A CRITICAL EXAMINATION
OF OUR
FINANCIAL POLICY
SOUTHERN REBELLION.
BY
SIMNO  NEWCOMB.
NEWYORK:
D. APPLETON AND COMPANY,
443 & 445 BROADWAY.
1865.
-          4'-,. iO
C.
DURING THE
'A 
SA 5
e/vj/
E NrTRED according to Act of Congress, in the year!865, by
D. APPLETON & COMPANY,
In the Clerk's Office of the District Court of the United States for the
Southern District of New York.
h   44.,  
PREFACE.
THE  objects of the following essay are to
trace our present financial system to its effects
on the power of our Government, the permanence of our institutions, the future wellbeing of society, and other great national
interests; to show how certain principles of
social science are illustrated in its workings;
and, incidentally, to inquire in what ways it
may  be  improved.   The  work  generally
avoids those topics of merely passing import.
ance, the discussion of which belongs to the
daily press, and confines itself to questions
of permanent interest. Aiming its criticisms
at the root of evil rather than its branches,
its fundamental doctrines are few and simple.
L-o i 
PREFACE.
The great desire of the author has been to
produce full conviction of the truth of these
doctrines. He has, therefore, sought to found
them solely on those facts of human nature
which, established by the general experience
of mankind, must be admitted by all unprejudiced men, and those facts of history which
are absolutely indisputable. For the same
reason he has avoided that large class of
questions which do not admit of a decided
answer.
The first two chapters were suggested by
the general disposition manifested in our legislative halls and our organs of public opinion,
to ignore all that the nineteenth contury has
done for financial science, and to adhere entirely to the views and practices of the eigh
teenth.  Their object is therefore less to develop a complete system of ideas than to
amend the most serious defects in the popular Political Economy.
4 
CONTENTS.
CHAPTER I.
MONEY AND TRADE,......          9
The Laws of Trade Founded on Human Nature-Object of
a Government Financial System-Popular Errors re      specting Finance-The Laws of Value-Popular Theo      ries respecting the Degradation of our Standard-Spec      ulation-The Money Market; what Controls it?
CHAPTER II.
THE FINANCIAL ELEMENTS OF MILITARY STRENGTH,  84
The Measure of Military Strength-Money not a Source of
Power-Frugality the real element of Power-Political
Economy not Conserved with our Highest Good  Should we Save our Gold?-Our War Expenditure,
what does it Mean?
i 
PAGM 
CONTENTS.
CHAPTER III.
PAG6
60
OuR DEBT AND OuR TAXES,.....
Relation of the Individual to the State-Supposed Bene      fits of the British Debt-Perils in which our Debt will
Involve us-How to Carry on War without Borrowing
-When Advisable to Borrow-Ought our Debt to be
Taxable?
CHAPTER IV.
THE LEGAL TENDER NOTES-THEIR EFFECT ON PUB      LIC CREDIT,...........
What the Legal Tender Act was-Failure to give the Notes
any Element of Value-The Evil, one of Principle      Payment of the Principal of the Public Debt-The
Price of Gold and Government Bonds-Causes of the
Depreciation in the Gold Value of the Bonds-How all
future Loans should be Contracted.
CHAPTER V.
INFLUENCE OF THE LEGAL TENDER NOTES ON PRI      VATE FAITH AND THE BUSINESS OF THE COUN      TRY..............
Laws of Value of the Currency-Effects of Depreciation
on Banks, etc.,-Effects of Depreciation on Ownership
of Property-Effects of Depreciation on our Future
Welfare.
Popular Views-The English Bank Money-Continental
Money, what it did-Rise and Fall of Assignats.
6
88
122
146 
CONTENTS.
CHAPTER VII.
PAG1
. 159
WERE LEGAL TENDER NOTES NECESSARY?
The True Functions of Notes-Our Financial History had
Specie Payments been maintained-Ought the Notes to
be Irredeemable?-Ought they to have been Legal Ten  der for Principal of the Public Debt?-Was it neces  sary that they should be a Legal Tender for Private
Debts?-Examination of Arguments for the Legal Ten  der Clause-Causes of our Financial Mistakes.
,CHAPTER VIII.
THE NATIONAL BANKING SYSTEM,....
Functions of Banks-Popular Errors respecting our Cur      rency-Who Lends to the Government?-Working of
our National Banking System-Unwise Restrictions in
the way on which they might use their Votes-Their
Functions as Fiscal Agents.
7
199  
A CRITICAL EXAMINATION
OF OUR FINANCIAL POLICY.
CHAPTER I
MONEY AND TRADE.
THE feelings and opinions, the hopes and fears
of the million, form an ocean of thought in which
the individual is lost as the drop is lost in the Atlantic. Tempests of passion agitate the surface of
this ocean, but they cannot change its general level,
nor drive it from its set bounds. It ebbs and flows
under the influence of victory and defeat, and a
thousand other causes, many of which we can trace
only in their effects.  Like the Atlantic, this ocean
is at once the most uncontrollable of powers, and
the most manageable of instruments. Address the
sea; reason with it; legislate against its tides; quarrel with its storms; enact that it shall change its
winds; complain of its destructiveness; demonstrate
to it that there is no good cause for the fury of its
waves, and you are impotent.  Accept it, with all
its vagaries, as unchangeable facts; study its winds
1'
- 6. 
MONEY AND TRADE.
and currents as they are, without seeking to change
them; trim your sails and guide your helmn accordingly, and you are carried in safety to your desired
harbor. With all the improvements man has made
in navigation since the time the Phoenician first
launched his boat on the Mediterranean, he has never
brought a breath of wind under his control, or commanded a single billow. Yet the most adverse
wind is his servant, and takes him whither he will.
In a similar way kings and statesmen have swayed
"the rod of empire" over millions, and made the
very selfishness of mankind to minister to them
without causing any change in human nature, or
altering the motives of a single individual.
Of this mass of thought and opinion none is more
intractable when we seek to control it, none more
manageable when we adopt the proper means to use
it, than that which relates to money, prices, and credit. No sooner do men begin to trade in great numbers than they find laws of trade which are beyond
individual control. They find that an increased supply of an article will diminish its price, and an
increased demand raise it; that goods will flow to
the best market in defiance of every thing except
forcible prevention; that the man who sells cheapest will have most custom, though hated by the
community. So long as no attempt is made to
interfere with the orderly operation of these laws
they might pass with little notice, But, by and
by the king, or the Government, finds that they
e
10 
MONEY AND TRADE.
are operating so as to be detrimental to his interests;
that the prices of articles which he wishes to obtain,
articles which suddenly become indispensable to the
public good, jump up with equal suddenness, that
his promises to pay are not properly appreciated
by the community; that men will prefer the money
which he cannot obtain to that which he has to pay
with. He attributes all this to the machinations of
his enemies, and the heartless selfishness of individuals, and forthwith resorts to penal  and mandatory legislation for a remedy. He enacts that his
promises to pay shall be as valuable as gold. Gold
instantly disappears. He then enacts that they
shall be legal tender. Immediately every man who
has goods for sale doubles or trebles their prices,
so that the Government is still no better off than
before. As a last resort he enacts that bread and
meat shall be sold at old prices. Bread and meat
thereupon disappear like the gold, except as they
are sold clandestinely at the increased prices. The
butchers no longer come to market, the bakers disappear from the community like icebergs melt in
the Gulf Stream. The farmers cease to cultivate
their fields, engines stop working, mines fill up,
grass grows in the streets, starvation and ruin stare
the public in the face.
Experiments like this have been tried by kings
and princes and legislators from time immemorial,
and always with the same result. The weakest
Government, and the most powerful; the king and
11 
MONEY AND TRADE.
the president, the despotism and the republic; the
ferocity of the triumvirate and the wisdom of Parliamenlt have been alike impotent. Why is this?
Why cannot two men or two millions of men,
acting through their chosen representatives, mutually agree that they will furnish the products of their
labor in certain quantities and on certain fixed
terms? What laws regulate the value of gold, the
price of government stocks, and the price of goods?
These questions must have risen in the philosophical mind on every exhibition of the phenomena to
which we have alluded. In answering them a new
science was constructed, that of Political Economy.
This science showed how the selfishness of individuals was made, in the social system, to contribute in the highest degree to the public good. It
showed that men labored primarily, not for the
benefit of others, but of themselves; that they benefited others by their labor on condition that others
should benefit them; that they would dispose of
their labor in such manner and give its products to
such persons as to receive the greatest possible
benefit in return; and that thus, while every man
would really be working from pure selfishness, that
very motive would lead him to exert himself so as
to do the greatest good to the community.
It has also shown that the function of money
is simply to cause these exchanges to be made
in the way most advantageous to all parties; so
that every man shall be able to receive whatever
12 
MONEY AND TRADE.
article he most wishes in exchange for his goods, no
matter whether the man who makes this article
shall want his goods or not; that the value of this
money, if useless for other purposes than money, is
fixed entirely by the wants of the community; and
that the value of all manufactured goods, and indeed
of every thing else, is in the long run measured
by the amount of labor necessary to their production, or their possession.
It can also be shown that for a people to fix
among  themselves  and mutually a standard of
prices, such that every man will have to exchange
his goods for so little money that he would in lis
own heart rather have the goods than the money,
is simply to introduce a system of communism, in
which men will have to work, not for what they
receive in exchange for their goods, but for the
benefit of the commonwealth. True, if men were
neither indolent nor selfish the community would
then enjoy nearly as much wealth as they actually
do; but the fact is that men always have been
indolent and selfish, and always will be. These
characteristics are not to be deplored; they only
keep in operation the just principle that the fruits
of every man's toil belong to himself, and that he
has the right to fix the terms on which he will part
with them.
Political economy as a pure science is founded
on this postulate of human nature: that every man
will dispose of his labor in such a way as to pro
13
.r 
MONEY AND TRADE.
mote to the greatest possible extent the objects of
his desire; and will endeavor to attain any definite
end with the least possible amount of irksome labor.
The savage and the sage alike exhibit this characteristic, they differ only in the nature of their desires.
On it is founded the science of Political Economy.
All the conclusions of this science are perfectly true
and quite applicable to practice so far as the actions
of men are governed by it, and no longer. Now, it is
a fact of observation which has held true in all ages
and countries, that all voluntary exchanges of property between man and man are made in obedience
to the above postulate. No man parts with his
goods except he is to receive in exchange something
which he prefers to them. No man will work two
days, or give two dollars for an object of desire,
when he can get it for one. Any government
polity which supposes men, in managing their
money matters, to be actuated by benevolence, malevolence, public spirit, political enmity, or any
other motive than self-interest, is fiundamentally
defective, and will be sure to fail. Hience, to answer the question, "What will a man do with his
money? " it is only necessary to discover what it is
for his interest to do.
We are not at present concerned with the whole
of this science, but with an application of its principles to our financial policy during the present war.
Four years ago our Government was attacked and
our liberties threatened by a combination at once
14 
MONEY AND TRADE.
the most malignant and the most unscrupulous
which any people ever had to contend against.
The Government and the social system which we
were to transmit to our posterity had to be decided
by the issues of battle. A vast amount of work
had to be done in the way of feeding and clothing
armies, casting cannon, shot, and shell, and putting
in operation all the complicated enginery of modern
warfare. The war once inevitable, each of our
twenty millions of people was willing to bear his
share of its burden, rather than see his country subjected to those who would conquer it. To distribute
this burden so that none should be able to shirk his
just share, or throw it upon his neighbor; so that
the total burden should be as light as possible; so
that the ownership of property should be disturbed,
the business and growth of the country impeded,
and honesty and frugality discouraged as little as
possible; this was or ought to have been the financial problem. True, it was disguised under the form
of raising loans and levying taxes, so that the end
really aimed at was almost lost sight of, and to this
circumstance all the mistakes that were made may
perhaps be traced.
The attention of the reader is called to the
means employed to attain these ends. It is proposed to examine how far the burden of the war has
been equitably distributed, and what effect the
policy pursued has had and is likely to have upon
public credit, private honesty, and the ownership of
15 
MONEY AND TRADE.
property. The whole foundation of our reasoning
shall be admitted principles or indisputable facts,
and all appeal to or respect for mere authority shall
be avoided.
It will conduce to clearness if we first try to
form a definite idea of what financial science really
is. Notwithstanding the simplicity of its principles,
and their continued illustration in the affairs of life,
the most crude and impractical ideas are entertained
respecting them. We are prone to fall into two
great errors, closely connected with each other:
firstly, that there is no such thing as financial
science; and secondly, that questions of finance are
too mysterious to be comprehended by the people at
large.
The speculations of many of our newspapers and
other organs of public opinion illustrate the first
mistake. Their reasonings on questions of government credit are remarkably like the speculations of
the ancient philosophers on questions of natural philosophy. We find the same disposition to frame
imaginative theories, and the same indisposition to
learn any thing from experience. We see every
effect, every fall in stocks, and every rise in gold
attributed to some cause, but how the cause produces the effect is left as much a mystery as how a
comet or an eclipse used to cause the death of a
king or the fall of an empire. The money market
is peopled with good and evil spirits, with "gorgons, hydras, and chimeras dire," who are waging a
16 
MONEY AND TRADE.
perpetual war, or playing an endless game of
Stygian ten-pins, using government stocks for the
pins. Like those household spirits who are always
ready to masticate a child without reference to the
calls of their stomachs, or the gustatory pleasure to
be derived from the operation, these bulls and bears,
hobgoblins of the stock market, are not animated by
any well-defined motives except a Satanic desire to
destroy the government credit. It can, I trust, be
shown to the satisfaction of every thinking man, that
all these sprites, including that king of hobgoblins
the gold speculator, are as powerless to injure the
government credit as they are to change the course
of the wind.
The second error to which we have referred is
worthy of much more careful examination. That
the principles of finance, like the art of banking,
are to be learned by long experience behind a counter, and that those only who have had this experience are qualified to judge of the effects of financial
measures, is an opinion so respectable and conservative that it may seem an art of presumption to
controvert it.  There is a disposition to look on
finance as an art to be learned in school or the
counting-house, rather than a science to be studied
by the aid of human nature, and the use of sound
logic. In opposition to this view it is maintained
that  common  sense, close study,  and attentive
thought, with such experiential knowledge as every
one may derive from the observation of current
17 
MONEY AND TRADE.
events are all that is necessary to enable any one to
comprehend the working and the effects of any
financial system, and to judge the arguments for
and against it; and that a lawyer may therefore be
as good a judge of such a system as a banker, provided that he will make himself master of the principles on which it is founded.
It will be universally admitted that experience
can increase any man's power of correctly judging
the effects of a new measure only when the things
to be judged are similar to those which he has met
with in experience. For instance, if a banker had
always done business in a community which would
allow nothing but coin to circulate as money, he
would not thereby be better qualified to judge of
the finances of a people whose circulating medium
was irredeemable paper. Nay, he would be rather
worse qualified, because he would be likely to adopt
conclusions founded on his former experience, without duly considering the change of circumstances
he might consider money as being simply money,
whatever its material, and totally forget that paper
and metallic money are governed by entirely different laws.  To judge the effects of a new measure
adapted to new circumstances, requires experience
of old measures much less than sound judgment,
a clear comprehension of human nature, and a clear
understanding of Political Economy.
But if we propose to put an old plan once more
in operation, will not the advice of those who have
18 
MONEY AND TRADE.
seen the old plan work be of great value   Undoubtedly it will. A young cashier of a new bank
will seldom fail to be benefited by the advice of an
old cashier. The advice of Washington, Franklin,
and ilamilton, who saw the rise, fall, and effects of
the Continental money, would have been invaluable
when it was first proposed to issue greenbacks.
Still more valuable would have been the advice of
Mr. John Stuart Mill, because he not only knew
what had been the paper-money experience of past
generations, but in addition thoroughly understood
the principles which must underlie every financial
system. is opinion ought therefore to have been
entitled to more weight than that of any banker or
board of trade.
The weight which any opinion ought to carry
with it depends very much on the reasons assigned for it. In a science so exact as that of political economy, we can trace the effect or every intelligible cause. If, then, we are informed, on authority, that such a measure will produce evil effects,
and such another measure good effects, we may
reasonably demand to know how this good or evil
is to be produced. If the authority fails to explain
to our entire satisfaction the relation between the
cause and the effect which he predicts, if he claims
that it is something which no one but financiers can
understand, then we may safely reject his advice. It
is not enough that we know certain effects, good or
evil, to have followed certain measures; we must
19 
MONEY  ND TRADE.
also be able to understand the machinery by which
these effects were produceed. It is now proposed to
elucidate some of the most elementary principles
which govern the working of every system of financial machinery.
In the first place, the desires and opvin?ons of
men are to be accepted as fundamental facts, without criticizing the foundation on which they rest.
Government credit is a fact, not a mathemetical
theorem. It is not to be measured by calculating
our resources, praising our honesty, and demonstrating our ability to pay, but by observing what
our bonds sell for in the public market. To say
that men ought to give more or less than they do,
because the bonds are really worth more or less, is as
idle as to say that stones ought to float, or wood sink.
The financier is not concerned with what ought to
be, but with what is; not with what men ought to
think, but with what they do think. He does not
seek to mould public opinion, for he knows that the
money market is insensible to argument or expostulation.  Men are determined to be their own judges
of what is for their own pecuniary interests. We
have had pamphlets proving that we are amply
able to pay off our national debt, and publications
trying to show that such payment is impossible; but
the price of government bonds refused to respond
to either argument. During the winter of 1862-'3
the value of 20 year six per cent. bonds gradually
fell far.below that of legal tender notes. During
20
I. 
MONEY AND TRADE.
the fall the public was almost daily lectured on the
absurdity of preferring a debt which bore no interest, and which depreciated twenty or thirty per
cent. below coin, to a debt which bore interest in
coin, but the lecturers might as well have talked to
the winds.  The bonds continued to fall until, with
the improvement in the military situation, and the
increased issue of notes, the money market slackened,
and the demand for the bonds began, from this
cause, to increase. Deeds, not words, is emphatically the maxim of the stock market.
In the next place the fundamental postulate of
political economy already alluded to, that every
man will seek to attain the objects of his desire at
the smallest expense of labor, is to be taken for
granted, else financial science can have no existence.
Actions not in accordance with this principle are
mere child's play.* Our whole monetary and industrial fabric rests upon it. From it follow the
laws of value, and price, which we shall briefly set
forth and illustrate.
1. The real value of an article, money included.
is measured by the least amount of labor necessary
to its possession. If a barrel of flour costs three
days' labor, and a coat costs twelve, then one coat
will, on the average, sell for as much as four barrels
of flour. So long as an ounce of gold can be got as
* When Vanderbilts arise in sufficient number to give us an ironclad navy, it will be time to cite examples of patriotic munificence as
exceptions to this rule.
21 
MONEY AD TIRADE.
easily as a coat can be made, we may be sure that
the latter will sell for as much as the former.
2. The relative value of articles, thus fixed, fluctuates under the influence of variations in the supply and  demand.  But the equilibrium cannot be
permanently changed by the action of these causes,
because, if they continue, men will gradually give
up the production of those articles which are too
cheap, and apply themselves to those which are too
dear, until, by'competition, the equilibrium of prices
is restored. Indeed, a largely-increased demand, if
permanent, will generally diminish the value of the
article, because things can be made cheaper when
made in large quantities.
3. Whenever the business of a country rises
above mere barter, a common accepted standard,
by which every man can estimate the value of his
goods, becomes indispensable. A designated weight
of one of the precious metals forms the best standard attainable, because these metals are universally
desired, and subject to no serious fluctuations of
value.  Hence they have been used for this purpose from the earliest ages. The price of an article
is its value, measured by the accepted standard.
By a change in the standard, the price may change,
without any corresponding change in the real value,
just as by diminishing the yard measure we increase the number of yards in a piece of cloth.
The cupidity and the prejudice of governments
have many times prompted the alteration of the
22 
MONEY AND TRADE.
legal standard. This has generally been done by
changing the weights of the coins; as when the
profligate Roman emperor Elagabulus, who was entitled to receive pieces of gold from his subjects,
cunningly increased the amount of gold in the
aureus;* and the kings of England, when they
found their debts pressing heavily, diminished the
weight of the pound sterling, in order that they
might the more easily discharge them.t In modern times the change of standard has generally been
effected by substituting paper for coin. In such
cases ignorance and prejudice have generally dictated the total repudiation of the old standard, and
the reference of all values to the new one. This
has been aptly likened to "hiding the thermometer"
in order to avoid the heat.
These degradations of the standard of value, in
order that debts may be more easily discharged, are
as gross a fraud as a diminution of the yard measure by a power which had agreed to furnish a cer
* Enyclopedia Britannica (Art. MONEY).  It is here suggested
that Elagabalus took the hint from a governor of the Gauls under
Augustus, who divided the year Tmto fourteen months, instead of
twelve, because the Gauls paid a certain monthly tribute.
t From the Norman Conquest until the reign of Edward III., the
pound sterling contained a pound of silver. From that time until
Edward VI., there was an almost continual degradation of the standard. It is now less than one-third its original value. But this was
nothing to the doings of the House of Stuarts, in Scotland, who, in a
century and a half, reduced the quantity of silver in the pound to less
than one-twentieth its former amount.
23 
MONEY AND TRADE.
tain amount of cloth, in order that he might fulfil
his contract in name without doing it in deed.
Why, then, have they not met with a reprobation
corresponding to their criminality? The answer is
obvious: a measure of value is not directly cognizable by the senses, like the length of a yard-stick.
For a long time, therefore, the name usurps the
place of the thing.  The new "pound," "franc,"
or "dollar," is called by the same name as the old
one; and even when every one sees that one old dollar will sell for two new ones in the market, it is
difficult to conceive that this does not proceed in
part from an increase in the value of the old one.
The illusion can be completely eradicated only by
remembering that the gold mines yield their treasures as freely as ever, and that in foreign countries
the old coins are no more valuable than before.
But, if the yard measure were reduced to eighteen
inches, every one would see at once that the new
yard was only half as long as the old one; that a
piece of cloth which formerly measured thirty yards
was no longer than before, although it now measured sixty; that if he had loaned thirty yards of
cloth before the change of measure, he would be
defrauded out of half his just due if compelled to
receive thirty of the new yards as an equivalent.
4. Although, by such changes in the standard
of value, the equilibrium of prices may be temporarily disturbed, this disturbance cannot be permanent. The disturbance is felt in the wholesale be
24 
MONEY AND TRADE.
fore being felt in the retail market; in the prices of
those articles the production of which requires an
easily-calculated expenditure of labor, before it is
felt in those of which the labor of production cannot be exactly estimated. Sooner or later, however,
all prices must change to correspond to the new
standard.   The price of no one article of general
use can be permanently raised in this way without
lifting all other prices with it. Let us take gold
for example, because this is the standard to which
all other standards must be referred. Suppose that
every man who has a gold dollar can get two dollars in currency for it from a speculator, from his
neighbor, or from any one else, while they will give
him no more than before for the products of his
labor. If he makes butter, flour, clocks, or any
thing which we are in the habit of exporting, selfinterest will make him refuse the prices offered, and
export his goods, in order to receive gold for them.
Thus, the price of his goods will certainly go up to
correspond with gold. The prices of goods which
cannot be exported must follow, because otherwise
men would gradually stop making them, and turn
their attention entirely to exportable commodities.
Thus beginning at the stock and wholesale market,
the wave would gradually roll under every class of
business, until it reached the street lozenge-vender,
who would charge four cents instead of two for a
paper of lozenges.
The increase of prices in our country furnishes
2
25 
MONEY AND TRADE.
a very good illustration of the prineiples laid down.
Two economic theories respecting this state of things
have been so widely disseminated that it is well
worth while to give them a close examination.
Those who hold them would probably express them
as follows:
1. The rise in gold does not correctly and fairly
express a depreciation of our legal standard of
value, but is in part fictitious. Although a dollar
note will only bring from forty to fifty cents in gold,
it is really worth more.  The price of every thing
did not go up to correspond with gold.
2. Granting that the depreciation of the standard is real, it is the work of stockjobbers and specuLlators, who have compassed the depreciation in
order to forward their own selfish ends.
Perhaps the former doctrine can be most easily
and conclusively refuted by an appeal to first principles. It is indisputable that men on the average
can now possess themselves of a dollar in greenbacks with as much ease as they could obtain forty
or fifty cents in gold before the war, barring the insignificant tax on production levied by the General
Government. Every man who feeds us, every man
who clothes us, nearly every one who ministers to
our wants in any form, gets in return from two to
three times the money he got before, without working any harder for it. The merchant makes twice
as much money by buying and selling the same actual amount of goods, the butcher gets two or three
26 
MONEY AND TRADE.
times as much for his meat, and the farmer for his
corn. Labor being the most natural measure of
value of which we can conceive, it follows that men
do not desire and therefore do not value a dollar of
our present currency more than the amount of our
old money which the present dollar will purchase.
It may be answered that there is no good reason
for this great depreciation of the standard; that the
notes are really secure, and will be as good as gold
when the war ends.   The only objection to this
argument is, that it does not bear on the point in
question. We are not concerned with the real value
of the money, but with the estimate which the community at large set upon it. Individuals are but
drops in the ocean.  A few such drops may object
to the tidal influence of the moon and insist on remaining on the beach while the tide recedes, but the
ebb and flow will go on just the same in spite of
them.
In logical strictness, the second argument, that
against speculators, is irrelevant to our subject.
The caucse of the depreciation does not alter the fact,
nor does it affect the consequences which flow from
that fact. It is of interest to us only so far as it is
under our control, and it is impossible to control
speculation without entirely prohibiting all business.
But the doctrine that speculation is the cause of all
the disturbance has been repeatedly endorsed in such
high official quarters, and has taken such deep root
in the public mind, that it is worth while to analyze
27 
MONEY AND TRADE.
it.  Singular as it may seem, this doctrine has been
most strenuously maintained by the supporters of
the paper standard, who should have been the last
ones to admit it; for if such a standard is really at
the mercy of a class of gamblers, this very fact would
furnish the strongest argument against its adoption.
Speculation consists in buying goods in anticipation of a rise in their price, in order to make a profit by selling them after the rise.   The speculator
may intend to bring about the rise himself; or he
may only take advantage of it without being in any
way the cause of it.  If the market offers but a
limited supply of some indispensable article, he secretly and suddenly buys the stock on hand, and
then compels the public to buy from him at his own
price until a new supply can be obtained. In such
a case as this the speculator is really the cause of
the rise. The more necessary the article and the
more limited the supply, the more easy is this operation. Gold is about the last thing in the world to
be operated on in this way, because it is something
which the whole world are always ready to supply,
and which no one is compelled to provide himself
with.  The absurdity of any attempt to raise the
price of gold artificially may be easily illustrated.
Suppose that all the speculators in the country unite
themselves into a firm for the express purpose of
raising the price of gold.  While the people at
large are willing to sell their goods at double the
gold price, this firm sets the price of gold at 250.
28 
MONEY AND TRADE.
To make the case as favorable as possible, suppose
they have got possession of all the gold in the market and refuse to sell for less than 260, while they
offer 250 for all that may be brought to them.
What will be the effect? A shipper has $10,000 in
gold which he is about to export to England for
dry goods. On seeing the speculator's offer, he
modifies his venture by selling his gold to them for
$25,000 in currency, with which he buys 2,000
barrels of flour at $12' per barrel, which he exports
instead of the gold. For the flour he receives
$14,000 in gold, supposing the English price to be
$7, which his consignee draws from the Bank of
England. Importing this coin, he sells it to the
speculators for $35,000, thus making from $10,000
to $15,000 clear profit by the operation. In the
same way will the speculators stimulate the shipment of goods to every place where gold can be obtained, while a steady'stream of that metal will
flow into their coffers from the vaults of Europe
and the mines of California, until their capital is
exhausted. During this time the prices of all exportable goods would rise to correspond with the
speculators' price of gold, if it were certain that the
capital of the firm would hold out until the gold
could be got from Europe. After its exhaustion,
the ctuse of the great rise having ceased, gold and
every thing would go down to its old price, and the
speculators would be ruined, for no one would give
more than 200 for gold, while goods enough to buy
29 
MONEY AND TRIADE.
$100 in gold in Europe or California can be had for
less than $200 in currency.
No set of men could ever be guilty of so mad
an attempt to injure the government credit,,ecause
self-interest would dissuade them from it. Human
nature is exhibited in the stock market just as it is.
The buyer of gold, like all other buyers, will obtain
what he wants as cheaply as he can get it.  If a
speculator, or any one else, gives 150 per cent. premuium for gold, it is only because no one in this or
any other'country will let him have as much as he
wants of it for 149. The case has been supposed
for the sake of illustrating the powerlessness of
individuals to seriously alter the equilibrium of
values, though controlled by the most inexplicable
motives.
If measures as desperate as these would be so
entirely ineffectual, still less so would be the common
way of speculating, which amounts, in effect, to
betting on prices. The general idea of this operation seems to be that every one bets against the Government, and no one for it; or, at least, that he
who bets for it is powerless. But I trust it does
not require any argument to show that for every
bull there must be a bear; that the bear will have
as great an interest in the fall as the bull in the
rise; and that the bear's exertions to attain his end
will be as powerful and as effective as those of his
opponent. I-Iow, then, can their efforts change the
price?
30
I
I 
MONEY AND TEADE.
Bull and bear are in fact equally powerless to
effect any great or permanent change in the price
of so universal and easily transportable an article as
gold.  At best they can only foresee the change.
The stock market registers the price of gold, but
does not fix it. It is governed entirely by the relation between the supply and demand.  The supply
and demand are governed by public opinion, and depend entirely upon it. How, it will not be difficult
to show:
1. Taking that portion of the community who
have occasion to buy or sell gold, whether they be
speculators, importers, manufacturers of jewelry,
bankers, or owners of gold mines; if ten men of
this class think gold is likely to fall, while only nine
think it will rise, there will be ten sellers for nine
buyers, and the price will fall, temporarily or
permanently.
2. The influence of these men is small compared
with that of the public generally. The effect of the
opinion of the large mass of the community may be
most easily appreciated by remembering that the
real value of gold is subject to no appreciable
change, and that the fluctuations of its price represent fluctuations in the value of legal tender notes,
just as the height of a man would vary if measured
by a rule of varying length. Suppose now that an
Ohio farmer, who never heard of a stock board or
the premium on gold, has received a hundred
'dollars in notes for his wheat.  He knows that the
31 
MONEY AND TRADE.
same wheat would have brought him only forty
dollars in gold. If he is disposed to set a higher
value on this money than his neighbors genierally,
he will be'disposed to sell more wheat, and to spend
the least possible amount of the money in buying
goods at such high prices. IHe will either keep the
money, or invest it in government bonds.  The increased amount of wheat he has thrown on the market will then cause the price to fall, and his refusal
to buy the usual amount of dry goods will diminish
the demand for them, both effects being caused by
the farmer's increased appreciation of legal tender
notes.  The fall in wheat will stimulate an increased export of that article, while the diminished
demand for dry goods will cause a diminished importation. The importer will want less gold for
foreign export, so that the price of gold also will
fall.
