It is an established fact, that the idea of the Legal Tender originated with Mr. Erskine Hazard,
---James Gallatin



Thoughts on Currency and Finance.

by Erskine Hazard.


Philadelphia, September 25th, 1863.


Our ideas of quantity can always be corrected by the pieces of metal which have been by law established as the standards of weight and measure, and deposited in the proper departments for reference and comparison.  Other instruments, regulated by these standards, are in common use, by which we can always ascertain that we obtain definite quantities of any articles in our purchases.

But when we come to exchange one article for another, we find that quantity not the only point to be considered.  A yard or ton of earth is not exchanged for the same quantity of broadcloth or of iron.  The one is not considered as having the same value as the other, and we see a necessity for a measure or standard by which to compute the relative quantities of the articles to make them equivalent to each other.

This value depends upon a variety of circumstances, which are ever changing with the progress of society.  It, in general, may be said to depend upon the quantity of an article in proportion to the demand for it, at any particular place and time, and the facility of supplying it.  The labor necessary to procure or prepare it for use, also, in a great degree, affects its value, or the estimation in which it is held.  Its absolute usefulness is by no means the criterion of its value, as is shown by the diamond, which has little to recommend it but its brilliancy, its hardness, and its scarcity.  It has little utility beyond the cutting of glass.  So silver and gold, although denominated the precious metals, and are thus fitted for making personal ornaments, but cannot compare with iron in usefulness to man.  Caprice, therefore, may be considered as affecting value.  In fact, the value of anything we possess is what we can obtain for it from the person who most highly appreciates it at any particular time.  Food, to the starving, is of more value than all the world beside.

There can be no positive standard of value, like those of weight and measure, for we see that any article which we may select for the standard is itself subject to variations in its own value, arising from abundance, or scarcity, or speculation, which may, at any time, cause an adventitious demand for it, or the contrary;  while all other articles may remain entirely unaffected by the causes which have changed the value of the standard, and yet their nominal values, when measured by the standard, must fall as the value of the standard rises, and vice versa.

Various articles have, however, been adopted by different nations, as units or representatives of value, which each member of the community consents to receive as an equivalent for every article, multiplying or dividing them to suit the value of the article for which they are to be received.  Thus shells, pieces of leather, iron, copper, brass, silver and gold of specified weights, bearing certain stamps, have all been used as representatives of value, the amount to be represented by each piece being generally fixed by the Government of each country issuing them.  The exigencies of business have also introduced stamped or printed paper issues by Governments for the same purpose, and all have assumed the general denomination of money.

In this country we have had money made of copper, silver, gold and paper, all in circulation at the same time, the different pieces being exchangeable for each other at the standard or nominal value.  But at one time gold became so scarce here, in consequence of a foreign demand, that the purity of our gold coinage was changed, making its legal value greater than the market value of the metal.  By this means it was retained in the country, and the previous coinage now brings an advance over the later coinage.  So, also, the deficiency of silver, from not working the mines to the usual extent, changed its value relatively to gold, and caused the debasement of our silver coins, to place them on an equality with those of gold.  This last change is now creating difficulty in money transactions between us and Canada, and our coins abroad are sold by the ounce.

It is of the utmost importance that whatever may be used as the measure of all our values should of itself be as invariable in value as possible.  Paper money, having no value in the material used in making it, depends for its value altogether upon the Government stamp and the law under which it is issued, and, except under peculiar circumstances, is available only in the country which issues it.  Our paper money has thus become our only legal standard representative of value, which must be received in all payments to the amount of its face, and that in all parts of this country and at all times.  Having no reference to redemption in gold or silver, or any other articles of merchandise, subject to great variation in value, it can always be depended on to furnish an equal amount of Government loan, which is certain to pay six per cent. interest in gold for twenty years, or at least so long as these is security for any other species of property in the country.  There can, therefore, be no real depreciation in its value.  It becomes safe to make contracts payable years ahead, because the debtor is certain to be called upon only for the value he has agreed to pay, and the payee knows he will get just what he bargained for.  This is a very important consideration in favor of our legal tender currency, and gives it a decided advantage over every other.  When a contract is made, payable in gold a year or two ahead, it is impossible to foresee what will be the price of gold when it falls due.  The last year has shown us that it may require 76 per cent. more property to pay the contract when due, than it did when it was executed, from the rise in price of that metal.

It has been objected to the legal tender currency that it is redeemable only by making a permanent investment for twenty years.  The fact is that this investment in Government loan is as nearly as possible a "call loan," for the cash can be obtained for it any time at the Broker's Board, with the chance for a premium.

Previously to the use of the legal tender notes, we nominally had a currency of bank notes at all times convertible into gold.  But what was the fact ?  It is only necessary to look at the published weekly statements of the banks, to be satisfied that there never was a time when they could, at once, redeem their circulation with coin.

The quantity of the metal in the different countries, after a few years of peace, through the operations of commerce, becomes distributed among them in proportion to the amount of their transactions;  or assumes, as it were, a commercial level over the world, and has thus been sufficient to meet their ordinary business.  But when a war breaks out, or any important enterprise is undertaken which requires any particular country to make large exports of coin, as, for instance, England engaging in war with China, she immediately finds her specie level disturbed, and that it is necessary to fill it up by importations from abroad.  This can only be done by a foreign loan, or through the operations of commerce.  England always prefers the latter.  Our country, consuming more foreign goods than any other, at once finds the markets flooded with English goods, and those of kinds indicated, by our unexecuted mercantile orders, to be in demand here.  The goods are sold at auction for mercantile paper.  This, through the medium of brokers, is converted into gold which perhaps is crossing the ocean to England, while the goods, shipped upon American orders, are meeting it upon its passage, to arrive in markets already supplied with the same articles upon English account.  Or, American securities are returned here and sold for the same purpose.

