the value at the time in gold and silver coin of the paper currency advanced and paid to the Government on those bonds." Mr. Davis argued earnestly in favor of his amendment. He declared it to be "robbery and iniquity for this Congress to make the people of the United States pay nearly $900,000,000 more than by law and equity they are bound to pay."

—Mr. Bayard seconded the arguments of Mr. Davis. "Suppose, instead of issuing paper money," said Mr. Bayard, "it had pleased Congress to order a debasement of our National coinage. Suppose twenty-five per cent more of alloy or worthless metal had been injected into our currency, and with that base coinage men had come forward to buy your bonds, what would be thought of the man who, when the day of payment of those bonds arrived, should say, 'I gave you lead, or lead in certain proportions; but for all the worthless metal I handed you, you must give me back gold'? Whether he was more maddened or more dishonest would be the only question arising in men's minds." Mr. Bayard used this analogy to illustrate the wrong of paying the bonds of the Government in coin, and expressed the belief that the debasing of the coinage would have been "far more Constitutional and right than the power which Congress exercised when they issued paper money."

When President Grant sent his first annual message to Congress (December, 1869), the National debt, less cash in the Treasury, amounted to $2,453,559,735, the cash being $194,674.947. The aggregate obligations bearing interest in coin had risen to $2,107,938,000; while the three per cent certificates and the Navy pension-fund, which alone carried interest in currency, amounted to $61,195,000. The debt bearing no interest, composed of old demand-notes, legal-tenders, fractional currency, and certificates for gold deposited, had fallen to $431,861,763. The seven-thirty notes had disappeared from the financial statement, and the bonds authorized by the Act of March 3, 1865, amounted to $958,455,700. The rate of interest on the bonds still stood at six per cent, except on the old debt of 1858 and 1860, and upon $194,567,300 of the ten-forties issued under the Act of March 3, 1864. One of the chief recommendations in the President's message was the refunding of the debt in bonds, with interest not exceeding four and a half per cent. He urged legislation for redeeming the legal-tenders at their market value, at the option of the holder, increasing the rate from day to day or week to week. He believed "that immediate resumption, even if practicable, would not be desirable," but that "a return to a specie basis should be commenced immediately." He expressed the belief that the revenue might be at once reduced $60,000,000 or possibly $80,000,000 a year. In connection with this feature of the message, Secretary Boutwell submitted a well-matured plan for funding the debt and expressed entire confidence in its success.

The result was the refunding Act of July 14, 1870. It was a broad and effective measure. It was subsequently modified by the Act of Jan. 20, 1871, permitting the payment of interest quarterly, and increasing the amount of bonds bearing five per cent interest. The two laws for purposes of refunding, taken together, authorized the issue of $500,000,000 at five per cent, $300,000,000 at four and a half per cent, and $1,000,000,000 at four per cent,—all to be payable in coin, to be exempt from taxation, and to be issued without any increase of the debt. The fives were redeemable after ten years, the four-and-a-halfs after fifteen years, the fours after thirty years. The laws were not enacted without considerable legislative controversy. The exemption from taxation and the payment in coin were stubbornly though unsuccessfully resisted. A proposition to state the interest in sterling money and in francs, as well as in dollars, so that the bonds might be more easily negotiated abroad, was vigorously pressed, but was happily defeated.

Further reduction of the revenue was effected by the Act of July 4, 1870. There was an earnest effort to repeal the income tax, but it was retained for the year, and was to terminate at the end of 1871. The duties on tea, coffee, sugar, and some articles of iron and steel, were diminished. In presenting the conference report Mr. Schenck estimated that the reduction in customs charges by the Bill would be $27,000,000, and in the internal taxes more than $50,000,000. Many persons feared that the reduction of taxes was too rapid, but it was impossible to resist a movement so popular as the removal of the burdens left by the war. Under such a pressure it was probable that Congress might not have sufficient regard to the prospective needs of the Government.