But, suppose the farmer, through improvidence,
or want of confidence in the Government, spends his
money in fine clothes. ile will then create a demand
for five yards more of foreign broadcloth, without
throwing the wheat on the market to pay for it;
the importer will be found in the gold market inquiring for $20 more gold than he would otherwise
want, and the price will rise.
Thus the sentiments of the Ohio farmer are reflected in the gold market.  The influence of one man
will of course' be infinitesimal, but the influence
of millions will govern it entirely.  The market is a
32
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MONEY AND TRADE.
most delicate and impartial thermometer, which
registers the average opinion of the country as it is
manifested by men's preferences in buying and
selling. The opinions will not be registered at
once. They must first cause men to act, to buy less
or sell more, and it may then be some time longer
before the effect of the actions will be felt in the
gold market, just as the sun is up some hours before
he has warmed the air, and caused the thermometer
to rise. But the rise or fall will be anticipated by
those who have gold to buy or sell, according to
their best judgment. The coming waves of supply
and demand will be looked for with all the care of
men who know that their pockets must pay for the
smallest mistake.
2*
33
I 
CHAPTER II.
THE FIANCIAL ELEMENTS OF MILITARY STRENGTH.
THE illusions of habit are as numerons as those
of the sense. Our accustomed associations of ideas
may confirm us in an erroneous theory as strongly
as the senses of the untaught confirm them in the
notion that the earth is flat and immovable.  Men's
erroneous notions respecting the functions of money
are for the most part purely artificial.  "The true
theory of money," says Professor Bowen,* "when
nakedly stated, seems like a string of paradoxes
which contradict the common sense of mankind."
This string hangs from another seeming paradox,
that the less men have used or desired money, the
more correctly they will be able to appreciate its
true functions.  If a tribe of savages about to undertake a raid, were advised to supply themselves
beforehand with a commodity which every one desired to possess, but which could neither be made
into spears nor cooked into food, they would conclude that the benefits to be derived were of supernatural origin. Their views of the natural advan
* Political Economy, Chap. XVIII. 
FINANCIAL ELEMENTS OF MILITARY STRENGTH. 35
tages to be derived from such a commodity would
be nearly correct, not only as applied to themselves,
but to any collection of people however numerous.
They would be unable to comprehend the tableau
vivant of a late reviewer who exhibits to their astonished gaze twenty millions of people, possessed of
every appliance of war, and threatened with destruction by their enemies, yet unable to move a
finger, turn a wheel, or fire a musket, until they are
set in motion by the beneficent invention of certain
pieces of green paper.
This inability would proceed from their practical good sense. When we consider money as a
source of power, we make such a mistake as a railroad engineer would who had gradually imbibed
the notion that it was the rails and not the steam
which moved his engine, and that fire and water
were mere conveniences for keeping it in order. So
long as he made the accustomed use of these conveniences no harm would result from his false
theory; but if, in an emergency, he should trust to
the rails alone to move his engine, he would discover his error.
WVhen we hear poets call gold and iron the
sinews of war; reviews tell how paper money drains
swalinps, and builds roads, ships, and cities; and
popular orators call upon the people to aid the Government by converting a note which bears no interest into a bond on which Government has to pay
interest in gold; we can hardly separate the poetical 
36 FINANCIAL ELEMENTS OF MILITARY STRENGTH.
from the prosaic, the ideal from the real, and the
figurative from the literal. Such expressions give
us no deeper practical insight into the true functions of money, than figurative statements that iron
rails drive the locomotive, and the yard-stick is the
sinew of commerce, would add to the practical
knowledge of an engineer or a merchant. Quite
harmless as poetic fancies, they will be pernicious
indeed as maxims to shape our policy. Gold is a
sinew of war in no higher sense than quicksilver or
platinum, or any thing else for which we can obtain
munitions of war.   Cannon foundries and fertile
fields, trust in God, and a consciousness of right;
';these are the real sinews of war.  Without them, the
gold fields of California will be useless; with them,
gold will never be wanted.
But money has its uses. In commerce it is the
medium of exchange, for which every man sells, and
with which he buys. Its use in war can be best
seen by beginning with the requirements of war itself. In what does the military power of a nation
consist?  Undoubtedly in the magnitude and courage of its armies, the efficiency of its artillery, and
its power of making good the waste of war. That
nation which can cast most shot and shell, transport
them to the seat of war with the greatest facility,
and project them in the greatest numbers, will possess in the greatest degree the material elements of
military strength. Its efficiency in these respects
will depend on the efficiency of its mines, its foun 
FINi. CIAL ELEMENTS OF MILITARY STRENGTHII. 37
dries, and its machine shops, its agriculture and its
manufactures of clothing.  This, again, will depend
on the number of men that can be spared from the
pursuits of peace to dig coal and iron, cast shell,
make wagons and clothing in the mines and shops
already built, and to dig new mines, and build new
shops.  If it is stored with no minerals, the men
who would otherwise be engaged in digging coal
and iron may be employed perhaps with equal advantage in producing food and clothing, to be exchanged for coal and iron with other countries;
and unless it is capable of employing its industry
in this way, it will be unable to wage war. Hence
we derive file fundamental proposition:
The military power of a nation is measured by
the amount of industry which it can divert into the
channels of wa.
This proposition will be universally admitted.
It is equally true in ancient and in modern times.
The great point of difference between the ancient
and modern systems, which makes a budget more
necessary to the latter than to the former powers, is
simply this: in ancient times almost the only labor
which was necessary to the prosecution of war was
that of the soldier who did the fighting; while with
us, nearly every branch of human industry is in
some way made subservient to the preservation and
efficiency of the army.   The  iron-founiders, the
miners, the carpenters, the ship-builders, the chemists, the surgeons, are all called upon to contribute 
38 FINANCIAL ELEMENTS OF MILITARY STRENGTH.
their labor, and indirectly to fight the iron-founders
and ship-builders of the other side. The success of
the cause depends as much on the skill displayed
by these professions as upon the courage of the
soldiers.
The question now is, Does money increase the
amount of skill and labor which can be thus turned
into the channels of war? I answer, No; although
on a cursory view it might seem that the question
should be answered in the affirmative. It may be
pronounced impossible for industry to be diverted
into the channels of war without the aid of money.
The manufacturers cannot supply the army with
clothing, unless they receive money with which to
pay their operatives and keep their machinery in repair.  The soldiers must be paid, else their families
will starve. All this seems very reasonable; but
let us look at the question a little closer.
What the nation really wants is labor, a certain
number of days' work from every inhabitant. If
there were no money, taxes would have to be paid
in this shape. If one-tenth of the productive population were entirely engaged in the war, then the
remaining nine-tenths would have to be called upon
for one-tenth of the product of their labor. The
manufacturer would give one-tenth of the cloth he
made; this would be handed to the tailor, who
would be required to spend one day in ten in making it into clothes. The farmer would give a tithe
of his harvest, which would suffice to feed every
iI 
FINANCIAL ELEMENTS OF MILITARY STRENGTII. 89
one in Government employ. By such a system of
taxation the war would be as efficiently, though
not so conveniently, supported without the money
as with it. The inconveniences would be these:
The tax might not be entirely equable; for less
than one-tenth of some products, and far more of
others, would  be  needed.    One  factory might
be in an inconvenient position for supplying the
army, and besides have some other very profitable contract on hand; while another might be con.veniently situated, and have nothing to do but
supply the Government.   Clearly, then, it will
tend most to the public good if the latter can be
employed exclusively upon Government account;
and nine-tenths of its work be paid for by others.
Xoloey enables this to be done in such a way that
every one shall be taxed equally. Government demands from the individual, not labor, but money,
which is the representative of labor. With the
money thus obtained, it enters the market and purchases its supplies on the best terms that it can obtain.
It is very plain, however, that the Government
cannot obtain any money by taxes or loans, unless
the payers can earn more than they need for their
own consumption; nor will there be any supplies in
the market unless more goods are manufactured
than are needed by the country at large.  Let us
suppose that our soil were so poor, our manufactures
so rude, and our wants so numerous, that the entire 
40 FINANCIAL ELEMENTS OF MILITARY STRENGTH.
products of our industry are required to supply
those wants.   Our farmers can only raise food
enough to feed us, the factories can only make
cloth enough to clothe us, and we have no idle
population to devote to the manufacture of war
materials. In such a case, no amount of money,
paper or metallic, would enable us to wage war.
We could not spare a farmer to take the field, because his fellow farmers could not then raise food to
subsist themselves and him too; we could not spare a
manufacturer to cast shot, or build a powder mill,
because the manufacturers who are left could not
then make the necessary amount of clothes. The
Government could buy nothing, because there would
be nothing to buy, though it possessed the silver
mines of Peru.
It, may be replied, that in such a case the offer
of articles which men desire so strongly as silver
and gold, would stimulate them to extraordinary
efforts in the production and manufacture of war
nmaterial, and to extraordinary self-denial in the
consumption of food and clothing.  Very true; but
it would only increase their wiingness, not their
abiity, to work extra hours, and stint themselves in
the enjoyment of the necessaries of life. The willingness is indeed as important to the Government
as the ability, but we are at present considering the
power which a nation can exert, not what it will
exert. Besides, even the increased willingness depends on the supposition that the Government has
I
I 
FINACIAL ELEMENTS OF MILITARY STRENGTH. 41
obtained possession of the precious metals without
taxing the people, which is a case that does not
often occur in practice.   It seems, then, that the
amount of industry which a people can divert into
the channels of war is not increased by the posses8sion
of any sort of money.   The latter only facilitates
the diversion by making it easier to measure each
man's share of the public burden.
An  attempt, on the part of a community, to
make military efforts beyond its strength, is productive of certain well-defined effects which we shall
proceed to show.
The Government levies taxes, and raises loans in
gold, with which it hopes to purchase supplies for
its armies.   It purchases from  a manufacturer
clothing which the latter would otherwise exchange
for bread. In lieu of the clothing he must now
offer gold for his bread. It also purchases from the
farmer corn which he would otherwise exchange for
clothing, so that the-farmer must now offer gold for
his clothing instead of corn.  Clothing, bread, and
every thing else required for the army, will, in consequence, become scarce and dear; and gold will be
exported by the people to supply the want. Then
comes general distress among the poorer classes, and
general scarcity of money.
If, now, the Government attempts to remedy the
scarcity of money by prohibiting the export of
specie and by issuing paper money, the consequence
will be a universal rise in the prices of the neces
s
4 
42 FINANCIAL ELEMENTS OF MILITARY STRENGTII.
saries required by the people and the army, so that
neither the distress nor the scarcity will be mitigat ed in any degree.  If the paper money is redeemable in coin on demand, the rise will not be so rapid as
if it is not so redeemable. In the latter case, it will
speedily lose all purchasing power, no matter how
secure may be its ultimate redemption; for the
simple reason that people cannot afford to part with
the fruits of labor for any thing but necessaries.
Thus, the inevitable effect of the attempt alluded to will be universal distress among the poorer
classes, accompanied either by enormous prices or
great scarcity of money, according as the policy of
the Government has or has not tended to expand the
currency. The distress, and the difficulty of procuring supplies, will, for the time being, be entirely
independent of the financial policy of the government, following equally whether the war be carried
on with paper or with gold, by loans or by taxation. We have seen them in France in the time of
the revolution; in England during the Napoleonic
wars; and we see them in the rebel states now.
They are the true and only indications that the
resources of the country are taxed to the utmost.
It might have been possible to make the love of
gold the means of demoralizing, and finally destroying, the Southern Confederacy. If, during the war,
we had allowed the rebels to export what they
pleased, without restriction, receiving in exchange
therefor nothing but gold, what would have been
k
I
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FINANCIAL ELEMENTS OF MILITARY STRENGTH. 43
the consequence?  Individuals, instead of devoting
themselves to the poorly paid task of supplying the
rebel government, would have exerted all their
energies in raising cotton, to export for gold. The
possession of this metal would have been a source
of great gratification to the individual owners, but
would have added nothing to the military strength
of the rebel. government. The policy would, therefore, have acted as a bribe to devote their energies to
other purposes than the prosecution of war. The
only objection to it would be that much of the gold
would have fallen into the hands of the rebel
government, and been employed in fitting out privateers in foreign countries.
We have now arrived at a standpoint where we
can clearly see what the measure of military power
really is.  It depends upon, and is measured by the 
excess of what the nation is able to produce over
and above what is necessary for its subsistence. If'
all our labor is exhausted in the production of food,
clothing, and other necessaries, we cannot make war
at all, as we have already seen. If half our labor is
sufficient for this purpose; if one-half our productive
population can, by their industry, supply the whole;
we can then employ the entire energies of the other
half in war. On an average every man can spend
half his time either in fighting or making things to
fight with.
But we make a great mistake when, as is often
done, we estimate this excess of production over 
44 FINANCIAL FLEMENTS OF MILITARY STRENFTI.
consumption by its actual amount in time of peace.
This only shows what we can spend in war without
working any harder than usual, and without depriving ourselves of any enjoyment that costs money
or labor.  But there is generally a large, partially 
idle population which can'be employed in case of
an emergency; men can work more industriously,
and they can greatly curtail their expenditures.
All we have said of the source of military
strength may be concentrated into one word,
Frugality. It is the frugal'man who consumes less
than he produces; and as the nation is made up of
individuals, it is the frugal nation which can turn
its energies to war, and at the salne time supply its
own wants.  It is the frugal nation which in time
of peace will be prepared for war. On the other
hand, the man'who consumes all that he produces
will never have any thing to sell the Government, no
matter how much money the Government may have
to pay with; anl a nation composed entirely of such
individuals will not only be unprepared for war, but
will have to change its habits before it can prepare.
Thus the trite maxim, which men are generally
so much more ready to apply to others than to
themselves, namely, that one's wealth is measured
by the simplicity of his wants as much as by the
amount of his income is the expression of a great and
important political truth. A nation may be saved
or destroyed according as its people are willing or
unwilling to dispense with costly luxuries.
i
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FINANCIAL ELEMENTS OF MILITARY STRENGTii. 45
That the labor of engines, as well as of men, is
to be included in the war power; that foundries,
mines, and machine shops all add to military
strength; that the nation which already possesses
cannon, means of transportation, and military stores
in quantities sufficient for the war, will have a great
advantage over one which has yet to east its cannon
and build its wagons; all this is too evident to require further elucidation. Wealth in all these forms
is power.  But there other phases of the problem
which are very difficult. Wealth is not always power; in some respects it may be absolute weakness.
There are, in fact, two entirely different points of view
from which the science of the accumulation of wealth
may be approached; and according as we take one
view or another of the objects of human industry we
shall be led to different answers to the question,
What ought a nation to do with its money?
Political economy, as an abstract science, considers every thing as wealth which nren desire, and
which they can obtain by labor, and in no other
way.   It does  not discuss the ethical question
whether men ought to desire it; the bare fact that
men do desire it, and are willing to labor in
order to enjoy it, is all that concerns it. The value
of any article of wealth is measured by the least
amount of labor adequate to its possession by the
individual who desires it. If a laborer is willing to
work all day for a quart of whiskey to get drunk
upon, political economy does not question his wis 
46 FINACIAL ELEMENTS OF MILITARY STRENGTH.
dom; it argues that the quart of whiskey must afford
him more enjoyment than any thing else he could
obtain at the same price, else he would have bought
something  else.   Any law  or regulation which
forces him to buy any thing else detracts from his
welfare, which is looked upon as one and the same
thing with the utmost gratification of his wishes.
If all men really desired their highest good at
all times, no fault could be found with any of the
conclusions of this pure science. But such is not
the case; and it is the part of statesmanship to
encourage those desires which really tend to good,
and to discourage those which tend toward evil.
When it is once concluded what desires are good,
and what are evil, political economy steps in as a
concrete science, and shows how the good may be
encouraged, and the evil discouraged. The question
to be solved then is, how must our labor be employed to promote our welfare in the greatest degree?
In the present chapter we are entirely employed
with this question. The national good which we
are supposed to be seeking is neither wealth nor the
utmost gratification of our desires, but military
power.  It may, indeed, be considered as an application of the principles of political economy to the
case of a nation whose great desire is to attain the
largest measure of military strength. A discussion
of the entire subject might fill a volume; we are at
present trying to discover what financial condition
is most conducive to this end. Particularly are we
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FINANCIAL ELEMENTS OF MILITARY STRENGTH. 47
seeking to discover the functions of the precious
metals in enabling a nation to carry on war.  It
has, I hope, been made sufficiently plain that the
possession of gold adds no more to the internal
power of a nation, no matter how large, than a sil ver mine would have added to the resources of
Robinson Crusoe. The sole office of money is to
equalize the burden of war among the individual citizens; and this can be done as effectually by a correct
system of paper money as by exchanges of gold.
But, every gold dollar is the embodiment and expression of a certain amount of war material which
the possessor can command in foreign countries.
To command the material it is necessary to export
the dollar. The latter has, then, disappeared; in
its place has appeared a musket, or a box of percussion caps. It is certain, then, that, other conditions
being equal, the nation which has the most gold can
make the greatest military efforts, because a people
can always export readily their entire stock of gold
without serious detriment to their business, or their
enjoyment. This metal is thus a reservoir of power.
But a collection of any other sort of property,
equally desired by mankind at large, and equally
transportable, would  be equally a reservoir of
power. The only reasons why quicksilver or platinum would not be as good as gold, are, in the first
place, that equal values of them  cannot be transported so easily; and in the next place, that the
demand for them is so far from universal that their 
48 FINANCIAL ELEMENTS OF MILITARY STRENGTH.
value would be diminished by throwing any considerable amount on the market at once. It is probable that fifty millions of dollars' worth of gold would
find a more ready market in any European country
than ten millions' worth of any other article.
Is it, then, desirable to encourage the accumulation of the precious metals in time of prosperity, in
order that we may have them to fall back upon in
time of adversity? It is impossible to answer this
question  absolutely, because it depends on the
habits, dispositions, and circumstances of the nation. But we can easily lay out the foundation
on which it depends. It must be remembered that
there is one objection, and only one, to such accumulation; the loss of interest on the capital thus
accumulated.   Gold  and  silver coin is, in the
strictest sense, unproductive capital, whether lying
in the vaults of banks, or locked up in a miser's
chest, or circulating as money.  Every man who
has it in his possession loses the interest during the
time it remains so, as will be quite clear on refleeting that no one would pay interest on gold to
eep, but only to exchange as soon as possible for
something else.  Hlence, the use of the precious
metals as the principal currency of a nation, is deprecated by political economists. But, it must be
remembered that the community, in precisely the
same way, loses the interest on all the products of
its labor while they are waiting to be consumed.
The goods kept for sale represent so much idle capital,
I
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FINANCIAL ELEMENTS OF MILITARY STRENGTH. 49
in the same way, and to the same extent, as does the
gold kept in the vaults of a bank. If it is, on the
average, a year from the time that a piece of cloth
is manufactured until it finally reaches the person
who is to wear it in the form of a coat, the last
seller must add one year's interest to the price.
If a merchant, on the average, holds his stock of
goods a year before finding a purchaser, he must, in
addition to every thing else, add a year's interest
to the price.   If cloth, like gold, was  all of
one kind and quality, a kind of cloth banking
would be speedily introduced. In the cloth bank
both the manufacturers and tailors of an entire
city could deposit their goods free  of expense,
exactly as they deposit money in a bank, and
receive a certificate that A, B, or bearer, is entitled to     yards of cloth at the Clothiers' Bank.
The bank, thus holding permanently the entire stock
in trade of all the tailors of a city, could safely sell
three-fourths, or even nine-tenths of it, and invest
the money in dividend-paying securities.  The remainder would be kept as a reserve, like the specie
reserve of a money bank. As fast as one man sent
in checks for his cloth, another would come in with
a new deposit; and if, on any extraordinary occasion, the drafts should exceed the new deposits by
an amount greater than the cloth reserve, the securities could be changed back for cloth without serious loss.
In the same way, if a nation during peace manu
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50 FINANCIAL ELEMENTS OF MILITARY STRENGTH.
factures arms and munitions of war, to be kept for
use in case of hostilities, it loses the interest on all
the money thus spent during the time that the arms
are waiting to be used, with the additional disadvantage that they may be superseded by some improved
weapon. Indeed, every thing which enables the
business of the nation to be carried on, and its
strength to be kept intact with a diminished amount
of circulating capital, whether in the form of gold
kept in reserve, food waiting to be eaten, goods
waiting to be sold, or arms waiting to be used, saves
the amount of that diminution to the nation, and enables it to enjoy, to an additional extent, the fruits of
its labor. Thus, from a politico-economic point of
view, every contrivance which enables men to live;
" from hand to mouth " increases their wealth. The
paradoxical character of this view will disappear on
applying the principle to the case of an individual.
If a householder is obliged, from any cause, to keep
on hand continually ten barrels of flour for the use
of his family, the removal of this cause will enable
him to get along with only one barrel of flour at a
time, and will set free, for other uses, the money formerly invested in niine barrels of flour.
But it is clear that all this utilizing of capital,
while it adds to the enjoyment of the community,
detracts from its power to meet a sudden emergency.
Where the amount of idle capital is reduced to its
minimum, there will be less coin to place at the
disposal of the Government; less cloth to clothe an
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army; less flour to feed it; fewer muskets to arm it.
But these evils will-not be serious, if the utilized
capital has been invested in such a form that it can
be rapidly transformed into the required food, clothing, and arms. The whole problem, then, depends
on this question:  Fhat will be done with the capital set free in the ways suggested?  If we do not allow gold to accumulate, what will we accumulate
in place of it? A representative case is that of the
man who has been keeping ten barrels of flour on
hand. Whether he sell nine of his barrels at once,
or save the money he would otherwise have spent
in flour, until the nine barrels are eaten up, he will
have the price of nine barrels, say $50, to dispose
of., If, now, he is going to spend this money in
building a cannon foundry, or digging a mine, the
transformation will increase the military power of
the community, and ought therefore to be encouraged. But if he spend it in giving a feast to his
friends, it will all have disappeared next day, and
the country will be less able to feed an army, owing
to the disappearance of the nine barrels of flour.
The samne principle is illustrated in the case of
the precious metals. To the question: Ought we to
keep the gold in the country or export it? the only
philosophical answer is: that depends altogether on
what you get in exchange for it. If you get something which is of special importance-if in time of
war you get arms and ammunition, or, in time of
peace, get things which will be sources of wealth
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52  FINANCIAL ELEMENTS OF MILITARY STRENGTH.
and power in the future, then by all means export
it. But, if you are to receive only articles of luxury, which will be consumed without adding to
your real welfare, then keep it at home. The stock
of gold is like a cistern of water kept by a family
against a time of drought. If this emergency is
never to come, it is foolish to save the water.  If it
does come, it will defeat the purpose of saving the
water to say that the family must still avoid drinking it. But we must distinguish between its legitimate use and its use by the children to drive a toy
water-wheel.
We, therefore, conclude that it is more conducive
to power to hoard our wealth than to consume it;
and better still to place it in such a form that it may
help to create more wealth. In more ways than one
is frugality at the bottom of national as well as individual prosperity.  It may not at first sight appear
that he who loans his money to a manufacturer adds
any more to the national wealth than if he spent it
in wine and cigars; but in the former case he perhaps enables a manufacturer to enlarge his buildings and add a new engine to his workls. IHe is
really the owner of the additional power, which the
manufacturer himself only uses. The latter holds
himself in readiness to resign either this or its equivalent in money when the debt is demanded. When
the Government is in need of military power the
creditor can assign to it his debt, or, in other words,
the right to use the factory power without any shock
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to his own business, and without giving his debtor
any just cause of complaint. The Government then
has command, for war purposes, of enginery which
would not have been in existence but for the fact
that the owner of the spare money preferred a fu ture to a present good.  It follows that the habit of
frugality is as necessary in preparing for war as in
carrying it on. It is the bounden duty of every
government which seeks the happiness of posterity,
to encourage frugality by giving all possible security
to the savings of the poor. Who can measure the
total additions to our war resources made by the
savings banks of Massachusetts.
Thus, in whatever way we approach the subject,
we are led to the strictly logical conclusion that the
great and permanent elements of real power are to
be found in the characters of the people, and not in
the iron and gold they-may possess. History teems
with illustrations of the truth of this conclusion.
How did Tyre, and Phmnicia, and Athens make
themselves felt over a large part of the known
world? How did the little republic of Venice re sist the armies of Continental Europe? How did
the Dutch Republic foil the mighty efforts of Louis
XIV. to compass its destruction, and at the same
time contest the supremacy of the ocean with the
combined fleets of France and England?  By their
mines of iron and gold, their fertile fields, or their
)  internal financial system?  It cannot be, for in all
these respects their neighbors had the advantage. 
54 FINACIAL ELEMENTS OF MILITARY STRENGTH.
By what means have the inhabitants of the British
isles been enabled to found an empire which encircles the globe?  Is there any thing in the situation
or resources of those little islands, not so large as
New England, which has given them this enormous
power?  In fine, how is it that small nations have
so often become great maritime powers, and that
once become so, they have exerted so great an influence over the destiny of the human race? Since
these effects are not due to the advantages of the
position in which nature placed them, they must be
due to the characteristics of the people themselves.
The fundamental cause of all this greatness is a
disposition to labor for a higher good than present
gratification. A luxurious people, not desirous to
leave their country or the world any better than
they found it, would never subject themselves to the
privations and hardships of long sea voyages. We
have shown that the desire of a higher good than
present gratification, and the disposition to labor for
that end, are the foundations of all military power;
and thus it is that such people as we have alluded
to have always been powerful.
Again, to launch a ship on the seemingly illinmitable ocean and trust for success to the fitful action
of the elements, requires both courage and skill.
Without confident courage, the feat would never be
attempted; without skill, it would result in the destruction of the adventurer.
The world seems designed to encourage and fos
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ter these higher qualities of the human mind by fur  nishing all men with the means of using them.
Brains have always in the end triumphed over brute
force, however fiercely the latter may have main  tained the contest.  The inflexible will is stronger
than brass, and genius better than gold. Farragut
and Bailey have shown that iron hearts within make
the best plating for a ship of war.  Genius, cour  age, honesty-above all, self-denial-these, and these
alone, mould the institutions of posterity.
Necessarily.following, from the notion that mon>
ey is a sinew of war, is another: that a nationi
which has reached the point of financial exhaustion/
will have to stop fighting.  The example of the r
bellious States ought to have dispelled this illusion;
for they had scarcely any financial resources worthy
the name to start with, and what they had were ex hausted in the beginning. Nevertheless we still
find one set of men counting up the enormous sums
of money we are spending, and another the enor mous sums which our resources will enable us to
pay. "We have spent $3,000,000,000 in this war,"
say the former. Admit that we have, where, let me
ask, has this $3,000,000,000 come from? And where
has it gone to? We only had from $250,000,000 to
$300,000,000 of coin in the beginning, and the
chances are that we have three-fourths of that
amount still.  Hiave our farmers curtailed their
crops? Have they got fewer ploughs, horses, barns,
or wagons than in the beginning? Are their facilities 
56  FINANCIAL ELEMENTS OF MILITARY STRENGTH.
for raising horses and the means of our mechanics to
build barns and make ploughs lessened? Hiave our
factories been suffered to disappear, our engines to
wear out, or our mines to fill up? I trow not. I
think we possess as much material wealth as at the
beginning of the war, and perhaps much more. Our
unworthy financial policy has indeed caused large
sums to change hands unjustly, and caused us
to lose largely in that moral wealth which is so
much better than material wealth, but of this hereafter. We at present want to know what is meant
by saying that we have spent $3,000,000,000, when
we are as rich as ever. Plainly it means neither
more nor less than this, that the people of the loyal
States have done $3,000,000,000 worth of work in
carrying on the war. They have ploughed and reaped, and cast cannon, and rolled iron plates to this
amount. If one day's work is worth on the average
$3, then each man has done on the average one hundred days' work to transmit social liberty to his posterity. Is the expenditure of this labor to be regretted to the same extent that we would regret the
loss of an equivalent of wealth?  The answer to
this question is very much a matter of taste. From
a strictly economic point of view we should be compelled to answer in the affirmative. But it by no
means follows that we are any poorer than if the
war had not occurred. Does any one suppose that
all the labor we have spent in this way would have
been spent in adding to our wealth if the war had
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not occurred? Assuredly not. One-half would
have been dedicated to idleness, or the gratification
of the moment, and perhaps half the remainder to
objects which every one would admit to add little or
nothing to our highest good.
The point in question, as well as the difference
between the highest good and the good of the political economist, may be illustrated by a single instance. An individual of dramatic tastes would
spend $1 in money and three hours of time in seeing a play.  The gratification he is to derive from
this source must compensate him for his time and
money, else he would not spend them in this way.
But Government steps in with a tax, and compels
him to give up his surplus dollar for the public good,
and requires him to spend his three spare hours in
making cartridges.   Next day the Government is
more powerful by one box of cartridges, worth perhaps $1, and $1 worth of munitions of war, while
the individual who made the contribution is as
wealthy as if it had not been required of him.  As
far as we may say that this diversion of labor and
money is to be deplored, just so far may we deplore
the expenses of war.  As far as we can call it spending $2, so far may we say we have spent $3,000,000,000 in carrying on the present war.
The question we ought ask is not whether what
we have gained by the war is worth so many dollars, but whether it is worth a year's work from
every able-bodied man in the country.
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58 FINANCIAL ELEMENTS OF MILITARY STRENGTHi.
But for our unsound financial system we might
be able to continue the war for generations without
seriously crippling our powers. We could not, indeed, enjoy quite so many luxuries; we could not
develop our resources so rapidly; the digging of our
mines and the clearing of our forests would be impeded; but we should enjoy more luxuries than our
ancestors even a half century back could enjoy in
time of peace.   In one respect, indeed, we could
not continue the war on its present scale; it is not
likely that we should be able to keep half a million
of effective soldiers in the field fighting such battles
as have hitherto characterized the war. In all other
ways we can continue our present exertions indefinitely.
The Southern States furnish an example of a
people who, while commanding few of the elements
of military power we have described, were nevertheless able to turn those few into the 6hannels of
war with great ease. They consumed nearly all
they produced, but they spent much more in the
luxuries of life than in its necessaries. Subsisting on
the coarsest and cheapest food, such as a Lowell operative would have starved upon, the greater part
of their wealth was devoted to the social circle, the
chase, the turf, and the tournament. All these expenses are easily dispensed with, and the wealth diverted into other channels. It needs only the general acquiescence of the community to enable every
one to reduce his social wants, including the luxiL
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ries of dress, to a minimum, and this acquiescence
was granted by Southern society-at an early period,
while we are nearly as luxurious as ever. The excitements of war furnish a very good substitute for
the great amusements of the Southron, but are illadapted to the more refined and intellectual taste of
the North. Thus the transition from peace to war
was accompanied with a far greater shock to the
North than to the South.
Let us recapitulate some of the conclusions of
this chapter.
Neither metallic nor paper money adds any
thing to the internal power of a people.
