40th Congress
2d Session

In the Senate of The United States
December 17, 1867.

Mr. Sherman made the following

(To accompany Bill S. 207.)
[for funding the national debt,
and for the conversion of the notes of the United States]

pages 4-9

The Public Debt.

The Five-Twenty Bonds.

Dismissing the unliquidated debt as depending entirely upon the future prudence of Congress, we come to consider the present condition of the five-twenty loans.

As all of these are of the same legal character, differing only in their dates and time of redeemability, it will only be necessary to examine the laws under which the original bonds were issued.  These bonds were issued under the act of Congress passed February 25, 1862, entitled "An act to authorize the issue of United States notes, and for the redemption or funding thereof, and for funding the floating debt of the United States."

The notes to be issued are provided for by the first section, and were limited to the sum of one hundred and fifty millions of dollars, fifty millions of which were to be exchanged for that amount of what were known as demand notes.  These new notes were declared to "be receivable in payment of all taxes, internal duties, excises, debts, and demands of every kind due to the United States, except duties on imports, and of all claims and demands against the United States of every kind whatsoever, except for interest upon bonds and notes, which shall be debts, in coin, and shall be lawful money and a legal tender in payment of all debts, public and private, within the United States, except duties on imports and interest as aforesaid."

This act does not rest the value of these notes solely upon the clauses making them a legal tender, and receivable for all public dues, but it further provides as an additional and the highest inducement for the people to take them that the holder of any of them may deposit them with the Treasurer of the United States, and "shall receive in exchange therefor duplicate certificates of deposit, one of which may be transmitted to the Secretary of the Treasury, who shall thereupon issue to the holder an equal amount of bonds of the United States, coupon or registered, as may by said holder be desired, bearing interest at the rate of six per centum per annum, payable semi-annually, and redeemable at the pleasure of the United States after five years, and payable twenty years after the date thereof."

Thus these notes were invested with every possible security and value that could be given to them, except only that the holder could not demand their payment in coin.  In lieu of such payment, the holder had the right to pay them for taxes, and for all public or private debts, and coin not being attainable, he might demand for them at their face the highest form of national security with interest at six per centum, payable in coin.  The second section of this act provides "that to enable the Secretary of the Treasury to fund the treasury notes and floating debt of the United States, he is hereby authorized to issue on the credit of the United States coupon bonds or registered bonds to an amount not exceeding $500,000,000, redeemable at the pleasure of the United States after five years, and payable twenty years from date, and bearing interest at the rate of six per cent. per annum, payable semi-annually."

On the 11th of July, 1862, before any of the five-twenty bonds were negotiated, Congress authorized the further issue of $150,000,000 of the United States notes, with a like provision to convert them into bonds at par.

On the 3d of March, 1863, before any considerable amount of the five-twenty bonds were negotiated, Congress authorized the further issue of $150,000,000 United States notes, and by the same act provided that the holders of United States notes issued under and by virtue of said acts, shall present the same for the purpose of exchanging the same for bonds, as therein provided, on or before the 1st day of July, 1863, and thereafter the right so to exchange the same shall cease and determine.  The same act provides for the issue of $400,000,000 of treasury notes, bearing interest at six per cent., which "for their face excluding interest," were made "a legal tender to the same extent of the United States notes."  This act provides "that the interest on said treasury notes, and on certificates of indebtedness and deposit, shall be paid in lawful money."  Nothing is said in this act as to how the principal was payable, but all have been redeemed in lawful money.

After these acts took effect the five-twenty bonds were negotiated.  These several acts form the contract under which they were issued.  No subsequent act of Congress can vary that contract without the consent of the holder of the bond, and the contract must be construed according to the intention of the parties at the time, gathered from the words of these laws, and from the previous construction put by the government upon similar words, and from the authorized declarations of the agents of the government in negotiating the bonds.  Your committee may go a step further, and say that as there is no court high enough to sit in judgment upon the acts of the government to its public creditors, those who act for the government are bound in honor to observe the strictest faith.  In dealing with this question, Congress does not act as the mere judge or jury confined by the writen law.  We are chancellors to administer equity, or rather are arbitrators, chosen by the people of the United States, both debtor and creditor, and are under the highest obligation to do what is just and right.  There is no appeal from our decision, and no power can reverse our judgment, except that popular opinion which, sooner or later, in a republican government becomes the established law.

