XX. THE AMERICAN LEGAL TENDER PAPER. CHARLES F. DUNBAR. FROM QUARTERLY JOURNAL OF ECONOMICS, XI, APRIL 1897, THE HE legal tender notes of the United States present now, as they always have presented, an appearance of great simplicity. There are still but two such issues, the United States notes of the Civil War and the coin notes of 1890: their legal tender power has few exceptions, and the obligation for their redemption is to be read in a few lines. Take away the confusing element introduced by the silver agitation, which is quite extraneous to the original conception of the legal tender paper, and what is in itself better suited for easy comprehension or has more prima facie attractions than a system of government notes, established by the authority and resting on the credit of the nation? But, simple as the notes themselves may appear, it is by no simple process that the conditions under which they are now issued have been arrived at. Our legislation on this subject now covers a period of thirty-five years. During that time there has been a rapid succession of important legislative acts bearing upon the legal tender paper and some administrative acts of equally serious import. The system, as we have it to-day, is, therefore, a product, not of any compact declaration by the law-making power, but of a singularly complex series of laws and executive orders. It is to some aspects of this series, or, in other words, to some aspects of the history of the legal tender issues, and to some considerations flowing therefrom, that I desire to direct the attention of readers of this article. Accepting the constitutionality of the legal tender acts, as settled by the repeated decisions of the Supreme Court, and waiving all questions as to the necessity of the acts or of either of them, as foreign to my present subject, I wish to inquire what inferences are to be drawn from the manner in which the authority of Congress has been exercised, and how far the prima facie attractions of our paper legal tender are thereby affected. For this purpose, it will be necessary to make a short recapitulation of the chief legislative and executive acts which mark the period opened by the first Legal Tender Act and relate to the same subjectmatter, and to do this even at the risk of stating much with which the reader must be supposed to be familiar. 1. The leading advocates of the act of February 25, 1862, pressed that measure upon Congress as a temporary expedient forced upon the country by the stress of war (1861-62, ch. 33). They also pressed it as a measure which had its place in a large scheme of legislation, by which they expected to provide a permanent paper currency exclusively of bank notes. To meet the urgent needs of the Treasury, a limited amount of legal tender notes were to be issued, exchangeable at the pleasure of the holder for United States bonds, and the bonds were to be made the basis of a bank currency. Issued, exchanged, and reissued, the notes were expected to open a market for a large amount of bonds, and finally to be absorbed and disappear. It may be doubted whether the majority in Congress were then ready to accept the whole of this comprehensive scheme, but there is no doubt that the majority agreed to the issue as something not intended long to survive the exigency which called it into being. Even with this restricted view of the scope of the legislation, the provision making the notes exchangeable for bonds was plainly a matter of prime importance. It was looked upon as offering a possible outlet for the notes in case the circulation were over-loaded with them, and it provided the means for their withdrawal when the present need should have passed by and the public credit should have begun to advance. The bonds having been made coin bonds, the exchangeability of the notes was the ground of hope for their present credit and ultimate redemption. 2. But the expectations of the advocates of the first Legal Tender Act were disappointed. Although some sanguine leaders had predicted that the whole of the first issue would not be used, a second issue was called for by the Treasury, and a third. It was also discovered that, so long as notes could be exchanged for bonds at par, the price of bonds could not rise above that point, and that with this limitation of possible profit the present inducement for exchange was too small to invite large operations. At the instance of the Treasury, therefore, and in order to facilitate the sale of bonds, Congress, in the Ways and Means Act of March 3, 1863, declared that the right to exchange the notes should cease from the first day of the following July (1862-63, ch. 73, § 3). One year, therefore, saw the central provision of the original system abolished, and without debate in either House. "This act," says Mr. Sherman, in one of his numerous references to the subject," though convenient in its temporary results, was a most fatal step, and for my part in acquiescing in and voting for it I have felt more regret than for any other act of my official life."1 3. The summer of 1864 saw the worst fears as to a resort to a paper legal tender fully justified. At the end of June the outstanding United States notes were $431,000,000; there were