The consequence is, that our banks are obliged to curtail their business, and call in their loans, and even, in several instances, "to suspend the payment of specie" or to confess themselves insolvent.  A merchant getting into such a situation would immediately lose all credit;  his notes would not be received without good security.  But the banks have become so numerous, and so completely usurp the circulation of the country, that the people have no alternative;  they must receive their notes, or be without means for carrying on business.  The suspension having taken place, the banks are again in a situation to accommodate their customers with notes, and nothing more is thought about circulating specie.  Now this course of things has so frequently occurred, that the news of its recurrence, scarcely causes an excitement among the public.  A difference, however, at once arises between specie and bank notes, to the prejudice of the latter, which is an undoubted depreciation of the bank notes.

Under such circumstances the legal tender notes were introduced, and it became the interest of the banks to place them on no higher (if so high) position than their own notes.  They were styled an irredeemable paper currency.  Their certain depreciation was heralded.  They were likened to the old Continental money, and to the French assignats.  But the public preferred them to bank notes, and there was a prospect that Congress would authorize their emission to the extent required by the Treasury.  The bullionists joined the opposition, and a national bank note circulation was proposed.  A speculation commenced in gold, the rise in price of which was used as an argument in favor of the new banks, and as a proof of the depreciation of the legal tender notes.  A committee from Boards of Trade and from Wall street besieged Mr. Chase, and the finance committees of Congress, in favor of the new banks.  The telegraph kept Wall street advised how to regulate the price of gold, which constantly rose with every advance in favor of the legal tender notes.  Robert J. Walker aided the new bank scheme, with his financial reputation, and his letter to Mr. Spaulding, a member of Congress, published in pamphlet form, had a wide circulation.  The new bank bill was passed.  The provisions of it, however, do not seem to be acceptable to the old banks, generally, and but few new banks have been established.  This new system of Banking is proposed as a panacea for all financial difficulties.

It is certain that some change must be effected in our circulation, which will put an end to the constant fluctuations, which baffle all calculations of business, and no more important subject can be proposed for public discussion.

We have had a long trial of the banking system connected with a professed redemption in gold.  This necessarily connected all our operations with the monetary convulsions of all the other nations, who also had gold as the basis of their circulating medium, and more especially with England and France, who, being manufacturing as well as commercial, had the means of calling upon us for specie, in the manner above described, whenever their circumstances required it.  Our whole business was thus put beyond our control.  The merchant found that his orders guided foreigners in the supply of our markets before executing his orders.  Our manufacturers also found their calculations of business upset by totally unexpected importations on foreign account, and both merchant and manufacturer were disappointed in their expectations of accommodations from the banks, whose means were curtailed by the demands upon them for specie for shipment.

This view of the operation of the gold basis upon our general business led me, in 1839, to propose, and advocate in the newspapers, under the signature of "Public Lands" (see Hazard's United States Register, vol 1, pp. 139, 163, 270), and in letters to members of Congress, the issue by the Government of legal tender notes (not bearing interest, and redeemable only by payment to the Government), to the several States in proportion to their representation, the notes to be countersigned by an officer of the State and then to be applied to State purposes.  The State would deposit them in her banks, to be used as the basis of their circulation, and to take the place of gold.  The States would thus be supplied with the means for making public, improvements, for education, or any other State object, without imposing State taxation.  This than would have left it entirely optional to use gold in the currency, and the banks would have given the notes the preference to gold, as they would always be secure against any run upon them for exportation.  In fact, it would have reduced gold to the place it now occupies, a mere article of merchandise.  And the notes, as we have now proved, by experience, would have performed all the functions of gold in our domestic transactions, being at par everywhere, because they are a legal tender.  The whole system of domestic exchange would have been obliterated.  Gold would have affected only the balance of our foreign transactions.  A rise in its price would not then have produced any sensible effect upon the community;  and now, if we will consent to abandon all idea of a currency redeemable upon demand in gold, a foreign demand for it at high prices would be beneficial to the country, for it will soon become a larger article of our produce, in amount, than cotton.  It is said by the Commissioner of the General Land Office to be found over an extent of country embracing several degrees of latitude and longitude.  Should a plan be found of fluxing the matrix in which it is imbedded, it may yet be smelted in furnaces, like iron, at a very cheap rate.  Its abundance must soon affect its commercial value, and render it more variable in value, and, of course, more unlike what a standard of value ought to be.

With our present system of legal tender notes, what possible object can there be for the banks to hold large masses of gold bearing no interest, while they can, at any time, supply themselves with these notes to meet any demand for the redemption of their own notes by selling in the market the necessary amount of the funded debt of the United States ?

Congress have by law made the interest on their loans and the duties on importations payable in gold.  Beyond these there is no more necessity for gold in our domestic money transactions than there is for lead or iron, and about as little of it is used.  Foreigners can no longer demand it from our banks, and our business is thus rendered independent of the fluctuations of the money markets abroad, at least so far as they would affect us injuriously.  If foreigners require gold, we can sell it to them as freely as we would our wheat, or any other produce, without affecting the price of any other article.  But to do this, we must cease to use it as the basis of our currency.  It was a great mistake in Congress to make the interest on the United States loans payable in that medium, for it was done on the popular fallacy that gold was a better payment than legal tender notes, and the natural effect of this was to place the notes, in public estimation, upon a level with bank notes, besides continuing gold as a part of the currency, at a great loss to the country.  The public have, however, discovered that the United States are better security than banks for the payment of a note, and make a difficulty in circulating bank notes, except where greenbacks cannot be obtained.

The use of gold, in payment of interest and duties, could still be avoided, to a great extent, by making a portion of the coupons of the bonds fall due every month, and receiving them, as gold, at the Custom House, when within twenty or thirty days of maturity.  There would thus be a constant supply to the amount of the coupons, to meet payments at the Custom House.

The agreement to pay the interest in gold by the Government does no particular harm, however, for it only amounts to fixing the price of so much gold to the bondholders, irrespective of its market value, and tends to keep up the price, for the benefit of our gold producers, which makes a profit to the country on its exportation.  It is only in the general currency of the country that gold is injurious.  There, a foreign demand for it abstracts what is necessary for the comfortable transaction of our business, and reduces all our prices, frequently causing wide-spread ruin.