In construing this contract no pressure of necessity should induce us to violate any provisions of it, even if its execution is difficult or its terms hard.  Public credit is the most sacred property of a nation;  its reliance in war or danger which, once impaired or tarnished, entails upon the nation an irreparable loss.  The government of the United States have always faithfully observed its promises to the public creditors, and will not now sanction any violation of them;  but justice to its people who must from their earnings and by taxes, make good these promises, demand that we should not impose burdens upon them not required by a fair construction of public engagements.


The question now arises whether these five-twenty bonds are redeemable at the expiration of five years from their date in any other money than the coin of the United States ?

If this question rested solely upon the act of February 25, 1862, and the bonds had been negotiated under that act alone, it would be manifestly a breach of faith to redeem the bonds with the present United States notes.  They are very different from the first legal-tender notes, which, from the limited amount authorized, and the privilege to convert them into bonds, could not have had a less market value than the bonds.  But it was found that with such restrictions upon the notes the bonds could not be negotiated, and it became necessary to depreciate the notes in order to create a market for the bonds.  The limit of notes was trebled and the right to convert them taken away.  The amount of United States notes in circulation when the bonds were negotiated was equal to the amount now outstanding, so that the question arises whether by the terms of these several acts the bonds may be redeemed with notes of the precise character paid for the bonds when negotiated by the United States.

The law does not expressly provide that the principal is payable in coin, but does provide that the interest "shall be paid in coin," thus raising the implication that the principal may not be.

To meet this implication it is shown that by the established policy of the government the principal of the public debt has always been paid in coin without any stipulation to that effect.  Your committee have examined the various loan acts of the United States, and find no express stipulation to pay in coin;  but coin has always been paid, not only for the interest, but for the principal -- both funded and unfunded -- both for bonds and treasury notes.  This establishes the presumption that all public debts are payable in coin, unless the law under which they are issued expressly provides that they may be paid in a different mode;  and this stipulation must be made before the loan is negotiated.

The act under which the five-twenty bonds were issued also provides for the issue of United States notes, and declares that these notes "shall be lawful money and a legal tender in payment of all debts PUBLIC or private."  These notes were issued to an amount of $400,000,000 before the bonds were negotiated.  It is claimed that this provision negatives the implication drawn from the payment of previous loans in coin, especially as when previous loans were made and paid no other kind of money existed, or could have been contemplated.

It is said, however, that the distinguished Secretary of the Treasury who negotiated the five-twenty loan gave a construction to this act at the time the loan was offered; that this was announced to the people, and upon the faith of this the loan was taken.  Your committee can find no official declaration made by the Secretary on this subject until after the loan was negotiated.  On the 18th of May, 1864, he writes to Mr. Hooper that :

"It has been the constant usage of the department to redeem all coupon and registered bonds forming part of the funded or permanent debt of the United States in coin, and this usage has not been deviated from during my administration of its affairs.

"The five-twenty sixes being payable twenty years from date, though redeemable after five years, are considered as belonging to the funded or permanent debt, and so also are the twenty-year sixes, into which the three-year seven-thirty notes are convertible.  These bonds, therefore, according to the usage of the government, are payable in coin."

Mr. Spaulding highly objects to Mr. Sherman's statements;
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It is claimed that this language, used long after the bonds were negotiated, cannot show the understanding of the parties when the bonds were taken, and that it does not amount to a construction of the law, but that it simply affirms an admitted fact that the usage of the government had been to pay all its bonds in coin.  The same declaration might have been made as to all issues of treasury notes, compound interest notes, or certificates of indebtedness, all of which are now paid in lawful money.  Again, it is said that the agent employed by the Secretary did, in his advertisement, affirm that the principal and interest was payable in coin;  that this construction was acquiesced in by Congress, and induced thousands to take these bonds who would not otherwise have done so.  To this it is replied that such a promise is not in accordance with the plain language of the law, and is not a binding construction of the law.  No doubt the agent supposed that before the five years expired specie payments would be resumed.  No one supposed that two years after the war was over greenbacks would still be depreciated.  The advertisement was a supposition of a state of facts to occur five years afterwards, rather than a legal construction of a public law accessible to all men.