But gold is a source of power which can be
commanded by exporting the gold.
It is more conducive to military strength to put
our wealth in the form of gold laid up against an
emergency than to consume it.
But it is still better to put our wealth into such 
a form that it shall be productive of more wealth; 
for example, to employ it in building mills and dig- 
ging mines.   Such employment of our surplus
means is in the greatest possible degree conducive
to national strength.
I 
CHAPTER III.
OUR DEBT AND OUR TAXES.
IN the last chapter we considered the nation as, in
the fullest sense of the term, a commonwealth. We
considered the strength of the nation as the aggregate strength of the citizens composing it. We
measured what individuals could do to promote the
public welfare, not what Government might require
of them. If the public good were the first and
greatest object of every man's desire; if we could
rely upon every man to promote that good to the utmost extent of his power, without cavilling about
his just share, the question of ways and means
would be a very simple one.
But such is not human nature.  Every civilized
man demands that his share of the public burden
shall be fixed by law, and he then contributes in
obedience to such law. We propose now to examine the relation of the individual to the State,
and show the working of that system of governmental
machinery by which every man, however peaceful his
pursuits, and however difficult the division of his prop
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OUR DEBT AND OUR TAXES.
erty, is made to contribute his equitable share toward
the supply of the army with those things necessary
to its efficiency. It has been shown that by demanding the required contributions in the form of
money, leaving every man at liberty to obtain the
money in the easiest way he can, and then buying
in the cheapest market with the money, the work
of carrying on the war will be distributed in the
most advantageous manner. Under ordinary circumstances the privilege of paying the contribution
in money offers a great advantage to the tax-payer.
A still greater advantage is attained by the modern
system of borrowing, provided that the Government
can borrow on favorable terms. The tax-payer is
then allowed to make his contribution in small
sums during a long period instead of paying it all at
once.
The object of the present chapter is to discuss
the question whether the means for the further prosecution of the war should be raised by loans or
taxation. What are the advantages and disadvantages of a national debt?  Why have any national
debt at all?  Cannot the means necessary for the
prosecution of the war be raised by taxation as advantageously as by loans?   These  questions  are
worthy of the gravest consideration, not only by
our statesmen, but by the people at large. Let us
consider them in their order.
When the national debt of Great Britain was
increasing at the rate of forty millions sterling an
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nually, economists were not wanting who held that
such a burden must speedily prove ruinous to the
financial interests of the empire. They made a
mistake similar to that we make when we say we
have spent $3,000,000,000 in  the present war,
forgetting that this expenditure has been contributed in the form of labor, not money. They forgot
that this debt was not like one due from one nation
to another, but was all due to the British people,
as well as due by the British people, and that the
public creditors would directly or indirectly pay a
large portion of the debt.
The debt went on until it reached nearly
~1,000,000,000 sterling, and the British empire
not only still preserved its vigour, but went on
growing as rapidly as ever. An error of an opposite character then began to pervade the public
mind. The increase of wealth and power continuing in spite of the debt, the latter was concluded to
be the cause of the increase.  Men gradually came
to consider it the great consolidating power which
gives strength and permanency to the empire. The
payment of the debt depending on the continuance
of the Government, every-one who holds a share in
the public stocks is thought to have an interest to
the full amount of that share in the permanence of
the Government. It has been attempted to reason
in the same way with respect to the debt which we
are accumulating with such unexampled rapidity.
Let us see, therefore, what foundation there really is
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for such an opinion, and how far the reasoning is
applicable to our case.
Every one who holds government bonds draws
from the Government interest on the bonds, and it
is therefore to his advantage that the Government
'should be preserved. But whence comes the money
which pays the interest?  Does Government create
it?  Not at all; it must raise the entire amount
by taxation.  The taxpayers therefore have, alto  gether, as great an interest in the destruction of
the Government as the public creditors have in its
continuance, since as much money is raised by taxes
as is paid out in interest.  The whole reasoning
falls to the ground, unless it is shown that the bond  holders exert more political power than the tax  payers.  In England this is undoubtedly the case,
for three reasons:
1. Political power is there nearly proportional
to wealth.  The public creditors, belonging, for the
most part, to the more wealthy and influential classes
of the community, hold in their own hands a large
share of the political power of the country. The
taxes, being mostly levied on the products of labor,
a considerable portion of them are in reality paid
by those who have no voice in the affairs of Gov   ernment.
2. The taxes being to a great extent indirect are
less felt than if they were drawn directly from the
pockets of those who really pay them.
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be felt to demand the continued payment of the
debt.
Now, while the last two causes may operate as
strongly in this country as in England, the first will
not. Hiere, wealth endows its possessors with less
political power than there. In theory it here endows them with no power at all, since no amount
of wealth gives its possessor more than one vote.
Our taxpayers will have half a dozen votes to our
bondholders one; and this state of things Will offer
the unprincipled politician a tempting field in
which to aggrandize himself by fostering and advocating the principles of agrarianism. If, indeed,
every tax-payer could be induced to take such a
share of the public debt that he should receive in
interest as much as he paid in taxes, we should
have nothing to fear from this cause.   But the
idea of such a division is chimerical. Even if effected, it would not be permanent. The debt would
rapidly flow out of the hands of the improvident
into those of the frugal; from the hands of the poor
into those of the rich; fromn the business man to the
professional man.
This is not the worst; it will inevitably gravitate toward particular sections, on exactly the same
principles. It will leave those sections where agricultural, manufacturing, and mining capital is
scarce, and accumulate in those sections where it is
plenty. The debt which is held in the West will
flow East in exchange for agricultural implements,
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steam machinery, and the products of our looms and
our anvils. Or, which amounts to the same thing,
it will come East in exchange for manufactured
articles on which the Western men will subsist
while they are erecting the mills and factories
and digging the mines which are to be the future
sources of their wealth. In the East, where the
mills and factories are already built, and engaged
in actively competing with each other; where, therefore, the rate of interest and profit on capital is
lower, the bonds will be relatively more valuable,
for the same reason that 3 per cent. consols are
worth twice.as much in England as they would be
in this country.
Thus, in a very few years, four-fifths of our debt
will almost certainly be held in the Atlantic States,
while more than half the taxes will have to be paid
by the States which own the other fifth. Holding,
as the latter will, more than half the political
power, how long before they will forget the mills,
and factories, and fences for which they have exchanged the debt? Hiow long before we shall see
a race of ambitious and unprincipled demagogues
seeking to ride into power by advocating some
policy by which the Western people may be relieved of the taxes which they will be paying to the
people of other States? If we have to wait long for
these things there will be a most gratifying improvement in public honesty.   Considering  the
danger of such a result, it must be admitted that
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OUR DEBT AND OUR TAXES.
our debt, if suffered to increase any further, is more
likely to prove an element of weakness by causing
an antagonism of interests between the East and
the West, than to prove an element of strength by
giving the public creditors an interest in the continuance of the Government. The attempt to apply the English argument to this country furnishes
one instance out of many of the danger of applying
the argument from analogy without due consideration of the differences as well as the likenesses of
the things compared. We see that an argument
perfectly legitimate when applied to a consolidated
Government and homogeneous people like those of
England, may prove entirely delusive if applied to a
heterogeneous country like our own, different setions of which may have entirely different pecuniary
interests.
Yet another argument frequently urged in favor
of raising money for an important war by loans
instead of taxes, is that the burden of the war is thus
partially thrown upon posterity, for whose benefit it
is fought. But we must ask leave to dispute the
doctrine that the burden of war or any other labor
performed by one generation can be thrown on
another by any means whatever. The generation
that wages the war must be the one to shed its
blood, feed its armies, and cast the shot and shell
which its armies are to use. Food, clothing, shot
and shell are the real expenses of war. In running
into debt for these articles, we do indeed bequeath
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to posterity the work of raising the money to pay
for them. But posterity not only raises the money,
but also receives the pay, so that we may as logically
say that posterity gets paid for the war as to say
that it pays for it. The descendants of those who
have done less than their share pay the descendants
of those who have done more; but the total amount
of wealth inherited is about the same, whether their
forefathers carried on the war by loans or taxes.
Supposing it equally easy to raise money by
loans and by taxes, these two reasons are, it is believed, the only sound and forcible ones for preferring the former plan.  We have shown that one
does not apply to this country at all, and that the
other has no logical foundation. We are now prepared to discuss the question from a purely financial
point of view; that is, to consider the relative burdens imposed on industry by the two  systems.
And here let me say that our erroneous views of the
reasons why a national debt should be incurred at
all, are at the bottom of all our financial mistakes,
and are the fruitful source of all the difficulties
which our treasury has-had to encounter? Why
might we not have raised every dollar we needed
for the prosecution of the war by taxes? No doubt
a large majority of readers will say, " Because it was
impossible to raise such large sums by taxation. The
attempts to do so would paralyze industry, and thus
defeat the very object aimed at. We cannot possibly
raise $1,000,000,000 by taxation in a single year."
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OUR DEBT AND OUR TAXES.
This doctrine seems to be so firmly rooted i the
public mind, that the raising of nearly all our war
expenses by loans has been considered an imperious
necessity.   To this supposed necessity we have
patiently submitted, under all circumstances, without once inquiring whether it was real or imaginary.
In opposition to this popular view it is claimed
that a national debt is only a choice of evils, and
that under our present circumstances the debt is a
greater evil than its alternative. In support of this
I appeal to history.  The very idea of a funded
national debt is a modern one. Nations have waged
war in all ages on a scale as grand as ours in comparison with their resources without seeking to burden the future. It is not likely that either Alexander, Cesar, or Charlemagne, ever borrowed money.
Trie, in ancient times war could be carried on with
less expense than now, owing to the simplicity of
the equipments of an army; but the ability of the
people to pay taxes was less in a still larger ratio.
Besides, modern warfare has also been conducted on
the largest scale without borrowing as we do.
Neither Louis XIV. nor Charlea V. ever incurred
a permanent debt. The most they did was to
anticipate their revenue by issuing exchequer bills,
or giving the public creditors a lien on particular
taxes.
Indeed, the rate at which we are borrowing has
no precedent in the history of nations. The greatest loans ever attempted even by Great Britain, are
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insignificant when compared with ours. During the
first sixteen years of the present century, when that
power was engaged in the most gigantic efforts which
her history has recorded, she only borrowed, on an
average, ~22,000,000 sterling, or $106,000,000 per
annum, and the greatest amount'ever borrowed in one
year was less than $200,000,000. These loans only
sufficed to pay the interest on the debt previously
contracted, so that her entire war exsenses during
er struggle with 25apoleon were sustained by taxation. We are now borrowing at the rate of $600,000,000 per annum.  Moreover, as the real burden
of the debt is to be measured by the interest and
not by the principal, and as we are paying half as
much interest again as England did, it follows that
we are practically running into debt eight or ten
times as fast as England did during the wars with
Napoleon.*
II
* In the beginning of 1801, the public debt of Great Britain
amounted to ~528,000,000. The following table shows in round
numbers the sums borrowed in each subsequent year, allowing for the
excess of exchequer bills issued over those redeemed:
1801, ~28,000,000    $136,000,000
1802, ~21,000,000 =  $102,000,000
1803, ~15,000,000 =   $73,000,000
1804, ~18,00000 =   $87,000,000
1805, ~20,000,000 =   $97,000,000
1806, ~18,000,000 =  $87,000,000
1807, ~12,000,000 =   $58,000,000
1808, ~15,000,000 =   $73,000,000
1809, ~17,000,000 =   $82,000,000
1810, ~13,000,000 =   $63,000,000
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But the claim needs no appeal to hist9ry to substantiate it. The very fact that we have spent
$1,000,000,000, a year in war, without producing
any sensible increase in the values* of goods without driving all our gold out of the country, and
without causing any general distress among the
poor, does of itself furnish the most conclusive proof
that we could have raised  this amout by some
system of taxation.   We  have seen in the last
chapter that when we say we have spent all this
money, we only mean that individuals of the nation
have done $1,000,000,000 worth of work for the
Government.  We have also seen that the possession
1811, ~21,000,000 = $102,000,000
1812, ~29,000,000 =  $140,000,000
1813, ~24,000,000 = $116,000,000
1814, ~26,000,000 = $126,000,000
1815, ~21,000,000 = $10;,'00,000
Total, ~298,000,000=$1,244,000,000
During the last three years about ~37,000,000 additional was borrowed and loaned to foreign Powers, making a total increase of the
national debt of ~335,000,000, or $1,621,000,000 during the fifteen
years; a little more than half the debt we have incurred in four years.
The average rate of interest was generally about five per cent. on the
sums actually paid into the treasury. The notion that the money was
borrowed on unfavorable terms, because the debt contracted was frequently in excess of the sums received, is founded on a misapprehension. Five per cent. stock was nearly always worth par; and it was when
the rate of interest was only three per cent. on the nominal par value
of the stock, that ~100 of the latter was exchanged for ~60 in money.
By the "value of goods" is meant their gold value, and not
their market price measured by the depreciating, uncertain, and ever
varying standard which the legal tender act has authorized.
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OUR DEBT AND OUR TAXES.
of money adds nothing to the amount of work
which individuals can do for the Government. At
the worst, then, this labor could all have been de  manded as commutation for a special war tax. Let
us, however, go further into details.
It has already been shown that the only possible
way in which a nation can equip an army from its
own resources is by turning a certain amount of its
industry into the channels of war; that the military
power of the nation is measured by the amount of
industry which can be thus diverted; and that the
amount depends on the ability of the people to do
more than supply their own wants. We have also
seen that money does not increase the power of
diverting labor, but only furnishes a means of
making every individual do his just share.
Suppose, now, that we wish to devote one-fourth
of the entire productive power of the country into
the channels of war; in other words, that we con sider it necessary to employ one-fourth of the entire
productive population in the manufacture of war
material.  We  then levy a tax of 25 per cent. on
the entire production of the country.  One-fourth
the breadstuffs raised by the farmer will feed the
government employes, with their wives and chil dren. One-fourth the products of the looms will
clothe them. In fine, the required fourth being
paid the Government in the form of money, that
money will enable the government employes not in
the field to enjoy, on the average, the same comforts
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OUR DEBT  D  OUR TAXES.
that the remaining three-fourths of the community
do.
Can the productive population spare one-fourth of
all they produce, and still have enough left for themselves?  Yes: because they actually do it.  At least
one-fourth of our productive population is actually
engaged in carrying on the war, yet our farmers do
raise enough to feed them, and our factories to
clothe them. The only essential respect in which
the plan marked out differs from that actually
adopted is this: instead of demanding the required
fourth as a tax we accept it as a loan, giving the
producer promissory notes labelled "U Inited States
will pay" in exchange therefor.  As this note does
not minister to any bodily want, the nation at large
is none the richer for its issue.
Another objection has more weight.  Would
not so heavy a tax discourage industry, and lead
men to give up producing every thing not absolutely
essential to their subsistence?  This question can
be answered only by judging from experience and
analogy. In recent times, we have no example of
so heavy a tax. But it would, in its effects on industry, be precisely similar to a forcible deprivation
of such portion of our mechanical power, and laborsaving machines, that men would have to do onethird more labor to produce the same amount of
goods. As an example, take the production of
wheat. Suppose that by the use of sowing, reaping, and threshing machines, a farmer can raise
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four bushels of wheat with the labor required to
raise three without those aids. It is then a matter
of entire indifference to him whether you tax him
with one-fourth of his crop, or deprive him of the use
of the machines. The tax simply deprives him of
that additional fourth of his crop which the machine
" enabled him to raise. The question then takes this
shape: What would be the effect on industry of
depriving the nation of so much machinery that
one-third more labor would be required to produce
the same amount of wealth? Hiere we can appeal
to experience.  Ten, twenty, or perhaps fifty years
ago our people were in this very position.  They
) did not possess our improved machinery, and there  fore had to labor one-third more than we do to at  tain the same result.  Was industry then paralyzed 
No! They worked harder than we do. They
; devoted a much larger portion of their labor to
articles of prime necessity, and less to the improve  ment of their minds and the gratification of their
tastes.
If, then, our circumstances were changed  to
correspond to theirs, would not our industry take
? the same general form that theirs did? Undoubted ly it would.  The farmer would raise full as much
wheat and the manufacturer spin as much cotton, if
one-fourth of his products went for the public bene  fit, as he now does. Therefore, an enormous tax of
this kind is not so ruinous as might at first sight be
supposed.
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As an actual example Of the continuance of profitable industry in spite of the taxes, we may cite
the prosperity of commerce under import duties of
twenty, thirty, or even fifty per cent. Suppose that
for a century commerce had been perfectly free, and
that it had then been proposed to try the experiment of a duty of only ten per cent. on all imports.
We should have heard a universal cry that the
measure would be an embargo on all commerce.
It would be easily proved that importers did not
and could not make ten per cent. profit, and the
conclusion would be hastily reached that no one
would pay the increased price for imported goods.
And it must be admitted that if tried as a temporary experiment, the duties would really be found to
produce the predicted evils.   At first commerce
would be paralyzed and industry disturbed. The
importation of some goods might be stopped altogether.  Very soon, however, industry would flow
into the new and modified channels, people would
become accustomed to the new state of things, and
no one would be sensible of reaping any less enjoyment from his labor.
Very similar would be the effects of a special
war tax, or a return to the imperfect machinery of
former times on domestic production. Under any
circumstances, it is admitted that a certain length
of time, one, two, or perhaps three years would
be required for industry to accommodate itself to
the new order of things. This change once effected,
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the tax would not be seriously felt.   But the
greatest objection of all is found in the fact that if
the tax were merely temporary (and being a war
tax it would be temporary), industry might not
attempt to accommodate itself to the new order of
j things.  To take up once more the illustration by
the case of our being obliged to relinquish the use
of improved machinery; it cannot be denied that if
the deprivation were likely to last but a single year,
men would try to eke out their old stock of goods,
and get along with the smallest possible amount of
new manufactures.  The pro rata tax on produc   tion ought, therefore, to be a permanent one, to be
) applied to the extinction of the public debt.
How shall this difficulty be avoided?  By levy  ing the tax not on production itself, but on the
.productive powers.  Levy one-fourth, not of the
actual production, but of what the individual is
capable of producing.  Every man is capable, by
the use of his hands or his brains, of earning a
certain sum of money annually.  Demand from
him one-fourth of this sum, leaving him at liberty
to earn the other three-fourths or not, as he pleases.
? There would be required in each congressional dis   trict an enrolling officer, whose business it would
be to make a register of every male inhabitant
above the age of sixteen, capable of employing his
faculties so as to benefit the public.  Among these
individuals the tax would be divided, each man's
share being determined by his profession, his 
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come, and his wealth. Regard might also be had
to the number of persons dependent on him for
support.  And in case any one man should not be
able to dispose of sufficient of the products of his
labor to enable him to pay the tax, the alternative
ought to be kept open to him of commuting his tax
by working for the Government. Is he a laborer?
Ile can enlist in the army.  A farmer?   ie must
sow a larger field of wheat so as to be able to raise
his tax money by selling the surplus to the Government. A shoemaker? Hie must be allowed to
make shoes enough for the Government to pay his
tax.   Thus it will be found that there is not an
able-bodied man in the community but can in some
way contribute his due share.
The tax on the mercantile portion of the community, using the term mercantile in its largest
sense, as including every one who lives by buying
and selling at a profit, would be yet more easy. It
would best be levied as a percentage, not on profits,
but on gross sales. The tax would then include the
ineome as well as the per capita tax.
The income tax would be assessed on every
producer or manufacturer who earned more than
the average amount fixed for his particular profession, and on which the per capita tax was levied.
Finally, we have the tax on capital. Capital
gives to its possessor a certain advantage in production which is represented by the rate of interest.
Taking the country at large, every man who owns
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$100 worth of property can so use that property as
to earn from $6 to $8 per year more than he could
earn without it. A tax of one-fourth on produc tion would then involve a tax of from 12 to 2
per cent. on property.   As a matter of public
policy, however, it is advisable that this source of
power should bear a much larger proportion of an
extraordinary expense like that of war, than mere
labor. For in such a case the tax must be appor tioned, in a great measure, according to the ability
of the payer.  Now the capitalist has the same
facilities with the man who owns nothing but his
hands; and if we taxed him with the entire interest
on his capital, he would have left, on the average,
as large an income as a man of equal ability would
be earning without capital.
Such a system is the alternative of a national
debt in carrying on the war.  In practice it would
not be found so oppressive as might be supposed at
first sight, because the Government would, on the
average, be a customer buying goods to the same
extent that it would be a creditor demanding pay ment. All the money received fromn the people
would go directly back to the people, and indirectly,
in a great measure, to the very persons who contributed it. If the farmer, for example, was re quired to contribute the value of one-fourth of his
crop, either the Government or persons in Government employ would supply him with the required
money by buying one-fourth.  Thus, practically, the
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tax would be paid in the form of wheat, cloth, and
horses; just what the Government wants.
In arbitrary oppressiveness the system would not
be comparable with the Conscription Law, even in
the mild form in which we execute the latter.  Yet
we have seen the latter passed, executed, and approved by the people subject to it without complaint
on the score of its oppressiveness. No one has dared
to say that a dishonorable peace would be preferable
to impressing men into the military service by
draft.
As an example of the system proposed, if it is
resolved that we shall go on without any further increase of the public debt, on the basis of an annual
expenditure of $900,000,000, we may very roughly
estimate that the basis of the taxes, and the taxes
themselves, would be something like the following:
Able productive males..........................  4,000,000
Annual product of their labor.................... $3,000,000,000
Valuation of capital.......................... 10,000,000,000
The special and extraordinary taxes would be
levied each year separately by act of Congress, and
would be
1. Tax on occupation, varying from-say $30 for an
unskilled laborer, to $100 or $200 for men of the
liberal professions, averaging $50, would yield..... $200,000,000
2. Income tax of 20 per cent. on all who, from supe  rior talents, skill, or fortune, do actually earn more
than the minimum on which the first tax is levied.. 70,000,000
3. Property tax of 21 per cent..................... 250,000,000
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The ordinary taxes, to be continued after the close of
the war, and applied to the extinction of the public
debt already contracted, can easily be increased to.   400,000,000
Making a total revenue, ordinary and extraordinary,
of......................................... 920,000,000
We have suggested a large income tax on special
classes; but it must be confessed that although in
theory such a tax is the most just and equitable
that can be assessed, it is in practice the most un equal. It is notorious everywhere in our country,
that people enjoying much more than the average
amount of wealth, and living in a luxurious style,
do still pay an insignificant income tax. This does
not always arise from intentional dishonesty. Al though the word "income" may in the abstract be
susceptible of very exact definition, uncertainty and
doubt must continually arise in applying the defini tion to individual cases.  The utmost latitude of in terpretation is allowed to every one who does not
live on a fixed salary. iHence the taxes ought,
whenever possible, to take some other' form than
this.
The conditions under which a national debt may
be advantageous may be seen by comparing the
working of the above system with that which we
have adopted. The taxpaying community, with
respect to occupation, may be divided into three
classes:
1. Men whose occupation does not require the
use of capital. This class includes laborers, profes
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OUR DEBT AND OUR TAXES.
sional men, Government officers, and all who work
for salary, wages, or fees.
2. Mlen who use capital, whether their own or
that of others, and are responsible for its profitable
employment, whether they be farmers, manufacturers, or merchants.
3. Men who own capital, but instead of using it
themselves loan it to others. Such are owners of
shares in all institutions which own money, and all
who loan money themselves.
It is singular that we have no words in the English language which accurately designate these three
classes of producers.   For want of better names
they may be called workmen, business men, and
capitalists.
The ranks of the third class are naturally recruited from those of the first; and, indeed, the two
are to a great extent identical in this country. The
workman who loans his money to his employer or
puts it into a savings bank, and the professional man
who invests his money in bonds of any kind, become
capitalists to the extent of their savings. The class
.of men who live exclusively on the interest of their
money is quite small in this country.
Now, when the special war tax is assessed, it
may happen that the workman who has not been
frugal cannot pay his entire assessment during the
year, and cannot enter the Government service
without serious inconvenience to his family.   It
may also happen that the business man is employing
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his capital so profitably, or that all he has is so ne cessary to his business that his profits will be mate rially curtailed by the loss of what he has to
pay for carrying on the war. A farmer, for in stance, who  is assessed $100, may need  all the
money he can raise for the purchase of agricultural
implements and the payment of his laborers.  The
permission to apply his assessment to this purpose
may enable him to raise $10 worth additional of
wheat.  Hie may then appeal to a capitalist who
can not only pay his own share but the farmer's also,
to loan him the money at 6 per cent. interest, and
thus make a bargain that shall be mutually advan tageous.  But the capitalist may not be willing to
trust the farmer.  Here the Government steps in
and borrows the $100 from the capitalist, trusting
to gradually obtain principal and interest from the
farmer in the form of taxes.  This national debt is
incurred for the farmer's benefit, who is enabled to
lay out $100 more on his farm, on condition of pay ing the Government the annual interest on that
sum.
Herein lies the sole economical advantage of a
public   debt. It enables that portion of the com munity  which is in the greatest want of capital, to
keep possession of what they have, or to add more
to it by paying the Government the annual inter est on the money they actually owe it. So long
as  the          Government can borrow on such favorable
terms  that it would be to the advantage of the tax              4*
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payers generally to borrow on the same terms, so
long is the public debt a public advantage, and no
longer. The great practical question now is, does
our Government borrow money on such terms.?
L       et us see.
A  ive per cent. bond, interest payable in gold,
can now be sold for par in currency; but one dollar
of this currency is worth little more than 40 cents
in gold, so that we are really paying 12 per cent.
interest on the actual amount we borrow. Is it to
the advantage of our taxpayers generally to borrow money at 12 per cent. interest?  Few, I think,
will hold that it is. Then, it cannot tend to the
public benefit for our Government to incur any
further debt, for in doing so it is, as the agent of the
citizens, borrowing money for them on exorbitant
terms.
In answer to this there is an argument for preferring indirect taxation  extending over a long
period, to a large and temporary direct tax, which
it is well to consider, granting that it is not for the
actual pecuniary interest of the citizen to borrow
money on these terms; it is said that the object of
the Government is not to raise the money in thattway
which conduces most to the real welfare of the community, but in such a way as to cause the least amount
of complaint. If every man calculated exactly what
was for his best interests, these two ways would be identical. But men generally do not make such calculations. Thus, an attendant at church will drop twenty
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five cents into the contribution-box every Sunday
without any complaint, when he would complain
very loudly if obliged to give twelve dollars once a
year, although the latter is really more to his advan   tage than the former.  Moreover, the interest on the
debt will gradually be paid in taxes which are in   direct and insensible, being paid the Government
by manufacturers who simply charge them to their
customers by increasing the price of their goods. It
will thus happen that the owner of a hundred dol  lar bond will feel richer for possessing it, though
obliged to pay indirectly fifteen dollars a year in
taxes for interest on his own bond.
To a politician, whose maxim is, "after me the
!   deluge," such an argument as this is very accepta   ble. But it is unworthy the statesman whose ob   ject is the real good of the nation.  So long as the
( entire peace expenses of the Government, including
interest on the public debt, can be paid by insensi   ble indirect taxes, it may be well to borrow, even
on terms somewhat unfavorable. But we are
speedily approaching, if we have not already reach   ed, the point at which insensible indirect taxes will
no longer suffice for these objects. When all claims
growing out of the war are adjusted, and the entire
debt is funded, the annual interest alone will prob   ably amount to $150,000,000, though the rebellion
should be suppressed immediately.  But in view of
the facts that the war for the Union may last much
longer, that when it is over we may be engaged in.
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OUR DEBT AND OUR TAXES.
war with a European power, and that a tax on industry heavier than that under which we now labor
will discourage emigration, and thus impede the
development of our resources, the argument in
question invites us to risk our future happiness
in order to gratify a present supineness.
It is, indeed, a general and very sound rule, that
taxes on production, paid indirectly by the consumer of the articles taxed, are to be preferred to
direct taxes, not merely because the consumer does
not feel that he is paying a tax, but because he can
select his own time of payment.  Such rules are
very good when the object is to raise a small
and definite annual sum in the easiest way; but to
apply it to a people in our situation, is as if a map
should regulate his exertions to save his house from
burning down, by the rules respecting exercise laid
down by physiologists.
The increase of the public debt by selling bonds
for forty cents on the dollar tends to the unequal
distribution of the burdens of war. If principal
and interest of the debt is really paid in gold, then
the bondholders will be profited at the expense of
the taxpayers, who will have to pay just double
their right share. If they are paid in paper, it will
make a complete lottery out of the entire debt, as
we shall very clearly see in a subsequent chapter.
If they are not paid at all (which God forbid!) the
burden of the war will fall entirely on the bondholders. Thus, all is chance where all should be
certainty.
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If; indeed, the debt were distributed in exact pro    portion to the taxes to be paid so that every one
should pay out in taxes as much as he received in
interest, it would cease to be a burden.  The idea
of such a distribution has already been shown to be
( chimerical; and if it were possible, there would be
need of incurring the debt.  For if a man has mon    ey to loan the'Government, he certainly has money
to pay the Government what he owes it. Hiis share
of the debt has been incurred solely because it is
presumed he has no money to spare.
In fine, let us try to put the matter into a nut   shell.  Hiere are twenty millions of people who are,
'  together, to do a certain large and unusual amount
of work, in the way of fighting and manufacturing
munitions of war.
Under  our  present  system, every  one who
}  chooses is allowed, if he escapes conscription, to
stay at home and do absolutely nothing to advance
the common cause except pay an insignificant in   direct tax. Those who really do the work are stim   ulateu  il.,eto by promises to pay, which the Gov   ernment agrees, at some future time, to make good
from the proceeds of taxes which are to be. paid
by the present do nothing class. Clearly, when
these promises have depreciated to forty cents on
the dollar, it is time some other system were adopt   ed.
Our true policy is to demand that every man,
without exception, shall come forward and do his
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OUR DEBT AND OUR TAXES.
share of the work. Whenever we organize such a
system that this demand is complied with by all, the
necessity for borrowing will cease.
Even though the war should end immediately,
such a special war tax would be advisable, in order
to raise money to pay outstanding claims. The
general opinion seems to be that the unadjusted
debt amounts to more than five hunfdred millions;
and that if our entire army were disbanded to-morrow, we shall actually find ourselves owing this sum
to individuals.
Thus the conclusion seems unavoidable that
every consideration of sound policy demands a stop
to the further increase of our debt, and the levy of
taxes sufficient to meet all the future expenses of
the war.
Ought the public debt to be subject to taxation?
There is no reason why the owner of a Government bontshould not pay the same tax on it as on
any othe  property of the same kind.  The man
who loaw  money to the Government, does not
thereby resign either the real ownership or the benefits of the money, for it is all to be returned to him; he
ought, therefore, to pay the same taxes on it that he
would pay if he kept it for his own use. If he
lent his entire property to the Government, when
the debt was discharged he would get it all back
again without having paid any tax on it at all,
unless his bond was taxed.
