Spaulding, in his " Financial History of the War," gave the following

account:

The first legal tender notes were issued bearing date March 10, 1862, and on the back of them was printed these words:

"This note is a legal tender for all debts, public and private, except duties on imports and interest on the public debt, and is exchangeable for United States six per cent. bonds, redeemable at the pleasure of the United States after five years."

The right to exchange these notes at par for six per cent. bonds was distinctly authorized by the second section of the legal tender act, and was in the nature of a contract made by the Government with the holders of the notes. It was inserted as a just and equitable provision for the benefit of those persons who should be compelled, by the legal tender clause, to take the notes, by giving them, at any time, the privilege of converting them into a six per cent. bond. It was, in effect, a forced loan, but the right of immediately returning them to the Government for gold bonds divested the forced character of the transaction of any material hardship. It also had a tendency to prevent any great inflation, for the reason that as soon as this currency became redundant in the hands of the people, and not bearing interest, they would invest it in the six per cent. bonds to prevent any loss of interest.

This right to exchange the notes for bonds was, at the request of Secretary Chase, taken away by the third section of the above act after July 1, 1863. It is true that the Secretary had still the discretionary power to receive the notes at par for bonds, but it never seemed to be quite right to change the law while any of the legal tender notes were outstanding with the above endorsement upon them.

The act forbidding the further cancellation of the United States notes was undoubtedly due to the influence of Mr. Sherman, at the time Secretary of the Treasury, now Secretary of State of the United States. In his annual report for 1877 he considered at great length the financial policy of the Government, and the various forms of money in use. The occasion was one of supreme importance, as the Government, by the Act of January 14, 1875, was to resume specie payment on the first of January, 1879. The question of the kind of money for the future was to be determined, — whether greenbacks should be continued as the money of the country, or whether a return should be made to the money of banks of com

merce springing naturally out of the business operations of the country. Of that discussion Mr. Sherman, in his "Forty Years in the House, Senate, and Cabinet," published in 1895, gave the following synopsis :

I expressed in my report the opinion that the notes of the Government, when redeemed after the 1st of January, 1879, if the amount outstanding was not

in excess of $300,000,000, might be reissued as the exigencies of the public service required. These notes were of great public convenience - they circulated readily; were of universal credit; were a debt of the people without interest; were protected by every possible safeguard against counterfeiting; and, when redeemable in coin at the demand of the holder, formed a paper currency as good as had yet been devised. ... It was conceded, I said, that a certain amount could, with the aid of an ample reserve in coin, be always maintained in circulation. Should not the benefit of this circulation inure to the people, rather than to corporations, either State or national? The Government had ample facility for the collection, custody, and care of the coin reserves of the country. I said that the legal tender quality given to United States notes was intended to maintain them in forced circulation at a time when their depreciation was inevitable. When they were redeemable in coin this quality might either be withdrawn or retained, without affecting their use as currency in ordinary times. But all experience has shown that there were periods when, under any system of paper money, however carefully guarded, it was impracticable to maintain actual coin redemption. Usually contracts would be based upon current paper money, and it was just that, during a sudden panic, or an unreasonable demand for coin, the creditor should not be allowed to demand payment in other than the currency upon which the debt was contracted. To meet this contingency, it would seem to be right to maintain the legal tender quality of the United States notes. If they were not at par with coin it was the fault of the Government and not of the debtor, or, rather, it was the result of unforeseen stringency not contemplated by the contracting parties.

In establishing a system of paper money, designed to be permanent, I said it should be remembered that theretofore no expedient had been devised, either in this or other countries, that in times of panic or adverse trade had prevented the drain and exhaustion of coin reserves, however large or carefully guarded. Every such system must provide for a suspension of specie payment. Laws might forbid or ignore such a contingency, but it would come; and when it came it could not be resisted, but had to be acknowledged and declared, to prevent unnecessary sacrifice and ruin. In our free Government the power to make this declaration would not be willingly intrusted to individuals, but should be determined by events and conditions known to all. It would be far better to fix the maximum of legal tender notes at $300,000,000, supported by a minimum reserve of $100,000,000, of coin, only to be used for the redemption of notes, not to be reissued until the reserve was restored. A demand for coin to exhaust such a reserve might not occur, but, if events should force it, the fact would be known and could be declared, and would justify a temporary suspension of specie payments. Some such expedient could, no doubt, be provided by Congress for an exceptional emergency. In other times the general confidence in these notes would maintain them at par in coin, and justify their use as reserves of banks and for the redemption of bank notes.

There can be no doubt that the notes of the United States seemed to be a great public convenience. All forms of money are alike

convenient so long as circulation is to be had for them, as to their holders they have the potency of capital. That which seems at the outset to be good money may in the end prove to be the worst kind of money, even if finally taken in at its nominal value. No money seems more convenient than the issues of banks made in the discount of "accommodation paper," yet no kind is worse, as the waste and loss are usually in ratio to the amount issued. A long time may elapse before the kind is disclosed. So the notes of the United States, instead of being as "good money as has been devised," were the very worst kind, no adequate provision being made previous to their issue for their redemption, there being no limit to their issue but the caprice or necessity of the issuer. For such money the appropriate penalty will always be exacted. It has in our case been already exacted in the apprehension that has been created, arresting to a greater or less extent all the operations of our people. The penalty already paid exceeds fifty-fold any assumed advantage of "debt without interest." After all that has been suffered a more terrible penalty still may have to be paid, suspension of specie payments by the Government, to be followed by all issuers throughout the country.

