Questions • of-th«- fcM/ THE Silver Situation IN THE United S^ate i illl limw m o alifornia rional ility Taussig QUESTIONS OF THE DAY. IT (The numbers omitted represent Monographs no longer in print.) 3 — Our Merchant Marine. By David A. Wells. Octavo, cloth i oo 5 & 6 — The American Citizen's Manual. Edited by Worthington C. Ford. Part I. — Governments (National, State, and Local), the Electorate, and the Civil Service. Part II. — The Functions of Gov- ernment. Two vols, in one. Cloth . . . . I 25 9 — The Destructive Influence of the Tariff upon Manufacture and Commerce, and the Figures and Facts Relating Thereto. By J. Schoenhof. Octavo, cloth, 75 cents ; paper . . 40 10 — Of Work and Wealth. By R. R. Bowker. Octavo, cloth, 75 13 — Public Relief and Private Charity. By Josephine Shaw Lowell. Octavo, cloth, 75 cents ; paper . . . . . . 40 14 — " The Jukes." A Study in Crime, Pauperism, Disease, and Heredity. By R. L. Dugdale. Octavo, cloth,, 1 00 16 — The True Issue. By E. J. 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Dabney, Octavo ........... 1 25 61 — Railway Secrecy and Trusts; Its Relation to Inter-State Legisla- tion. By John M. Bonham. Octavo 1 00 62 — American Farms : Their Condition and Future. By J. R. Elliott. Octavo ........... I 25 RUVfiKSm' OF CALMWHNIA LOS AMOJHJ9S The Silver Situation IN THE United States F. W. TAUSSIG, LL.B., PH.D. PROFESSOR OF POLITICAL ECONOMY IN HARVARD UNIVERSITY, AUTHOk OF "THE TARIFF HISTORY OF THE UNITED STATES " SECOND EDITION, REVISED AND ENLARGED G. P. PUTNAM'S SONS NEW YORK LONDON 27 WEST TWENTY-THIRD STREET 24 BEDFORD STREET, STRAND &\t ^nicktrbotkcr |)kss 1896 COPYRIGHT, 1893 BY F. W. TAUSSIG Electrotyped, Printed, and Bound by TSbe ftnicfeerbochec press, mew ]£>orft G P. Putnam's Sons NOTE. This paper was originally published in January, 1892, by the American Economic Association, as No. 1 of Volume VII. of its Publications. The limited number of copies printed by the Association having been exhausted, it is now offered to the public in a second and revised edition. In the revision the passages relating to the act of 1890 have been almost entirely re-written, chiefly with a view to giving an account of the instructive events of the year 1892. In its present shape, the historical account is carried to the close of that year. F. W. TAUSSIG. Cambridge, Mass., January, iSgj. 2003425 NOTE TO THE THIRD EDITION. The present edition has been enlarged by adding a postscript which describes the course of events from 1893 to 1896; the rest of the book, with the exception of a page or two at the close, being left as it was published in 1893. No one is more sensible than I am of the defects of this little volume, and especially of the need of a larger and fuller consideration of the general bime- tallic question than is given in Part II. But I am still disposed to maintain the general views set forth in Part II., even though further discussion is needed on some points, and modification on others. A con- tinuous demand for the book indicates that it serves some useful purpose, and emboldens me to offer it again to the public in its present enlarged form. F. W. TAUSSIG. Harvard University, Cambridge, Mass., July, 1S96. CONTENTS. PAGE PART I.— THE ECONOMIC SITUATION. I.— The Act of 1878. Provisions of the Act 2 Silver Certificates 4 Causes of the Act 5 Wherein Peculiar 6 Expected Effects 8 II.— The Silver Circulation. Position of the Eastern Banks II Explanation of the Chart 13 Regular Autumnal Increase of Silver Cir- culation 14 Limited Circulation for the Dollar Coins. . . 15 Four Periods in the History 17 III. — 1878-1884. First Coinage and Circulation 18 Large Certificates Return to the Treasury. . . 18 Upward Movement in i879-'8i 19 Treasury Offer to Carry Silver West Free.. 20 Prosperous Conditions of this Time 22 Consequent Increase of Silver Circulation. . 24 IV.