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When the Government sells bonds with a pledge
that they shall not be taxed, in order to get more
for themn, it amounts to selling out, in advance, all
the taxes to which the bonds might, in common
with other personal property, become subject.  This
"farming out " of taxes to be collected, for this is
what the contract amounts to, is the worst possible
way of borrowing money.  It was an accompani  ment, partly cause and partly effect, of that miser  able condition of the finances of France which
preceded the first revolution.  If, then, it has proved
disadvantageous when  the amount of the tax is
known beforehand, how much more so in the
present case, when no one can know how heavy a
property tax the Government may have to levy?
The increased price obtained for the bonds is prob ably quite small, perhaps insignificant; yet, if the
Government should think proper to levy a prop erty tax of five per cent. it would lose $100,000,000
by being obliged to remit the tax on the pres ent public debt.   It is, therefore, to be hoped
that in the sales of bonds to be hereafter authorized,
the Gove?-Lnent will bind itself only to levy no
higher. & es on them than on other personal prop erty.
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CHIAPTER IV.
THE LEGAL TENDER  NOTES-THEIR INFLUENCE ON
PUBLIC CREDIT.
DURING the third session of the thirty-seventh
Congress, in the winter of 1861-'2, the financial situation of the Government, on a superficial view,
presented  many  inauspicious features.   To  the
public mind the future was all doubt and uncertainty. A war of unknown duration, with expendituLres of unheard of magnitude, were in prospect.
We had but a faint idea of our capacity for sustaining a long war. Forty millions of demand notes
were in circulation, and payment would be due
whenever the holders chose to ask for it. A much
larger - -bt, in the form of interest-bearing treasury
notes would be due at various intervals during the
ne: three years.  During the same period the debt
would be increased many fold by the vast war expenditures. There was no prospect that the money
required by the Government could be borrowed on
favorable terms, and a system of taxation was
hardly thought of. The State banks, through which
the war loans had hitherto been negotiated, could
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supply no more money.  Six per cent. stock, whiclh,
in prosperous times, would command a heavy pre mium, was at a discount of from seven to fifteen
per cent. Its price would probably fall lower yet;
how much lower no one could divine.
Matters were made worse by the general sus pension of specie payments by the banks at the end
of 1861. There would be a general flow of the
demand notes to the Treasury for redemption. To
prevent this flow the Treasury ignobly followed the
example of the banks, by refusing to redeem the
notes.
February 25, 1862, an act was passed author izing the issue of certain United States notes.  The
provisions of this act are too well known to require
any statement of them.  There has, indeed, been
some difference of opinion whether the notes thus
authorized ought to be called "paper money," and
spoken of as "irredeemable;" but this is purely a
question of terminology. Webster defines paper
money as "Notes or bills issued by authority and
promising the payment of money, circulated as the
representative of coin."  In mercantile language a
bill is said to be "redeemable" when the drawer is
ready to pay it. It is notorious that the bills in
question answered to the above definition, and that
the Treasury was not ready then, and is not ready yet,
to pay them. Therefore, to take the ground that
they were neither "paper money" nor "irredeem  able" is not to defend them, but to attack the
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definitions of Webster, and the common forms of
speech used by the business world.
It is proposed to examine the notes thus authorized from three distinct standpoints. -
In the present chapter attention will be called to
the principles involved in the measure, and the
effect on the public credit of the adoption of such
principles.
Next, we shall examine into the effects on the
business and other interests of the country.
Finally, to judge whether the system devised
was really the best one, we shall inquire how far
the notes were expedient and necessary; compare
them with previous systems of paper currency,
such as our Continental money, and the assignats of
the French revolution; and examine the arguments
urged in their favor.
The object of the measure was two fold: it
was intended to alleviate the burden of the debt
already contracted, and to pay certain of the future expenses of the war. First let us Bee how the
former object was attained. There were notes in
circulation, issued by authority of Congress, to the
amount of some $35,000,000 each bearing the
words "THE UNITED STATES WILL PAY THE BEARER      DOLLARS ON DEMAND."  The United States
had not, at the moment, the necessary number of
dollars to pay with.  So the "bearers " were met
and checkmated by a timely revision of the I)ictionary.
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LEGAL TENDER NOTES.
If men had examined the acts of Congress with
a view of learning exactly what was the legal mean ing of the word "dollars" in the promise "will
pay the bearer     dollars," he would have found it
to be as follows:
DOLLAR.  A  coin of the United States containing 23 +  grains of fine gold.
These thirty five millions of dollars, therefore,
meant more than eight hundred million grains of
gold.  Could not the meaning of the word "dollar"
be so altered as to include something more easily
commanded than gold?  Without discussing the
legal question whether it could be so altered or not,
the historical fact is that it was so altered.  It was
made to read:
DOLLAR.  A  piece of paper stamped "United
States will pay one dollar.-Legal tender for one
dollar:" etc.
Since these pieces of paper could be command  ed at a very small cost, it is obvious that there was
a great saving and a great relief at least for the
,time being. As soon as the plates could be en  graved, and the printing presses be put in success  ful operation, the Treasury was prepared to fulfil
the promise, " United States willpay the bearer 
dollars." So whenever the holder of a demand note
thereafter presented it at the Treasury and persisted
in demanding payment, he received another note,
with the words "on demand " left off, and the debt
was'for the time being discharged.
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LEGAL TENDER NOTES.
It was not the demand notes alone that were
thus provided for. The new paper money was a
legal tender in payment of the entire principal of
the public debt.  Hiow would this operate?  In the
course of the preceding twelve months, when twenty millions of hearts were all aglow with enthusiasm for their flag and their country, thousands of
old stockings in every State had poured their golden contents into the treasury of the nation. Thousands of mechanics, farmers, and workmen, each
gave a hard-earned hundred of gold dollars to support the credit of the Government. They received
in return 7T3  notes; promises that the United
States would repay them the "dollars" in three
years. The new definition of dollar was applied to
the entire principal of these notes also.  It was
enacted that when the holder of the 7-30 note presented it at the Treasury for payment, instead of
getting his gold dollars back, he should be paid in
dollars which were obtained by the Government at
the cost of paper and printing unless he preferred a
six per cent. bond.  The promise to pay would be
legally cancelled by the delivery of another promise
to pay.
Now let us consider an ethical question. Why
might not Congress have enacted as follows:
That the notes known as seven-thirties shall,
after they become due, be a legal tender for all
debts public and private, when so stamed at the
Treasury P
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LEGAL TENDER NOTES.
Then, when the holder of the note presented it
for payment, the teller would simply stamp it
"Legal Tender," and hand it back, and the debt
would be paid. Would it not have been just as
satisfactory to the creditor to be paid in this way as
to be paid in a new note?  It certainly would.
The old note stamped would have been legal tender
equally with the new one; and it was just as easy as
not to give it all the elements of value of the new
note by receiving it in payment of debts and loans.
In fact, a law was actually passed which permitted the demand notes to be redeemed in this
way.  They also were declared a legal tender in
payment of debts.  Consequently, when the bearer
of the note presented it for payment, the teller
could pay it by handing back either the identical
note presented, or another one exactly like it, without even the trouble of stamping.  Quite likely
this formality was not actually gone throLugh with in
a single case; more especially as the old demand
notes, being receivable for customs, were more valuable than the new ones in which the teller would
have been equallyvat liberty to redeem them. Consequently, it would have been to the positive injury
of the note holder to allow the Government to redeem its promise in the altered way.
This ethical question gives rise to a few others.
They are not asked in a spirit of censoriousness,
nor with the idea of intimating that there can be
but one answer to them; but simply to induce the
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LEGAL TENDER NOTES.
reader to study the subject from an ethical point of
view. Was the operation we have described-that
of paying one note with another-paying the debt
expressed by the first note? If so, was it paying
the debt in the manner understood between the
parties at the time the debt was contracted?  If
not, what is the "dishonored public faith" and
"national bankruptcy" of which  Mr. Chase so
emphatically warned Congress not three months
before?
No  elaborate argument  can be necessary to
make it obvious to any unprejudiced mind, that
such measures as have been described could not be
otherwise than most injurious to the credit of the
Government.  That promises made by the Government were modified without the consent of the
party in whose favor they were made, is undeniable.
The promise meant one thing at the time it was
made; the meaning of the words was afterwards
changed so that it should mean something else.
Gold had been the only legal tender of the Government since the adoption of the Constitution. For
the first hundred million of the 7-30 notes it would
accept nothing but gold, or its absolute equivalent.
Among those who thus loaned the metal gold to
the Government, no one for a moment supposed
that if the loan were ever repaid at all, it would be
repaid in any thing but gold.
It would be entirely useless to inquire whether
the measure in question was a breach of public
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faith.  If every citizen of the country, and every
holder of bonds, were to believe and maintain that
the act was perfectly right, it would not prevent the
evil effectsin the least, but only exaggerate them. The
relation of cause and effect is as invariable in the
world of mind as it is in the world of matter. We
need not decide whether a moral cause is right or
wrong in order to trace it to its consequences. If
the effects of the legal tender notes depended on the
purity of the motives of our statesmen in issuing
them, they would undoubtedly be good. But such
is not the case. In so far as the effects are bad, the
adoption of the measure was like setting fire to a
wooden house.  The house will burn down equally
whether the act of setting it on fire was right or
wrong, necessary or unnecessary.
On  the very same  principles Great Britain
could relieve herself of the burden of her entire
public debt in a single month by ordering an issue
to the public creditors of legal tender notes for the
debt as fast as it became payable. Perhaps if we
cannot see the beam in our own eye, we may never theless see the mote in our neighbor's eye, and
divine the effect of such a measure on the public
credit of the British Empire, whether the measure
itself should be necessary or unnecessary. Indeed
a Government could in the very same way make its
contracts mean any thing it pleased by altering the
legal meaning of the words which entered into
them.
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LEGAL TENDER NOTES.
In our own case the change would have been
less to the disadvantage of the bondholder, had any
efficient measures been  taken to give the legal
tender money a definite gold value. It may be
replied that three measures were taken to this end:
1. The notes were declared lawful money and
legal tender.
2. They were redeemable, not directly in coin,
but in the class of securities familiarly known as
"five-twenty bonds."
3. They are themselves part of the public debt,
inasmuch as each note contains a promise that the
United States will pay the bearer the amount of its
face.
Perhaps it is hardly necessary to argue the first
point. No Government was ever powerful enough
to compel its paper money to be considered as the
equivalent of coin, for this would be to control the
most secret thoughts and opinions of men. Whatever might have been thought of the case in the
beginning, few will now pretend that our paper dollars are in any way the equivalent of the gold dollars
which could be legally demanded for every debt
previous to Feb. 25, 1862. Let us look at the question in a general light. Why should a note stamped
by authority of the Government " Legal tender for
one dollar," be worth twenty-three grains of gold
rather than five grains or one grain? Why should it
be worth our gold-dollar rather than a German thaler?
I can see no reason.  Making the notes legal tender
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adds nothing to their value.  You can, indeed, pay
> off an old debt with them as with gold, because the
> creditor cannot help himself; but when you come to
buy flour and butter, you find the holders graduate
' their prices to correspond to the new value of the
' dollar. bYou find that although Congress can de dclare notes legal tender, it cannot fix the price of
provlsions.
2. The legal tender notes now issued are not re[ deemable in five-twenties or any other specified form
of security.  They are, indeed, receivable for all
loans; but as the loans can be negotiated only on
{ such terms as the Government chooses to accede to,
this adds nothing to the value of the notes.  The
first issue of notes was redeemable in the bonds al  luded to.  Hence their value could not fall below
that of the bonds, for which they could at any time
be exchanged.   But how  was  the value of the
' bonds fixed?  By the terms of the legal tender act
th e            Government could redeem the bonds at any
time       after five years in legal tender notes.  The
value of the bonds was therefore fixed by the value
of  the       future legal tender notes, which might be
much less than that of the present ones. There was
no        promise or pledge, expressed or implied, that the
money  with which the principal should be discharg  ed               should have any  intrinsic  value  whatever.
There was, indeed, no doubt that it would be dis  charged in something which would be declared law   ful money by Act of Congress; but what one hun
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dred dollars of this money, when received, would be
worth, no man in the country knew then; no man
in the country knows now. They may be paid in
gold, in lawful money the equivalent of gold, or in
lawful money one thousand dollars of which will
not buy a barrel of flour, without any breach of
promise on the part of the Government.
Had the faith of the nation been unequivocably
pledged that both principal and interest of the new
bonds should be paid in coin of the same weight
and standard as that already authorized by law;
had the national legislature likewise declared, that
the sense of the country demanded that every obligation into which the Government had previously
entered should be discharged exactly as was understood at the time of entering; had they in consequence provided for the payment of thie demand
notes and the " seven-thirties" in coin, the former
immediately, the latter at maturity; then, I can
scarcely conceive that the bonds in question could
have fallen very much below gold. But whether
this idea is corrector not, whether the measures proposed would or would not have given  a great
impulse to public credit, it is certain that, as the
case stood, no definite value could be assigned to
the money in which the principal of the bonds
might be paid. Making notes redeemable in bonds
which were again redeemable in notes, was like
trying to keep a ship from blowing to sea by lashing
her to another and then anchoring this one by lashing
her to the first.
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The interest of the public debt was excepted
from the operation of the legal tender act.  This
was the great redeeming feature of the bill.  But
for it, our currency might now be rapidly following
our Continental money, and the present currency of
-the rebels, in the road to ruin. But a great part of
the good effect which might have resulted from
this proviso, was lost from the circumstance that
there was no pledge of faith to continue paying the
( interest in coin for any specified length of time.
Sfhe bill simply enacted that the notes should be
lawful money, and a legal tender in payment of all
debts except duties on imports and interest on the
public debt, which should be paid in coin.  There
: would certainly have been no greater breach of
faith in including the interest of the debt in the op eration of the law than in including the principal;
and if one Congress can declare paper a legal
tender for one debt, the next Congress can declare
it legal tender for another.  At the same time every
enlightened friend of the credit of the country
cannot but earnestly hope that the interest on the
present funded debt will never be paid in any thing
but coin of the present standard.
3. The legal tender notes are, indeed, counted as
part of the public debt, but the time when this debt
is to be paid is entirely unknown. Equally, un known is the kind or value of the money in which
it is to be paid. If it is not to be paid for a century
.its present value as a debt is very inconsiderable.
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LEGAL TENDER'NOTES.
Indeed, so long as the present law is in force, every 
note would seem to be virtually legal tender for its 
own payment. Whenever it is presented at the e
Treasury, it can be legally redeemed in another note
just like it,and this second note can be redeemed by 
returning the first.  So the note has not necessa- 
rily any value at all as a Government debt:
It is, then, quite plain that there was no neces-,
sary limit to the possible depreciation of the new 
notes. But the circumstance that a fixed gold'
value was not given to the notes, is not of itself th4
great evil to be complained of. a
We  may say of every act of a Government or 
an individual, that it involves and is founded on 
some principle, and some general rule of conduct. 
In many cases the principles involved in the act are i;
really of much more importance than the act itself, 
because they may be the occasion of a long series.
of analogous acts.  If a trader makes false repre- 
sentations in the sale of goods, the general fact that;
he cannot be trusted is of far greater importance 
than the particular fact that on such a day he.
cheated you.  The evil of an unjust imprisonment
is not that Mr. A or Mr. B has been deprived of liberty for a few hours, but that a principle has been established under the operation of whiclh personal liberty 
is no longer secure.
So with  the measures  under consideration;
their real evil lay, not in the inception of a fact, but
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LEGAL TENDER NOTES.
that we declared paper a legal tender, but that
we adopted a rule of action under the operation
of which public credit was but an empty sound.  It
was not that the Treasury happened to be in a strait
for money, but that it pretended to pay when it did
not. The fact that the measure was accepted by the
country as a just and proper one made the matter
worse, because the sanction of public opinion was
thus given to a ruinous principle, and the principle
was, for this reason, more likely to become a standard policy. On the other hand, the more unfavorable the light in which the public view the measure;
the more they reprobate the principles involved in
it; and the less they are disposed to justify them or
accept them as the basis of a permanent policy, the
better. For the credit of a people will always correspond to their standard of public honesty as indicated by their acts and opinions.  Consequently,
whenever the nation clearly sees that measures
injurious to the public credit are fundamentally
wrong, and manifests a desire to repudiate or modify them at the earliest moment, its credit will by
the general recognition of that state of feeling be
restored. The nation as a seeker of credit is in the
position of an individual, against whom payment
can be enforced by no law except his own sense of
justice. It is more important that his sense of
justice shall be correct and delicate, than that he shall
have ready money.
The legal tender notes naturally grew out of the
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suspension of specie payments by the treasury two
months before. Considering only the present exigencies of the Government, the views which our
people had been accustomed to entertain respecting
the extent of the obligation to pay a circulating
note, and the general practice of the banks throughout the country, this act was a comparatively harmless, and very necessary one. But let us measure it
by that high standard of faith which ought to be
adopted by the statesman who desires to see his
generation bequeath an untarnished honor to posterity.
Let us see how it would be with individuals
placed in circumstances similar to those of the Government, in the first part of 1862. A creditor holds
notes against such a person. I-e demands payment,
and the following conversation ensues:
Debtor. Cannot pay it. I have not money
enough to pay all notes of that kind, so to be
impartial I shall not pay any. The banks have suspended, and so have I.
Creditor. When can you pay it?
Debtor. Don't know: cannot answer any more
questions.
This was no doubt the substance of the conversation between the teller and every one who presented a note at the Treasury between the suspension
of specie payments and the issue of the legal tender notes. Not only the obligation to pay on demand,
but, so far as the public could discern, all obliga
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tion to pay at all until the holder should chance to
owe an equal debt to the Government, was deliberately repudiated.   This weak, timeserving, and
timid act is a principal link in the chain which has
brought on all our subsequent difficulties. No man
who believes that honesty is the best policy, that a
nation as well as an individual in search of credit,
should exhibit the most scrupulous honor in fulfilling all obligations, can doubt that the counsels which
suggested this course were the very worst that could
be adopted.  It was a critical period in our financial
history.  Fear and confidence fought for the mastery in the minds of the community. Had the
Treasury allied itself with the side of confidence by
resolutely continuing specie payments, it might have
prevailed. sThe suspension, except during the short
time necessary to negotiate a temporary loan, was as
unnecessary and unjustifiable as it was weak. A
heavy tax, say six per cent. per annum, on the repudiated bank circulation, would of itself have stopped
the run on the Treasury in forty-eight hours after it
was imposed. The banks would then have called
in their notes as rapidly as possible, and there would
have been a positive necessity for either gold, demand notes, or other Government money to fill the
vacuum. No doubt such a measure would have
seemed harsh and ungrateful, and would have caused
much complaint on the part of the banks.  But,
which is of most importance, the honor of the Governinent and the moral stamina of the nation, or
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the interest of those corporations? It must be re   inembered that such a tax would only have deprived
the banks of a source of profit to which the Gov   ernment has a far better right than they; namely,
the interest on the money circulating through the
channels of business. Indeed, as we shall see in the
next chapter, the course actually pursued has been
far more disastrous to the bank interests than would
*    have been a compulsory prohibition of all their
business.
It may not be uninteresting to examine more
fully that state of public sentiment which led the
nation to look with so little dissatisfaction upon the
act in question.
The general complacence with which our mer  cantile community look upon the failure of a house
to make good its obligations, the frequency of such
failures, and the circumstance that they are not
looked upon as compromising the honor of the de  faulters in any degree whatever, have beeni thrown
into our faces by our transatlantic brethren as indi  cative of our very lax notions of public morality.
The imputation is neither just nor reasonable, so
long as good faith is kept between the parties.
When one merchant gives credit to another, or fur  nishes a young man with a stook in trade, it is done
with the tacit understanding that the obligation of
the debtor ceases, if, through losses in business, he
becomes unable to pay. The creditor of course
charges a little more on account of the risk; he in
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sures the debt as an insurance company would insure
a house, and it may be that this system of debt in  surance is as beneficial to the community as fire
insurance. It certainly is as honest.
But when we extend this system of debt insur? ance into transactions of a public character we start
on the road to infinite evil.  The frequency with
which our banks have for a longer or shorter period
suspended specie payments has habituated the pub  lie to read every bank note with the mental reserva  tion "if we do not suspend," just as every promisso  ry note contained the understood proviso "if I am
able."  Now, the question arises, ouqt thi, or any
other proviso to be uTderstood as g qalifying the
_promises to pay of our Government?  Most cer  tainly not, except as circumstances absolutely be  yond the control of the Treasury might temporarily
compel it. Absolute inability of the nation to
redeem its obligations to its own citizens is almost a
physical impossibility. For, as has been shown in
the last chapter, paying such a debt is nothing more
than equalizing the unequal contributions of indi  vidual citizens, so that each one shall have contribut   ed his just share.
The evils of the Treasury suspension were
greater than those involved in the suspension of the
banks, owing to the different conditions of the two
institutions. A well-managed bank always holds in
its vaults either coin olrpromissory notes of respon   sible individuals sufficient to pay all demands upon
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LEGAL TENDER NOTES.
it, and to make good its capital beside.  All these
notes would be due in less than ninety and perhaps
less than sixty days, depending on the length of
time of discount. The Government, on the other
hand, held no such notes, and payment would have
to be left entirely to its sense of good faith. Hence
the more disastrous consequences of its refusal to
pay as promised. But the Government had a power
which the banks had not, that of levying taxes to
any extent on the whole country, so that its failure
could be due only to its own supineness.
But failing to see anymore serious consequences
in the Treasury suspension than in the bank suspensions, the nation supinely submitted to it, as something which could not be helped, and which did not
involve any degradation of the public faith. The
credit of the banks had not generally been impaired
by thtir suspension, or by the general expectation
of such an act.  Why should that of the Government? So, notwithstanding the fear of the people
exhibited by the Treasury, and notwithstanding the
vote of want Of confidence in the nation implied in
the legal tender bill, which two months after the
suspension protected the Treasury against the assaults of its creditors by surrounding it with a parapet of legal tender paper, the confidence of the
nation was not at first impaired. This is conclusively proved by the gold value of the National
bonds. The twenty-year des, a month after the
passage of the act, brought 96 in gold, showing con
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elusively that the people had no idea that the prin   ciples involved in the recent acts would be carried
out to their legitimate conclusion.  The evils of a
redundant currency had just been so clearly depict   ed by the Honorable Secretary of the Treasury,
f and the general determination to sustain the credit
' of the nation was so strong, that every one felt con   fident that efficient measures would be taken to
guard the currency against serious depreciation.
'  Had any one predicted that in threeyears the notes
which were declared a legal tender forthe entire prin  cipal of the public debt, would only have been worth
i  from 40 to 45 cents on the dollar in gold, he would
/ have been looked upon as a villanous slanderer of
the public credit.
Yet their history exhibits the same characteristics
which have been exhibited by every system of paper
money not redeemable in coin.  The Inagic word
"dollar" had at first a great influence over the
minds of the community.  Value being something
which could not be seen, felt, or heard, but only
learned from the exhibition of public demand in
the market, it was thought that any thing declared
a dollar by act of Congress must be as valuable as
any thing which had formerly been declared a dol    lar. But, as additional issues of legal tender paper
began to be emitted or called for, as these issues
began to be recommended on the miserable plea of
their necessity, as men began to see that this paper
money had absolutely no fixed basis of value what
4
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LEGAL TENDER NOTES.
ever, and that there was no apparent disposition on
the part of the Government to form any such basis
for it; then the prices of things began to rise, and
gold to rise with them.
The actual cause of public credit, as a matter of
fact, not of theory, as it existed in the minds of the
community, not in the speeches of politicians, is
shown by the following table. This shows for each
month-1. The average price of gold in legal tender
notes; 2. The value in gold of $100 in legal tender
notes; 3. The market value in gold of 6 per cent.
bonds, accrued interest for the half year taken
off.
Gold value of
$100 20-years
6 per cent.
bond.
90
91
99
98
86
87
84
79
78
76
67
60
67
68
72
73
80
83
79
74
73
70
1862. March.............
April..............
May...............
June..............
July...............
August............
September..........
October............
November.........
December..........
1863. January............
February...........
March.............
April..............
May...............
June..............
July..............
August............
September.........
October............
November..........
December..........
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Gold valu
Of $100 i
legal tende
n,6tei3.
. 98
98
97
94
. 86
87
84
77
76
76
62 -
66
66
68
69
76
79
75
69
68
66
Price of
Gold.
1.02
1.02
1.03
1.06
1.16
1.15
1.19
1.30
1.31
1.32
1.44
1.61
1.51
1.51
1.48
1.46
1.31
1.26
1.33
1.46
1.47
1.52
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Gold va lue   o f
$100 20-years
6 per cent.
bond.
69
69
67
61
62
5,f
42
41
47
51
48,
48
Gold value
Price of    of $100 in
Gold;      legal tender
notes.
1.54           65
1.60           63
1.64          61
1.75           57
1.80           56
1.95           51
2.50           40
2.56           39
2.28          44
2.06           49
2.24           45
2.30           44
1864. January............
February...........
March.............
April..............
May...............
June..............
July..............
August.............
September.........
October............
November.........
December..........
t
The two last columns of this table, which show
the actual gold value at which the Government
notes and bonds have been held, is worthy of very
serious attention. Whatever metaphysical themes
may be propounded about the demonetization of
gold, and its conversion into an article of merchandise, the following three facts are thoroughly understood by the mercantile community:
1. Gold and silver have for centuries been the
standard of value in every civilized country.
2. Gold now is the standard of value in our own
as in every other civilized country, in spite of the
legal tender paper.
3. Gold will be the standard of value in.this
and every other civilized country, in spite of any
thing any Government may do to prevent it.*
* The fact that prices in general do not fluctuate in exact correspondence with gold, no more disproves these general propositions
than the existence of mountains disproves the rotundity of the
earth.
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These unchangeable facts being taken for granted, does the circumstance that our six per cent.
bonds, in the public market, will only bring fifty
cents on the dollar in coin, imply any doubt of the
Government faith?  This depends, in part, on what
standard of credit the Government is supposed to
adopt.  If legal tender notes are to be the permanent Government currency, its credit in this respect
is very good; indeed all that can be desired, and
more than could be expected, showing most conclusively that the people look forward to some better
standard than that. If the bonds are to be considered as redeemable in paper, it is as absurd to measure them by a gold standard as it would be to assume that a dollar meant a pound sterling. In fact,
in the case supposed it is impossible to fix any gold
value for the bonds, because no one can predict the
gold value of future legal tender notes.  It is as if
you held a note against an individual for 100 piastres, when neither he nor you knew how much a
piastre was; when no one knew, in fact, because its
value would have to be fixed by future legislation.
In such a case your unwillingness to consider the
piastre as the equivalent of the gold dollar would
not involve any doubt of the good faith of the
drawer of the note.
But, if both principal and interest of the debt
are to be paid in gold coin, our public credit is practically not good. In ordinary times five per cent.
bonds are worth par in our markets. True, the
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effect of the war has been to increase the rate of
profit on capital for the time being; but this in  crease is only temporary, so that a seven or eight
per cent. bond, if it has many years to run, ought to
be worth par, and probably would be if its security
were perfect.  Since, then, our six per cent. bonds
are only worth about 50 in gold; since, in order to
borrow the equivalent of $100 in coin, we must not
only pay $12 per annum interest, but $200 for prin  cipal at maturity, it must be conceded that the coin  munity does not feel universally assured of receiving
both principal and interest of those bonds in gold
coin of the present standard.  If any additional
proof of this fact is wanting, it is found in the much
higher price commanded by Massachusetts bonds of
/    similar character.  Why  are Massachusetts bonds
preferred to those of the United States?  Let our
consciences answer this question for us.
While it can hardly be controverted that the low
gold price of our bonds does imply some doubt of
their being paid in gold, we cannot measure this
doubt by the amount of the depreciation. The lat  ter depends in part on certain attributes of human
nature.  No man will give any thing for a debt not
payable until twenty years have elapsed, unless he
takes an interest in his future self. Now, although
to a certain extent most civilized men are disposed
to provide for the far future as carefully as for the
present, this disposition speedily finds a limit. They
are quite willing to invest their ordinary surplus
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earnings for the benefit of the future.  But when it
comes to making those unusual exertions necessary
in the prosecution of a great war, the prospect of
future pecuniary benefit speedily loses part of its
hold on the mind. Menrill want larger and larger
promises to stimulate them to the same exertions, no
matter how certain of fulfilment those promises may
be. Thus a great depreciation of any kind of bonds
is the necessary result of throwing more of them on
the market than will absorb the ordinary surplus
earnings of that class of the commnity who consider
them perfectly secure.  The more frugal this class,
that is, the more willing they are to labor and exercise self-denial for a future good, the less will be the
depreciation from overloading the market.
But apart from all questions of frugality among
the people and right principles on the part of the
Government, a diminution of the gold value of bonds
is the necessary result of an issue of notes in payment of indebtedness. Respecting the manner in
which the Government will discharge its debts, we
have all shades of opinion.  Many are fully convinced that its every promise will be redeemed in
coin, and would be willing to give par in gold for
six per cent. bonds if they could not get them any
cheaper. Now let us see how paying in paper has
operated on this class. Let us take, for instance,
the 713o notes, issued in 1861. There are, we will
suppose, five persons of equal wealth, each of whom
would have paid $100, had this loan beenr assessed
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as a tax. But one of them, being a firm and confident believer in the Government, paid the share of
all five, by loaning the Government $500 for three
years, thereby rendering the tax, for the time being,
unnecessary. If, now, at the end of three years, the
Government determines to pay off this debt in coin,
it simply levies a direct tax equal to the entire
amount of the loan, receiving the 71  notes in payment therefor.  The confident man will now get
$40) of his gold back again, either by his four
neighbors each coming to buy $100 of his loan in
order to pay their tax, or by the Government paying his notes in gold. The debt will then be discharged by the equitable division of its burdens
among all, as it ought to be. The confident man,
hlaving got his gold back, and found his faith in the
Government vindicated, will be willing to loan the
gold to the Government again on favorable terms,
and the gold value of bonds will be as great as ever.
But by failing to levy this tax, and compelling
the creditor to fund his debt, we place it out of its
power to make another loan to the Government, no
matter how little his good opinion of the public faith
may have been shocked by the failure to compel an
equitable division of the war expense. The Government is, therefore, compelled to borrow from those
who have less faith in it and less disposition to invest money for the future. Thus the measure under
considerationifnecessarily paralyzes the efforts of those
who have faith in the Government, and compels it
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to resort for further loans to those who doubt whether
it will make good its promises.
Is it not a short-sighted policy which has thus
punished our friends, and played into the hands of
our enemies?
A system of paper money may be described, in
general, as a convenient device for throwing the entire burden of an  extraordinary expense  por  that
class of the community who have most faith in the
paper money.  Such a system necessarily acts in
this way.  It was so in the revolutionary war.  The
tory, who had no faith in the redemption of the
money, always parted with what he received as soon
as possible, by purchasing the necessaries of life from
the more confident patriots. As the currency depreciated prices rose, and the tories, having thus got
a large portion of the army supplies in their own
possession, charged their own price for them.  Thus
the patriots and the cause lost, and the tories gained.