The state of war has brought about a singular anomaly in our business, I have alluded to what has hitherto been the uniform result of a demand for gold, and the consequent reduction of the circulation by the banks --the universal fall of prices.  Now, the prices of other articles and stocks have risen, as well as the price of gold.  This has been seized upon by bullionists and bankers as a proof of the depreciation of United States paper money.  But it is easily accounted for on another principle.

There is a certain amount of circulating medium necessary for the transaction of the ordinary business of the country, and this amount will be the same, whether the currency be coin or paper.  For a considerable time after the commencement of the Rebellion the prices of articles not connected with supplies for the Government, or the supply of which was noy dependent upon the South, scarcely varied from what they were previous to the Rebellion.  Contractors with the Government took the opportunity of stipulating for prices which yielded them enormous profits, and when these were realized, the money was freely lavished in unaccustomed expenditures.  The articles of luxury first found a demand, with consequent rise of prices.  The plenty of money extended to those who furnished them, and the free expenditure also.  General employment gave the means of consulting their pleasure and comfort to the working classes, and thus created a demand and rise of price in the general markets.  Taxation followed on the producers and on their products.  They added the taxes, with a proportionate profit, to their goods, at the same time indulging in new expenditures.  Thus the community became rich.  Each man had money to invest for income.  Stocks first attracted attention, competition made them rise, and speculation, fostered by bank loans, excited fresh eagerness to purchase.  When they got out of reach, other investments were sought, and the streams of accumulating profit continuing to flow, were at last turned into the Government loans.

Now, for all this amount of receipt and expenditure the circulation would have been precisely as great, whether made by means of paper or of coined metal.  Had the Government created no funded debt, and had made all their payments in gold, what would have been the result ?  The amount now accumulated and absorbed by the funded debt would have formed a mass of perfectly useless metal, for no object of profitable investment for it could have been found.  Then, depreciation of the currency would be understood, and the Southern prices for goods would be common among us.  Now, the funded debt absorbs whatever would form an excess of circulation, everything, in fact, which could not be profitably used;  it forms a perfect savings fund, from which you can, at any day, draw your money by presenting your certificate at the Brokers' Board.  It is, then, impossible that depreciation should take place in a paper which cannot accumulate beyond the point desired by the people, or at which they have more money than they know how to employ, because they can always exchange it for 5-20 years' loan, the interest of which, secured by revenue, is paid in gold, which now bears a premium.

If there be any depreciation in the paper money, it must be in the Bank notes, which are, beyond doubt, not so freely received in payment as the greenbacks are.  This may, however, arise from their great variety of form, rendering them not so familiar to the eye as the legal tender notes are, the great extent to which they have been counterfeited, their being subject to exchange at a distance from the issuing bank, and the failure of the banks to redeem their pledge of paying gold upon demand.

We are now upon the eve of having a circulation of paper which has been styled a National Bank currency, which is to be guarantied by the Government, and received by it in all payments, except duties.  The Banks issuing it are to raise and support the credit of the nation by their private capital, according to Robert J. Walker's letter to Mr. Spaulding, and their notes are to be at par everywhere.

When the State of New York passed a law having similar provisions with the National Bank law, it was intended to support and raise the credit of the State, by creating a demand for the certificates of loan, to be deposited as security for the bank notes to be issued.  These notes thus received the confidence of the community, because the State loans guarantied them.  But no one ever dreamed that private capital invested in these banks increased the credit of the State.  Individuals with small means were enabled by the State guaranty to deposit at Albany a sufficient amount of State loan to procure a batch of circulating notes;  these paid for more State loan, which again furnished more notes;  and so the process was repeated, till the circulation could be no further extended.  The bank was receiving interest on a large amount of State loan, and kept its notes in circulation, at a discount, until it became no longer profitable;  and the operation was closed by the sale of the State loan for the payment of the notes.  The State, however, gained its object by thus causing demand for its loan, for which it received the money for State purposes.

But how will the "National" Banks benefit the Treasury ?  The Secretary of the Treasury says in his report:-- "As the [United States] notes received for the bonds cannot be reissued without injurious inflation of the circulation, they must necessarily be withdrawn and canceled.  The aggregate circulation of Government United States notes withdrawn, will be replaced by the amount of National circulation furnished to the associations."  Now this operation of selling the bonds for United States notes amounts to nothing more than changing the form of the debt from a floating one bearing no interest, to a funded debt, bearing six per cent. interest.  It, at the same time, gives no money to the Treasury, and places the Government in the position of being obliged to solicit a loam of the "National" notes which it has furnished to the banks.  It has no circulation at its command, the greenbacks being "withdrawn and canceled;"  it must, therefore, make such terms as it can with the new banks.  It will no longer be the people, by their agent, the Government, issuing their own notes on the faith and revenues of the nation, to the amount necessary to its operations.  Instead of this freedom of action we must consult the interest and avarice of a few individual associations, who will have the power to stop the wheels of the Government unless their terms be acceded to.  We have already been in that predicament, with the old banks, who were deliberating whether they should make any further advances, and what security they should demand from the Government;  double the amount of bonds for the money advanced and to be advanced;  a positive lien upon all the public property of every description;  the bonds to be made payable in sterling money if desired;  the banks to have the right to sell them in Europe, at any time and at any price they might think proper, were among the securities to be demanded.  What security have we that this case may not recur ?

The difficulty with the banks led me to examine the plan proposed by me in 1839, and determined me to propose it to Mr. Chase, with the alteration of making the legal tender notes redeemable "when presented in multiples of $50," by investment in the twenty years' bonds, instead of being received only in payment of debts due the Government, and their being issued for the benefit of the United States, instead of the individual States.  In a letter addressed to the Secretary of the Treasury, dated 17 December, 1861, I mentioned this plan of legal tender currency, not bearing interest, as one which would furnish all the money required by the Government without consulting any bank.  It only required an act of Congress to make the notes a legal tender, to enable him to make all his payments in them.  They would thus get into the hands of the public, the banks must receive them in payment of mercantile paper, and on deposit, and would soon be obliged to pay them out at their counters, and exchange them for bonds, bearing interest, withdrawing their own notes from circulation.  I also presented the same views in a letter to the Hon. Thaddeus Stevens, Chairman of the Finance Committee.  I do not know that either of these letters was received, as I have had no communication to that effect from either of the gentlemen to whom they were addressed.  The only reason I have to suppose they were received is, that the phrase "when presented in multiples of fifty dollars," which was used in my letter, occurs in the law which was soon after brought before Congress.

