But from the passage of the legal tender act, by which means were provided for utilizing the wealth of the country in the suppression of the rebellion, the tide of war turned in our favor. Delaware, after a short hesitation, complied with the proclamation of the President. Maryland had, by clear and repeated votes and acts, arrayed herself on the side of the Union. Her rebellious sons who fought against the old flag could not tread in safety on a single foot of the soil of that state. Western Virginia, the eastern peninsula, and many ports on the eastern coast, were securely reclaimed. The State of Kentucky had distinctly, by the vote of her people, and by the action of all her constituted authorities, proclaimed her loyalty, and her sons were fighting side by side with the soldiers of other states to expel traitors who, in her days of doubt, had seized upon a small portion of her soil, which they still occupied. In the State of Missouri the constituted authorities, organized by a convention of the people duly elected, were sustained by physical power in nearly all the state, and the rebellion there was subsiding into bands of thieves, bridge burners, and small parties of guerillas, who could soon be readily controlled by local militia. In nearly every rebellious state, the government had secured a foothold, and an army of half a million men, armed, organized and disciplined, impatiently awaited the word of command to advance the old banner of our country against every foe that stood in its way. Where does the history of nations present an example of greater physical weakness followed so soon by greater physical strength? When have results more wonderful been accomplished in eight months?
At the beginning of the year 1862 we were physically strong but financially weak. Therefore, I repeat, the problem of this contest was not as to whether we could muster men, but whether we could raise money. There was great wealth in the country but how could it be promptly utilized? To that question the diligent attention of Congress was applied. The banks which had aided us with money were crippled and had suspended coin payments. The Secretary of the Treasury was begging at the doors of both Houses for means to meet the most pressing demands. On the 15th of January, 1862, the London "Post," the organ of Lord Palmerston, said:
"The monetary intelligence from America is of the most important kind. National bankruptcy is not an agreeable prospect, but it is the only one presented by the existing state of American finance. What a strange tale does not the history of the United States for the past twelve months unfold? What a striking moral does it not point? Never before was the world dazzled by a career of more reckless extravagance. Never before did a flourishing and prosperous state make such gigantic strides towards effecting its own ruin."
The legal tender act, with its provision for coin receipts to pay interest on bonds, whatever may be said to the contrary by theorists, was the only measure that could have enabled the government to carry on successfully the vast operations of the war. Our annual expenditures at that time were four times the amount of our currency; were three times the aggregate coin of the country; were greater than any ever borne by any nation in ancient or in modern times. The highest expenditure of Great Britain during her war with Napoleon, at a time when her currency was inflated, when she made the Bank of England notes a legal tender, was but £100,000,000.
Anticipating these enormous expenditures I introduced a bill which became a law on the 31st of July, 1861, which provided for a commission to examine and report as to the compensation of all offices for the government, the commission to be composed of two Members of the Senate, three Members of the House of Representatives, one officer of the navy, and one officer of the army, who were directed to examine and report, as soon as practicable, a fair and just compensation for each officer of the government, and such regulations as would secure a more economical collection of the revenue. When this bill was pending I stated its purpose and my hope to accomplish a reduction of the expenditures of the government, or, at least, an equalization of the salaries then paid to the different officers. We sought economy by the reduction of expenses. I was chairman of this commission, and Senator Clark, of New Hampshire, was my associate. The commission collected a mass of information, and upon it based several bills introduced in the second session of the 37th Congress. Some of these were made nugatory by the rise of prices, measured in most cases by the fall in value of our currency, but many of their provisions were ingrafted into other bills that became laws.
The organization of national banks, authorized to issue circulating notes, is so intimately connected with legal tender United States notes that I think it proper to consider them in connection, though the banking law did not pass until 1863. The two forms of currency, one issued directly by the government as lawful money of the United States and a legal tender, and the other issued by private corporations, but secured by bonds of the United States, constitute a system of national currency which, organized in the midst of war, was an important aid to the government in its great struggle, and when placed at par with coin by the resumption act has proven to be the best paper money created by legislation in this or any other country.
The issue of circulating notes by state banks had been the fruitful cause of loss, contention and bankruptcy, not only of the banks issuing them, but of all business men depending upon them for financial aid. Inflation and apparent prosperity were often followed by the closing of one bank and distrust of all others. The notes of a broken bank were rarely paid, the assets of such bank being generally applied to the payment of other liabilities, leaving the loss to fall on the holders of the notes, mostly innocent persons of limited means. This led to the adoption in 1846 of the sub- treasury system, by which all payments to the treasury were required to be in coin, to be held until required for disbursements on government account. This protected the United States, but it did not save the people from loss, as, from necessity, they were compelled to use bank bills authorized by the several states, varying in value and security, and chiefly limited in circulation to the state in which issued. With a narrow view of the powers of the national government, Congress had repeatedly refused to authorize a national bank, a policy I heartily approve, not from a doubt of the power of Congress to grant such a charter, but from the danger of intrusting so vast a power in a single corporation, with or without security. This objection did not lie against the organization of a system of national banks extending over the country, which required every dollar of notes issued to be secured by a larger amount of bonds of the United States, to be deposited in the treasury of the United States, thus saving the note holder from all possibility of loss.
Secretary Chase, in his report of December 9, 1861, recommended that a tax be imposed upon notes issued by state banks and also that Congress should exercise its authority to establish a system of national banks, with proper safeguards and limitations. A bill was introduced for the latter purpose in the House of Representatives in 1861, but, owing to the urgency for legislation on war measures, it was not acted upon.
CHAPTER XIII. ABOLISHMENT OF THE STATE BANKS. Measures Introduced to Tax Them out of Existence—Arguments That Induced Congress to Deprive Them of the Power to Issue Their Bills as Money—Bill to Provide a National Currency—Why Congress Authorized an Issue of $400,000,000, of United States Notes—Issue of 5-20 and 10-40 Bonds to Help to Carry on the War—High Rates of Interest Paid—Secretary Chase's Able Management of the Public Debt—Our Internal Revenue System—Repeal of the Income Tax Law—My Views on the Taxability of Incomes.
Long before I became a Member of Congress I had carefully studied the banking laws of the several states. The State of Ohio adopted, in 1846, an improved system of banking. My study and experience as a lawyer in Ohio convinced me that the whole system of state banks, however carefully guarded, was both unconstitutional and inexpedient and that it ought to be overthrown. When I entered Congress I was entirely prepared, not only to tax the circulation of state banks, but to tax such banks out of existence. But, while this feeling prevailed in the west, the opposite feeling prevailed in the New England and Middle States, where their banking system had been so improved that bank failures were rare, and bank bills were protected by mutual guaranties.