The first bore the entire burden, the last none.
The uncertainty which hangs over the real value
of the future "dollar" is much to be deplored.  At
present a simple promise on the part of the Government to pay $119 in three years, being principal
and interest of a three years' compound interest
note, will only bring 45 cents in gold in the public
market. Why is this? Simply because no living
man can judge what will be the value of those dollars when he gets them. The holder of the note
may be paid in gold or its equivalent. In that case
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he will have made an enormous profit by keeping
possession of the note. On the other hand, he may
be paid in paper, one hundred dollars of which will
lnot buy ten in gold, without any breach of faith on
the part of the Government. Every thing depends
on the relation between the public expenditures and
the receipts from loans and taxes. Should our re  ceipts be greater than our expenditures, and the
volume of the currency begin to diminish in conse  quence, the value of the dollar must rise rapidly.
Should the war and our present financial policy both
be continued, no one can tell how little a paper dol  lar may be worth.
How is the principal of the fnded public debt,
the five-twenties, for example, to be paid?  This
question is intimately connected with the value of
the future dollar, and, we have already shown that
the present state of our credit depends very much
on the answer to it. Here the Government is a
great loser, merely fi-om the uncertainty which hangs
over the question. By the letter and spirit of the
legal tender act the bonds can be redeemed in notes
at any time after five years. We tacitly repudiated
all obligation to pay any portion of the principal of
the public debt in coin, and lenders took us at our
word by giving us no more for them than for bonds
payable in paper. This was perfectly natural, be cause it was not to be supposed that we would deal
any better by the public creditors than we were
bound to by the terms of the contract. But about
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LEGAL TENDER NOTES.
the time the five-twenty loan was all taken, an offticial announcement was issued from the Treasury
that the principal of the entire permanent debt
should be paid in coin. Thus we are placed in the
following dilemma: If we pay the principal in coin,
we shall give the creditors much more than they are
entitled to by the strict terms of the contract. If
we pay in paper, we shall be accused of a breach of
faith by foreigners who bought bonds without being
aware of the terms of the act authorizing their issue.
Every enlightened lover of our country's good
name should be gratified that the loan of 1841, due
January 1, 1863, was paid in coin.  But the reasons
assigned for this act are such as must have annulled
whatever good effect it might otherwise have produced. They are found in communications from
the Presidents of the principal New York City
banks, and from the Honorable Secretary of the
Treasury, laid before the House of Representatives
January 6, 1863. Had Congress been emphatically assured that every instinct of good faith and
mnanly honesty demanded that this loan should be
paid in coin, because coin was the only lawful money
when the loan was contracted, and that such a degradation of the national honor as would be involved
in the discharge of the loan in paper would consign
the authors of the act to the just execration of enlightened posterity; and, had this view of the case
been accepted by the nation, our credit would have
been placed on a firm basis.  Instead of such views
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as this, we find that the act of paying in coin is
apologized for on the ground of its expediency. The
bankers advise the Honorable Secretary that the
credit of the Government at home and abroad would
be greatly promoted by payment in coin, while a
failure to meet the just expectations of the public.
and the holders of the loan, in this respect, would
deteriorate the value of all government stocks to an
extent far exceeding the whole sum in question
(about $3,000,000). The Secretary adds that his
judgment "was determined in favor of coin, not
merely by the weighty considerations growing out
of its beneficial influences on public credit," but by
the circumstance that the needed specie could be
obtained with great ease. It was, in fact, loaned
by the banks at four per cent. interest.
That these reasons do not suffice to place the
credit of the nation on the required footing will be
evident on reflecting that we want, not a reason
founded on temporary and adventitious circumstances, but a universal rule of conduct; a rule founded
on such reasons that it cannot be de,arted from.
We want an authoritative and unequivocal recognition by Congress and the country of this principle.
Good  faith demands that every loan contracted by
the Government when coin only was a legal tender
should be paid in coin.
The rule finally laid down by Mr. Chase, and
already referred to in speaking of the principal
of the five-twenties was, that the principal of the
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permanent debt, including all bonds, should be paid
in coin, but that the principal of all the temporary
loan was payable in legal tender notes. This decision gives rise to the ethical question, How does the
circumstance that a loan is " temporary" modify
the obligation to pay it?  The difficulty of answering it is increased by the circumstance that the fivetwenty loan, declared payable in coin, was all contracted by borrowing paper, while the seven-thirty
loan, declared payable in paper, was nearly all contracted by borrowing coin.
It has sometimes been urged, in extenuation of
the act of refusing to pay the latter loan in coin,
that there was no agreement to pay it thus. If we
admit such a plea as this, our credit is good for
nothing. See what courses the plea would justify:
Congress has enacted that a number of debts and
dues should be paid in coin, but has never agreed to
pay any thing in gold coin. So a special coinage of
bronze dollars of the same weight as the gold dollar might be authorized, and the entire interest of
the public debt might be paid in this worthless
bronze, merely because the word "gold" did not
appear before the word "coin."  And even, should
gold coin be distinctly named in the agreement, the
quantity of pure gold in the dollar might be indefinitely reduced on the plea that Congress had never
agreed to continue the same weight of gold in the
dollar. It is clear that a people who would swindle by such verbal quibbles would neither deserve
nor enjoy any credit whatever.
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It has already been argued that a further increase
of the public debt is neither necessary nor expedient.
But, if borrow we must, our true course is to nego tiate all future loans on a gold basis, by borrowing
nothing but gold coin or bullion, and agreeing to
pay nothing but a given weight of gold coin. This
coin may then be sold for currency at the highest
market rates.  At the present price of gold every
million in coin would cancel 2i millions of the
public debt, and diminish the volume of the currency
by the same amount.  Government would receive
proposals, not for a purchase of bonds, but for a loan
of bullion (or coin), repayable at the pleasure of the
Government after one, three, or five years, and hold  ers would be asked simply to specify the lowest
rate of interest which they would accept.  It would
be better for the Government to pay twelve, or even
fifteen per cent. interest on such a loan, than to sell
10-40 bonds at par.  Borrowing a million, for ex  ample, at fourteen per cent. interest, the principal
and interest will be as follows:
..  $1, 000,000
Ana  i.    140,000
At the present price of gold (January, 1865) Government will receive $2,300,000 in currency for the
million in coin. To command the same amount
of currency by the sale of 10-40 bonds, the debt
would be
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LEGAL TENDER NOTES.
n...$2;300,000
Ans.   115,000
Thus, while borrowing bullion at fourteen per
cent., the interest would be greater by $25,000, the
principal would be less by more than half. Does
the country really comprehend that for every $100
received into the treasury from loans, we not only
pay $12 interest, but agree to pay $230 for principal?   While we cannot cancel the present debt
without paying $130 premium on every hundred
borrowed, we can cancel that proposed without paying any premium, whenever the Government is able
to borrow money at less than fourteen per cent. interest.
It may be asked, "Why have a double transfer
of gold?  If we can get par in gold for the bonds,
we can get the equivalent of gold in currency.
Then why not sell the bonds directly for currency,
and thus save handling the gold? "
There are two reasons why the bonds should be
negotiated only for gold, or its absolute equivalent:
The true state of the public credit will then be evident to the country, and, if it is bad, means will undoubtedly be taken to improve it.  An evil must
be seen and felt before any great pains will be taken
to heal it. The present system of receiving legal
tender notes as gold in exchange for gold bonds,
and paying them out as paper, supplies a'convenient
hole, in which, ostrich like, to hide our heads to the
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LEGAL TENDER NOTES.
true state of our credit.  Doubtless great numbers
ofloyal citizens think that so long as a 1040 bond
will bring par in legal tender notes the Government
credit is good. This is as if an importer should
think he was making a profit so long as he sold his
goods for a higher price in paper than he paid in
gold.
The great reason for borrowing bullion is, that
there would be no doubt how the debt should be
paid. That unfortunate an'l much abused word
Dollar," the meaning of which can be fixed by
any subsequent Congress to suit the real or supposed
exigencies of the times, ought not to be suffered to
appear in the contract.  The bond should be a
pledge of faith to pay a certain specified weight of
gold coin or bullion. The advantage of such a contract will appear from the consideration that the
depreciation of the gold value of our bonds may be
traced to three sources:
1. Throwing such large quantities on the mar
ket.
2. Fear on the part of the community that something may happen to the Government to cause a
general destruction of the national debt.
3. Fear that the word " dollar," or "dollar in
coin," may, 10 or 30 years hence, mean something
different from what it does now.
Now, it is plain that, while the first two causes
would not be avoided by the proposed plan, the last
would. It is, therefore, worth trying, at the least.
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CHAPTER V.
INFLUENCE OF THE LEGAL TENDER NOTES ON PRIVATE
FAITH AND THE BUSINESS OF THE COUNTRY.
THE value of the entire circulating medium of a
country, be it gold, silver, paper, or wampum, is
subject to this general law: that it can never be increased beyond a certain limit, no matter how much
you may increase the volume of currency. The
total value of the money actually required to transact the business of the United States is, on an average, about $250,000,000 in gold. When business
is "brisk," and a great deal of buying and selling
is done, the value of the money increases; when
business is dull it diminishes. Thus it may, under certain circumstances, rise to $300,000,000, or
fall to $200,000,000. A paper issue, though irredeemable, will not depreciate materially so long as
its amount is kept within the required limit; but,
exceed this limit, and depreciation is inevitable. If
the amount is double what is necessary, it will depreciate to one half; if treble, to one third, and so
on.  But we must consider as currency proper only
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that portion of the money of the community which
is actually in use for the purpose of buying goods or
paying debts.  If any is hoarded, either for its own
sake or for the purpose of finally putting it to some
other use than buying, it must be excluded from
our estimate of the total value. HIence gold and
silver must be excluded whenever they have ceased
to circulate as money.
If our currency were entirely of gold, and greater
in value than $250,000,000, the excess would necessarily cease to circulate; it would either be hoarded for use at some future time, exported, or melted
up into articles of jewelry. The fact that it may
be put to other uses than that of money, thus prevents its value from depreciating.
In a country possessed of no great moneyed institutions, where little credit is given, and no debts
incurred to be paid at distant periods, the evils of a
depreciating currency are not so seriously felt as in
a country differently circumstanced. If a dollar
bill, starting at par in gold, is in the course of a
year gradually diminished to fifty cents, it may perhaps have passed through hundreds of hands in the
mean time, so that the loss of fifty cents has been
divided among hundreds of people. But if, at the
beginning of the year, an individual who did not
foresee the depreciation, agreed to receive the bill
as a gold dollar at the end of the year, hlie would
thereby lose one-half.
As the currency depreciates prices must rise in 
124   INFLUENCE OF LEGAL TENDER NOTES.
proportion, and, if the proper equilibrium to which
prices tend is preserved, they will all rise in the
same proportion.  Thus, if one coat is worth  as
much as two pair of boots before the depreciation,
it will still be worth two pair of boots afterward,
unless some circumstance other than the depreciation affect the price.
Another relationship of value necessarily holds
between the prices in gold and in currency of all
commodities. If a coat is worth $20 in gold, $1 in
gold worth $2 in currency, and three barrels of flour
worth a coat, then one barrel of flour is worth $13*
in currency. If the barrel of flour is worth but $10
in currency here, and $8 in gold in England, it will
necessarily be exported until its price here rises, or
the price in England falls so that the difference only
pays for the risk and expense of shipping. Simple
as these principles are, they are very imperfectly
understood, else we should hear far less of talk about
fictitious premium on gold, effects of speculation,
&rC.
As moneyed institutions rise, as large amounts of
property take the form of debts, as banks, savings
banks, insurance and trust companies, railroad corporations, and other institutions absorbing large sums
of money for payment at distant periods begin to be
established, then it is that a depreciated currency becomes really destructive. Let us see what was involved in that sweeping enactment which made bills
a legal tender in payment of all.private debts.
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INFLUENCE OF LEGAL TENDER NOTES.   125
Three years ago 200 mechanics each put $100 in
gold into a savings bank. The savings bank afterward loaned this $20,000 to a shipbuilder, who emplo yed it in building a ship. Jie sends the ship to
England and sells her for $22,000 in gold, making
ten per cent. legitimate profit. By every principle
of justice, $20,000 of the money belongs to the savings bank. But now the legal tender clanse comes
in and declares the builder relieved from the debt
on payment of 20,000 paper dollars. ile therefore
buys these paper dollars with perhaps $8,000 in gold,
pays them to the bank, and keeps the additional
$12,000 for his own private use. ile can cover
Mrs. Shipper with diamonds, indulge in riotous livmg during the rest of the war, and furnish to the
country a striking example of commercial prosper
A professional man, dependent entirely on his
income for support, insured his life inorder that his
family might not be left penniless at his death. The
life insurance company loans the money to Mr.
Shoddy, who invests it in manufacturing capital.
With the rise in gold M]Nr. Shoddy finds both his
capital and profits apparently to increase in a corresponding ratio. When his debt is due he finds that
he can sell one-half his stock for greenbacks sufficient to pay it, he retaining the other half, though
it also rightfully belongs to the insurance company.
Banking capital suffers in the same way, unless
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126   INFLUENCE OF LEGAL TENDER NOTES.
tal. If a bank holds no specie, its capital and profits
are in the form of an excess of debts due to the
bank over those due from it, and whatever deteriorates the value of those debts deteriorates the capital in the same proportion. If it holds specie to the
full amount of its capital and profits, then the debts
due and those payable balance each other, and it
suffers nothing from depreciation of the currency.
It suffers in proportion to the excess of capital and
profits over specie reserve.
Suppose, now, that a bank holding specie to the
amount of one-tenth of its capital had, toward the
end of 1861, refused to discount any more notes,
called in all its paper, and thus collecting its entire
capital in the form of specie, had locked that specie up, only drawing from it what was necessary to
pay its regular semi-annual dividends in currency.
For each share of $100, the cost of those dividends, supposing each to be three per cent. would
have been as follows:
July, 1863 $2.14
Jan., 1864 $1.96
July, 1864 $1.36
Total cost in gold $13.30, leaving $86.70 of the
capital unimpaired, which would be worth, with
gold at 2.20, $190 per share. As things actually
stand, the stock of such a bank is only worth $112.
Thus, by using their capital for the benefit of the
Jan., 1862 $3.00
July, 1862 $2.70
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INFLUENCE OF LEGAL TENDER NOTES.   127
public, the banks have, in three years, lost 40 per
cent. on its entire amount, beside interest. Includ-'
ing interest, they have lost 50 per cent.  This lost
capital has not gone to the Government, but to that
portion of the community who have done business
on borrowed capital, and has of course caused their
business to prosper in proportion.
Some astute economists hold that banks which
hold a large percentage of specie have an interest
in the rise of coin, because the coin in their vaults,
and their stock also, will thereby increase in price.
If the community coincide in opinion with those
wiseacres; if owners of bank stock are satisfied with
seeing their stock worth a great many dollars, without caring whether those dollars are themselves
worth any thing or not; then the economists in
question little dream how rich a mine of national
wealth they have struck. Our country can be made
the most powerful in the globe, our men transformed into giants, and our manufactures made to exceed
those of all other nations put together, by very simple acts of Congress. In the first place let it be
enacted that the gold dollar shall be reduced to onefifth of its present weight, and all other coins in
proportion; and that previous to the new coinage
the present gold dollar shall be lawful money and
legal tender for $5; the eagle for $50, and so on.
The consequence will be that the price of %11 the
real and personal property of the country will be
increased five-fold. The man who was before worth 
128   INFLUENCE OF LEGAL TENDER NOTES.
only $2,000 will suddenly find himself worth $10,000;
the real and personal estate of the country, instead
of being worth only $16,000,000,000 will now be
worth $80,000,000,000. It would be nothing more
than fair to divide this enormous increase of
$64,000,000,000 equally between the Government
and the individual property holders; the former
thus getting $32,000,000,000, and leaving the country more than twice as wealthy as in the beginning.
This enormous sum would pay off our national
debt, and enable us to become the first military
power of the globe.
The act need not be confined to money value.
It might also be enacted that hereafter the lawful
foot should consist of only six inches instead of
twelve; and that the pound should contain but two
ounces instead of sixteen. Our people would then
find themselves grown to the gigantic height of
eleven or twelve feet, and our artillery would throw
shot wveighing thousands of pounds! What earthly
power could take the field against men twelve feet
high, using cannon throwing thousand-pound shot,
backed by a Government with $32,000,000,000 of
money? If the economists aforesaid are true to
their principles they will answer NONE.
If all this were actually done, it is probable that
a large part of the community would not be long
in concluding that the apparent increase in the
wealth of the country, the size of the man, and the
weight of the artillery, was all fictitious; that a piece 
INFLUENCE OF LEGAL TENDER NOTES.   129
of gold had increased in price, not because it was
worth any more than before, but because the dollar
was worth less, just as the apparent increase in the
height of the men proceeds from a shortening of the
foot measure. It can hardly be necessary to tell any
thinking man that this opinion is correct; that the
real value of gold has not increased a jot since the
beginning of the war, but rather diminished, because.
there is now less use for it; that it is now exported
just as freely as ever, if not more so; and that bank
stock which since 1860 has risen from par to 200 is
really less valuable now than then.
Heretofore one distinguishing.feature of civilized Governments has been the protection which
they have afforded to property. They protect the
owner not only in that which he holds in his own
hands, but in that which he entrusts to others.  The
advantage which society thus gains is strikingly
shlown by an illustration of the " transmutatians of
wealth "in Bowen's Political Economy. A laborer
saves $100 from his earnings.  "What will he do
with this $100? " In a rude state of society among
a half-civilized people, or under the government of
a Turkish Pacha, property being insecure, he would
probably obtain it in the form of gold or silver coin,
and bury it in the corner of his cellar or garden.
There, sure enough, it would remain without change,
and therefore without income or increase. But in
this country, in England, or in France, he would
probably put it into the savings bank. He would
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130    INFLUENCE OF LEGAL TENDER NOTES.
thus benefit not only himself, by receiving interest
on his money, but also the community, by placing
$100 more capital at the disposal of the customers
of the bank. The latter would be enabled to make
more shares, bake more bread, and import more
cloths.
Our own country will now have to be excepted
from the list of those in which it is always desirable
to invest coin in savings banks, rather than bury it
under ground. The depositors in the savings banks
of Massachusetts alone have been defrauded out of
twenty million dollars of their savings, which they
would have kept had they buried them. It is impossible to form an accurate estimate of the entire
losses sustained by the creditor class of the community, but the following is an exhibit of some items.
Debts due the following institutions have been diminished by 50 per cent. of the amount given:
Banks of Issue,.... $280,000,000
Savings Banks,...       100,000,000
Insurance and Trust Companies,. 50,000,000
If to these we add the losses sustained by individuals, we shall probably have a sum  total of
$1,000,000,000, one-half of which has changed
hands by the legal tender act.  What a commentary
is this on our financial policy-that the owners of
property to the extent of $1,000,000,000 would have
done better to bury their property in the earth than 
INFLUENCE OF LEGAL TENDER NOTES.   131
suffer it to be loaned the public for the public benefit! What would we have thought in 1861 at such
a conversation as the following between an owner
of bank stock and an individual of sufficient prescience to see what was coming?
" I advise you, sir, speedily to sell your bank
stock for coin, and keep that coin for three years or
more; for if you keep your stock, it and all its proceeds will then be worth little more than half as
much as the gold."
"What catastrophe is coming?  Our stock is
nearly all in the form of well-secured promissory
notes of sound commercial men, and I cannot conceive how they should fail to pay us."
"No catastrophe at all is coming.  Your property will be legislated out of your hands so smoothly
and gently that most of your stockholders will never
know it.  They will, at the same time, be furnished
with a pair of magnifying spectacles which will
make every dollar look like a quarter-eagle; so that
when their stock is reduced to one-half, it will look
more valuable than ever."
"It will then, I suppose, be seized by the Government."
"There you are mistaken.  The Government will
suffer with you.'
" Then what will become of our property,"
This question is worth considering. What has
become of all this $500,000,000.which the moneyed
institutions and individual creditors have lost?  It 
132   INFLUENCE OF LEGAL TENDER NOTES.
has not been destroyed. It has passed into the
possession of those men who, during the time that
gold was rising, were doing business on borrowed
capital. For every debtor there must be a creditor;
there must be as much money owing as being owed.
How the wealth has changed hands may be seen
from the examples of the shipbuilder and the manufacturer. already cited. Another illustration may be
given in the case of an importer. In May, 1864, an
importer borrows $20,000 from a bank, and buys
foreign exchange with the money to pay for cloths
in England. In sixty days his cloths arrive in New
York. The premium on gold, in the mean time,
has risen from 80 per cent. to 150 per cent. The
price of his goods has increased in a corresponding
ratio; they are worth 40 per cent. more in currency
than they would have been two months previously.
He sells out, and finds that, in addition to the regular profits of trade which he would have enjoyed
had there been no advance in gold, he has made 40
per cent. on his entire outlay solely by the rise in
gold, or, to speak more accurately, the fall in U. S.
notes.
In what respect, let me ask, is this importer better than the " heartless speculator" of Wall Street,
who "seeks to coin money out of the national misfortunes"? He has made his money, practically, in
the same way, namely, by buying gold, and sixty
days afterward selling, not indeed the gold, but the
cloth bought with the gold, which amounts to the
.1\ 
INFLUENCE OF LEGAL TENDER NOTES..133
same thing. Thus every importer of foreign goods
is, per force, a "speculator for the rise," whether lihe
will or no. Is it wonderful that thousands, who
would otherwise devote themselves to honest industry, are seduced into the giddy rounds of speculation
when they see fortunes made so rapidly?  And who
is most to blame, the man seduced, or the system
which seduces him by continuing a policy which
offers such temptations?
As favorable a view as we can take of the legal
tender act is that it enacts, in substance, as follows:
That whenever any debt  s18 discharged within the
United States the creditor shall forfeit to the debtor
such percentage of the debt as is equal to the depreclation of legal tender notes since the debt was contracted. This, in fact, is the simple sum and substance of the enactment. It made every promissory
note, every bank bill, every dollar of bank stock,
every bond of every state and railroad corporation,
and, indeed, every promise to pay money, a real unavoidable bet, which the creditor wins when gold
goes down, and the debtor when gold goes up.
This, in fact, is the result of every system of iltedeemable legal tender paper, and must continue to
be while human nature remains as it is.
It must be remembered that, in the general confiscation of fifty per cent. of all old debts which
happen to be payable now, the Government gets no
share whatever of the spoils. The shipbuilder has
pocketed the savings of the mechanics, the mnann 
134    INFLUENCE OF LEGAL TENDER NOTES.
facturer those of the life insurance company, and
the importer the capital of the bank, but the Government nothing at all. - Had we enacted that all
debts due in-the country should be paid through the
Government, the creditor paying the Government
coin, and Government paying the debtor in legal
tender notes, so as to gain the amount of the depreciation, the creditor would have had the satisfaction
of knowing his loss to be the public gain. As things
are, he has no satisfaction whatever.
To a lover of justice the discussion of such a system of spoliation, from a purely utilitarian point of
view, must be repulsive in the extreme. No man
who believes that honesty is the best policy; no
man who believes in a moral government of the universe; no man who believes that the laws of nature
always act to preserve the good and destroy the evil,
will ask for any other judgment on the system than
that which will be pronounced by his own conscience.
But it will be instructive to trace all this injustice to
its economic effects, present and future, if only to
show how we are to be punished for transgressing
the moral law.
It is plain that, while gold has been rising from
par to a premiumn of one hundred and thirty per
cent., the creditor class of the community, represented by the owners of bank stock, depositors in savings
banks, holders of bonds and mortgages, and the frugal poor who have loaned their savings, have, on
the whole, been subjected to heavy and unjust losses, 
INFLUENCE OF LEGAL TENDER NOTES.   135
while the debtor class, represented by those who live
beyond their income, or do business on borrowed
capital, have made heavy and illegitimate profits.
Owing to the different functions of these two classes
in the social economy, these gains and losses are
productive of effects which vitally concern the best
interests of society, and are, therefore, well worthy
the serious consideration both of the philosopher and
the statesman.
The debtor class, having been from time to time
relieved of a percentage of their equitable liability,
have found less difficulty than usual in meeting
their obligations.   Hence there have been fewer
failures than common, as well as larger profits, and
unusual business prosperity. For the country is
naturally considered prosperous when there are few
failures and large profits. The corresponding losses
of the creditor are productive of little inconvenience
to him, and are almost entirely overlooked. Productive of little inconvenience because the very fact
of the creditor's willingness and ability to resign the
use of his property to his neighbor shows that he
can do without it. No one loans money for a month,
a year, or a term of years, unless he is able to forego
the use of all except the interest during that length
of time; consequently, if the principal of his loan is
impaired, or even wholly destroyed, it does not interfere with the regular course of his business. His
loss is overlooked because it takes the form of a depreciation of the currency in which his debt is pay
e 
136   INFLUENCE OF LEGAL TENDER NOTES.
able; nominally he loses nothing, because his debt
is worth as many dollars as ever. Thus the losses
which counterbalance the profits of the debtor are
entirely lost sight of by those who take a merely superficial view.
The debtor, being more inclined to enjoy his
money than to lay it up, very naturally spends a
large portion of his profits in gratifying his desires.
Hence an unusual consumption of luxuries, and another sign of prosperity. It is as if a provident
farmer, who had been laying up a supply of choice
fruit for sale, should be compelled to divide that
fruit among such of his neighbors as did not believe
that the products of the orchard were intended for
any other use than immediate enjoyment. The
tables of the community might be greatly improved
for a week. But at the end of the week the wealth
would have been consumed. A nation can no more
"eat its cake and have it too" than can an individual. Thus the depreciating currency encourages the
consumption and enjoyment of wealth rather than
its preservation. This is the real nature and effect
of the prosperity which is so attractive when we do
not look below the surface.
When Government wishes a loan, it must apply
to the creditor class.  Without a temper and disposition peculiar to this class no government could
ever borrow. There must be a willingness on the
part of owners of property to forego the present enjoyment of wealth, and part with it for a long series 
INFLUENCE OF LEGAL TENDER NOTES.   137
of years, in consideration of receiving a small fraction of it annually in the form of interest. The
more universal this disposition to lend, the better
the terms on which the Government can borrow.
The Government ought, therefore, to encourage this
disposition by making all property in the form of
debts as secure as possible. The transfers of the
ownership of this great reserve power to the business
and debtor class, not only takes it from those who
are disposed to lend and gives it to those who are
disposed to u8e and spend on their own account, but
discourages that disposition without which Government can never borrow.
The delusive prosperity caused by this transfer
is only the fattening of the canker-worm  which i8
eating out the very vitals of public credit.
The writer has no disposition to hide the good
or exaggerate the evil of the measures under consideration. He has shown that the legal tender
notes, or rather their depreciation, has promoted
commercial prosperity and the general enjoyment of
wealth by the community. It was only right to
show, in addition, that this additional enjoyment
arose from the consumption of wealth which would
otherwise have been saved or turned into the channels of war.
So, on the other hand, he is prepared to admit
that, had our business during the war been conducted on a specie basis the commercial and business depression, and a general inability on the part  
138   INFLUENCE OF LEGAL TENDER NOTES.
of the debtor class to command the usual amount
of the necessaries and luxuries of life, would have
been inevitable. Still more marked would have
been this seeming poverty, had the war been carried
on mainly by taxation, as it is claimed it should.
But it is contended that this depression would not
have indicated any diminution of the real power or
wealth of the country, and that all its evils would
have been temporary. To illustrate this, let us consider that class of debtors whose case would excite
most sympathy-farmers who had mortgaged their
farms. Real estate, bearing about the same nominal
price now as before the war, and therefore worth
only half as much in gold, would have fallen considerably had there been no depreciation of the cur.
rency. But it would not have fallen to one-half, because part of the actual fall is, no doubt, due to the
unusual profits of trade and speculation having
stimulated the diversion of capital into those channels, rather than into the more solid investment of
real estate and government bonds.'
But although the farmer might thus be subject
to a heavy and unforeseen loss, if obliged to sell his
farm in order to pay the mortgages, yet his ability to
make money from it would be but slightly diminished, nay, would not be diminished at all except
by the war taxes. Unless he mortgaged on speculation, intending to sell in order to redeem the mortgage, he must have calculated that he could redeem
it from the produce of the farm. The available pro 
INFLUIENCE OF LEGAL TENDER NQTES.   139
duce being diminished by the war tax, he would
have been obliged to deny himself and his family
the enjoyment of the usual luxuries, and perhaps
even some of the necessaries of life, and, at the same
time, to work harder, so as to produce more corn,
hay, and beef.  Thus he would have suffered; thus
the class he represents, namely, men doing business
on borrowed capital, would have suffered had the
currency remained as valuable as specie.
But the important point is that this suffering
would have involved an increase in the- ability of
the nation to carry on the war, just as the enjoyment permitted by the depreciation has caused a
diminution of that ability. In fact, the farmer,
obliged to raise more wheat, hay, and beef, will
have more to offer the Government, and, obliged to
deny himself in clothing, will be less a competitor
with the Government in the purchase of that article; Government will, therefore, be able to purchase
it more cheaply.
Still, saying nothing of injustice, it may  be
thought that, if the creditor class are not sensible of
their loss, much harm will not be done after all.
The unenlightened man, who knows nothing of political economy, does not know that he is defrauded
of his just rights by being paid his old debts in paper. How, then, can he be discouraged from making future loans?
Such a view, though specious, would be entirely
fallacious. Whatever theory may be adopted re 
140   INFLUENCE OF LEGAL TENDER NOTES.
specting the moral government of the universe,
the experience of mankind in all ages shows that
any evasion of the great law of compensation is an
impossibility. In the case in question, ignorance of
political economy can no more prevent the legitimate effect of a wrong economical measure than ignorance of toxicology can prevent the action of a
poison. We have poisoned the springs of our true
wealth and greatness, and we shall most assuredly
suffer the legitimate consequences, though every
man in the country believes and proclaims that the
poison was a healthy and necessary stimulant. Take,
for example, the case of the man who is unconscious
of being wronged.   Suppose there is a community
of such people. If they are not sensible of their
loss, its effect will be all the more lasting. The laborer who put his earnings into the savings bank
now sees that his neighbor, who turned his into
gold which he kept in a stocking, has somehow done
better than himself. Not understanding the causes
which have brought about this state of things, he
will not know when they cease to exist. He will,
therefore, during the rest of his life substitute the
stocking for the savings bank, and perhaps teach his
children to do the same.