— 1885-1886. Crisis of May, 1884 25 Silver Circulation Ceases to Grow 26 Explanation of this 26 Treasury Gold Receipts and Holdings Shrink 27 Policy of the Treasury 28 Effort to Get out Silver Dollars 29 Redemption of Public Debt Ceases 30 Hoarding of Silver 31 vii Vlii CONTENTS. PACE Made Possible by Surplus 32 Banks Lend Gold to the Treasury 32 Suspension of Gold Payments Feared 33 Position of the Greenbacks 34 The Gold Reserve of 100 Millions 35 Embarrassment Ceases in 1885 37 V.— 1886-1S90. Decline in the Bank-Note Circulation 38 In what Way it Takes Place 39 Small Denominations of Silver Certificates Authorized in 18S6 41 Revival of Business, 1886 42 Growth of Money in Circulation, 1878-92. . 43 Rate of Growth and Annual Increment. ... 46 How much Additional Money the Growth of the Country Calls for 47 VI. — The Act of 1890. Provisions of the Act 49 Effect of the Price of Silver 50 Amount of the New Issues 52 Decline of the Gold Reserve, 1890-92 55 Customs Gold Receipts Shrink 56 Use of the New Notes in Clearing-house Transactions 59 Denominations of the Notes 61 Crisis of 1890 and its Effects 63 Redundancy of Currency in 1891 65 Exports of Specie 66 Efforts of the Treasury to Get Gold 60 Heavy Crops and Exports of the Fall of 1891 67 Renewed Redundancy of Currency in 1892. 69 VII. — General Conclusions. Silver Issues have Followed, and not Caused , Rising Prices 72 Bearing of this Fart on the Theory of Prices 73 Effects of Bank Deposits 74 CONTENTS. IX PAGB Analogy of Silver Currency to Subsidiary Coins 75 Silver Issues under Act of 1878 not Exces- sive 77 What would have Happened, if No Silver. . 78 VIII. — The Probable Future — Free Coinage. Bank-Notes will Shrink for a Few Years more 79 Possible Effects of the Use of New Notes in Bank Reserves 79 The Issues of 1890 probably Excessive 81 A Gold Premium eventually Probable 81 How a Gold Premium maybe Reached. ... 83 No Contraction from a Gold Premium 84 Amount of Gold in the Country 85 Possible Effects on Credit 87 The Financial Position of the Treasury Important 87 The Sale of Bonds to Maintain Gold Pay- ments 88 A Permanent Break-down can Come only from a Foreign Drain of Gold 88 Eventual Rise of Prices under Silver Standard 90 Probable Effects of Free Coinage 91 Early Break-down of Gold Payments 92 Slower Effect on Prices 93 PART II.— THE ARGUMENT FOR SILVER. I. — The Bimetallist Argument. The Argument from Falling Prices 96 The Burden of Debts Increased 97 Depression of Industry Alleged 99 Is the Silver Dollar Dishonest ? 101 Extent of the Fall in Prices 102 II. — The Effects ok Improvements in Pro- duction. The Fall in Prices at First Denied 104 Then Ascribed to Improvements 105 CONTENTS. PAGE The Appreciation of Gold not so Disproved 106 Real Bearing of Improvements 1 07 Inverse Movement of Wages and Prices .. . 108 Case Different from that of a Simple Fall in Prices iog Improvements and Depression lie III. — The Case of the Farmer. Improvements Affect Agriculture differently from Manufactures 113 Effects of Agricultural Improvements 114 Causes of Agricultural Depression 116 Transition in Agricultural Methods 118 IV. — Silver and Gold as Standards of Value. Negative Reasons against Use of Silver. . . . 120 Positive Reasons. The Effect on Creditors 121 The Increased Production of Silver 122 Difference between Gold in 1850 and Sil- ver now 123 Gold a Satisfactory Standard of Value. ... 124 A Multiple Standard not Needed 125 The Morale of Silver Agitation 126 V. — The Expansion of the Currency. The Growth of the Currency 128 Increase of Bank Deposits 129 Sufficient Gold for Bank Reserves 130 How to Secure Growth of Large Change. .. 131 POSTSCRIPT. Depression in the Latter Part of 1S92. . . . . 134 Outflow of Gold 134 Drain of Gold Falls on the Treasury 134 Decline of Gold Reserve 135 Crisis of 1893. 136 How far Due to Silver Situation 137 Repeal of Act of 1890 139 Transformation of some Treasury Notes into Silver Certificates. . . 140 CONTENTS. xi i to e The Treasury during and after the Crisis. 142 Redundancy of the Currency 143 National-C^nk Circulation Rises somewhat, 145 Experts of Cold , 146 Deficit in the Revenue. . . 147 Embarrassing Position of the Treasury. . . . 147 Domestic Withdrawals of Gold ... . 149 Bond Sales 150 Accumiua*:on of Legal Tenders in the Treasury, 152 The Siirifyjion Unbearable ,. . 