The Secretary of the Treasury had, in two annual messages, proposed a tax on the circulation of bank bills. He believed that the existing bank circulation prevented or embarrassed the process of funding, by which alone the bonds of the United States could be absorbed. He was forbidden by law to receive bank bills in exchange for bonds or for any purpose, so that the current money of the people was not available for the purchase of bonds. This was an additional argument for taxing the state banks out of existence. I introduced a measure for this purpose as an amendment to the revenue bill, but it was postponed to save it from defeat.
I introduced a bill in January, 1863, containing two sections, the first to levy a tax of two per cent. per annum on the circulation of all bank bills, and the second to provide for a tax of ten per cent. on all fractional currency under one dollar issued by corporations or individuals. Upon this bill I made a carefully prepared speech, not only defending the proposed tax, but declaring my purpose to urge a gradual increase of the tax until all state bank bills were excluded from circulation. As the reversal of this policy is threatened I feel justified in briefly restating the argument that induced Congress to deprive all state banks of the power to issue their bills as money.
I drew the distinction between the ordinary powers of banking and the issue of bank bills. I said that the business of banking proper consisted in loaning money, discounting bills, facilitating exchanges of productions by the agency of commercial paper, and in receiving and disbursing the deposits of individuals. The issue of bank bills was an exclusive privilege conferred only on a few corporations. It was a privilege that an individual could not enjoy. No person could issue his bills in the form of paper money without a corporate franchise granted him and his associates, either by a general banking law, or by an act of incorporation. All the business of banking might be exercised by private individuals except this franchise. There was no reason why any one individual or a partnership might not carry on all the business incident to banking except this one of issuing bills to circulate as money. The largest banking houses in the world did not exercise the privilege of issuing bills. The strongest banks in the United States, such as the Bank of Commerce of New York, had but little or no circulation, while the weakest banks supported themselves and made profit by issuing the largest quantity of bills authorized. The law then existing taxed heavily the business of banking proper. All commercial paper—checks, drafts, orders, bills of exchange, protests, bonds —every instrument that was used in the ordinary process of banking —was heavily taxed, while bank bills were not taxed at all. A private banker doing business had to pay a license of $100, but a bank of circulation was expressly exempted from the necessity of procuring a license. The tax law, as it stood, had this significant provision: "But not to include incorporated banks legally authorized to issue notes as circulation." Every commercial instrument was required to pay a stamp tax, but this did not attach to a bank bill. Bank notes issued for circulation were expressly excepted. The only tax levied upon banks of circulation was a tax of three per cent. on the net income. This tax could be deducted from the dividend of the stockholders. The discrimination in favor of banks of circulation ran through all the tax laws, while other corporations, such as railroad companies, insurance companies and the like, were subject to heavy taxes.
The profits of banking were then very great. The average profits of the banks of New York were twelve and one half per cent. per annum. The burdens imposed upon the banks by their charters were lessened by the suspension of specie payments. When the banks had to keep in their vaults coin to the amount of one-third of their circulation, and were liable to be called upon any day for the redemption of their notes in gold and silver, they might claim exemption from taxes on their circulating notes. But during the suspension of coin payment there ws no such liability. Whether right or wrong the banks suspended specie payments, and increased their currency without paying either principal of it or interest, or tax on it, though in direct violation of law in some states.
I referred in my speech to an interview which was sought by the banks of our chief commercial cities with the Secretary of the Treasury, to which they invited the financial committees of the two Houses to hear their propositions for carrying on the financial operations of the government. We all went to the office of the Secretary of the Treasury, and the proposition was there made that the United States should issue no paper money whatever, that the specie clause, as it is called, of the sub-treasury act should be repealed, and that we should carry on the war upon the basis of the paper money of the banks, legalizing the suspension of specie payments, and that the government should issue no paper except upon an interest of six per cent., or higher if the money markets of the world demanded more. That was their plan of finance, the plan substantially adopted in the War of 1812, and which had been condemned by every statesman since that time, a plan of carrying on the operations of our government by an association of banks over which Congress had no control, and which could issue money without limit so far as national laws affected it. That was the scheme presented to us by very intelligent gentlemen engaged in the banking business. They were honest and in earnest, but it appeared to me as pretentious and even ludicrous.
