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

—An amendment to strike out the words authorizing the sale of the bonds elsewhere than in the United States was overwhelmingly defeated, ayes 7, noes 35. The bill was then passed by ayes 32, noes 7, and by the President's signature became a law on the 12th of April, 1866.

The discussion of this important financial measure illustrates the various phases of opinion prevailing both in Congress and in the country. The desire to return to a specie basis was general, and yet not a few clung to the legal-tender notes as a permanent and standard currency. While the argument in favor of contraction was prosecuted with great force, the possibility of going too fast, even in the right direction, was conceded by the wisest financiers. The natural disinclination of the American people to entrust unrestricted power to any officer was frequently and forcibly expressed. The policy of funding the obligations bearing interest was admitted on all hands, and for this purpose the sale as well as the direct exchange of bonds was approved. But the repugnance to accepting less than par, or allowing the possibility of such a rate, had its origin and support in the patriotic instincts and in the sound judgment of the people. The requirement of a report from the Secretary and the limitation of the extent of contraction, were the essential changes which made the measure acceptable.

The enactment of this bill presents in an instructive light the character of our financial legislation and the methods by which it is accomplished. As originally presented the bill had the approval of the Secretary of the Treasury and came before the House with the favorable report of the Committee on Ways and Means. Yet it had no such standing as in the British Parliament is given to a financial project of the Government. There, such a proposition would be definitely framed at the Treasury, and its details would be elaborated when first presented. The Chancellor of the Exchequer would state the full character of the measure and the reasons for asking its adoption. Opposition or question would be expected only from the benches of the rival party. Here, on the other hand, after the House, using its own judgment, had modified the bill, criticism and hostility came from the Treasury that had originally proposed it. Several prominent members of the dominant party were pronounced in opposition. Saved by parliamentary strategy when once defeated, the bill was started into new life by the adoption of restrictions upon the power and the action of the Secretary of the Treasury. These restrictions were shown to be necessary in the progress of the debate. Individual judgment asserted itself and the Act became the harmonious resultant of the conflicting opinions of the entire House.

Congress therefore did not enact anybody's theory. It put into the statute the prudent, cautious sense of the people. Recognizing the principle of funding the floating obligations, and of contraction as a means to resumption, Congress only responded to the common sense of its great constituency, in forbidding reckless haste, and in defining the rate of speed. The purpose of keeping in Congress the control of the rate of contraction was only a part of the general determination that the representatives of the people and of the States shall prescribe the methods of conduct as well as the principles and broad measures of administration. Every Government finds by practice the system of legislation and administration best adapted to its own wants. While ministerial power and a trained following, such as obtain in England, may possess advantages under the circumstances existing in the British Empire, it is the settled judgment of this country that a perfectly free discussion, enlightened but not restrained by departmental recommendation or by dictation of committees, is best adapted to the varied and conflicting wants of the whole people. And this was never better illustrated than in the financial bill whose important provisions have been under consideration.

The revenue laws received careful attention during this session. The chief measure was the Act of July 13, 1866. It came before the House with the assurance from the Ways and Means Committee that it would steadily and materially reduce internal taxes. The system of internal revenue which had been so elaborately and intelligently constructed for war purposes, yielded $310,906,984 for the fiscal year ending June 30, 1866. Reduction were now made in the taxes on several hundred articles of manufacture, on savings banks, on the gross receipts of certain corporations; and the income tax was in some degree mitigated. The total reductions were estimated at $75,684,000, but an increase was proposed on raw cotton amounting to nearly one-third of this sum. Prolonged discussion arose over this tax and resulted in a disagreement between the two Houses. The bill was finally perfected in a conference committee and ended by reducing the total internal revenue to $265,920,474 per annum—with all allowance made for the growth of the country and the elasticity of Government receipts.