Though specie payments should be resumed, our
entire financial system restored to a healthy state,
and the savings bank patronized by all, with every
war and rumor of war, with every whisper of a suspension or a financial crisis, there will be a general 
INFLUENCE OF LEGAL TENDER NOTES.   141
panic among the poor and ignorant, and a general
run on the banks to realize all notes and securities
in the form of specie. And if public opinion permits a suspension of specie payments, speculation in
gold will be resumed in all its vigor, in remembrance of the enormous profits made by this operation in times past. So long as men remember, without disgust, the iniquitous decisions of those judges
who have disgraced the very name of LAW, and legalized. acts of perfidy which would put a savage to
the blush, by declaring our paper money a legal
tender in discharge of the most solemn contracts to
deliver a specified weight of gold or silver coin, so
long will entire confidence between man and man
be impossible. The evil will be corrected only
when the public at large view the acts and the system now under consideration with such reprobation
that every one shall feel a repettion of them to be
impossible.  For how can any man receive'with confidence a promise from his neighbor to pay a specified sum in gold coin at the end of a term of years,
when he does not know but that an ignorant legislature and prejudiced judiciary may, in the mean
time, entirely relieve that neighbor from all obligation to fulfil the contract?
In his first annual report on the finances, not
a month before the suspension of specie payments,
Mr. Chase warned Congress of the possible consequences of a system of government circulating notes
in the following prophetic words. 
142    INFLUENCE OF LEGAL TENDER NOTES.
"The temptation, especially great in times of
pressure and danger, to issue notes without adequate
provision for redemption; the ever-present liability
to be called on for redemption beyond means however carefully provided and managed; the hazard
of panics precipitating demands for coin concentrated on a few points and a single fund; the risk
of a depreciated, depreciating, and finally worthless
paper money; the immeasurable evils of dishonored
public faith and national bankruptcy; all these are
possible consequences of the adoption of a system of
government circulation."
Suppose, now, that our paper money system had
been expressly designed to produce all the evils so
graphically described by the Honorable Secretary,
in what respect would it have been different from
what it actually was? See how exactly it seemed
calculated to promote the four principal evils:
" The temptation, especially great in times of
pressure and danger, to issue notes without adeqate
provision for redemption."
This temptation was yielded to by issuing several
hundred millions of notes without any provision at
all for redemption.
"The hazard of panics, precipitating demands
for coin concentrated on a few points and a single
fund."
This hazard was indeed most effectually guarded against. But how? By letting the noteholders
know in advance that any demands for coin, delib 
INFLUENCE OF LEGAL TENDER NOTES.   143
erate or precipitous, would be a waste of time and
words. So the times when there would have been
such panics were indicated only by the upward
jumps in the price of gold. This was avoiding the
hazard in the same way that a man who should
jump overboard in mid ocean from a leaky ship
would avoid the hazard of being carried down with
her.
"The risk 6f a depreciated, depreciating, and
finally worthless paper money."
The great risk and great evil of a depreciating
paper money are found in the losses it entails on
those moneyed institutions in which the savings of
the nation are invested. Accordingly, the currency,
having been left to depreciate as fast as it would,
three-fourths of the banking capital of the country,
all the State debts, and nearly the entire assets of
all savings banks and life insurance companies, were
fastened to it by the legal tender clause. These interests have followed the currency half way to ruin,
and, should it finally become worthless, must be
ruined with it.
"The immeasurable evils of dishonored public
faith and national bankruptcy."
The Treasury deliberately refused to pay notes issued by authority of law and declared payable on
demand by the same authority. A law was then
passed, under the operation of which paper money
was a legal tender, not only in payment of these
notes, but in return for one hundred millions of gold 
144. INFLUENCE OF LEGAL TENDER NOTES.
coin paid into the Treasury by the people. If by
"dishonored public faith" the Honorable Secretary
did not mean a failure to pay the notes, what did
he mean?  And what did he mean by "national
bankruptcy". Is this calamity possible while it is
possible to print the words "United States will pay
the bearer      dollars "?
It is one of the embarrassments of our situation
that we cannot restore our finances to a healthy condition without producing effects injurious to the
business interests of the country. Opposite causes
must produce opposite effects. If, in consequence
of a sudden.improvement in government credit, our
currency should become as valuable as gold, we
should experience a commercial revulsion proportioned to the excitement consequent upon the depreciation of the currency. Those trading on borrowed capital would be subject to heavy losses, and
traders of every class would be obliged to sell their
goods below the nominal cost. The derangement
of trade thus produced will obstruct the operations
of supply and demand throughout their whole
course, as the stopping of a single company in a
marching column of troops will throw the whole
into confusion.
But the real interests of the nation would not, in
the end, suffer by this revulsion. If its effects are
the reverse of those formerly described in their superficial aspect, they will be equally so when we
consider their ulterior effects upon the stability of 
INFLUENCE OF LEGAL TENDER NOTES.   145
the Government, and the highest economic interests
of the country. The Government will gain by being enabled to buy and borrow on better terms than
before. The real prosperity of the country will not
be diminished, but rather increased, because we will
then turn our attention to saving ratherthan enjoying our wealth. Indeed, if every dollar of our paper circulation were annihilated to-morrow, it would
be a very serious question whether it were not the
best thing for the nation that could happen; whether
we would not come out of the commercial crash
which would be the result a wiser people, in a better
position to filfil our mission to the human race.
7 
CHAPTER VI.
NECESSITY  OF  PAPER  MONEY-THlE  LESSONS  OF
HISTORY.
IN the last two chapters we have set forth the
evils which have flowed and must continue to flow
from our issues of irredeemable paper money. Respecting the character and extent of these evils
there will be little difference of opinion. All must
concede their gravity to be such that the measure
can be justified only on the ground of imperious necessity.
But this is only one side of the case.   The
measure was adopted under the pressure of a great
emergency; and in an emergency the very best course
may be productive of many evils, and subject to a
quarto volume of objections. Hience it will be premature to pass judgment on it until we have inquired whether it has been productive of any good
to compensate for all these evils. Hiave these notes
enabled us to put more men into the field, or to
build more ships? Have they performed any important office of war, which could not have been 
NECESSITY OF PAPER MONEY.
performed without them? Public opinion seems
inclined to answer these questions in the affirmative.
What is the foundation of this opinion? If it is
correct we can certainly show how the good has
been effected. But a satisfactory exposition of the
mode of operation of the legal tender notes, showing in what way they have performed the functions
of money better than coin, or notes convertible into
coin, is a desideratum with which the friends of the
measure have never supplied us.
In the absence of such an exposition the question must be considered on its own merits. The
two great authorities to which we appeal are reason
and experience. The friends of the measure are
fond of appealing in a vague and general way to
experience, by saying that no great war was ever
carried on without paper money. A refutation of
this assertion would involve us in a useless verbal
dispute unless we could first agree what wars should
be considered "great wars," and what sort of evidences of indebtedness should be considered "paper
money."- Paper money has indeed been used as a
medium of exchange in some great wars, and it is
very pertinent to our present purpose to inquire
whether it has aided the belligerents in their efforts.
The three systems of paper money best known to us
are:   The "Continental money" of our revolution.
The assignats of the first French revolution.
The bank money of England during the Napoleonic wars.
147 
NECESSITY OF PAPER MONEY.
The last is so essentially different from the other
issues, our own included,-that no instructive comparison can be made with it. No paper money was
issued by the British Government to pay off its
debts except very limited amounts of interest-bearing" exchequer bills."  The circulating notes were
issued by the Bank of England, which was alone
responsible for their redemption.  As  this institution always held in specie, and the notes of solvent
individuals, the means of making good all its obligations whenever the law restricting specie payments should be repealed or cease to operate, any
serious depreciation of the notes was impossible except as a result of bad management on the part of
the bank, or a panic on the part of the people. It
was simply an instance of a bank suspension of specie payments, and we have seen how different this
is from a govermnent suspension.  Its effect was
not, like the latter, to encourage the exportation of
specie in exchange for luxuries, but to keep it locked
up ready for any emergency.
The paper money experience of our revolutionary ancestors and the French Republic will be reviewed, not for the purpose of giving a detailed
history of the origin, progress, and final fall of the
money, but to learn to what extent, and in what
way, it assisted them in the efforts they were obliged
to make to maintain their governments, and to see
whether our circumstances are so like theirs, that
our paper money extends a similar help to us.
148 
NECESSITY OF PAPER MONEY.
The Continental Congress first authorized the
issue of certain "bills of credit" in 17X5. These
'bills were paper money, pure and simple.  They
bore no interest, were not convertible into any kind
of bonds, were not secured by any thing but the
promise of the power which issued them, and after
the first six millions were issued no time was fixed
for their redemption. They were simple certificates
that the bearer thereof was entitled to a certain
number of " Spanish milled dollars." After the is sue exceeded a certain limit, the inevitable process
of depreciation commenced. It continued slowly,
but regularly, throughout the whole revolutionary
war. Every fall in the value of the paper gave rise
to larger and larger issues, until, finally, $200,000, 000 of it were in circulation, and all hope of its re demption vanished. In 1781-'2 it gradually disap peared friom circulation altogether, and coin flowed
in to take its place.   No provision was ever made
for its redemption.
These are the essential facts of the case.  Our
revolutionary war was carried on and brought to a
successful issue by means of this depreciated, depre ciating, and finally worthless paper money. But
let us see how. Were there neither taxes nor loans?
With the issue of every bill a loan was effected,
and a debt contracted. When Congress bought
from an individual a musket, or a barrel of pork,
giving him a bill in exchange, it borrowed from him
on the spot, and the bill was the certificate of in
149 
NECESSITY OF PAPER MONEY.
debtedness.  Suppose the bill was worth $20 in
coin when issued, and that when the holder passed
it off again it was worth but $19, then he virtually
paid a tax of $1 toward the discharge of the debt,
and received $19 worth of some article for the remainder. If the bill was worth but $18 when it
changed hands again, the second holder paid another
dollar tax, as he received but $18 worth of goods
for it, while he had given $19.. Thus, the bill itself
collected a tax equivalent to its depreciation from
every man through whose hands it passed. And
since every bill issued must have been held by some
one during the whole time it was depreciating to
nothing, the sum total of the taxes thus collected
must have been the equivalent of the sum total of
the supplies it originally purchased for the Government. Thus the tax was, virtually, a very irregular
one on sale8, equivalent, on the average, to the percentage of depreciation every time the bill changed
hands.
It is now, I hope, perfectly plain that so far as
the people at large were concerned, they could just
as well have afforded to furnish all the supplies
bought with the money as a direct tax; nay, could
have afforded them much better in this form, because the tax could have been graduated so as to
fall more equally.  As was remarked in a previous
chapter, the tax was apportioned according to men's
confidence in the good faith of the country, because,
the greater this confidence, the more they would be
150 
NECESSITY OF PAPER MONEY.
disposed to hold on to the money in hope of its final
redemption.
But whether that assemblage of men who constituted the Continental Congress could have put
in operation a system of taxation which would have
collected the supplies bought with the paper money
is an entirely different question. Their office was
advisory, not mandatory. Any laws they might have
enacted would have had to depend on the separate
State authorities for their execution. This circumstance alone would have rendered it extremely difficult to put any general scheme of taxation into operation. Again, the use of paper money was a most
easy and certain means of collecting the tax. Neither
assessors nor  collectors were  necessary.   There
were no applications for abatement, no legal technicalities to hinder the execution of the law. Once
issue the note, and somebody would most assuredly
pay. If not the right man, then the wrong one.
Finally, much as the admission may reflect on the
good sense of our ancestors, it must be conceded
that men submitted to a tax in this form, who
would not willingly have submitted to one so heavy
in any other form.
All these conclusions harmonize completely
with those to which we were led in the chapter on
" the financial elements of military strength." It
was there shown, in general, that the military
power which a people are able to put forth is
not increased by the money circulating through the
151 
NECESSITY OF PAPER MONEY.
channels of business. This general principle is
illustrated by the fact that our ancestors really paid
as heavy taxes to carry on the revolutionary war
as if no paper money had been used. If they had
not been able to sustain the taxes they would not
have been able to furnish the supplies in exchange
for the money.
But it is not intended to maintain that no
Government, no man or collection of men endowed
temporarily or permanently with authority, can
ever add to their power by an issue of paper money.
In proportion as the Government and the people
constitute two. separate and distinct interests, in
that same proportion may circumstances arise to
make an issue of paper money by the former advisable.   Thus a king, who finds his expenses to
exceed his income, and whose subjects are more
noted for lack of judgment than for loyalty; or a
collection of men, like our Continental Congress,
charged with the interests of a people, but unable
to put the machinery of taxation into operation, may
promote their objects by issuing bills of credit,
though the real interests of the country will most
assuredly suffer. It is very clear that the relation
of the Government of the United States to the people thereof is not of either of these characters. Our
Government is a firmly-established one, with practically unlimited power to levy taxes. Its interests
are identical with those of the people.  It is to be
sincerely hoped that our people have too much
1.52 
NECESSITY OF PAPER MONEY.
good sense to desire to be cheated out of a tax
which they would not pay directly.
Thus, a comparison of our circumstances with
those of our ancestors does not indicate that our
legal tender notes were either necessary or expedient. Still more conclusive is the experience of
the French Republic.
The "assignats" and "mandats " of the French
revolution bore a greater resemblance to our legal
tender notes than any other well-known system of
paper money. Substitute government bonds for
landed estates, and the resemblance is complete.
The circumstances which seemed to make their issue
necessary, were of the same general nature with
those which gave rise to our notes, only the difficulties of the situation were far more grave and far
more real. Indeed, the deplorable state of the
French finances during the reign of Louis XVI.
was one great cause of the revolution.  The taxes
were all paid by the "third estate," the nobles and
clergy being exempt. They were so heavy in proportion to the productive powers of the people, that
industry was nearly paralyzed. At the same time
the expenses of the Government were greatly in excess of its revenue. The deficit was made up by
"farming out" future taxes to capitalists who supplied the Government with money at exorbitant
rates of interest. The debt thus increased from
year to year, without any corresponding increase
in the productive power of the people. Specie had
7*
153 
NECESSITY OF PAPER MONEY.
almost ceased to circulate. The king had to coin
his plate into money. The wisdom and economy
of Neckar were insufficient to the task of making
both ends meet. Such was the state of affairs when
the States-General commenced the work of remodelling the Government and social system of
France.
The first vigorous attempt to provide a remedy
for these evils, was made in 1790. A wholesale
confiscation of the entire landed property of the
Church was decreed. The objects of the Assembly
are thus set forth by Thiers:
" To deprive a too powerful body of a large portion.of their estates, divide these estates in the best
possible way, so as to allow a large part of the
poorer classes to become landed proprietors; finally,
by the same operation to extinguish the public debt,
and reestablish order in the finances: such was
the object of the Assembly, and they felt its importance too strongly to cower before obstacles."
But, how could the possession of landed property be made to contribute to the military power of
the nation?  This was the insoluble problem which
the Assembly attacked.  It was perfectly clear that
to throw such quantities of land on the market at
once would greatly depress its price, not only fromn
lack of disposition on the part of the people to buy
so much, but from lack of ability to pay for it. So
the attempt was made to obtain the value of the
lands indirectly, by issuing assignats, evidences of
.1
154 
NECESSITY OF PAPER IMONEY.
indebtedness, bearing a certain daily interest, and
entitling the holder to confiscated lands equal in
value to the face of the note, just as our notes entitle the holders to certain United States bonds.
To give them a. still greater value, they were declared a legal tender. Neckar, warning the Assembly of the consequences of the measure, was thrown
overboard, and finally compelled to flee the country, much as a young profligate might dismiss his
physician for pointing out the inevitable consequences of his acts.
At first, the new scheme worked well, as such
schemes always do. The people were delighted to
be relieved from the visits of the tax gatherer. The
assignats paid off the public creditors, purchased
army supplies, and kept the Government going.
They furnished the people with money, the great national want. Very soon, however, the nation had all
the money it wanted, and thereafter the assignats
must depend for their value, not on being a legal
tender, but on being convertible into land, of which
they were the representitive.   The falsity of the
theory on which they were issued, now became
manifest. The Assembly did not want to glut the
market with land, so they glut it with the representative of land instead. How the representative
could have a greater value than the thing represented; why any man would give a larger consideration for a certificate entitling him to land than
he would for the land itself, they did not ask.
155 
NECESSITY OF PAPER MONEY.
The baneful effects which followed, the continual rise in price of all'the necessaries of life; the
almost total stoppage of productive industry, and
the substitution of attempts to make money by any
other means than honest industry, the only real
source of wealth; the vain attempts of the Convention, backed by the mob and the guillotine, to fix
a maximum of prices; the rage and misery of the
half-starved populace; all these illustrate the folly
of human nature, but do not prove that the assignats really did no good whatever for the Republic.
The circumstances of their fall are conclusive on
this p]oint. A defect in their form, which in fact
was pointed out by Neckar when they was first
proposed, became evident during their depreciation.
The land in which they were redeemable rose in
price with every thing else (though, of course, not
in the same ratio), so that in 1796 an assignat would
buy a small fraction of the land it would have bought
originally.   To remedy this objection the assignats
were withdrawn, and the "m a/ndats" were issued
in lieu of them, at the rate of one franc in mandats
for twenty in assignats.  The new bills entitled- the
holder to receive the lands at their valuation in
1790. They therefore bore the same relation to the
assignats that our original legal tender notes, expressly convertible, dollar for dollar, into five-twenty bonds, bear to the present notes, which are merely
receivable in payment of loans, on any terms the
Government may- prescribe. But the people had
156 
NECESSITY OF PAPER MONEY.
become so disgusted with the paper money that
the mandats did not circulate as many months as the
assignats had years. Refused by all as money,
they were bought up by speculators for investment
in lands. After a vain contest, the Directory were
obliged to give way and return to a specie basis.
The mandats were received and paid out by the
Government only at their market rates for coin,
which soon became the only currency of the nation.
This happened in 1796, i, the midst of the first
Italian campaign, when the twenty years' struggle
of France with the other European powers was
but fairly begun. If our modern theories, or rather our modern rejuvenation of old theories, of the
necessity of paper money are correct, this downfall
of the circulating medium must have been dis:
astrous in the extreme. But, so far is this from
being the case, that productive industry rapidly recovered from the depression of the paper money.
Men raised corn and made bread in full confidence
that no mob would punish them for their pains, by
compelling them to part with it for worthless rags.
The war was continued nineteen years without
any attempt to issue more paper money, and from
1796 till now nothing but coin has been a legal
tender in France.
Looking back, then, at the actual effects of paper
money in past generations, and at the actual services rendered by it; weighing justly all its benefits and all its evils, it must be conceded that it
-157 
NECESSITY OF PAPER MONEY.
I warns us to avoid it much more forcibly than it in vites us to adopt it, and that it has never lent to
any Government a help of which we were in need
when we tried it. It has simply proved the intoxi cating cup of nations. As a bottle of wine seem ingly invigorates the laborer, and diffuses new life
through every vein, so does an issue of irredeema ble paper money stimulate commerce, and give a
new impulse to business of almost every kind. The
first effects are so good that a universal cry for more
soon rises from the entire body politic. Govern ment is certain to yield to the temptation. More is
issued, and yet more. The point at which the stim ulus becomes clearly unhealthy is as well marked in
the case of the nation as in that of the individual.
There is a universal disposition to buy, a universal
demand for money to buy with, but a growing in disposition to make or produce by honest industry.,
When this state of things reaches its inevitable
termination, the depression is as great as was the
previous excitement. As the bones, muscles, and
nerves of the individual are still entire after a fit of
drunkenness, so are the nation's elements of mate rial wealth. But the elements of moral power,
which alone can make wealth contribute to our real
happiness, are destroyed.  Mutual confidence, public faith, private honor, frugal industry, all are gone
like the nervous energies of the drunkard.
158 
CHAPTER -VII.
WERE THE LEGAL TENDER NOTES NECESSARY?
IIAVING seen to what extent the issue of our circulating notes is sustained by the precedents of history, it is now proposed to consider them on their
own merits, and examine the official arguments with
which they have been sustained. The measure presents four features which, for the sake of clearness,
will be considered separately. The questions to
which these features give rise are as follows:
1. Was it expedient to issue notes at all?
2. Was it necessary that they should not be redeemable in coin?
3. That they should be a legal tender for the
principal of the public debt?
4. That they should be a legal tender in payment of private debts?
That the issue of notes sufficient in amount to
form the entire circulating medium of the country
was expedient, cannot, I think, be successfully controverted.*  Such an issue is equivalent to a loan
* It will be understood that the discussion of constitutional objec
0 
160 WERE LEGAL TENDER NOTES NEOCESSARY;
from the people of its entire amount, without interest. Before the war this advantage had been monopolized by the banks, and Mr. Chase, in his first
annual report (December, 1861) well remarks that
"it deserves consideration whether sound policy
does not require that the advantages of this loan be
transferred, in part, at least, fron the banks, representing only the interests of the stockholders, to the
Government representing the aggregate interests of
the whole people." It is hard to see why, when
the Government was in so great a strait, the entire
advantages of the loan should not have been transferred to it.  Let us look at the exact nature of
this loan, as much misapprehension exists respecting it.
Its maximum  amount  may  vary from  $200,000,000 to $300,000,000.   The real advantages
which it is possible to obtain from the issue of circulating notes are exhausted when their amount
reaches this limit. Issue more, and they will come
back for redemption if redeemable, or depreciate if
they are not. We may, indeed, in the latter case,
adopt the miserable plan of recklessly issuing more
and more, thus collecting an indirect tax by their
depreciation, as our revolutionary forefathers did.
In that case, however, we must finally either repudiate the notes, or redeem them by collecting the
tions to an issue of notes by the Government is foreign to our present
purpose. Taking the power to issue notes for granted, we are only
inquiring how far it is expedient to exercise it.
0 -
. -:.:,.... -: I
I I. i,: - 
WERE LEGAL TENDER NOTES NECESSARY a  161 
tax all over again for the benefit of the last holders.
I repeat it: a loan of say $250,000,000, during
the pleasure of the Government, without interest, is
the sole advantage to be derived from the issue of
notes. After this loan is contracted, we are in the
same position with respect to future loans as if no
notes at all had been issued.  Unfortunately, however, the notes were expected also to facilitate new
loans. Such a mistake could never have been made
by any one who knew enough of political economy
to have a clear comprehension of the functions of
money. But for it we should never have experienced any of the evils of a redundant currency.
That it was made and acted on is evident from the
tenor of Mr. Chase's first two annual reports. In
his report of December, 1862, he says, with reference to the possibility of negotiating loans of coin
ten months before:
" Careful inquiries satisfied the Secretary that
the first $60,000,000 could not be had, in coin, at
better rates than a dollar in bonds for eighty cents
-in money; and that each succeeding loan would involve submission to increasingly disadvantageous
terms. To obtain the first $60,000,000 would require, therefore, an issue of bonds to the amount of
$75,000,000, and, of course, an increase of the public debt by the same sum; the next $60,000,000
would require perhaps $90,000,000 in-bonds and
debt; and the next $60,000,000, if obtainable at 
162  WERE LEGAL TENDER NOTES NECESSARY?
all, would require perhaps $120,000,000. It was
easy to see that on this road utter discredit and
paralysis would soon be reached.  The adoption of a
plan of finance involving such consequences was not
compatible with the Secretary's ideas of public duty."
This specification of the terms on which the
Government could borrow coin is not quoted for
the purpose of refuting it, because its correctness
does not affect the question under discussion. But
it may be remarked, parenthetically, that events
have shown the disadvantages which would have
attended loans of coin to be greatly exaggerated.
The "inquiries" seem to have been made at a moment of great general depression. Two months after
they were made, and eight months before their result was communicated to Congress in the above
paragraph, the six per cent. bonds brought very
nearly par in coin, as will be seen from the table on
pages 108,109 (Chapter IV.).  And in 1863, when,
had the results of the inquiry been correct, the
bonds would have been worth but fifty per cent. in
coin, they were worth eighty. Moreover, subsequent experience has shown that the skilful negotiation of sixty millions of bonds at once need not
depress their price more than five per cent.
A skilful negotiation is one conducted so as to
avoid the accumulation of large quantities of coin.
It is not denied that if, in effecting the three loans
of coin of $60,000,000 each, the policy of the Treasury had been to keep all the coin locked up, in 
162 WERE LEGAL TENDER NOTES NECESSARY?
all, would require perhaps $120,000,000. It was
easy to see that on this road utter discredit and
paralysis would soon be reached.  The adoption of a
plan of finance involving such consequences was not
compatible with the Secretary's ideas of public duty."
This specification of the terms on which the
Government could borrow coin is not quoted for
the purpose of refuting it, because its correctness
does not affect the question under discussion. But
it may be remarked, parenthetically, that events
have shown the disadvantages which would have
attended loans of coin to be greatly exaggerated.
The "inquiries" seem to have been made at a moment of great general depression. Two months after
they were made, and eight months before their result was communicated to Congress in the above
paragraph, the six per cent. bonds brought very
nearly par in coin, as will be seen from the table on
pages 108,109 (Chapter IV.). And in 1863, when,
had the results of the inquiry been correct, the
bonds would have been worth but fifty per cent. in
coin, they were worth eighty. Moreover, subsequent experience has shown that the skilful negotiation of sixty millions of bonds at once need not
depress their price more than five per cent.
A skilful negotiation is one conducted so as to
avoid the accumulation of large quantities of coin.
It is not denied that if, in effecting the three loans
of coin of $60,000,000 each, the policy of the Treasury had been to keep all the coin locked up, in 
164  WERE LEGAL TENDER NOTES NECESSAiRY?
can never permanently alter the relative value of
commodities.  To apply this principle to the present
case, let us admit that while there is in existence in
the country a certain amount of gold, $100 in bonds
would have brought in the market only $50 in coin.
To give the advocates of the currency as strong a
case as possible, let us suppose that under the same
circumstances the bond could be sold for $100 in
currency.  What would follow   Simply this, that
$50 in gold would be worth in the market as much
as $100 in paper; and that the former would therefore be at 100 per cent. premium. No one can
maintain that $100 in paper and $50 in coin can be
the market equivalent of the same thing, and yet
not the equivalent of each other. And gold being
at 100 per cent. premium, of course $100 in gold
will buy as much flour, clothing, gunpowder, or
iron, as $200 in paper. In one word, if the country is more willing to loan paper than gold, it can
be only because it values the gold higher than the
paper; and, this being the case, it will give more
munitions of war for the gold than for the paper in
exactly the same proportion.
It is very true that the Government could pay
off old debts with a smaller issue of bonds by issuing depreciated paper, for the simple reason that
the creditors could not help themselves. Thus, for
a long time after gold rises, Government may by
this system be in the actual receipt of goods at old
prices.  But, in contracting future debts, we may 
WERE LEGAL TENDER NOTES NECESSARY? 165
be sure that the contractor will charge for the depreciation, if he does not add on a good percentage
in addition to compensate himself for the uncertainty. Finally, when gold falls, Government will have
to pay high prices for about the same length of time
it paid low prices during the rise, so that in the end
the compensation will be complete.
If Government does not now give twice as much
for every thing it wants as at the beginning of the
war, the fact affords no argument against the position laid down. The large scale on which we are
now manufacturing war material; the labor-saving
devices which have been introduced; the introduction of female labor; the efforts of the country to
supply its armies in the most economical way; all
these circumstances operate to make the absolute
cost of war material much less than in the beginning, when we were suddenly called upon for these
immense supplies without any previous preparation.
Consequently, had specie payments been continued,
it is reasonably to be expected that we should now
be manufacturing war material at a much cheaper
rate than at first. What is maintained is, thlat now
we are paying twice as high for every thing we buy
as if we paid in gold. Even if we could not buy
half as cheap for gold directly, we could indirectly
by selling the gold for notes to buy with.
What the Government really gives in exchange
for its supplies is its bonds, as a shoemaker really
supplies himself with necessaries by making shoes. 
166 WERE LEGAL TENDER NOTES NEC]ESSARY?
The money which is paid into the Treasury for
bonds, and then paid out again for supplies, serves
no purpose except that of making and equalizing
the exchanges, and enabling the Government to
buy from the cheapest market, whether the seller
wants bonds or not, and to sell bonds to the highest
bidder, whether that bidder can furnish supplies or
not. If the contractors who supply the Government were the same persons who wanted all the
bonds, there would be no need at all of money.
Thus, the only necessary restrictions respecting
the money with which loans should be negotiated,
are those imposed by considerations of convenience,
namely, (1) that the money should be easy to handle,
(2) of equal value at all times, and (3) of equal
value all over the country. The first condition is
best fulfilled by paper, but coin would be subject to
no serious inconvenience in this respect, because
all large payments to or from the Government
would have been made by checks, without actually
handling the coin.
By some singular hallucination, it seemed to be
taken for granted that after the suspension of specie
payments it was no longer possible for the Government to borrow coin. This was considered the fundamental fact on which our policy would have to be
based.   Gold had "dsappeared!"   A  stranger,
ignorant of chemistry, would have derived the impression that, through some carelessness on the part
of the public, our $300,000,000 in gold had all been 
WERE LEGAL TENDER NOTES NECESSARY? 167
suffered to evaporate. But the gold was still in the
hands of the people and the banks. The very fact
that it had disappeared from circulation, ought to
makeit more easy to borrow large sums, because the
owners no longer needed it for money, and therefore
could all the better afford to lend it. It is very true
that during the temporary panic caused by the suspension, there would have been a general disposition to
hold on to gold rather than pass it off at par. But
why? Simply for fear on the part of the owners
that Government would acquiesce in the suspension,
for fear gold would be at a premium, for fear that
if they parted with it they would not get it back
again; in one word, for fear of the very things that
actually were done!  To conquer this difficulty it
was only necessary for the Government to exhibit a
bold and inflexible determination to continue its operations on a specie basis, irrespective of the doings
of the banks, and thus dispel the fears in question.
The holders of gold would soon have found it to be
only so much idle capital lying on their hands, and
would therefore have been desirous to exchange it
for something which would yield a profit.  Yet, so
deeply has the opinion in question taken root, that
although, during the past year, every dollar in gold
which the Government could command would cancel from two to two and a half dollars of the public
debt, not the slightest attempt has been made to
command that coin, either by loans or taxes. 
168  WERE LEGAL TENDER NOTES NECESSARY?
The table on page 169 shows the coin price at
which the sixper cenlt. twenty-year bonds were actuallyheldin themarket. Hadspeciepaymentsbeencontinued, bonds could always have been negotiated for
at least this sum in specie, to the extent to which
they actually were negotiated in notes. Probably
they would have brought a much higher price, as
the two great depressing causes which have diminished the value of all government securities would
not have existed. These causes are:
1. The suspension of specie payments, thereby
establishing the principle that if it were not convenient to pay a debt when due, payment might be
indefinitely deferred; and the passage of the act declaring irredeemable paper money a legal tender for
the entire principal of the public debt.
2. The depreciation of the currency, causing
enormous profits to accrue from commercial and
speculative  ventures,  thus  discouraging  investment in securities which only pay reasonable
dividends.
The manner infi which each of these causes has
operated to diminish the market value of Government securities has been fully set forth in the fourth
and fifth chapters.  Allowing for their probable effect, our financial history as it would have been had
specie payments been continued, and no notes issued, compared with what it has been, is shown in
the following table: 
WERE LEGAL TENDER NOTES NECESSARY?  169
(1)        (2)         (3)        (4)
.8
90 
83
78
77t
82
82~
qu
70
67
70
PI
0I
z:
.3.
