§ 4. Experiments with paper Money in the United States.

The experience of the colonies before our Revolution is rich in warning examples of the over-issue of inconvertible paper money. Those of Rhode Island250and the Province [pg 356] of Massachusetts251are the most conspicuous, perhaps, because we have better knowledge of them, but other colonies suffered in as great a degree. The experience of the latter illustrates as well as any, perhaps, not only the general theory of inconvertible paper, but the device of supporting the paper by paying interest upon the notes. Although the issues since 1690 had depreciated, in 1702 £10,000 more notes were issued, because, as it was said, there was a scarcity of money. It is always noticeable that the more issues of paper money there are made, the more there is a cry of scarcity, much like the thirst of a hard drinker after the first exhilaration has passed off. On the new issues five per cent interest was paid, and even excises and imposts were set aside as security for their payment. The year 1709 saw a new expedition to Canada, and saw also the broken promises of the province, when £20,000 more notes were put out; the collection of the taxes with which to pay the notes was deferred in 1707 for two years; in 1709 deferred for four years; in 1710 for five years; in 1711 for six years. By 1712 they had depreciated thirty per cent, when the charm of legal tender was thrown around them, but to no purpose. The idea of value was not associated with them in people's minds, and they put no faith in promises. The usual result took place. People divided politically on the money question, and parties began to agitate for banks which should issue notes based on real estate, or for loans from the state to private persons at interest to be paid annually. Such facts show the train of evils following the first innocent departure from the maintenance of a currency equivalent to coin. The people forgot, or did not know, the nature of money, or the offices it performed. They did not understand that creating paper money did not create wealth. This experiment closed only in 1750 (March 31st), when the province had courage enough to resume specie payments. The effect was to transfer the West India trade from paper-issuing colonies to Massachusetts, and to produce a steady prosperity in her business interests.

Chart XI. Continental Currency, Issue and Depreciation.

The issue of paper money as a means of making a forced loan from the people, when there seem to be no other means of getting funds, has been fully illustrated in our country by the Continental currency issued during our Revolution. It is not, however, considered that this is also accompanied by a process by which every debtor takes “a forced contribution from his creditor.” Congress had no power to tax, and the separate [pg 358] States would not do it; and this has been considered as the excuse for making issues of that well-known paper money, which has given rise to the familiar by-word for absence of value, “not worth a Continental.” Without going into details,252in one year, 1779, Congress issued $140,000,000, worth in coin only $7,000,000. They, however, bravely declared that paper had not depreciated, but that the price of coin had gone up! Legal attempts were made to repress the premium on silver; but resolutions do not create wealth as fast as money can be printed. The depreciation went on more rapidly than the issues (see Chart No. XI, in which the black line represents the amounts of issues, and the broken line the depreciation of paper, starting at 100); and, finally, March 18, 1780, Congress decided to admit a depreciation, and resumed in silver at the rate of one dollar in silver for forty in paper.

The question of government issues253of paper money again came up in the United States in 1862, during the civil war, and part of our present currency is the result of the policy then adopted. The first step—the one that generally costs—however, was taken July 17, 1861, when the Treasury issued $50,000,000 of “demand notes,” not bearing interest. These notes, however, were not made legal tender. They could be used in payment of salaries and other dues from the United States. It may be well to state that the Treasury balanced the arguments for and against the issues of paper at the beginning of the experiment, and we can see how these views were realized as we go along. In favor of paper issues it was urged that we could borrow a large amount without interest, as in the case of the Continental currency; that there would be no expense beyond the coin necessary for keeping the paper at par; and that the country would gain a uniform currency. On the other hand, it was seen that there might be temptations to issue without provisions for redemption; that even if a fund were kept, a disturbance of the money market would precipitate a demand for coin, and all upon this single fund; and, lastly, that there were all the dangers of over-issue. Secretary Chase254then decided [pg 359] against paper issues. Government bonds, however, did not sell, and the attempt of the banks toward the end of 1861 to carry $150,000,000 of bonds brought on a suspension of specie payments, December 31, 1861. Without any taxation policy, the country drifted along, until in a spasm of dread at seeing an empty Treasury, Congress passed the legal-tender act (February 25, 1862), issuing $150,000,000 of paper in the form of promises to pay. A committee of bankers showed that the issue could have been avoided by selling bonds at their market price; but Congress would not sell them below par. No necessity for the issues of paper need have arrived. In four months another issue of $150,000,000 was authorized (July 11, 1862); and a third issue of a like amount (March 3, 1863), in all $450,000,000. The depreciation took place (see Chart No. XII), for, as Secretary Chase anticipated, no provision was made for redemption. They were made legal tender, but this “essential idea” did not preserve their value; nor did the provision that they be received for taxes (except customs), avail for this purpose.