Not satisfied with the large reduction of taxes made at the first session after the close of the war, Congress resumed the subject at the second session. Early in February, 1867, Mr. Morrill, from the Committee of Ways and Means, reported a bill for the further reduction of taxes, which became a law on the 2d of March. The taxes removed were returning a yearly revenue of more than $36,000,000 to the National Treasury. The principal reductions were $19,500,000 from the income tax; $4,000,000 from clothing; $3,500,000 from woolens; $3,250,000 from leather; $1,000,000 from engines; $600,000 from sugar-refiners; $600,000 from tinware; $500,000 from castings; $500,000 from doors, sashes and blinds; with many others yielding less sums. All these formed a part of what were termed war taxes, and the steady purpose of Congress was to remove them as rapidly as the obligations of the Treasury would permit. As matter of fact they were removed long before such action was expected by the people, and before the special interests subjected to the burden had time to petition for relief or even to complain of hardship.

During the winter of 1866-67 there was a prolonged discussion in Congress over an Act finally passed March 2, 1867, authorizing the Secretary of the Treasury to exchange three per cent certificates of indebtedness for compound-interest notes, and allowing these certificates to be counted as a part of the reserve of National Banks. The first proposition was to allow interest at 3-65/100 per cent. The exchange of notes not bearing interest for those bearing compound interest was proposed by Mr. Stevens, and at first supported by a majority, but on reconsideration it was defeated. Objections was made to the bill that it was a scheme for giving to the banks interest on their reserves, which they could not otherwise receive when the compound-interest notes should be retired. Of these notes the banks held $90,000,000 and the limit proposed for the certificates was $100,000,000. Congress finally limited the amount of certificates to $50,000,000 at three per cent, and allowed them to stand for two-fifths of the reserve of any bank.

While this arrangement was an obvious advantage to the National banks, no such motive inspired Congress in passing the bill. Quite another object was aimed at in its enactment. The influence of contraction, which had gone into operation by the Act of the preceding summer, was already felt in the business of the country. The real significance of the Act just passed was that to a certain degree it checked and even neutralized the operation of the statute which ordered contraction. The compound-interest notes served the National banks as a part of their reserve, and as rapidly as they were cancelled, legal-tender notes were to be held in their stead. Their withdrawal from circulation for this purpose led therefore to a direct and forcible contraction of the actual currency of the country. By substituting the certificates of indebtedness as available for reserve this contraction was prevented, and by the concession of interest, even at three per cent, the banks were induced to surrender the securities which cost the Government a higher rate. The limit of these certificates was subsequently raised to $75,000,000,—a limit which in fact was often reached,—but as legal-tenders were needed the certificates were surrendered to the Treasury.

This is substantially the history of contraction, or of attempts at contraction made by the Thirty-ninth Congress. The successful effort to parry its effect, as already described, shows how unwelcome it had proved to the business community, and how Congress, without resorting at once to an absolute repeal of the act, sought an indirect mode of neutralizing its effect. Mr. McCulloch, in trying to enforce the policy of contraction, represented an apparently consistent theory in finance; but the great host of debtors who did not wish their obligation to be made more onerous, and the great host of creditors who did not desire that their debtors should be embarrassed and possibly rendered unable to liquidate, united on the practical side of the question and aroused public opinion against the course of the Treasury Department. An individual, by an effort of will, can bring himself to endure present inconvenience and even suffering, for a great good that lies beyond, but it was difficult for forty millions of people to adopt this resolve. Nor were the cases quite similar in motive and influence, for although it might be admitted that the entire nation would be benefitted by the ultimate result, the people knew that the process would bring embarrassment to vast numbers and would reduce not a few to bankruptcy and ruin. It was easy to see, therefore, that as each month the degree of contraction was made public, the people more and more attributed their financial troubles to its operation. Perhaps, in large degree, this was the result of imagination, and of that common desire in human nature to ascribe one's faults and misfortunes to some superior power. The effect nevertheless was serious and lasting. In the end, outside of banking and financial centres, there was a strong and persistent demand for the repeal of the Contraction Act.

The process of funding and paying the National debt, and of contracting the currency, went on with vigor and persistency during the summer and autumn of 1867. The Treasury statements for the year showed that up to November 1, 1867, the long obligations of the Government had been increased to $1,781,462,050; while the short obligations, other than currency, had been reduced to $441,655,120.63, and the currency in greenbacks, fractional notes and certificates of deposit for gold, to $402,385,677.39. The Treasury held $133,998,398.02; so that the National debt, less this cash, stood at $2,491,504,450. It thus exhibited an average reduction of the debt from its maximum, August 31, 1865, to November 1, 1867, of more than $10,000,000 per month.