The Legal tender system has now had a fair trial, and has not disappointed the expectations formed of it.  It now saves the nation, in interest, about twenty-four millions of dollars a year, and reduces the average rate of interest from six to three and a half per cent., while $142,761,441 of the circulation is made up, according to Dr. Elder's pamphlet, of One-year Certificates of Indebtedness, bearing interest.  But Robert J. Walker, in his letter to Mr. Spaulding, advocating the law to create National Banks, anticipates that the circulation will increase in proportion to the population, or rather to the wealth of the country, which increases much faster than the population.  He gives $460,000,000 as the circulation of 1860, and calculates that, for 1870, it will be $779,700,000, and for 1880 it will be $1,762,122,000.  By this estimate, the interest on the amount of the circulation for 1860 would be $27,600,000;  for 1870, $46,782,000, and for 1880, $105,727,000.  Dr. Elder's pamphlet, which proses to deal in official figures, gives the circulation of the loyal States, on 1st of May, 1863, as follows:--

Bank circulation ..................... $168,400,000
United States notes and fractional currency ......... 394,920,956
Add United States Certificates of Indebtedness ................... 142,750,000
Total circulation .................... $706,070,956

These figures corroborate the statement of Mr. Walker to this time, and there seems to be no room for doubting that the currency must increase in the ratio of the wealth of the country, and that this must exceed that of the population.  Now all this circulation is to be furnished by somebody, and whoever furnishes it must either make or save the interest on that amount of it.  Mr. Walker's figures show the utter impossibility of such a currency founded on gold, or of which gold would form more than a barely appreciable part.  We have already had proofs by the repeated failures, or in ordinary parlance, suspensions of specie payments, of our banks, that, no matter what their promises, and our expectations of the convertibility of their notes, at all times, into specie, may be, it is an impossibility to realize the idea, when it becomes necessary.  There is no use in the public being longer deceived by this notion.

There is nothing about the new banks to enable them to do better than the old ones, except what they will derive from the use of the people's money deposited with them.  They may make use of the Government's specie to pay their notes, and when this runs short they get into the same predicament with the others, and then the people become bound for the payment of their notes.  These notes, though called national currency, and receivable everywhere by the Government, will not be at par everywhere whenever specie payments are resumed.  They are but the notes of an association, and payable at their counter, and nowhere else, and will be subject to a charge for exchange at a distance from that counter, like all other bank notes, and like the Government Demand notes, which were made payable at different points, before the rise in price of specie made them desirable for use at the Custom House.  There may be quite as little real "private capital" in these banks as there was in the New York banks, notwithstanding the examinations provided for in the law.  The temptation to swell the apparent capital, so as to draw interest on a large amount of bonds, is very great when the means of purchasing bonds with Government deposits are at hand, and the circulation of the consequent notes of the banks is kept up by the business of the Government.  The grand object of these banks will be to keep their circulation as large as possible, as this will entitle them to increase their amount of interest from more deposited bonds, and the constant tendency will be to depreciate the currency by excessive circulation.  This will be most sensibly felt when, the war expenditures being no longer required, the business of the country shall demand only the usual amount of currency.  The banks will naturally strive to continue their full circulation, to curtail which they must reduce the amount of deposited bonds and, perhaps, some of them cease to operate.

Now, these National banks seem to be pet institutions.  The people are to give up all idea of independence for their treasury, and to pay interest for the circulation of the paper banks when it furnishes them no more security than the legal-tender notes, which cost nothing, both having the same basis, viz., the funded debt of the country, the interest on which is adequately secured by duties and taxes.  The banks are to be furnished with the notes by the Government, and also with the business growing out of the fiscal agency, while the Government withholds the issue of its own paper, lest it should interfere with the bank note circulation, and consequently has to pay interest for those notes.

There seems now to be a settled conviction that we must have a paper currency, which must, in some shape, be a National one.  Now the question is, whether our present legal tender currency is not as perfect and beneficial as any that can be devised.  It performs all the functions of gold in our business at home, and will purchase gold, at the market price, when we require it abroad.  It prevents any derangement of our business by a foreign demand for gold.  The Government can furnish itself by it, at any time, with all the money it may require in an emergency, thus making the amount of the currency equal to the wants of the country, and any redundancy of it can be immediately absorbed by the funded debt.  The amount in circulation will be more steady than that of Bank notes, as there will be no motive of interest in the Government to exceed the demands of the public, while banks have a direct interest in keeping up a redundant circulation, as long as possible.

Whatever amount may be required for currency, at any time, may be put into circulation by appropriating it to the purchase of funded debt, to the construction of naval and military preparations for war, to making railroads and canals along the coast, and from ocean to ocean, or to any other desirable public object.  Thus the public debt and the currency will operate as balances to each other, the former being no burden, and the latter furnishing all the means which may be required for the progress of the country.  As gold will form no part of the circulation, our mint will not be required for the manufacture of coins of that metal.  It will only be necessary to stamp the bars, of given weight and fineness, to facilitate commercial operations.  The Government should claim its constitutional, exclusive right to furnish all the money of the country, and establish its value by law.  This will necessarily exclude the issuing of bank notes.  But the Banks can be compensated for the loss of this part of their business by giving them United States charters, free from taxation, provided they confine themselves to the use of Government paper money in their business circulation, and by using such of them as are favorably located as depositories and fiscal agents, they furnishing adequate security.