9.4
en *
1.00
1.00
1.10
1.15
1.20
1.40
1.35
1.30
1.40
1.80
2.40
2.40
So
In
:z.
Iu 0
.80
.90
.91
.89
.85
1.08
1.10
1.07
1.05
1.26
1.60
1.68
PI
9
11
15 a
. g
20
10
9
11
15
l 1st Quarter
j2d    "        9*      1.0.0      1
1862.   3d             8.
3d    "
4th   "
1st   "
1863.   2d             8
3d    "
4th   "        8
, 1st    I t 5          25     14    10 
J2d    "    ~            0     18.62
1864.  3d                      3        4
3d  "1
I4th  "1
*     4t            0     3     24.86
Taking an average each three months, it shows:
1. The price at which bonds and certificates of
indebtedness could have been negotiated for coin,
* At this time bonds were worth nearly par in coin, but this is
because Government put none on the market, issuing legal tender
notes to the public creditors. The brilliant victories in the spring of
1862 caused a great rise in the value of government securities.
t The public mind desponded, owing to the ill success of our arms
during the past six months.  Bonds in consequence very low.
t The victories of the past summer seem to presage the speedy
fall of the rebellion. Lee is driven from Pennsylvania; Vicksburg,
Chattanooga, and Port Hudson have fallen; and "the men of the
West have hewn their way to the Gulf of Mexico with their swords."
There is another rise in bonds, which, unfortunately, is only tempo
rary.
8
0
PI
bb
9
.:14
. bD
I.
0 9
P4
20
10
17
22
29
23
18
18
25
30
33
30
8
10
7
5
26
. 60
68 
170 WERE LEGAL TENDER NOTES NECESSARY?
or notes convertible into coin, as compared with the
price in the notes actually used.
2. The nominal loss per cent. in the negotiation,
to which the Government would have been obliged
to submit in consequence of employing coin instead
of notes. It is found by subtracting the preceding
column from 100, which represents the price the
bonds actually brought in paper.
3. The buying power of the gold, compared
with that of paper generally, put lower than the
price of gold, because there are many payments,
such as salaries and old debts, for which paper
has, up to the present time, been nearly as good as
coin.
4. Multiplying the columns (1) and (3) we have
the percentage of indebtedness actually incured
compared with what would have been incurred had
specie payments been adhered to. It will be observed that up to the first quarter of 1863 there is
a steady gain from the issue of notes; after that timne
a continual loss, which, however, does not become
very serious until 1864. The loss is now increasing
in a most alarming ratio.
Had a specie basis been maintained, we should
probably have incurred an indebtedness of about
$150,000,000 in each quarter.  The gradually diminishing amount of coin which this amount of indebtedness would have secured us, would have been
compensated by the increasing revenue from taxes, 
WERE LEGAL TENDER NOTES NECESSARY?  171
and the increasing cheapness of war material. The
gain and loss in dollars from the use of legal tender
notes may therefore be estimated as follows, for each
quarter:
Gain.           Loss.
rlst Quarter.  $30,000,000
1862. J 2d    "        15,000,000
3d    "         14,000,000
4th   "        16,000,000
1st   "        22,000,000
1863.    2d                        $12,000,000
13d                               15,000,000
4th   "                         10,000,000
1st   "                          8,000,000
1864. J 2d    "                         39,000,000
3d    "                         90,000,000
4th   "                        102,000,000
Thus, according to the best judgment we can
form, we saved $97,000,000 in indebtedness by the
use of notes during the first year after their issue.
This was saved because the notes, answering the
purpose of money, were more acceptable than bonds
would have been, and because we were enabled to
pay off contracts made when gold was at par with
notes after they had depreciated one-th'd.
But, since that time, up to the end of 1864, we
have not only lost that $97,000,000, but $180,000,000 in addition. At the end of this period the loss
is peculiarly great, because we are paying debt contracted when gold was at 260 with an apreciated
currency. 
172 WERE LEGAL TENDER NOTES NECESSARY?,
In 1865 we shall probably incur an indebtedness $300,000,000 greater than we should had we
adhered to the specie standard, though the war
should end immediately, because we will have to
pay debts in the appreciated currency.
Thus, owing to the unfortunate misconception
of the true object of the notes, a misconception
founded upon a total ignorance of the functions of
money, and the laws which in practice regulate its
value, a measure which might have been a limited
source of good has been made to work us infinite
mischief. The object of the notes was not to furnish the country with money to buy bonds with,
but to obtain as large a loan as possible without
interest. If the notes were not redeemable on demand, it was not only unnecessary, but highly mischievous, that they should have been universally
receivable for loans.
The fact that our finances are in a far worse condition, and we, as a people, morally weaker than if
we had never issued a government note, is of itself
a sufficient answer to the question whether the notes
were necessary.
II. Wa~it necessary that the notes should not be
redeemable  n coin?  That it was desirable to provide means for redemption of the notes, no one will
dispute. In no other safe way could they be kept
from the depreciation and continual fluctuations in
value, which experience has shown to be the universal lot of every system of irredeemable paper 
WERE LEGAL TENDER NOTES NECESSARY?  173
money, and which reason tells us must be its lot, so
long as human nature remains as it is. In fact,
redeeming the paper is the only practical mode of
fixing its value. If, in the opinion of the Governinent, its obligation expressed by the note is as
valuable as coin, then it will be willing to give
coin in exchange for it. If it values the obligation
at fifty cents on the dollar, fifty cents on the dollar it will give to be relieved from the obligation.
At the present moment there are millions of dollars of notes, the holders of which would be glad to
resign them to the Government at fifty cents on
the dollar, but the Gbvernment will not give it! It
is perfectly idle for Congress, or any other power, to
enact, or proclaim, that a note has any definite value,
while it is belieing its own words by its acts.
It was not nece8ssary, however, that they should
have been absolutely redeemable in coin on demand.
We might have adopted Ricard's plan of redeeming
them in bullion, instead of coin, or the less philosophical, but probably more advisable plan of redeeming them in a certain specified time, say sixty days
after demand. Then, each holder of a note, on
surrendering it to the Treasury, would have received
a check payable in coin in sixty days.   The money
necessary to redeem the notes would have been
raised by loans and taxation. When the Treasury
was not pressed, it might have been adyisable to
receive checks which had already run over thirty
days in payment of loans, and probably four-fifths 
1 74  WERE LEGAL TENDER NOTES NECESSARY?
of the checks would have been cancelled in this
way.
All danger of panics would in this way have
been avoided. Circulating money of some kind, to
the amount of at least $200,000,000, the country
must and will have. Suppose a panic-stricken public do rush to the Treasury with notes in such
quantities that less than this amount was left in
circulation; in a few days a great scarcity of currency will be felt. Notes will become as valuable
as gold, and holders of coin checks will be glad to
withdraw their demands for redemption, and exchange the checks back again for the note, to which,
of course, the Government would have no objection.
After going through this operation two or three
times, every one will be careful not to present
notes for redemption, unless he has more on hand,
than he will have occasion to pay out during the
next sixty days. When every one does this, over
$200,000,000 will be reserved in all, and this
amount will finally be retained in circulation. Thus
the evil will always correct itself.
III. Was it necessary that the notes should be a
legal tender for the principal of the public debt?
By the principal of the public debt we understand,
not the sums owing to contractors, public offieers,
etc., for supplies or services rendered, but the bonds
and Treasury notes issued by authority of Congress,
in definite sums, under an expressed or implied
pledge of faith that they should be paid at a certain
I. 
WERE LEGAL TENDER NOTES NECESSARY? 175
time.   These authorized acknowledgments of indebtedness may be divided into two classes: those
already issued when the legal tender act was passed,
and those to be issued thereafter.
To begin with the latter;-we have seen that
what the Government really gives in exchange for
the clothing, flour, shot, and shell needed for its
armies is its bonds; that the legal tender notes are
mere tickets entitling the holder to their equivalent
in bonds, so that the transfers of notes, goods, and
bonds may be made with the greatest advantage to
all parties; that it is, therefore, the value of the
bonds themselves we are to look after, rather than
that of the tickets, or other money with which they
are negotiated. It is now perfectjy obvious that
the value of the bonds must be less, how much less
it is impossible to say, in consequence of being payable in notes. It is obvious than any person would
prefer a bond, of which the principal was payable
in coin, to one payable he knew not how, and would
therefore be willing to give the Government more
goods and more labor of every kind for it. Hience
the measure in question must, in the long run,
necessitate a larger public debt than if it had not
been adopted.
In the case of the bonds already issued, the measure savors so strongly of a breach of faith; it so certainly involves all the evil consequences of a breach
of faith, that it can be justified only on the plea of
"absolute overwhelming necessity." Let us look a 
176  WERE LEGAL TENDER NOTES NECESSARY?
little at the necessity of the case. There are a great
many things to be done in the world which seem
very difficult when we look at them with our hands
in our pockets, but prove quite feasible when we
earnestly attempt them. When legal tender notes
were authorized, the amount of the debt referred to,
maturing in the course of the next three years, was
as follows:
7'3 Treasury Notes,....
Demand Notes,........
Other Treasury Notes,* say.
Total-about........  $210,000,000
Let us recall a few items from previous chapters.
Far the large portion of this debt was contracted
by actually paying into the Treasury gold coin, or
its absolute equivalent, at a time when nothing else
would be received or recognized as money by the
Government, and when no one supposed that any
thing else would be so received or recognized. We
have also seen that a national debt is due from the
citizens to the Government, as fully as from the
Government to the public creditor; that if every one
* The writer has no data, nor is he aware that any published data
exist, for an exact statement of the amount of miscellaneous Treasury
notes (mostly interest-bearing six per cents) outstanding at the time
in question. But the actual amount cannot vary so far from that
given as to affect the point he is seeking to establish, the feasibility
of redeeming them by taxation.
$1401000,000
40,000,000
. 30,000,000 
WERE LEGAL TENDER NOTES NECESSARY? 177
contributed his exact share of the debt in the form
of a tax, there would be no debt contracted; but as
so heavy a tax would interfere with the business
of many citizens, it is arranged that some shall
voluntarily contribute more than their share, on
condition of afterwards being reimbursed from those
who have paid less. A debt is thus contracted.
Paying the debt is nothing more than equalizing
these contributions, so that every one shall have
contributed his just share. The debt in question
would have been paid off by a contribution averaging about three dollars and a half per annum from
each inhabitant of the loyal States.   To say that
the Government could not pay off this debt in coin,
is to say that it could neither compel nor persuade
its citizens to fulfil their most sacred obligations;
that it could not raise a tax of three and a half dollars per annum in coin from each inhabitant, and
had not credit enough to borrow coin to this amount.
A Government which can do none of these things,
is at the same time bankrupt and helplessly imbecile;
for if it were not bankrupt, it could raise the coin
by loans, and if it were not helplessly imbecile, it
it could raise it by taxation.
The plea of necessity is therefore at the same
time a plea of bankruptcy, and a plea of helpless
imbecility!  No man who will hereafter raise it,
is worthy to be a citizen of the Reublic.   And yet
it has been urged by men not only professing to be
patriotic citizens, but friends of our public credit.
8* 
178  WERE LEGAL TENDER NOTES NECESSARY?
IV. Was it necessary or expedient that the qotes
8should be a legal tender in payment of private debts?
In a previous chapter we have described the
great revolution in the views, feelings, honesty, and
habits of the nation, and in the ownership of that
property which is the result of laborious frugality,
slowly and almost insensibly, but most certainly being produced by the operation of the legal tender
act. This revolution, and the evils involved in it,
were not unforeseen by the able men who framed
the act.  The statesmanlike speeches of Messrs. Fessenden, Collamer, and Cowani in the Senate against
the legal tender clause demonstrate this, but the
clause was nevertheless retained under the pressure
of a supposed necessity.
The entire argument for this necessity is found
in an extract from a paper of the Honorable Secretary of the Treasury read in the Senate during the
debate. The respectable and responsible source
from which this paper emanated, the weight which
it carried in the legislative debates, and the enormous extent to which the legislation it gave rise to
affected the ownership of property, alike demand for
it the most serious and conscientious attention. The
reasons referred to were quoted as follows:
"The making them a legal tender, however,
might still be avoided if the willingness manifested
by the people generally, by railroad companies, and
by many or all banking institutions, to receive and
pay them as money in all transactions, were abso 
WERE LEGAL TENDER NOTES NECESSARY? 179
lutely or practically universal; but, unfortunately,
there are many persons and some institutions which
refuse to receive and pay them, and whose action
tends not merely to the unnecessary depreciation of
these notes, but to establish discriminations in business against those who in this matter give their cordial support to the Government, and in favor of
those who do not make such discrimination. This,
if possible, should be prevented; and a provision
making notes a legal tender in a great measure prevents it by putting all citizens, in this respect, on
the same level both of rights and duties."
This argument has a two-fold, it might be said
an ambiguous application; and, in-order to give it
the accurate analysis proposed, it will have to be
considered under two entirely distinct heads. When
the Honorable Secretary says that many persons and
institutions refuse to receive and pay the notes as
money, he may mean either-1. That there are many
creditors who would refuse to receive them for debts
contracted before the passage of the act, and therefore with the understanding that they could legally
demand coin in payment; or 2. That many would
refuse to receive them as cash in payment of services
rendered or goods sold on the spot; for-example,
that a drygoods merchant might refuse to receive
them in exchange for goods, or a railroad company
refuse to receive them in exchange for tickets. As
the legal tender clause covered both these cases, we
shall consider separately the two applications of the
argument. 
180 WERE LEGAL TENDER NOTES NECESSARY?
To begin with the first: the argument simply
advocates all the evils which we have shown to flow
from the legal tender clause. When this clause was
under discussion all debts had been contracted by
the creditor's delivering to the debtor moneys, goods,
or valuable privileges, equivalent in value to a certain amount of gold coin; and the evidence of indebtedness given to the creditor was at the same
time an acknowledgment from the debtor that the
other was justly and rightfully entitled to this
amount of gold coin, and a promise that he would
deliver him either this amount of coin, or something
else which he would be willing to accept as its
equivalent. This amount of coin was as truly and
rightfully the property of the creditor as if he had
it in his own drawer; he is taxed for it as he would
be in the latter case, and, if he owed a third person,
that person could seize it equally whether it is in
the form of a debt or in the actual possession of the
first creditor. The argument of the Honorable Secretary, so far as it applies to the case under consideration, might be more fully and exactly expressed
as follows:
Unfortunately there are many persons and some
institutions who own coin which is in the possession
of others, and who will refuse to accept these notes
in lieu of the coin, and whose action thus tends to
the unnecessary depreciation of the notes, &c.
So the legal tender clause was inserted, which
compelled all these individuals to receive the notes 
WERE LEGAL TENDER NOTES NECESSARY?  181
in lieu of the coin, thus most unjustly depriving
them of their just rights.  Now the question arises,
does this power of consummating injustice add any
thing to the value of the notes?  Not a particle!
A little close thought (to say nothing of centuries
of experience) will make this quite plain from
whatever standpoint we view the question:
1. The absence of the legal tender clause would
not, as we shall presently show, have diminished
the circulation of the notes in the least. Nine debts
out of every ten, and more likely ninety-nine out of
every hundred, would still have been cancelled by, a
transfer of notes.  The only difference would have
been that, instead of paying notes to the nominal
amount of the debt, they would have been paid to
its real amount, that is, to such amount as the creditor was willing to receive and the debtor to give as
the equivalent of coin. The debtor would thus be
saved the trouble of buying the coin, and the creditor that of selling it.
2. It is perfectly obvious that the creditor would
not set a higher value on the notes in consequence
of having been compelled to receive them in lieu of
coin, any more than he would set a higher value
on the ashes left after the conflagration of his house
than on any other ashes.
3. Although, from the position in which the
debtor is placed, the notes are more valuable to him
for being legal tender, this adds nothing to their
market value. This will be made clear by an exam 
182  WERE LEGAL TENDER NOTES NECESSARY?
pie. A debtor owes $100. Gold is at 100 per cent.
premium. If the notes are a legal tender, $100 of
them will pay the debt; if not, he will be obliged
to supply himself with $200 of them. The greater
number of them thus required will rather tend to increase their value. To take a parallel example, suppose an inventor should contrive to rig a ship with
half as much cordage as is now used.  The ship
owner would then find half a mile of rope to answer
him as good an end as one mile would before, exactly as the debtor finds $100 in notes to answer him
in place of $200 without the legal tender clause.
But the manufacturer of the rope would not, on this
account, be enabled to get a higher price for a mile
of it.
4. The value of any article depends on the estimate set upon it by the community. Is there any
single individual who will set a higher estimate on
the notes because they possess this power of indefinite swindling?
The fact is, that the ideas which underlie the
argument of the Honorable Secretary are precisely
those which in the last century used to enact
penal  laws, or fulminate denunciatory proclamations against all who would not accept pieces
of paper as the equivalent of gold. These laws
enacted that persons who had goods for sale
should sell them at the same rates for paper that
they would have sold them for coin. The legal
tender act does not go as far as this; it only 
WERE LEGAL TENDER qOTES NECESSARY?  183
enacts that those who had previously sold goods
with the expectation of receiving coin, should be
compelled to accept paper as the equivalent. But
the argument would have applied with as much
force to subsequent sales of goods. We might
argue, for example:
" There are many persons and some institutions
having goods for sale which refuse to receive and pay
out these notes as the equivalent of coin, but charge
twice as much for goods when paid in notes as
when paid in coin; and whose action thus tends not
only to the unnecessary depreciation of these notes,
but to establish discriminations in business against
those who charge no more for their goods than if
they had been paid in coin."
Would not this argument be as sound and conclusive in favor of setting a universal tariff of prices
as that actually used was in favor of the legal tender clause. 
It will be remembered that all this criticism applies only to that interpretation of the argument
cited, which presumes it to refer to debts already
contracted. We still have the second application
of the argument to consider, viz.: that if the notes
were not a legal tender, "many persons and some
institutions would refuse to receive and pay them
as money" in current transactions, as in exchange
for goods sold, or services rendered on the spot. It
is fairly supposable that the Hionorable Secretary had
in his mind's eye a railroad company who would 
184 WERE LEGAL TENDER NOTES NECESSARY?
not receive the notes in exchange for tickets; a trader
who would not receive them in exchange for goods,
or a bank,which would not receive and pay them
as "bankable funds." At least, we may fairly take
these as representative of the persons and institutions which would have refused to pay and receive
them; so that if it can be made perfectly plain that
no one of the above three parties would have seriously diminished the value of the notes by their
action, then it may be considered as established
that no other persons or institutions would have
done so. But we must first look at 6ne or two preliminary facts:
In the first place, the general acceptance of the
notes as the medium of exchange of the country
was inevitable. Paid by the Government to the
army, the navy, and the public contractors, they
would, through these media, have permeated every
Channel of business. National pride would have
promoted this general acceptance..
Again, when the notes began to depreciate,
they would have driven the bank money out of circulation, in consequence of the general fact that
the less valuable money, if accepted by the majority of tAe community at all, always displaces that
which is more valuable. In other words, the bank
notes being redeemable in coin whenever the State
authorities choose to force the banks to do so,
would have been hoarded as gold was, while the
government notes, not being thus redeemable,
would have been kept for use as money.
I 
WERE LEGAL TENDER NOTES NECESSARY?  185
The notes having. thus become the "money"
which every man would carry in his pocket to meet
his current expenses, suppose that a trader should
refuse to take' any thing but gold in exchange for
his goods. At the worst he would only put his
customers to the trouble of buying the gold somewhere else; but more likely the customers would
prefer to buy their goods where the money they
already had in their possession would be received
in exchange. Thus the trader would injure no one
but himself by his actions.
The same remarks will apply to railroad companies. If they were determined to have their
fares paid in gold, they had only to add the premium on gold to the currency price of their tickets,
and then buy gold with the proceeds. This they
can do just as well under the operation of the legal
tender clause as if that clause did not exist. Finally, no bank could reasonably refuse to receive
the notes from depositors, to be paid back in kind,
nor refuse to loan them to customers on the same
terms; the blow aimed at the value of the notes by
such refusals would simply have recoiled on their
own heads, by driving their customers to other institutions.
Thus reason agrees with experience in showing
that it adds nothing to the value of a paper circulation to declare it a legal tender. Mr. Chase's argument is like a cloud on a mountain-top, which looks
solid and impenetrable when viewed from a dis 
186  WERE LEGAL TENDER NOTES NEESSARY?2
tance, but offers no more resistance than the air
when we come to grapple with it. Every idea in
it is a century behind the age.  It belongs to the
period when men thought that money was the great
element of wealth and power; that it derived its
value from the authority of the Government, and
that all who would not set the government value
upon it were offenders.  Since men have cured
themselves of the illusions of habit, and acquired
natural and correct ideas of the functions of money;
since they have learned that the interests of different classes of society are not antagonistic, but harmonious, and that the good of the State is the combined good of the citizens, they have seen that
every one, whatever his religious or political opinions, will accept any kind of money at the same valuation and on the same terms that his neighbor will
accept it from him, that no man ever accepts it on
any other terms, and that forcing him to do so- is
simply robbery; in a word, that if a- legal tender
clause does not force paper money on an unwilling
creditor it is useless, and if it does it legalizes robbery.
Paper money has been the curse of our country
for nearly two centuries. Before the Revolution
nearly every state had its "bills of credit" in circulation, the value of which was continually fluctuating.   Sometimes they were founded on  correct
financial principles, as when, contemporaneously
with their issue, a tax was levied sufficient to absorb 
WERE LEGAL TENDER NOTES NECESSARY?  187
them. Serious depreciation was then impossible;
but commonly no means were provided for giving
them any fixed value whatever, but they were left
entirely to the mercy of chance. This long fit of
paper money drunkenness came to an end with the
Confederation. The cup was drained to the dregs.
When the fathers of our republic met to frame
that Constitution which was to secure the blessings
of liberty to their posterity, they had this century
of paper money experience to look back upon.
They saw innumerable evils, without any good to
counterbalance them. Every argument for the alluring cause of the evil had been refuted by the
bitter test of experience.   They thought,  and
thought justly, that one of the greatest blessings
they could bestow upon their posterity would be
to protect them against this fruitful source of
evil.  Accordingly, it was enacted that "no State
should issue bills of credit or make any thing but
gold and silver coin a tender in payment of debts."
To show the views of these prohibitions entertained
by the next generation of statesmen and jurists, we
quote the opinions of Story * and the writers of the
Federalist:
"The history, indeed, of the various laws which
were passed by the States in their colonial and independent character upon this subject, is startling at
once to our morals, to our patriotism, and to our
* Commentaries on the Constitution of the United States. Chap.
Xiii.
...
=XX11}. 
188 WERE LEGAL TENDER NOTES NECESSARY?
sense of justice. XNot only was paper money issued,
and declared to be a tender in payment of debts,
but laws of another character, well known under
the appellation of tender laws, appraisement laws,
instalment laws, and suspension laws, were from
time to time enacted, which prostrated all private
credit and all private morals. By some of these
laws property of any sort, however worthless,
either real or personal, might be tendered by the
debtor in payment of his debts. Such grievances
and oppressions, and others of a like nature, were
the ordinary results of legislation during the revolutionary war, and the intermediate period down
to the formation of the Constitution. They entailed
the most enormous evils on the country, and introduced a system of fraud, chicanery, and profligacy,
which destroyed all private confidence and all industry and enterprise."
The prohibition to emit bills of credit cannot,
perhaps, be more forcibly vindicated than by quoting
the glowing language-of the Federalist, a language
justified by that of almost every contemporary
writer, and attested in its truth by facts from which
the mind involuntarily turns away at once with disgust and indignation. This prohibition, says the
Federalist, must give pleasure to every citizen in
proportion to his love of justice and his knowledge
of the true springs of public prosperity. The loss
which America has sustained since the peace from
the pestilent effects of paper money on the neces 
WERE LEGAL TENDER NOTES NECESSARY?  189
sary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an
enormous debt against the States chargeable with
this unadvised measure which must long remain
unsatisfied; or rather, an accumulation of guilt
which can- be expiated no otherwise than by a
voluntary sacrifice on the altar of justice of the
power which has been the instrument of it."
"It was the object of the prohibition to cut up
the whole mischief by the roots, because it had
been deeply felt throughout all the States, and had
deeply affected the prosperity of all."
Such are the enlightened opinions of our wisest
statesmen and jurists, and such the sad array of folly
and wickedness on which those opinions were founded. And yet, here we are restating the sophisms,
and reacting the history of a past century! The
,most powerful republic on the globe, with unlimited resources, adopting the last and most reckless expedient of a bankrupt Government, and men professing to be its friends declaring that this is its
only resource!  By what process have we brought
ourselves into such a position?  Our whole policy
can be traced to two very simple logical fallacies:
The first fallacy was that the mail, expenses of
the war must be obtained by loans in some form.
We looked in the wrong direction for our money
in the beginning, and we have most steadily and 
190 WERE LEGAL TENDER NOTES NECESSARY?
persistently looked in that direction ever since.
When the President called on Congress for $300,000,000, instead of trying to devise some means
of raising this sum by a direct tax, or at least
inquiring whether a loan or a tax would be
the better, it was universally taken for granted
that loans were the only resource.  As additional
sums were wanted, we had recourse to more loans.
When the Secretary of the Treasury called for
million dollars, the idea of levying a direct tax of
million dollars was never discussed, never
broached, so far as we have any evidence never
thought of. Finance committees simply racked
their brains for devices to sell    million bonds.
This course was productive of its legitimate and
inevitable effect. Loans could be obtained on favorable terms only from that small class who were at
the same time frugal, possessed of money, and possessed of confidence in the good faith and stability
of the Government.  As soon as this class was exhansted, the inevitable depreciation commenced.
Government promises brought less and less in the
market.
With the suspension of specie payments, gold
" disappeared" from circulation.  Alarmed at the
increasing difficulty of negotiating bonds, the Secretary of the Treasury made an estimate of their
future depreciation, on the supposition that they
were  negotiated  for coin.   He  concluded that
before $200,000,000 in coin could be obtained ill 
WERE LEGAL TENDER NOTES NECESSARY? 191
this way, the bonds would fall to 50 cents on the
.dollar.
Here was an excellent opportunity for a change
of policy. When government promises to pay
would only bring fifty cents on the dollar, and
when there was every prospect of an expenditure
of eight or nine hundred millions a year, it was
high time to inquire whether arms, ammunition,
and clothing could not be obtained by some other
means than giving promises to pay in exchange
for them. Unfortunately, however, instead of doing
this, it was thought that that credit which could
not be obtained directly, might be obtained indirectly by some ingenious device of statesmanship,
or some scheme of financial legerdemain. This
was the second great mistake. The issue of legal
tender notes, and of certificates of indebtedness,
the issue of bonds and Treasury notes in a multitude
of forms, the various devices to create a demand for
government indebtedness, including that concentration of absurdities the National banking law, tile gold
laws, the prepayment of interest on the public debt,
all these are mere temporary makeshifts in a grand
attempt to achieve an impossibility. Had none
of them ever been thought of; but had we kept on in
the old-fashioned way of selling bonds exclusively for
coin, our finances would have been in a far more favorable condition than they are. But we would still
have been obliged to submit to large sacrifices,
probably half as large as we actually have submit 
192  WERE LEGAL TENDER NOTES NECESSARY 
ted to. The combined skill of all the financiers of
the age could no more borrow $X00,000,000 a year
on favorable terms, with a tax of less than $200,000,000, than the combined skill of Alexander,
Hannibal, and Napoleon could avail to win victories with an army which was  to remain immovable.
The nature of this second mistake will appear
more clearly, if we compare our policy with the
reasons urged in favor of it. These reasons are
found in the Report of the Honorable Secretary of
the Treasury for December, 1862.
Mr. Chase here speaks of the suspension of payment of the demand notes as a "necessity."  He
says that it was "impossible for the Government
to negotiate loans of coin except at ruinous loss,"
and that "a condition had been created by the
suspension which rendered loans of coin impossible."
I have maintained that these statements are illfounded; but let us admit that they were true in
every particular. Why was it impossible to negotiate loans of coin? What was "the condition of
things" which caused this impossibility?  But one
answer is possible: The people would not trust the
Government on any reasonable terms with the coin
lying idle on  their  hands.  Grant M1fr.  Chase's
premises, and there is no possible escape from this
conclusion.
With such a statement of our public credit at 
WERE LEGAL TENDER NOTES NECESSARY? 193
home, published to the country and the world in an
official document, what gold.value could we expect
our bonds to bear? And yet Mr. Chase goes on to
attribute a premium of 37 per cent. on gold, as
compared with legal tender notes to "the ignorant
fears of foreign investors in National and State
bonds  and  other American  securities, and the
timid alarms of numerous nervous individuals in
our own country."  The premium is here attributed to its true i?rnimediate cause. But what caused
these "ignorant fears and timid alarms"?  Were
they not to be expected when a complete financial
system had been adopted, the fundamental idea of
which, openly and officially vowed before the world,
was that American citizens would not trust their
Government with the universal money of nations
on any terms but such as would involve the Government in speedy financial ruin?
That we should have initiated a policy founded
on two such mistakes as. those pointed out, is perhaps excusable under the circumstances. We suddenly found ourselves in a new and untried and
most embarrassing position. There was not a man
in the country who was qualified by experience to
give us any advice, for the simple reason that there
was not a man who had seen a nation suddenly attempt to raise money at the rate of $800,000,000 a
year.   The general principles of national finance
were our only guide. These were almost wholly
unstudied and unknown.   It was, therefore, very
9 
194 WERE: LEGAL TNDER NOTES NECESSARY?
natural that we should adopt, in the first place, the
policy which nations in general have adopted of
late years when called on for a sudden and temporary increase of national expenditures.
It was also natural, though less excusable, that
when we found this path beset with difficulties, we
should try whether they could not be removed, not
reflecting that they necessarily inhered in the path
marked out, and that every attempt to remove them
was simply a waste of most valuable labor. In a
word, that we should have adhered to a wrong
policy was excusable when we had only the voice
of reason (which was drowned in the din of war)
and the teachings of-history (which were forgotten
in the turmoil) to warn us of our error.
But that we should have adhered to our error
after it was made patent by our own experience, as
well as by reason and the experience of others, is
inexcusable. When gold attained a premium of onethird, the fallacy that the value of our bonds could
be increased by an issue of notes, was perfectly
plain. How was this premium on gold viewed
by the financial authorities? Mr.  Chase says:
"It is true that gold commands a premium in
notes; in other words, that to purchase a given
amount of gold a greater amount in notes is requir ed. But it is also true that on the suspension of
specie payments, and the substitution for coin of
United States notes convertible into six per cent.
specie bonds as the legal standard of value, gold 
WERE LEGAL TENDER NOTES NECESSARY? 195
became an article of merchandise, subject to the
ordinary fluctuations of supply and demand, and
to the extraordinary filuctuations of mere speculation."