And it is contended that, conceding that the agents of the government construed the law as binding the United States to pay the principal of this debt in coin, yet that this construction was not so generally acquiesced in and adopted by both parties to the contract as to create a moral obligation which the United States is bound to execute to preserve its faith.  Is it true that this construction was so generally admitted as to make it a part of the contract ?  Congress uniformly refused to declare this construction as to the five-twenty bonds, but did do so as to the ten-forty bonds.  And it is a further and very significant fact that every State in the Union, with, perhaps, the exception of Massachusetts, put a different construction on this act.  Every State had a public debt.  It stood in precisely the same position as the national debt.  Its bonds had uniformly been paid, principal and interest, in coin, and yet under the law they held that their public faith was complied with when they paid either principal or interest in legal-tender notes, and this construction was acquiesced in by their creditors.  So with corporations and private citizens who had contracted debts which by law and custom had been previously paid in coin considered themselves, and were released by payment in legal tenders.  Now, by a well-established principle of the law of contracts, when it is sought to vary the meaning of the words of a contract by a contemporaneous construction, it must be shown that both parties acquiesced in it, and understood and acted upon it in precisely the same sense, otherwise the words of the contract must govern.  When a general rule is laid down, and an exception is made, it implies that there are no other exceptions.

Duties on imported goods and interest on the public debt are excepted from the legal-tender clause.  This implies the principal of the debt is not excepted.  The construction drawn from the payment of previous loans in gold is answered by the fact that the act under which this loan was issued expressly declares that a note shall be lawful money as well as gold, and shall be receivable in payment of a public debt.  The argument that a construction was put upon the law by the agents of the United States is answered by the fact that this was not a mutual construction recognized by both parties as a part of the contract, but was rather an opinion based upon a supposition of a state of facts which, when the five years expired, did not actually exist.

It is clear that if the bonds are "payable" when due in legal-tenders, they are "redeemable" after five years from the date in same kind of money.  The word "payable" imports a duty or obligation which must be performed at the time stipulated.  The word "redeemable" implies a discretionary power which may be or may not be exercised.  But the same kind of money in the same mode tendered will redeem a note or pay a note.

Your committee have deemed it their duty thus to present the argument in favor of redeeming the bonds in legal-tender notes, for it cannot be concealed that this construction has been adopted by many who disclaim all purpose to evade the public engagements;  still the admitted fact remains that these bonds were generally taken upon the supposition that they would be paid in coin --that this was explicitly declared by the authorized agents of the government in negotiating the loan --that such declaration must have been known by Congress and was not negatived --that it was sanctioned by three successive Secretaries of the Treasury --that upon the faith of it the bonds have been continually higher in market value than the notes and --that a public sentiment both in this country and in Europe would regard it as a breach of public faith.  Public credit is go sensitive a quality that time cannot restore it when impaired.  It is better far to forego a doubtful privilege if, in the judgment of impartial men, we have no right to exercise it.  But the doubt should be promptly removed.  The discussion of the question manifestly impairs the public credit.  Until it is settled no new loan can be negotiated.  The public mind becomes accustomed to the idea of repudiation, and the wildest schemes of paper money worthy of the days of George Law poison the fountains of public and private credit.

It has been proposed that Congress, by joint resolution, declare that the five-twenty bonds are redeemable only in gold.  This, instead of settling the question, will only create divisions and parties, and the resolution, when passed, will be subject to agitation and repeal.


These considerations induce your committee, without deciding the question, to propose a substitution of new bonds, clear and explicit in their terms, for the five-twenty bonds as they become redeemable.  This exchange must depend upon the voluntary consent of the holder, but it is believed that the great body of them will readily make the exchange, and that the government will be able to sell the new bonds at a rate that will redeem or purchase an equal amount of the five-twenty bonds.  It is the manifest interest of the bond-holder, as well as of the tax-payer, to have his rights clearly defined, and that Congress after full consideration should so settle them that they will not be affected by any uncertainty as to the manner of their payment.  If this exchange is refused by the bond-holder it will be time enough to determine whether by the condition of his bond he may not be paid in lawful money.

Will this proposition operate harshly upon the public creditor ?  He holds a security now redeemable.  No one can affirm, that his right to receive gold is clear and unquestionable.  The doubt now does impair the value of his security, and may lead to measures that will seriously affect it.  The security substituted is of equal intrinsic value to that be surrenders;  it is explicit in its terms, and secures a reasonable rate of interest, free from all taxes.  He has already received the interest in coin, according to the stipulation of the bond, thus securing a higher rate of interest on the money invested than is allowed by the policy of our laws to private creditors.  Still, if your committee, after a careful examination of the law, were convinced that it clearly required the payment of coin, they would advise that it be paid in coin.  The meaning of the contract, and not its profit or loss, is the true rule of construction.  To give more than is stipulated to the public creditor is to do injustice to the tax-payer;  to give less is to violate the public faith;  and we, as the representatives of both bond-holder and tax-payer, are not at liberty to do either.

Your committee have heretofore considered this question as involving only whether the present United States notes, limited, as they are, to $400,000,000, can be applied to the redemption of the bonds.