The advantage to the people of having the whole circulation of the country confined to Government paper-money, not bearing interest, does not seem to be properly appreciated.  Taking the amount of it at six hundred millions (which is one hundred and six millions less than Dr. Elder's statement of what it is at present), the interest on this sum, or thirty-six millions a year, will be saved by the legal tender system, or must be paid upon the bank-note system.  If this amount, instead of being paid out for interest, be expended in the purchase of bonds, and the coupons be added each year to the amount purchased, the difference in twenty-six years will be $2,129,629,765, or probably more than the whole national debt at the conclusion of the war.  The following figures show the progress of the operation:--


If we look forward to the extremely rapid increase of the population and wealth of this country, and the consequent increase of the circulating medium indispensable to their business, we shall soon discover that, on the exclusive legal tender system, the great difficulty will be to keep up a national debt, not to pay it off.  To elucidate:-- Between this present time and 1880 the sum of $1,367,201,044 will have to be issued by the Government to keep pace with the natural increase of required circulation, the amount now in circulation of United States notes and fractional currency being only $394,920,956, and the estimated circulation of 1880 being $1,762,122,000.  It is clear that whatever portion of this sum is not issued in payment of the disbursements of the Government may be applied in its issue to the purchase of so much of the public debt.

It thus appears that, if we consider our debt a burden, we have it in our power to pay it off in twenty-six years, should it amount to 2,129,000,000 of dollars, by the mere saving we should effect in the interest, by pursuing the course pointed out by the Constitution -- to manufacture and issue our own money through our agent, the Government, instead or paying others interest for its manufacture and issue.  And further, that every dollar, in its passage from the hands of the Government into the circulation of the country, performs an important part, in paying the necessary expenses of the Nation while we are at war;  in paying off the national debt afterwards, and when that is reduced as far as we think proper, in making preparations for war, by the construction of military and naval depots, and for the pursuits of peace, by the extension of railroads and canals, and making such improvements in the country as will promote our manufacturing and commercial industry.

All the bondholders have a strong inducement to support the Government, and if the whole circulation is furnished by the Government, every man in the community who has a dollar in his pocket will feel that be has an interest, not only in supporting it, but in seeing that it is administered by competent and honest men.

But to derive the full benefit of the legal tender currency, it should be exclusive, and not be mixed even with the issues of the Government bearing any rate of interest, intended to circulate with it.  That intention will always be frustrated.  Neither a gold nor a bank note circulation pays any interest.  The interest-bearing Treasury note will, therefore, be more profitably withheld for the sake of its interest, which the Government will have to pay, without any benefit to the public, as the payments for the public service would be as readily received in the ordinary greenbacks.  No interest should be paid upon any Government issues except the funded debt bonds, which we can purchase by the issue of legal tenders required for circulation, and thus be relieved from the interest.  Any other course affords a bonus for the issue of bank notes.

The Government must raise money either by loans or taxation, or by the issue of a circulating medium.  The plan, by loans, is not to be depended on to furnish the amount required with sufficient despatch, and capitalists are always disposed to obtain the most they can for their money.  Foreigners sometimes have political reasons for refusing loans, as in our present war, even before they are asked.  But in the emergency caused by the Southern Rebellion, the circulation of the country was inadequate to pay for the domestic loans agreed to be made, without resort to the plan of cheques marked good, even after a large amount of Treasury notes had been infused into the currency.  This difficulty, in case of interference with our war by France or England, would be much enhanced, if, for the accommodation of the "National Banks," the legal tender notes are to be withdrawn from circulation.  The surest and safest reliance is the legal tender system, extended so as to occupy the whole circulation of the country, and protected by law from any interference by bank notes, or other private issues.  All contracts would then be made with reference to them, and we should have in invariable standard.  These should be exchangeable at par, at all times, for interest-bearing bonds, redeemable after five years, at the pleasure of the Government, within twenty years, and payable in legal tender notes.  This would enable the Government to vary the rate of interest on its bonds, after five years, to suit the commercial value of money.  It would require a provision to meet the demand for bonds in payment of notes.  A Bureau, subject to the supervision of the President and Secretary of the Treasury, would probably be required to have charge of the regulation of the currency and public debt, which would thus be brought into mutual operation on each other.

The question has been asked, if the Treasury notes are to be redeemed by bonds, and bonds are to be purchased by the issue of Treasury notes, how are the notes ever to be paid ?  The answer-- When a citizen obtains a bond from the Government in exchange for them, they are paid, and taken out of circulation.  The notes which remain in circulation are necessary for that purpose;  they are money on hand to meet payments the same as any other coin.  The bonds purchased in the market by the Government are paid off by the notes issued into circulation.

To insure the continued credit of these bonds, and, consequently, of the notes, it is only necessary that a revenue should be provided, adequate to pay the ordinary expenses of the Government, and the interest of the bonds.  But upon this proposed system of finance and currency, the amount of revenue required will be constantly diminishing, as the fresh issue of notes, which will be wanted for circulation, will reduce the public debt and interest, when applied in that way, after the extraordinary expenditures occasioned by war shall no longer be necessary.

The operation of this system in furnishing the Government with the necessary funds is no longer an experiment.  The treasury immediately found itself relieved from dependence upon both foreign and domestic aid;  it had only to make its contracts, and issue the legal tenders in payment even before the revenue laws were passed.  It must have stopped payment had it depended upon loans from any source, and the people would have had so little currency that the business of the country could not have been carried on.  Such would now be the case were the legal tenders to be withdrawn.  Even now it is evident that more of them are required;  the exchange of them for bonds has been reduced to a great extent, and a loan of fifty millions has been negotiated wit the banks, for a temporary purpose, it is reported.  This could as readily have been paid by the Government in legal tenders as by a temporary bank loan, and thus be convertible into bonds.

It is amusing to see the anticipations entertained in England of a grand financial crash, to occur from 'the expansion' of our paper currency.  There certainly is no necessity for such an occurrence.  Indeed, the very circumstance of the abundance of money has in a measure substituted cash payments for the credit system, so that individual paper is scarce in the market.  The Government notes cannot be presented for redemption, except in bonds, a mode perfectly at command at any time.  It will be the fault of the banks themselves, if, when specie shall again be demanded, any of their "promises to pay" shall be found in circulation, as they have the opportunity of gradually withdrawing them and substituting the legal tender notes.