also in circulation $168,000,000 of interest-bearing notes. which were a legal tender for their face; and, in response to the urgent demand of the Treasury, authority for an additional issue of $200,000,000 of similar interest-bearing legal tender notes was to be embodied in the Ways and Means Act. Gold, which in April stood at 180, was starting on the rapid ascent which carried it to 240 on the 1st of July. Congress was engaged in an unsuccessful effort to prevent time-sales of gold and of foreign exchange, by means of what has been known as "The Gold Bill;" and confusion, distrust, and discredit were rapidly gaining ground. As a reassuring measure, therefore, to quiet public alarm, a clause was incorporated in 1 Speech in the Senate, March 6, 1876; to be found in his " Speeches,” p. 496. the Ways and Means Act declaring that the total amount of United States notes should never exceed $400,000,000, and a possible temporary addition of $50,000,000, if required for the payment of private deposits then held by the Treasury (1863-64, ch. 172, § 2). This limitation of the issue of United States notes was a wise concession to public opinion, and without doubt had its influence in the next few months in raising the public credit; but the ability of Congress to maintain such a restriction under the pressure of any great exigency was never put to a severe test, and the happy ending of the war nine months later abruptly introduced an entirely new order of questions relating to the legal tender issues. 4. So far as the temper of the public was concerned, the first months of peace were remarkably favorable for measures looking towards specie payment and the withdrawal of the legal tenders; and it was probably a misfortune that Congress was not then in session to improve a moment which in other respects was opportune, and to do this before the apprehension of contraction or any of the real dangers of that process should be seriously felt. But when Congress met in December, 1865, after the announcement of his policy by Secretary McCulloch, the strength of feeling was still such that, by a vote of 144 to 6, the House of Representatives adopted a resolution of cordial concurrence" in the views of the Secretary of the Treasury in relation to the necessity of a contraction of the currency with a view to as early a resumption of specie payments as the business interests of the country will permit," and pledged its co-operation to that end. 5. A secretary gifted with tact in dealing with other men, and standing aloof from the political contests of the time, might perhaps have made this proffer of concerted effort the basis of a successful policy; but Mr. McCulloch had not that tact, and was so far identified with the reconstruction policy of President Johnson as to share the odium incurred by the latter in his struggle with Congress. Four months after the declaration of December, 1865, Congress, in making provision for the retirement of Treasury notes, forbade the Secretary to retire more than $10,000,000 of United States notes within the next six months, or more than $4,000,000 in any one month thereafter (1865-66, ch. 28). 6. The Secretary did not use to its full extent the authority allowed him by Congress. The Commercial revulsion which began in London in 1866 was followed by continued depression in this country, the public mind became more and more sensitive on the subject of contraction, and wild demands began to be made for the payment of the five-twenty bonds in legal tender notes. The Finance Committee of the Senate in December, 1867, reported a bill providing for the exchange of these bonds for a five per cent. coin bond, the offer resting upon the avowed calculation that the right of the public creditor was doubtful, and that he would find it for his advantage to take a bond bearing a lower rate of interest and free from cloud. In the discouraged state of mind. indicated by this proposition, Congress, in February, 1868, "suspended" altogether the authority previously given to the Secretary "to make any reduction of the currency by retiring or cancelling United States notes;" and thus the first movement for a return towards specie was peremptorily closed (1867-68, ch. 6). The notes outstanding had been reduced from about $400,000,000 to $356,000,000; but this reduction had been offset by an increase of national bank notes during the same months. 7. Happily, the Republican National Convention in July, 1868, planted itself on firm ground as to the payment of the five-twenty bonds, and in its platform denounced "all forms of repudiation" and called for the payment of all creditors, "not only according to the letter, but the spirit of the laws." The Democratic party a few weeks later gave its support to what was supposed to be the popular craze of the day, and upon this issue and others was badly beaten. General Grant was elected after an excited canvass; and the popular verdict was registered in an "Act to strengthen the Public Credit," approved in March, 1869, being the first act passed under the new administration. This law declared the faith of the United States to be pledged to the payment of both notes and bonds in coin, except when the law under which they were issued |