It was claimed that a tax on banks interfered with vested rights. I said that all taxes that were levied by the government were to maintain vested rights, liberty and life. All these corporate franchises were held subject to the power of taxation in Congress, which was sometimes necessary to be exercised in the most potent manner in order to maintain the government. The state could not, by an act of incorporation, place their property beyond the power of Congress. The only question was what rate of taxation ought to be adopted. The rate proposed—two per cent.—I insisted was not too high, because it was only one-third of the profit derived from the issue of paper money without interest, the principal of which was not paid in coin. I stated distinctly that the purpose of the bill was not merely to levy a reasonable tax on the banks, but also to induce them to withdraw their paper, in order to substitute for it a national currency. I then reviewed in considerable detail the history of our currency legislation, from the act chartering the first bank of the United States to the beginning of our Civil War, showing the view taken by the most eminent statesmen of our country in favor of the establishment of uniform national currency as the highest object of legislation. Mr. Madison said in his message:
"It is, however, essential to every modification of the finances that the benefits of a uniform national currency should be restored to the community. The absence of the precious metals will, it is believed, be a temporary evil; but, until they can again be rendered the general medium of exchange, it devolves on the wisdom of Congress to provide a substitute which shall equally engage the confidence and accommodate the wants of the citizens throughout the Union."
I said that when coin, the best of currency, was driven out of circulation, by the existence of war or extraneous circumstances, it was the duty of Congress to provide a substitute. In 1816 Congress did this by establishing the Bank of the United States. Most of the state banks shortly afterward exploded, and almost their entire issue outstanding at the time fell as a loss to the people of the United States. The Bank of the United States did furnish for a while a stable currency. After its charter expired in 1836, the controversy was between gold and silver, and paper money as a currency. Nearly all the statesmen of that time believed it was necessary to have a national currency in some form, but there was a part in the country that believed the only true national currency was gold and silver coin. After a controversy that I would not review, the sub-treasury system was finally adopted. The government had then no occasion to borrow money. Its debt was paid off and there was a large surplus in the treasury, which was distributed among the states. The agency of a United States bank was no longer necessary to sustain the public credit. The object then was to secure a safe deposit and custody of the public revenues. The state banks failed to furnish a safe redeemable currency. In 1837 their notes were in the hands of the people, depreciated and dishonored, if not entirely worthless. Therefore, I thought wisely, the sub-treasury system was adopted, by which gold and silver coin was the only money received or paid out by the government. I believed that such was a true policy in the absence of national banks. I also stated that if peace were restored to our country, we ought, as soon as possible, to go back to the basis of gold and silver coin, but, in the meantime, we must meet the exigencies of the hour. Paper money was then a necessity. Gold and silver were hoarded. War always had led, and always would lead, to the hoarding of the precious metals. Gold and silver flee from a state of war. All nations in the midst of great wars have been compelled to resort to paper money. It was resorted to by our fathers during the Revolution. It was only by the use of paper money that England maintained her wars with Napoleon. At several periods during these wars gold and silver were at a greater premium in England than they were in this country.
I then proceeded to discuss the power of Congress to issue paper money. I quoted an extract from the report of Mr. Dallas, in December, 1815, in which he stated:
"By the constitution of the United States, Congress is expressly vested with the power to coin money, to regulate the value of domestic and foreign coin in circulation, and (as a necessary implication from positive provisions) to emit bills of credit; while it is declared by the same instrument that 'no state shall coin money, or emit bills of credit.' The constitutional authority to emit bills of credit has also been exercised in a qualified and limited manner. . . .