How, then, is this "crash" to be occasioned ?  In former times the resumption of specie payments necessarily brought everything to a stand-still;  all bank accommodations must be curtailed, to enable the institution to sustain itself;  its debtors must press all around for cash;  no new contracts can be made, and everybody stands, looking for what is to come next.  After a while the wants of the community compel cautious, new transactions, and gradually things resume their regular course.  Now all this inconvenience, and, to many, ruin, is brought upon the community merely to gratify a very small number of people who will insist upon their legal claim to gold, which happens to be scarce, when they could be readily paid in lead, or iron, or some other article equally valuable.  This kind of revulsion, occasioned by demands for specie, has occurred about once in seven, or at most, ten years.

The revenue laws which have been passed to settle the loans and interest, and meet expenditures, as before hinted at, will soon produce more income than will be necessary on this system, on account of the notes, required to be thrown into the circulation absorbing the bonds;  the war expenditures having ceased.  Congress, anticipating this, have made the income tax to cease after two years.  The taxes on our manufactures should be among the first to be reduced, as the interest of this country will be most promoted by fostering them in every possible way.  We have every soil and every climate to produce all the raw materials required, with abundant water power and the means of creating steam power, to work them up.  By giving them ample protection, in a tariff which can be depended upon permanently, everything we require would soon be produced at home;  all the people would have a choice of employment, instead of being confined to an over-extended agriculture;  the consumer would be brought close to the producer, and domestic competition would soon render this the greatest manufacturing and exporting country in the world.


Philadelphia, November 9, 1863-- It is now nearly nine month, since the passage of the Act for creating the National Banks.  It limits the amount of circulating notes to be issued under it, to 300,000,000.  This is a small provision, even if carried out in full, to meet the 706,000,000 of the present circulation.

But where are the National Banks whose private capitals are to raise and support the credit of the nation ?  The last published statement respecting them, gave the whole amount of their combined capitals at 12,000,000 !  Is it not sufficiently proved that the National Bank plan is an utter failure !? -- The few associations that have been organized will only clog the operations of Congress in carrying out the legal tender system.

During the pendency of the question, whether the New York Banks could be compelled to pay specie for their notes, under the laws of New York --their Banks refused to issue any of them.  That question having been settled negatively, the Banks immediately returned to the exclusive circulation of their own notes.  This shows the necessity of the positive prohibition of such issues, if the public are to have the benefit of furnishing their own money,




Hazard's

United States
Commercial and Statistical

Register

August 1839

From the National Gazette.

Cause and Cure of Hard Times.


While we continue to have intercourse with the nations of Europe, the prices of articles in common use in the two countries will generally be alike in both;  the difference amounting to little more than the charges incident to transportation.  The effect of steam navigation will be to make the prices more nearly approximate.  To illustrate the proposition take flour for example.  The quantity of this article for exportation from this country probably never exceeds 3 or 4 per cent. of the quantity consumed here, but if the price in England would warrant $3 per barrel, to be given for it in this market, that would be the price to be paid by the consumer at home of the 96 or 97 per cent.

So while we continue to have the precious metals, as they are called, for the common bases of circulation in the two countries, we shall constantly be liable to variations, checks, and counter currents, in all our business transactions.  For although these metals do not probably form the one-hundredth of one per cent. of our circulating medium, yet that whole medium, being based upon the metals, is, like flour, affected at once by every change of their price abroad.  And in this way all our domestic arrangements are thwarted by the foreign transactions, although these may not bear a greater proportion to the domestic transactions, than the exported flour does to that consumed at home.  Let exchange be in demand so far as to raise its price only one per cent. beyond the value of the metals, and you immediately have all the banks in a panic, lest they should be drained of their specie;  they immediately curtail their discounts, and the whole business of the country is thrown into confusion --and all this when the whole amount of specie required to make up the deficiency of exchange might be exported and not be missed by the community in their transaction, were it not for the timidity and perhaps proper caution of the banks, who are looking out for their own safety.

---[This curtailment of discount and panic is caused not by gold/silver, but by fractional reserve banking;  were the banks made to use treasury notes and allowed to continue the practice, panic and bust would follow just the same]

It appears to me that the quantity of the metals is now so small in proportion to the demands of the world, and to the prices of articles established under a mixed paper and specie circulation, that it is no longer safe to use them as the foundation of a national currency, because such an institution as the Bank of England, or even a "specie circular" issued by our own President can at any time throw into confusion the whole business of the world.

---[The Treasury Circular did NOT throw the business of the country into confusion, fraudulent banking practices and land purchases DID.]

We should have a national basis of circulation, with which our intercourse with other nations could not interfere, and we would then cease to be subject to the eternal fluctuations which now baffle all the foresight of the most prudent and cautious.

I would suggest for the foundation of our national currency our national domain.  Let this be specifically pledged for the redemption of an issue of Treasury notes, not bearing interest, which shall be made a legal tender in common with gold and silver, and of course receivable for the public lands, customs, and all debts between government and individuals.  Then let all the banks pay their notes in these Treasury notes or specie at their option, and prohibit their issuing notes of a smaller denomination than ten dollars, which would force a sufficient amount of metal for change into the circulation, from which it could not be extracted suddenly by calls from abroad.

Under this arrangement our internal transactions could never be harassed by the course of foreign exchanges --out domestic exchange would be perfect, Treasury notes being at par everywhere;  our importations would be more regular and would more nearly correspond with our exports;  specie would be imported like any other merchandise, and be exported without regret or alarm;  our manufactures would find a steady market;  and our circulation would have a tangible basis, infinitely safer then the promises, which we now have, to pay in a medium which is well known not to exist to the amount of one-tenth of the promises.

It is idle to suppose we have not capital sufficient in this country for all our purposes while we have 900,000,000 of acres of first rate unimproved land in addition to all our improved property and the products of our soil and labour.  We want only something portable to represent that capital, which can be divided into portions suited to our transactions.  A man cannot buy a loaf of bread with a house worth fifty thousand dollars, because the baker has not the means of giving him change, and yet this man might as well be said to want capital because he did not happen to have the small money change, the price of the loaf.