Here the Honorable Secretary steers so close to
the truth that it is wonderful how it escaped him.
"The legal tender notes are convertible into six per
cent. bonds as the legal standard of value."  Of
course, then, the notes cannot be worth any more
than the bonds, after enough are issued to supply
the want of a circulating medium. Let, us then,
discover what the bonds will be worth, and we can
judge what the notes will be worth.  The bonds,
says Mr. Chase, will soon not bring sixty cents on
the dollar in coin;-" loans of coin are impossible
except at ruinous sacrifice." Then the notes, also,
must speed(ily fall to eightyA, sixty, or even fty per
cent. as compared with gold, if hi8 doctine 8s true.
Or, the notes being the standard, gold must speedily bear a premium of thirty, sixty, and one hundred
per cent.
Instead of accepting this inevitable conclusion
from his own premises, Mr. Chase argues that the
premium is greater than ought reasonably to have
been expected. Hie makes the same transparent
mistake that has been pointed out in the financial
management of the French revolution, namely, that
by issuing representatives of an article to circulate
as money, he could permanently prevent the value
both of the representative and the thing represent 
196  WERE LEGAL TENDER NOTES NECESSARY?
ed from depreciating.   To prove that there had
been no actual depreciation, he shows that there has
been no general advance in the price of the most
important articles of consumption. But this only
proves either that those articles were unusually
plenty, or that the equilibrium of prices was not restored.
No doubt he expressed the views of the country
at large. Instead of accepting the rise in the price
of gold' and of course the depreciation in currency
and bonds as unavoidable facts, and endeavoring to
frame some new policy, we began to carp at those
facts, and attribute them to every cause except the
true one, the unchangeable laws of value.  To express my whole idea in a metaphor, we built our
house on the sand, in defiance of the observed fact
that all who had previously been guilty of this
folly had their houses destroyed, and in defiance of
the plain dictate of reason that a house so situated
must be exposed to destruction. We can find excuses for this act.  But when the rain fell and the
wind blew, and we found our foundations being
washed away, instead of seeking a better foundation, we denounced the storm, and attributed it to
the machinations of our enemies. For this, enlightened posterity will never pardon us.
We have seen that the legal tender notes have
been productive of a vast amount of evil which
does not yet appear, while there is absolutely nothing to place to their credit. We have given one 
WERE LEGAL TENDER NOTES NECESSARY a 197
more illustration of the principle that high moral
qualities aided by hard labor on the part of those
who stay at home, as well as hard fighting on the
part of those who take the field, is the only source
of military power. Every argument in favor of
paper money is a fallacy unworthy the nineteenth
century.
There is but one way to set our credit on a firm
basis, and we owe it to posterity to retrieve our
faults by adopting this plan. It is to adopt a constitutional amendment to this effect:
Nothing shall be a legal tender in paynent of
debts exceeding $10 except gold coin, tendered in the
amount of at least two hundred and thirty-one grain8s
of pure gold to every $10 of indebtedness.
Enact thus, and the pledges of public and private faith will no longer be at the mercy of shortsighted politicians. Every man who loans gold to
the Government will then be sure of getting his gold
in return if the Government exists. The laborer who
deposits in a savings bank will not find his earnings
dwindle away when they ought to increase. The
annuitant will know then that he is not to be defrauded out of a provision for his old age by any
technical quibbles. Every one who holds a promise
to pay money at a future period will know that the
meaning of that promise is not staked on a die,
but is as unchangeable as the Constitution itself.
This measure will not prevent the circulation of
bank money or United States notes, whenever it is
t 
198 WERE LEGAL TENDER NOTES NECESSARY?
deemed advisable to issue them.   It will simply
protect the creditor in case the value of these notes
falls below that of gold, by compelling the debtor
to pay the real value of his debt, without reference
to the value of notes.
Until this, or something equivalent, is done,
public confidence can never be fully restored. 
CHIIAPTER VIII.
THE NATIONAL BANKING SYSTEM.
THE object of banks is to put into a different
form that portion of the wealth of a community
which is in the form of money. The circumstances
under which a change of form is desirable, and the
cause of the continual tendency to change, has been
hinted at in treating of the financial elements of
military strength. All that portion of the wealth
of a community which is in the form of "Circulating Capital," is really lying idle. Circulating capital may be defined as all products of labor which
are waiting to be put to their final use, or to reach
their final destination. Thus, if a coat is one year
in passing from the loom to the wearer, it has been
in the form of circulating capital during that time,
and the profits of the dealers through whose hands
it has passed must include one year's interest on the
price of the cloth. All coin circulating as money
belongs to this class, because every holder is waiting to pass it off, so that it never reaches its final
destination while in the form of coin. So does all 
200     THE NATIONAL BANRING SYSTEM.
the" stock in trade" of every merchant, manufacturer, or business man of any kind, because every
single article is waiting for a purchaser. It is very
clear that the profits of all these tradesmen must include the interest on their stock in trade.
If a method could be invented by which every
article made should pass immediately to the final
purchaser without waiting in anybody's hands, all
this interest could be saved to the community, and
wealth formerly invested in stock could be put into
some other shape. This might be effected in two
ways:
1. If the plan were such that it could be put
into immediate operation by each individual tradesman or merchant, he could export his entire stock,
and buy a share in a ship, or he could hire labor to
build a foundry, or he could exchange for some
article of luxury. The community at large would
then reap the benefit, the tradesman would be as
rich as ever, because he would have something to
show in exchange for his stock, and the community
at large would thereafter be enabled to buy goods
cheaper by the amount which they formerly had to
pay him as interest on his stock in trade.
2. The work of changing the form of the capital
might be left entirely to corporations, who would
gradually buy up the stock, and export it, constitute
themselves the agent for the tradesmen, buy from
the manufacturers and sell to the public at old
prices, and thus gain the interest on the entire stock 
THE NATIONAL BANKING SYSTEM.
while that stock was still in an entirely different
form.  The corporations alone would be benefited;
but since no one would be injured, and since every
one would be free to become a member of the corporation, this would give no ground of complaint.
This change of form is, however, almost entirely
impracticable in the vast majority of cases, owing
to the immense diversity in the quality of goods,
and the total uncertainty respecting the demand for
goods of any one quality. But, in the case of money, we have some $300,000,000 worth of circulating
capital, all of precisely one kind and quality, and
the demand for which is almost constant. It is
lying idle, and yielding interest to no one.  Whatever portion of this coin may be held by a neighbor
of a bank, he can advantageously deposit there until
he wants to pass it off. Then he can give his creditor an order or " check" on the bank for the coin.
Perhaps this creditor also will leave the coin on deposit. Thus the bank will soon find almost all the
money of the community lying idle in its vaults,
although the ownership of it is continually changing. Thus we have a bank of deposit.
The bank finding all this coin constantly on
hand can loan it out at the current rate of interest.
Thus we have a bank of discount.  The borrowers
will probably still leave the coin on deposit, and as
the applications for discount will be greatly in excess of the deposits, the bank may loan out many
times as much coin as it has in its vaults.
9*
201
0 
202      THE NATIONAL BANKING SYSTEM.
if the borrower or depositor wants to pay some
one to whom a check will not be convenient or acceptable, the bank may give him ill lieu of the coin
a bill entitling the bearer to the coin whenever he
demands it, which may be more convenient to him
than the coin itself. Thus we have a bank of circulation.
So long as all the business of the country goes
on as usual, the bank will be perfectly safe, though
its specie reserve amount to but a small fraction of
the debts payable on demand. But a panic comes,
and every one rushes to the bank to put his debt
into the form of coin. Then the weakness of the
entire system becomes apparent. The bank owes
debts many times exceeding not only the coin which
lies in its vaults, but perhaps more than is possessed
by the entire community. True, the bank holds
notes from individuals exceeding its liabilities, but
the latter are due now, while the former may not be
due for weeks; and the debtors may be unable to
pay them owing to the disarrangement of their business caused by the panic.
Against the disastrous effects of such a panic it
is impossible to guard by any plan yet tried.  If,
indeed, the bank were required to keep coin enough
continually on hand to meet all its liabilities, the
danger would be entirely avoided; but this would
defeat the very object of the bank.  The coin might
be idle in its vaults for a century. But, suppose the
coin is loaned to the Government, to be repaid when
0 
THE NATIONAL BANKING SYSTEM.
the bank is in need of it? Alas! the critical moment
when the bank will want it, will be just the moment when the Government cannot pay it, and
when the government bonds cannot be sold except
at enormous sacrifice.
A suspension under the circumstances seems like
a necessity; and yet it is a moral wrong, for which
we shall certainly suffer. The disastrous effects of
paper money which we are now beginning to suffer,
and are likely to suffer for a generation to come, are
the consequences of the lax ideas of public probity
which have been the result of bank suspensions.
The relative merits of the National and the State
banks in their way of effecting these primary objects
of banking, I shall not now stop to discuss.  The
difference between the merits of the worst and the
best system that could be devised is but a drop in
the bucket, compared with the interests affected directly by the making of notes a legal tender.  All
that our banks can do is to save the community
some $20,000,000 per annum interest on capital
that would otherwise be unemployed, and it is not
likely that the best system will save $2,000,000
more than the worst; so that we may regard $2,000,000 a year as the extreme measure of the benefit
which the community can gain by the introduction
of the best possible system of banking. But we
have seen that such a change in the value of legal
tender notes as frequently takes place in a single
week, may, cause property to the amount of $50,
$
203
4 
204     THE NATIONAL BANKING SYSTEM.
000,000 or even $100,000,000 to be gained and lost.
Considered simply as an improved system of currency and banking, then the new measure would scarcely have received attention.alongside of interests so
vastly greater.  It was supported almost entirely on
the ground of its beneficial influence on the government finances, and it is this influence which it is
proposed to discuss in the present chapter.
The idea of loaning the capital of a bank to the
Government is by no means a new one. When the
Bank of England was first chartered, the entire capital was loaned the British Government. As the
capital was increased from time to time it was immediately disposed of in the same way, sometimes
at a yery low rate of interest, and on some occasions
even free of interest.  If I am not mistaken, there
has never been occasion for the return of the money
thus borrowed, specie payments having been suspended, first by order in council and then by act of
Parliament, at the only time when a necessity of
the repayment seemed imminent.  But the circumstances under which our National banking system
was inaugurated, are so different from those of the
British Government at the time referred to, that we
shall only be deceived by any attempt to justify our
action by the example of theirs.
Before proceeding with the examination proposed, there are two points to be firmly established
respecting which great indefiniteness and confusion
of ideas seem to prevail. There are, in fact, two
Aw 
TIHE NATIONAL BANKING SYSTEM.
great illusions which our policy has the effect to
foster, and which it is to be hoped the country will
speedily be rid of. They are: 1. That every one
who takes notes to the Treasury, and exchanges them
for bonds, lends to the Government; 2. That the National currency may not depreciate the legal tender
notes as much as an additional issue of legal tender
notes to the same amount.
The idea that any one who takes a legal tender
note to the Treasury, and exchanges it for a bond,
lends to the Government, is indeed a most extraordinary one.  Nothing can more strongly illustrate
the illusions of habit than the prevalence of this
notion. The man who in the beginning of the war
gave the Government gold, and the man who now
gives the Government cannon, shot, and shell, receiving in exchange a note promising that the
"United States will pay;" these are the men who
loan to the Government.'The debt is contracted
when the cannon is received and the note issued,
and the same debt cannot be contracted twice. The
man who brings the note to exchange for a bond
only changes the form of the debt, and that in a
way greatly to the disadvantage of the Government,
because the latter then has to pay interest equivalent
to 10 or 15 per cent. on the market value of the
debt. Clearly, the Government has no reason to be
anxious for such an exchange, for it adds nothing
either to its power or its credit.  If the community
prefer notes which bear no iaterest to interest-bear
205 
206     THE NATIONAL BANKING SYSTEM.
ing bonds, it is to the advantage of all parties to let
them have them in preference.
It may be replied to this that the notes were
issued with the understanding that they were convertible into bonds at the pleasure of the holder,
and derive a large part of their value from this
privilege; that although the holder of the note may
decline availing himself of the privilege for a day
or a month, yet he would by no means be willing
to resign it altogether, and the value of the notes
would at once fall if he were deprived of it.
This is very true, and conclusively shows that
the Government ought to effect the conversion when
asked to do so, but furnishes no reason at all why
it should wish to be asked. The notes are in fact
redeemable in bonds instead of coin, and therefore
the Government ought to effect the so-called redemption for the same reason that a bank, in ordinary times, redeems its notes in coin. That the
bank shall be willing to do this is regarded as a
matter of course, but if it should establish agencies
throughout the country, offering inducements to
holders of its notes to come and get them redeemed,
the sanity of its directors would be seriously doubted.
Yet a disposition to convert notes into bonds
does indicate a state of things favorable to the public credit. Let us see how:
Every legal tender note has two elements of
value:
:1. A money value, in virtue of which, as ex 
THE NATIONAL BAilTG SYSTEM.
plained in the beginning of Chapter V., the sum
total of the circulation must be worth from $200,000,000 to $300,000,000 in gold. If, then, the total
circulation of every kind were kept down to $250,000,000, any serious depreciation would be impossible; because, if any general rise in prices should
then take place, there would not be money enough
to transact the business of the community on the increased scale of prices: the money market would
become "tight; " there would be a general disposition to borrow or sell, with a coiresponding inability
to lend or to buy; and prices would then necessarily fall until the pressure was relieved and the equilibrium restored.
Dividing the total circulation by 250,000,000,
we shall have the maximumn price which gold can
permanently command, supposing all the business
of the country to go on as usual. The circulation
must include every thing used as money, whether
government notes, national bank notes, state bank
notes, or hotel checks.
2. The legal tender notes have a value as a government debt, represented by that of the bonds into
which they are convertible, or dependent on the
hope that they will at some time be redeemed in
coin. When their value as debt is less than that as
money, there will be no conversion, the notes being
worth more than the bonds into which they are convertible, because the latter cannot be used as money.
Such is the very simple explanation of the state of
207
0 
208    THE NATONAL BANMG SYSTEM.
things in the winter of 1863, when a hundred dollar bond would only bring ninetfy-three dollars in
legal tender notes, although the former bore 6 per
cent. interest in coin, and the notes no interest at all.
When, from a rise in government credit, the debt
value exceeds the money value, the notes will not
all remain in circulation as money, but will be kept
here and there by individuals for the purpose of being converted into bonds, or in hopes the Governmeint will provide for their redemption.
Now, it is plain that, if the bonds were to remain
as valuable as gold, the whole issue of the notes
above $250,000,000 or perhaps $300,000,000, would
come back to be exchanged for bonds as fast as issued. This rapidity of conversion, this continual
demand for bonds, would indicate, but not cause, a
state of things highly favorable to government credit,
just as a high thermometer indicates a warm atmosphere, but does not cause it. It would not be the
demand for bonds which caused them to be valuable, but their value would cause the demand. Now,
if not satisfied with the natural demand for the
bonds, we use artificial means to stimulate it, we
act on the same principles with the attendant in a
sick-room, who, being ordered to keep the thermometer at a certain height, effected the object by bringing the thermometer nearer and nearer the grate as
the fire went out.
Thus, in whatever way we approach the matter,
we arrive at the conclusion hinted at in the last 
THE NATIONAL BANKING SYSTEM.
chapter, that it is the gold value of the bonds in
which our notes are to be redeemed to which atten  tion should be directed; and that, when this is as  certained, the notes may be safely left to come in of
themselves.
It can scarcely be necessary to go into a long ar  gument to prove that the $300,000,000 of author  ized national bank notes must depreciate the curren  cy as much as thie issue of an equal amount of legal
tender notes. True, the National Bank money may
, be redeemiedin legal tender notes, but this does not
prevent them from competing with each other. In  deed, under our present policy, the law which pro  vides for redemption provides for a mere farce. The
paper in which the bills are to be redeemed will an  swer no end which the bill itself will not equally
answer. If the bill were redeemable in gold, a
holder might present a bill for redemption either
because he wishes to keep the money and considers
the coin more secure than the bill; because he
wishes to take or send the gold to some place in
which the bill will not pass; because he wishes to
make payments to the Government; or because he
intends to use the gold in manufaictures. None of
these reasons can be assigned for preferring a legal
tender note to a National Bank bill. The latter are
as secure as the former; they will be received at par
in every place where legal tender notes will; they
are received and paid out by the Government in the
same way; and the "lawful money "-in which they
209 
210     THE NATIONAL BANKING SYSTEM.
are redeemable cannot be made into jewelry. Thus
the — redeemableness of the national currency does
not tend in the least to diminish the volume of it in
circulation; and it is the actual volume of the entire mass of currency, and not the convertibility of
one part of the mass into another, which determines
the depreciation of the whole. If this were not so,
the Government would have at command a very
simple way of preventing the depreciation of its
money. It would only be necessary to reduce the
amount of outstanding legal tender notes to $250,000,000, and issue in place of the remainder demand notes not themselves legal tender, but redeemable in legal tender notes on demand. These notes
would be precisely like the National Bank notes, except that they would be redeemable at the Treasury
instead of the bank. They could be issued to any
extent without serious danger of comining back for
redemption; and if the National Bank notes do not
depreciate the currency, neither would they.
We have had many complaints of the depreciation of the currency by the State Bank notes, but it
does not seem to occur to the authors of these complaints that the National Bank notes are equally pernicious in their influence. The latter are even more
pernicious, because, in making them payable to and
from the Government, every thing that could be
done was done to enable them to compete with the
Government's own notes.
All parties agree that an increase of the currency
it 
THE NATIONAL BANING SYSTEM.
is an evil.  When, then, a measure was proposed,
the consummation of-which would add $300,000,000
to an already expanded currency, we should natu rally expect it to be looked on with suspicion. We
should expect to find every one eagerly inquiring
what benefit the Government would derive from the
measure to compensate for so great an addition to
an evil of already alarming magnitude. We should
have expected the proposers of the measure, antici pating such inquiries, to have presented a careful
examination of its effect on the volume of the cur rency, the resources of the Government, and the
burden of the public debt. We should, in fact, have
expected a balance-sheet, showing exactly what
means would thus have been placed at the disposal
of the Government, and the cost at which these
means would be attained. If we examine the official documents of Congress with a view to find such
an exposition from the friends of the measure, we
shall be disappointed.  Many of the reasons assigned
had so little connection with the measures in ques tion, that they might as well have been assigned as
reasons for reenacting the fugitive slave law. Of
reasons really bearing on the measure, and of sufficient cogency to merit consideration, only two were
urged, and these two form the great foundation of
its support.  The first of them is, "That the people
want a uniform currency which will be at par every where, and which will be receivable for public as well
as private debts."
211 
212    THE NATIONAL BANKING SYSTEM.
To answer this it is only necessary to refer to the
notorious fact that the people then had, have now,
and are likely to have for years to come, just such a
currency in such inconvenient quantity that its value
has fallen to one-half. From the very nature of the
case greenbacks must be nominally at par everywhere, and of equal value everywhere, because they
are a legal tender; and they are receivable for public as well as private debts. The enormous fluctuations in their real value are indeed a most crying
evil, but the currency proposed is necessarily subject
to the same evil as long as it exists, and indeed must
exaggerate it. Thus the argument in question is
like proposing to add more water to a stream which
is inundating a city, in order that the inhabitants
may have water to drink. 
The great argument in favor of the measure was,
that it would support the public credit and create a
demand for government bonds. To this effect the
Honorable Secretary of the Treasury writes:
"The Secretary has already mentioned the support to public credit which may be expected from
the proposed associations. The importance of this
point may excuse some additional observations.
"The organizations proposed, if sanctioned by
Congress, would require within a very few years, for
deposit as security for circulation, bonds of the
United States to an amount not less than $250,oo000,000. It may well be expected, indeed, since the
circulation by uniformity in credit and value and 
TrIE NATIONAL BANING SSTEM.
THEE NATIONAL BANKING SYSTEM.       1
capacity of quick and cheap transportation will be
likely to be used more extensively than any hitherto
issued, that the demand for bonds will overpass the
limit. * * A steady market for the bonds would
thus be established, and the negotiation of them
greatly facilitated."
To this it is sufficient to reply, that it depends
altogether on the terms of demand whether it is
beneficial to the seller of an article. It is quite
possible for a tradesman to create a demand for his
wares by offering them on terms so favorable to the
purchaser that he is himself a loser by the demand.
In the case of the Governmient we want to know
not only that the Government sells the bonds, but
also want to know what privileges it sells with them,
and what it receives in exchange for bonds and privileges. What do the organizations give the Government for the bonds?   Gold?  No!   Gunpowder?a  No! Any thing of use in carrying on the
war?  No!  They give only the Government's own
notes. They simply exchange a debt which does
not bear interest for one which does. If they paid
for the bonds in gold at par, there would be some
foundation for the idea that the demand for the
bonds was beneficial to the Government; under the
actual circumstances there is none.
The Government grants the banks valuable privileges with the bonds; namely, the privilege of issuing notes to circulate as money. To appreciate
the cost of this grant to the Government, we must
213 
214      THE NATIONAL BANKING SYSTEM.
revert to what we have just shown: that the sole
advantage of an exchange of legal tender notes for
bonds is found in the consequent diminution of the
currency, thereby making room for the Government
to issue the notes. But, when the exchange is made
by a National Bank, the Government supplies the
bank with circulating notes to the amount of ninetenths the value of the bonds deposited, thus resigning nine-tenths of the sole advantage gained
from the organization!
We may now proceed to a more exact examination of the effects of the National Banking system
upon the volume of the currency and Government
indebtedness. To give the best case possible to the
supporters of the new system, we will admit that
the legal tender notes are money, that the Government must raise $300,000,000 of this money to pay
its creditors, and that national banking associations
have this entire amount all ready to pay into the
Treasury for bonds. To make the case stronger
still, suppose that the Government has no alternative but the issue of $300,000,000 of legal tender
notes, in addition to those already issued. Every
one admits that this would be a very bad way of
meeting the difficulty, so bad as to be totally unjustifiable, except in case of the most urgent necessity.
Will it be best, I ask, to have recourse to the printing-press for the requisite notes, or to accept the
offer of the National Banks?  Let us see:
There are already in circulation, we will suppose, 
THE NATIONAL BANKING SYSTEM.
$500,000,000 in legal tender notes.  Only $250,000,000 being actually needed for money, the gold
value of the notes, as money, will be fifty cents on
the dollar.  If the Government decides to obtain
the $300,000,000 required for its expenses by the
formation of banks, the process will be as follows:
The banks pay the Govermnent this amount of
money, receiving in exchange therefor five per cent.
bonds, interest payable in gold. At the same time
the Government supplies the banks with " National
currency" to the amount of $270,000,000 to circulate as money. After the Government has paid
out the'honey obtained from the banks, we shall
have the entire $500,000,000 of legal tender notes
once more in circulation, and $270,000,000 of bank
money in addition, making a total of $770,000,000.
So the effects of the measure are summed up as follows:
The principal of the public debt is increased by
$300,000,000, which has taken the form of bonds
deposited with the Treasurer of the United States.
The annual interest is increased by $15,000,000
in gold, which, with gold at 200, would be equivalent to $30,000,000 in currency.
The currency having been increased to $770,
000,000, its gold value as money remaining at $250, 000,000, each dollar as money is worth thirty-three
cents in gold; that is, it has fallen seventeen per
cent. on its par value, and thirty-four per cent. on
its real value.
215 
216    THE NATIONAL BANKIG SYSTEM.
To look at the other alternative: had the money
been obtained by a new issue of notes, the effect
would have been as follows:
The principal of the public debt would have
been increased by $300,000,000, the same as in
the other case; but this increase would have been
in the form of notes bearing no interest.
The annual interest would not have been increased at all.
The total circulation would have been increased
to $800,000,000 instead, of $770,000,000 as by the
National Bank plan.
Thus, the only effect of the National Banking
system is to increase the interest on the public debt
by $15,000,000 i  coin, in consideration of a diminution of the currency by $30,000,000; in -a word,
it is equivalent to borrowing $30,000,000 in currency at fifty per cent. interest, payable in coin!
And this as compared with the confessedly very
objectionable policy of an indefinite issue of legal
tender notes!
Hiow could such a measure ever be considered as
beneficial to the public credit?  Two reasons may
be found for this view.   One of them we  have
already referred to. The measure was8 never critically examined on its own merits. Legislators voted
for it, because it was vaguely said to be the opinion
of men qualified to judge, that the measure would
benefit the public credit. It does not seem that
any of the authorities in question, except the Hon 
THE NATIONAL BANKING SYSTEM.
orable Secretary of the Treasury, were ever called
upon to show, to the satisfaction of the Legislature,
in what way this benefit would be attained.
Again, the finlancial authorities who supported
the measure, forgot to take into account the great
change of policy necessitated by the different eircumstances in which the Government was placed
on the suspension of specie payments, and the substitution of United States notes for specie. In fact,
the reasons of the Honorable Secretary set forth in
his first annual report, made before the suspension
of specie payments, were perfectly sound. He there
depicted the evils of a circulation of government
notes, and the advantages to the government credit
of the proposed banking system.   Were the Gove,rnment really going to refrain fron an issue of
notes, and were gold to remain the only lawful
money, then the measure would have been highly
advantageous to the Government.  Remembering
that the two great operations of the system are as
follows:
1. The bank loans its capital, in lawful money,
to the Government;
2. The Government allows the bank to issue circulating notes amounting to nine-tenths of the capital thus loaned;
It will be understood that if this lawful money
is gold coin, the bank actually makes a loan to the
Government; whereas if the money is only the Government's.own notes, no such loan is made.
10
217 
218      THE NATIONAL BANKING SYSTEM.
Again, in the former case, the value of the coin
received by the Government is not sensibly depreciated by the notes which the bank is allowed to
circulate, because gold can be put to uses which the
bank notes cannot; whereas if the Government receives nothing but paper, the value of this paper is
depreciated at the very time of receiving it by the
privilege granted the bank of circulating notes.
IHad it not been for this oversight, we cannot
but suppose that it would have occurred to the supporters of the measure, that it was designed to avoid
certain evils, viz.: those flowing from a government
currency; and that after all those evils had been
accepted to their utmost extent as fixed and inevitable, the reasons in favor of the plan vanished.
If it has not been proved to the satisfaction of
every unprejudiced reader that, under the peculiar
circumstances in which we  are now placed, the
National Banking system is most deleterious to the
financial interests of the Government, let us view it
friom other stand-points, and see how every complete
examination of the financial operations involved in
it leads to the same conclusion.
The law forbids banks from using their circulating notes to increase their capital. If the effects
of the law are really beneficial, this interdiction is
much to be regretted, because it prevents the Government from reaping those benefits as rapidly as it
otherwise might. Let us see how rapidly the Government might otherwise raise money A National 
THE NATIONAL BANKING SYSTEM.
Bank is organized with a capital of, say, $100,000.
This amount it pays into the Treasury for bonds,
deposits the bonds with the Treasurer as required,
and receives $90,000 of National currency, for the
redemption of which in greenbacks it is responsible.
This currency, when properly signed, is in every
respect as valuable to the Government as legal tender notes, because it is payable by the Government
in all cases where legal tender notes are.  If, then,
the bank could loan the Government these notes as
an increase of capital, it would confer the same
benefit that would be conferred by a new bank
with $90,000 capital.   The Government would
then allow the bank to issue $81,000 of fresh notes,
which the bank would again loan the Government. This process might be continued until the
Government had received $900,000 from the bank,
viz.: $100,000 in lawful money, and $800,000
in bank currency, which it can pay out to public
creditors. Every thing will then be the same as if
the bank had been originally chartered with a capital of $900,000. The notes will be equally secure,
because bonds to the amount of $889,000 are deposited as security for their redemption. Then why
is it that this operation was interdicted? It is quite
plain that in the case supposed the stockholders, by
an actual expenditure of only $100,000, would draw
interest in coin on $989,000 just as long as their
notes remained in circulation; that is, as long as
they were redeemable in paper no more valuable
219 
220     THE NATIONAL BANNING SYSTEIM.
than themselves.  We may presume that it was not
considered desirable to allow the banks to support
the public credit in a way so highly advantageous
to themselves.
Now, I ask, would this operation have benefited
the Government, and supported the public credit?
If it would not, neither would the formation of any
number of National banks, for we have shown that
the Government is benefited in the same way, and
to the same degree, in either case. If it would,
patriotism has been prevented from reaping a rich
reward by the injudicious prohibition.
To view the system from yet another point:
every National Bank note in circulation may be
considered as representing a bond deposited with
the Treasurer of the United States.  The note is,
indirectly, a Government debt: the bank owes the
holder of the note; the Government owes the bank.
The Government pays interest on the debt, not to
the holder of the note, but to the bank. But the
holder can present his note at the Treasury, and
receive an interest-bearing Government bond in exchange therefor, although the Government is already
paying interest on the debt represented by the
note!
Can we not apply to this last operation the objections of the Honorable Secretary to receiving the
notes of State banks in suspension in payment for
loans?  " Loans negotiated in this circulation," he
says, "would be simply exchanges of the debts of 
THE NATIONAL BANKING SYSTEM.
the nation, bearing interest, and certain to be paid,
for the debts of a multitude of corporations bearing
no interest, and certain, in part, never to be paid."
Of loans by the Government of National currency
we may say with equal force, that they are exchanges of the debts of the nation bearing interest
for the debts of corporations bearing no interest,
whose only security is found in the- guarantee of the
Government itself.
The National banks are also supported on the
ground that they are fiscal agents of the Government. Considering that their principal business as
fiscal agents is to stimulate and facilitate the conversion of notes into bonds bearing fifteen per cent.
interest on the value which the Government gets
in exchange for them, it may well be doubted
whether the Government can afford to pay $40, 000,000 a year for their services.  If they could
make beef and clothing, shot and shell, for the army,
they would be of some benefit as agents; as things
actually are, they are of none.
The only banks which really negotiated a loan
for the Government since the beginning of the war,
were the old State banks.   They secured the pay ment into the Treasury of about $141,000,000 in
coin during the year 1861. Again, at the end of
1862, when the Government needed coin to pay
the debt of 1842, the same banks came forward tand
loaned the gold at four per cent. interest. Since
221 
222     THE NATIONAL BANKING SYSTEM.
that time the Government has never attempted to
borrow coin on any terms.
In conclusion, although the National banks are
most excellent investments for the stockholders if
every thing goes on smoothly, they are productive
of nothing but mischief to the finances of the Governrent.  But this mischief is of a different character from that of the legal tender notes.  In issuing the latter we did indeed purchase a temporary
relief, though at the expense of evils which will be
felt for a generation to come.  In the National
Banking system we pay enormously for what is an
unmitigated evil from the very beginning, with no
benefit of any kind to counterbalance it. But this
evil is not of the incurable character of the other.
It will be practically removed whenever we make
the banks pay the same price for the privilege of
expanding the circulation which the Government is
obliged to pay for contracting it.
THE END. 
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