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With the Secretary, money, whatever the kind, derives its value from the necessity of a medium of exchange, the greater part of it to remain in circulation. It is only the excess of issue that will ordinarily be presented for coin. As it is the rule with banks to provide reserves equalling twenty-five per cent. of their issues, our Government, when it determined to remain in the field, assumed to provide reserves in similar ratio to its immediate liabilities. It wholly overlooked the fact that in addition to their reserves the banks have the undertaking of the customers to return to them every dollar of their issues without interposition on their part. While with the Secretary the excess only was ordinarily to be provided for, it might happen that all the issues might be suddenly presented for coin. "All experience," he said, "has shown that there were periods when under any system of paper money, however carefully guarded, it was impossible to maintain actual coin redemption." Nothing is easier than to maintain coin redemption of paper money which symbolizes the subjects of consumption, as such money cannot be diverted from its use to reach its constituent; and as the makers of bills discounted, into whose hands, as the holders of merchandise,

the issues of banks necessarily flow, instead of presenting them for coin, will hold them for the payment of their bills. When a currency is symbolic the merchandise it represents will ordinarily be taken for consumption within the time in which the bills have to run. Consumption goes on as steadily after suspension of specie payments by banks as before. To reach their constituents the issues of those in suspension are as valuable as before. In the event of a panic, as issuers naturally stop discounting, sixty days will ordinarily suffice for the return to them of all their issues without the paying out of a dollar of coin. The laws of trade speedily place them in position to resume business, as the gold with which they may have parted returns in the payment of their bills, or, confidence restored, for deposit. Panics arise and runs are made upon issuers solely from the violation of the proper rules of issue. So long as these are observed, no disturbance calling for coin can arise, either in the foreign or domestic trade of the country. But the issues of governments will never be made in the discount of bills the payment of which necessarily retires the issues made in their discount. Their reserves, consequently, the only means provided to meet their immediate liabilities, - will bear only a very small ratio to the amount of the latter, in order that the greatest advantage may be secured from a money of "debt without interest." No other provision for the retirement of the notes of governments will ever be made than their reserves. If full provision were to be made for the redemption of their notes their issue would never suggest itself. If provided by creating debt in another form, they would lose a sum equal to the interest on the amount, no charge being made for their issues, necessarily "debt without interest," or if the amount equal to the issues were provided by taxation the public would be without interest on a corresponding sum.

As panics under a Government currency will necessarily arise, the only alternative is a suspension of specie payment to be proclaimed as soon as it is seen that the run upon it is to be a formidable one. It is here that, according to the Secretary, the value and importance of the legal tender attribute comes in, in order that "the creditor may not be allowed to demand payment in any other currency than that in which the debt was contracted; and further, 66 as every system of paper money must provide for suspension of specie payment it

would have to be acknowledged and declared to prevent unnecessary sacrifice and ruin. . . . In our free Government the power to make such declaration would not be willingly intrusted to individuals, but should be determined by conditions known to all," - that is, first known to the Government, which would be the first called upon for coin, its notes serving as the reserves of all other issuers of currency. "In case of a suspension the fault would be that of the Government, not of the debtor; or, rather, it would be the result of an unforeseen stringency not contemplated by the contracting parties." But with a Government currency all contracts are entered into at the value of coin. The Government notes are assumed to be the equivalents of coin. If, upon suspension, they fall greatly in value, the creditor must suffer in like ratio. The Continental currency, at the outset legal tender, and a very "convenient form of money," circulated for a considerable period at its nominal value. Those accepting it in exchange for property or merchandise, and holding it, made a loss equal to the nominal amount received. The history of the times is full of pictures of the terrible suffering that resulted. In the war of the Rebellion vast losses were suffered from the fall of value of the notes, at one time to about one-third of their nominal value. Fortunately, as was the case of the war of Independence, they have not been repudiated, still remaining the pest and menace of the nation. But where does this function or right of the Government to declare suspension of specie payments leave the commercial, industrial, and monetary interests of the country, — with weak, ignorant, vain, or unscrupulous politicians in the Department of the Treasury, a prey to their caprices or fears; or posing as the particular champions of "the people"? Is it not better to leave the currency to the guidance of national laws than to such guardians as these?

UNITED STATES SAFETY-FUND BANKING SYSTEM.

The second measure that distinguished Mr. Chase's administration of the finances was the establishment of our present National Safety Fund Banking System. The first act therefor, greatly amended by that of June 3, 1864, was passed February 25, 1863. Its most important feature was the provision made for the conversion of the notes of issuers into coin by deposits of securities over which they had no control. No more absurd and ill-timed measure could have been devised. The Government derived no considerable advantage