Our whole difficulty, in my view, arises from our foreign exchanges requiring the abstraction of the basis of our circulation, which basis is in fact more ideal and nominal than real.  The creation of Banks upon the present system will only be productive of harm instead of good, as the basis cannot thereby be enlarged.  The result will be the extension of paper promises without any thing real to represent them, and an increasingly pressing recall of them upon every foreign demand for specie, in consequence of the increased number of competitors necessarily diminishing the amount of specie which each is able to procure.  The loans which are obtained from abroad also in the end increase our difficulties.  If they are imported in specie from England, they at once create a demand in England which reacts upon us.  If they are drawn for, they generally go to pay for an increased importation incited by the loan, which causes the stagnation of our manufactures, and the interest on these loans increases the balance against us demandable in specie.  If specie were not the basis of our circulation, only those of us who are indebted abroad would feel any inconvenience from this circumstance, but now every man in the community who wishes to change his property by sale or purchase, is at once brought to a stand in his operations, because the Banks must hold on to their notes lest a demand should be made on them for the pittance of metal they have in their possession.  The consequence is a panic --the fall in value of all kinds of property, except specie, by which many men entirely out of business, and considering themselves comfortable for life, may find their competence at once swept away without any agency of their own, and in spite of their utmost prudence and caution.

All this evil may be avoided by the plan some time since proposed of issuing to the several states an amount of Treasury notes to pay for their improvements, to be distributed after the manner of the surplus revenue, and on the plan now proposed, making them a legal tender and the basis of our circulation.  They would thus speedily find their way into the Banks and release the obnoxious metals to serve the almost only use to which they are now applied, the settlement of the balance of our foreign transactions.

We have tried the specie experiment long enough.  Let us now try the experiment of a currency founded upon real estate, which must become more valuable, and increase our security every day by the very improvements for which itself furnishes the means;  a currency not liable to contraction upon the arrival of every steam ship, and under which, a man retired from business may feel secure, that the objects in which he has invested his hard earnings judiciously, will retain something like their original value.

Public Lands.



==================
September 1839

Currency, No. 2.


A writer in the National Gazette having replied to the communication of "Public Lands," copied into the Register of week before last, and objected to his plan mainly upon the score of its tending to increase the control of the government over the currency, a second paper of "Public Lands" appeared in the National Gazette of 28th ult., which, furnishing a further development of his system, in inserted below.

Your correspondent "Free Trade" has entirely misunderstood my views, or he would not have accused me of being willing to "entrust" the Treasury of the United States with the "important duty" of "manager of the Currency."  I would do no such thing.  On the contrary, I stated that with the currency on its present basis, either the Bank of England or a "specie circular of our own President," could at any time derange all our operations --that our currency war now under the full control of the Government, from whose power my plan would completely wrest it, as well as from the power of foreign institutions.  To prevent farther mistake, I will give you a fuller sketch of the plan, and again urge its necessity on account of the total insufficiency of the quantity of gold and silver in the world to form the basis of its currency.  This insufficiency has frequently been proved in this country by the consternation into which all the banks were thrown by exchange rising one-half of one per cent. above the price which would allow specie to be exported -- and the present situation of England proves conclusively to my mind, that her supply of the precious metals is not adequate to sustain her currency in the event of a short crop, or any other circumstance which would throw the balance of trade against her with the nations on the Continent.

My plan then is to add to the list of articles, which shall be deemed a legal tender, an emission of Treasury notes, not bearing interest, to an amount which shall be considered adequate when distributed among the several Banks, together with what specie they may have, to enable them to meet on demand any amount of their notes which may be presented.

In order to get these notes into the Banks, I would make them all pass through the Treasuries of the several States in the same ratio as the surplus revenue;  the notes for each State to be engraved on a separate plate, with the name of the State, and to be numbered, registered, and signed by an officer of the General Government;  and then handed over to the Treasurers of the States, and countersigned by an officer to be appointed for the purpose by each State.  They may then be applied by the State government for the purposes of internal improvement, or education, or any other objects at the option of each individual State.  They would thus get into the circulation in the same manner as any other state funds, and after having enhanced the value of the property in the State by being expended in its public works, &c., they would very naturally fall into the possession of the banks, and, with specie, form the basis of their circulation.  The General Government, or the "United States Treasury," would thus have nothing to do with them except to have then made --the whole emission of them into the circulation would be by the States separately, and the signature and enrollment by the Sate officer would be a sufficient guarantee and check.  The General Government would be the debtor, and could not contract the currency at its pleasure;  should it refuse bank paper for public lands or duties, as under the specie circular, it would be obliged to receive its own notes, which could, on the plan proposed, be furnished as readily as bank paper, and without disturbance to the general business of the country;  and Congress could determine whether the Treasury notes thus received by the Government, should be again put in circulation or cancelled, and their place be substituted by a new issue to the respective Sates.  The plan instead of tending to centralization, puts the circulation into the power of the States themselves, and only operates like the coinage of an additional quantity of specie, so far as the Government is concerned.

The effects on the community would be, in the first place, that the respective States would be put in possession of all the means they would require for the general improvement of the country, mentally and physically, without incurring debts by foreign loans or otherwise;  and in the next place we should have a circulation of Bank paper for which we could always obtain either specie or Treasury notes, which, being receivable in all debts to government or individuals, would be to us fully equivalent to specie;  and the Banks being at liberty to redeem their notes either in specie or Treasury notes at their option, would look to the business of this country alone in their transactions, and regulate their issues at all times by the wants of the community, and their own ability to meet their engagements in coin or Treasury notes.  We should be relieved from that sickly dependence on foreign nations which now makes us dread the arrival of a steam ship, lest she should bring the news of scarcity of money or short crops abroad, as the Treasury notes, although perfectly available to us, would not answer the purposes of other countries, nor be abstracted from us like coin to settle foreign balances;  and the mass of our population would pursue their own business without the constant apprehension of a panic arising from the foreign relations of importers, who alone would be called on to settle their balances in specie.

