Inflation legislation.
In order to fully comprehend the financial situation of the United States which led up to the inflation legislation, it is necessary to go back to the State and national finances just after the Civil War opened. The demand-note issue of July 17, 1861, was the first attempt to use the government notes as currency. These were redeemable at sight in coin, and were used in the payment of salaries due employes in the departments. The act of Feb. 25, 1862, authorized the issue of $150,000,000 in legal-tender United States notes, $50,000,000 of which were to take up the issue of demand notes. July 11, 1862, an additional issue of $150,000,000 in legal-tender notes was authorized by Congress, $35,000,000 of this to be in sums of less than five dollars. July 17, 1862, an act authorized the issue of notes of the fractional part of one dollar, receivable in payment of all dues, except customs, less than five dollars, and exchangeable for United States notes in sums not less than five dollars. The amount of this issue was not specified. On Jan. 17, 1863, a resolution authorized the issue of $100,000,000 in United States notes for the immediate payment of the army and navy. The amount of this issue was subsequently included in the act of March 3, 1863, which authorized an issue of legal-tender United States notes, in all respects similar to those already issued, to the amount of $150,000,000, and also an amount, not to exceed $400,000,000, of treasury notes, payable at any time within three years, bearing interest not to exceed 6 per cent., and issued in denominations of not less than ten dollars, which should be legal tender for their face value, the same as the United States notes. Under the authority of this latter clause, there were issued of one-year notes, bearing interest at 5 per cent., $44,520,000, and of twoyear notes, bearing interest at 6 per cent., $166,480,000. Authority was given on the same day for the issue of enough fractional currency to bring the amount of circulation up to $50,000,000.Authority having been given by law to reissue indefinitely any of the United States notes, no care was taken, in reissuing them, to maintain any distinction in the character of the notes. The amount outstanding at one time, however, never exceeded the aggregate amount authorized to be issued by the three acts, and its highest amount was reached Jan. 30, 1864, when it was $449,338,902. The total amount of legaltender paper issued by the government, exclusive of fractional currency, having a limited legal-tender quality, may be thus summed up:
| United States notes | $449,338,902 |
| One year 5 per cent. notes | 44,520,000 |
| Two year 6 per cent. notes | 166,480,000 |
| —————— | |
| Total | $660,338,902 |
In July, 1865, the government had outstanding $433,000,000 of United States notes, $43,000,000 of one and two year notes, and $25,000,000 of fractional notes. In his report at the opening of Congress in that year Secretary McCulloch advocated a contraction of the currency, and to carry out this policy Congress, by an act approved April 12, 1866, directed “that of United States notes not more than $10,000,000 may be retired and cancelled within six months of the passage of this act, and thereafter not more than $4,000,000 per month.” Under this act the notes were retired and cancelled as provided by law, and reduced to ashes, as provided by treasury regulations, until threatened stringency in the money market made Congress eager to ward off, if possible, the inevitable result of contraction. [38]
By an act of Feb. 4, 1868, the authority to further retire United States notes was suspended, then leaving outstanding $356,000,000. Now the maximum limit of United States notes had been fixed, by the act of June 30, 1864, as $400,000,000, and during the year 1870 some financial genius discovered that this was meant to indicate the minimum also, and that $44,000,000 in notes, though they had been burned according to regulations, still remained as a reserve, which the Secretary of the Treasury could issue or retire at his discretion. By virtue of this newly discovered discretionary power, Secretary Boutwell, in October, 1871, issued $1,500,000 of this to relieve a stringency on Wall Street. By the following year he had issued $4,637,256 of this reserve, but the outcry against his policy was so strong that he retired nearly all of it, and early in 1873 Secretary Richardson retired the rest. In the latter part of the year, however, on the occasion of the panic, Secretary Richardson reissued $25,000,000 of it to relieve the embarrassed banks.
A bill fixing the legal-tender United States currency at $400,000,000, and making some important stipulations about bank issues, was passed by both Houses early in 1874, but was vetoed by the President. A part of the veto message is here given to show the grounds of his action:
After quoting passages to verify this last assertion, the President said: “I am not a believer in any artificial method of making paper money equal to coin. when the coin is not owned or held ready to redeem the promises to pay, for paper money is nothing more than promises to pay, and is valuable exactly in proportion to the amount of coin that it can be converted into. While coin is not used as a circulating medium, or the currency of the country is not convertible into it at par, it becomes an article of commerce as much as any other product. The surplus will seek a foreign market, as will any other surplus. The balance of trade has nothing to do with the question. Duties on exports being required in coin creates a limited demand for gold. About enough to satisfy that demand remains in the country. To increase this supply I see no way open but by the government hoarding, through the means above given, and possibly by requiring the national banks to aid. It is claimed by the advocates of the measure herewith returned that there is an unequal distribution of the banking capital of the country. I was disposed to give great weight to this view of the question at first, but on reflection it will be remembered that there still remains $4,000,000 of authorized bank-note circulation, assigned to States having less than their quota, not yet taken. In addition to this the States having less than their quota of bank circulation have the option of $25,000,000 more to be taken from those States having more than their proportion. When this is all taken up, or when specie payments are fully restored, or are in rapid process of restoration, will be the time to consider the question of more currency.”Practically it is a question whether the measure under discussion would give an additional dollar to the irredeemable paper currency of the country or not, and whether, by requiring three-fourths of the reserve to be returned by the banks and prohibiting interest to be received on the balance, it might not prove a contraction. But the fact cannot be concealed that theoretically the bill increases the paper circulation $100,000,000, less only the amount of reserves restrained from circulation by the provision of the second section. The measure has been supported on the theory that it would give increased circulation. It is a fair inference, therefore, that if in practice the measures should fail to create the abundance of circulation expected of it, the friends of the measure—particularly those out of Congress—would clamor for such inflation as would give the expected relief. This theory, in my belief, is a departure from true principles of finance, national interest, national obligations to creditors, congressional promises, party pledges on the part of both political parties, and of personal views and promises made by me in every annual message sent to Congress, and in each inaugural address.
An act fixing the issue of United States notes at $383,000,000, the amount then outstanding, was approved June 20, 1874. Between 1868 and 1874 the amount of [39] fractional notes had also been increased from $25,000,000 to $46,000,000. In January, 1875, the resumption act was passed, and under its provisions the retirement of United States notes was again begun. The redemption of the fractional currency with silver was also begun, and went on so rapidly that by the end of 1877 only $16,000,000 of it remained. Congress passed an act, May 31, 1878, forbidding the further retirement of United States notes under the resumption act. But the increase in the commerce of the country had by this time so far readjusted credits that the value of legal tender and coin had become nearly equal. On Jan. 1, 1879, therefore, resumption took place according to law, without any serious derangement of the business of the country.