The effects of the depreciation were as evil as can well be imagined. (1) The expenses of the Government were increased by the rise in prices, so that (2) our national debt became hundreds of millions larger than it need have been; (3) a vicious speculation in gold began, leading to the unsettling of legitimate trade and to greater variations in prices; (4) the existence of depreciated paper later gave rise to all the dishonest schemes for paying the coin obligations of the United States in cheap issues, to the ruin of its credit and honor; and (5) it has practically become a settled part of our circulation, and a possible source of danger.

Of the whole $450,000,000, $50,000,000 were set aside as a reserve for temporary deposits; but in July, 1864, $431,000,000 were in circulation. At this time (June 30, 1864) Congress, retaining distinctly the feeling that the issue of paper was but a temporary measure, forbade any further issues. Secretary McCulloch, immediately on the close of the war, began to contract, and, by a resolution of the lower branch in Congress (December 18, 1865), a cordial concurrence in the measures for contraction was manifested. Of course, the return from the path of inflated credit and high prices was painful, and Congress began to feel the pressure of its constituents. Had they not yielded, much of the severity of the crisis of 1873 might have been avoided; but (April 12, 1866) they forbade any greater contraction than $4,000,000 a month. Here was a lack of courage not foreseen by Secretary Chase. This was again shown (February 4, 1868) by a law which absolutely forbade the Secretary to further reduce the currency, which now stood [pg 360] at $356,000,000. This marks an important change in the attitude of the Government, as compared with 1862. After the panic of 1873, the paper evil produced its usual effect in the cry for more money, and, as in the Province of Massachusetts in 1712, parties divided on the question of inflation or contraction. A bill to expand the Government issues to $400,000,000 (and the national-bank notes also to $400,000,000) actually passed both Houses of Congress, and we were fortunately saved from it only by the veto of President Grant (April 22, 1874). This was another landmark in the history of our paper money. Secretary Richardson, however, had already, without authority, reissued $26,000,000 of the $44,000,000 withdrawn by Secretary McCulloch, and the amount outstanding was thus $382,000,000. A compromise measure was passed (June 20, 1874), which retained this amount in the circulation.

When the resumption act was passed (January 14, 1875), the provision that, for every $100 of new national-bank notes issued, $80 of United States notes should be retired, resulted in a contraction of the latter from $382,000,000 to $346,000,000. The reason of this was, that there was no provision for the increase of United States notes when national banks withdrew their own issues; and after the crisis many banks naturally did so. The culmination of the policy of Congress came in a law (May 31, 1878) which absolutely forbade all further retirement of United States notes, and we are now left at the present time with an inelastic limit of $346,000,000. Finally, in 1877 and 1878, Secretary Sherman, aided by a most fortunate state of foreign trade, began to accumulate gold in order to carry out the provisions of the resumption act, which required him to resume specie payments on January 1, 1879. He successfully collected $133,000,000 of gold, and on December 17, 1878, the premium on gold disappeared, and resumption was accomplished quietly on the day appointed, without a jar to business.

But it is a significant fact that even after all the evils inflicted on our country by over-issues, in spite of the temptation to misuse paper money if it is in any way permitted, in spite of all the warnings of history, there seems to be a dangerous acquiescence in the presence of government paper money in our currency. It is an open pitfall, tempting to evils whenever sudden emergencies arise. It ought not to be allowed to remain any longer.