This plan is proposed on the ground that the population of the world and the application of the precious metals to the arts, have increased rapidly, while the product of the mines has diminished, and of course reduced the basis of the currency, while the business of the world requires its increase in the proportion at least of the increase of population.  It is a mere substitution for specie of what is in reality more valuable, a currency based upon the

Public Lands.



=================
Volume 1, number 15.
Wednesday, October 2, 1839.


For the U.S. Commercial and Statistical Register.
Mr. Hazard,

The present difficulties in our monetary system I consider a sufficient apology for requesting you to lay before your readers the following bill as embodying my views of the enactment necessary to carry out my plan of a new basis for the currency reprinted in your former numbers.  It will be seen that the object is to provide a standard of value which shall be as immutable as the nature of things will admit, and at the same time form a basis for the circulation of the Country which will not be liable to sudden contractions from a foreign demand.  It is proposed that the amount of notes to be issued should be equal to the amount of specie which is considered necessary for the Banks to keep on hand to enable them always to meet all demands upon them;  upon the supposition that these notes, being a legal tender as well as specie, would be kept by the Banks as the basis of their circulation in preference to specie for which they are now always liable to sudden demands from abroad.  The notes, not bearing interest, would offer no attraction to foreigners as they would be of little service out of this country.  Their introduction here would liberate the specie, which is now necessarily held by the Banks, for the smaller circulation and for the purposes of commerce.  It would also put a stop to the system now practiced by foreigners of using the orders of our merchants as guides for the shipment of goods here on their own account, to the great detriment of our merchants and manufacturers, as they would be obliged to take treasury notes in payment and purchase specie for remittance.  The notes being issued to the States would be equivalent to the division of so much of the public lands among them, and would furnish ample means for state improvements, education &c. &c. without resorting to loans.  As the bill now stands, the amount of notes in existence will at all times be nearly equal, and if found insufficient can at any time be increased by Congress on the same plan.  Congress would have no inducement to issue more than would be necessary, as the surplus would be immediately paid out by the Banks and go into the Treasury where they must be cancelled and thus take the place of funds which would have been available to Government.  Fraudulent issues could not be made without the collusion of the some Secretary of the Treasury, the United States Register, and the Governor, Treasurer and Register of the States;  and their re-issue, after having been redeemed, would be subjected to the highest punishment of the law.  The system of domestic exchanges would be perfect as the Treasury Notes would be taken in deposite at every Bank in the Union.  If the amount of notes to be distributed should be considered too great to be issued at one time, it can easily be divided into regular instalments to give time for the specie to be absorbed by commercial operations.  Specie would then be considered, what it really is, only an article of merchandize, and would give us no more uneasiness at its exportation than if it were so much broadcloth.  The security of the Treasury notes can never be doubted while the public lands have a value or the Government collects a revenue.

Public lands.


AN ACT
To authorize the issue of Treasury notes, to form the basis of Circulation and Standard of Value.

Whereas it is of the utmost importance in all commercial countries to have a fixed standard of value, as well as one of weights and of measures;  and gold and silver, our present standard, fluctuate so much in price, as to cause great and sudden variations in the prices of all other descriptions of property, without any change in the relative supply and demand for such property, and thus are too variable to be considered as a standard.  And, Whereas, experience having shown that great difficulties and instability in the business of this country, arise from our using gold and silver as the basis of our circulating medium, while the same articles are used in other countries for the same purpose, and thus forcing our currency to contract or expand with all the variations of scarcity, or abundance of the precious metals abroad, it has become necessary to adopt a new basis for our currency, which will be independent of all foreign demand, and be at all times under our own control:  Therefore,

Sec. I.  Be it enacted &c.  That the Secretary of the Treasury be, and he is hereby required to procure engraved plates for Treasury notes of the denominations of $5000, $1000, $500, $100 and $50 respectively, made payable to the respective states and territories of this Union, in the words following to wit:

The United States of America promise to pay to the State of Pennsylvania, [each of the other States and Territories, to have their names engraved in like manner on other plates] or bearer one thousand dollars, [and so the other denominations mentioned above] on demand, by receiving this note, for so much, in payments at the different land offices for the public lands, or, in liquidation of any debt to the United States.

Treasury Office, Washington 184
Countersigned.
Register U.S.;  Register State of Pennsylvania.

Sec. II.  [Be it further enacted]  That the Secretary of the Treasury shall cause to be printed from the said plates, in the proportion of each denomination that may be deemed most convenient, as many notes in favor of each state and territory respectively, as will, agreeably to the ratio of representation, be the share of such respective state or territory of the sum of ____ millions of dollars, and that he shall cause the same to be regularly numbered and registered, and also, to be signed by a register to be appointed by him for that purpose.

Sec. III.  [Be it further enacted]  That the said notes, when so prepared and registered, shall be delivered upon requisition of the Governors of the several states and territories, in whose favor they are drawn, to the respective treasurers thereof, and when countersigned by registers appointed for that purpose by the several states and territories, shall be deemed and are hereby declared to be a lawful tender for the payment of all debts and contracts which may be made after the passage of this act, unless otherwise expressly stipulated in the said contracts.

Sec. IV.  [Be it further enacted]  That the said notes when redeemed by the United States, shall be immediately cancelled and defaced and marked on the register as paid, and shall not again be issued.  And it shall be the duty of the Secretary of the Treasury at the end of each month, to publish a statement of the amount so redeemed and cancelled, specifying the amount of each denomination, and the state or territory in whose favor the notes were drawn.

Sec. V.  [Be it further enacted]  Whenever and as often as the notes redeemed by the United States, shall amount to ____ millions of dollars;  the Secretary of the Treasury shall cause new notes to that amount to be prepared and issued to the Treasurers of the several states and territories, upon the requisition of the Governors thereof, in the ratio of their representation, and the said new notes shall be considered and treated under all the sections of this act, as if they were the original notes directed by the 2d Section of this act, to be printed and prepared.

Sec. VI.  [Be it further enacted]  The re-issuing of any of the notes which may be issued under the provisions of this act, after they shall have been redeemed by the United States, and also the counterfeiting of them, shall be deemed a felony, and any person convicted of either of these offences, shall suffer death.


[Thoughts of Currency and Finance