The condition of trade, wise legislation, and the hope of refunding the debt with rapid reduction of interest, were producing beneficent results; but the expectations of the Secretary of the Treasury in regard to the prompt sale of the new bonds were rudely shocked by the war between France and Germany, which was declared immediately after Congress had clothed him with enlarged powers. At home, as well as in Europe, the money markets were so far disturbed that prudence forbade immediate action. After a necessary postponement and careful preparation Mr. Boutwell gave notice that on March 6, 1871, books would be opened in this country and in Europe for subscriptions to the bonds. Preference was awarded to subscribers for the five per cents within the limit of $200,000,000. On the anniversary of the passage of the Act, July 14, 1871, a proposition came from a syndicate of London bankers to take this whole amount of the five per cents. The National banks, with a few individuals in this country, subscribed for $117,518,950, and the residue was conceded to the foreign syndicate.

The leading arguments in the House for the policy of refunding were made by Mr. Dawes and by Mr. Ellis H. Roberts. The gain to the Government, as they proved, would be obvious and great. If the new bonds were exchanged for the whole amount of six per cents already issued, and were to run only till the time of redemption, the saving, without compounding interest, would amount to an enormous aggregate, certainly exceeding $600,000,000. The country was therefore disappointed that events beyond the sea had for a time suspended the operations of funding, and compelled the Treasury to maintain its high rate of interest. The suspension was not due to the neglect or mismanagement of any executive officer, or to lack of foresight on the part of Congress in providing the requisite legislation. It was simply a case in which the money market for the time prevented the Secretary of the Treasury from accomplishing any large proportion of the total funding operations contemplated by the Government.

When the Forty-second Congress met in December, 1871, the gold premium was 101-1/8 @ 110-3/8. The funding process was in its early stages. Specie was going to Europe at the rate of $66,000,000 per annum, and the balance of trade for that fiscal year was running against the United States to the amount of $183,000,000. It was a period of financial theories. The prejudice against National banks seemed to increase, and the fiat of a Government so rich and powerful as that of the United States would, it was maintained, suffice to make all the notes it might put out available for money, and the volume ought to be abundant enough to stimulate every nerve of production and trade.

Against such appeals the more conservative sentiment of the country held that honor and safety demanded the redemption of the United-States notes in coin at the earliest practicable day. The steps proposed to this end were extreme and therefore unwise. A large number of financiers urged the repeal of the legal-tender clause, the funding of the notes into bonds with some limitations, and further contraction of their volume by direct withdrawal. The argument was presented that if a man could not pay his overdue note he would deem it a privilege to give a new obligation to run on interest for a longer period, and the Nation ought to prove itself as honest as its citizens. This specious plea assumed that the legal-tender note was simply a promise to pay, with only the qualities of an individual obligation. It neglected to consider its different and essential character as a circulating medium. The advocates of the repeal of the legal-tender clause included many able lawyers, who however did not meet the objection that this clause was an element in the value of the currency, only less important than that of positive redemption. Nor did they seem to perceive that the abrogation of this feature in the contract between the Government and the note-holders would lead to confusion and distress in commercial circles, and would violate the obligations of common honesty.

The debate went on in Congress and in the press, but no general scheme of legislation could be agreed upon. Congress took up the tariff and the internal revenue, and passed the Acts of March 5, May 1, and June 6, 1872. By the first Act, all internal taxes were removed from fish, fruits, and meats. By the second, all duties on tea and coffee were absolutely removed after the first day of the ensuing July, reducing the revenue by this single Act to the extent of $20,000,000 per annum. The last Act (June 6) made a reduction of ten per cent in the customs duties on all importations of cotton, wool, iron, steel, paper, rubber, glass, and leather, with a number of specific changes in the tariff, and a large addition to the free list. The effect of the three Acts upon the revenue of the Government was a diminution of $44,000,000 in custom receipts and $20,650,000 in internal taxes. The machinery for collecting the internal revenue was greatly simplified and improved. A proposition introduced by Mr. Clinton L. Merriam of New York proved to be of great convenience and safety to the National banks. It permitted the Secretary of the Treasury to issue certificates of deposit in denominations of $5,000 without interest, in exchange for notes, and these certificates became available for the reserves of the banks and for settlements of clearing-house balances.