153 The Qu: :.io- c' a Silver Basis must be Seta;;. - , , , 154 THE SILVER SITUATION IN THE UNITED STATES. PART I. THE ECONOMIC SITUATION. I. The Act of 1878. A discussion of the silver situation in the United States divides itself naturally into two parts. On the one hand, we have the purely economic aspects of the problem, — the working of the silver legislation, its history, the results that have flowed from it in the past or may be expected in the future. On the other hand, we have the intricate and difficult ques- tions of policy involved, — the right and wrong of the legislation, the evils or benefits that have ensued and may be expected, the best course to be followed in view of all the emergencies of the situation ; the treatment of the problem not only from the eco- nomic, but from the wider social and political point of 2 THE ECONOMIC SITUATION. view. Here, as in almost every subject which the economist has occasion to examine, it is advantageous to distinguish between these two classes of considera- tions. Accordingly, the present monograph will discuss them separately, undertaking first an exam- ination of the economic phenomena, and proceeding thence to a discussion of the questions of policy. The economic discussion may begin with an ac- count of the act of 1878, familiarly known as the Bland Bill. Although the silver dollar of which the coinage was resumed in 1878 dates back as a coin to the earlier days of the Republic, its reissue in that year marks a policy so radically new that the ex- perience of previous years throws practically no light on its working. The act of 1878 ' provided for the purchase by the government, each month, of not less than two million dollars' worth, and not more than four million dollars' worth, of silver bullion, for coin- age into silver dollars at the rate of 41 2\ grains of standard silver (or 37 \\ grains of fine silver) for each dollar. The amount of the purchases, within the specified limits, was left to the discretion of the Sec- retary of the Treasury. As every Secretary of the Treasury, throughout the period in which the act was in force, kept to the minimum amount, the practical result was a monthly purchase of two million dollars' worth of silver bullion. 1 On the general history, up to and including the act of 1878, the reader should consult Professor J. L. Laughlin's History of Bimetal- lism in the United States (New York, 1885). The text of the act is conveniently found in Dunbar's Laws of the United States Relating to Currency, Finance, and Banking, p. 246. THE ACT OF 1878. 3 The act is sometimes described as having called for a monthly issue of two million silver dollars ; but this was not the exact situation. The amount of silver obtainable with two million dollars obviously varies according to the price of the metal in terms of the dollars with which the purchases are made. In February, 1878, when the first purchases were made, those dollars were the inconvertible United States notes, or greenbacks, worth something less than their face in gold. The amount of silver bullion obtain- able with two million such dollars depended, on the one hand, on the price of silver bullion in terms of gold, and on the other hand on the value of the dollars themselves in terms of gold. When specie payments were resumed, on the first of January, 1879, an d the greenbacks became redeemable in gold, the measure of value in the United States became gold, and the extent of the coinage of silver dollars under the act of 1878 became simply a question of how much silver bullion could be bought with two million dollars of gold. The price of silver in 1878 was, in terms of gold, not far from a dollar for an ounce of standard silver. After 1878 it went down almost steadily, and at its lowest, toward the close of the period during which the act of 1878 was in force, was barely above 80 cents an ounce. 1 The silver dollar of 412^ grains contains less than an ounce (480 grains) of standard silver. The monthly purchase of two million dollars' worth of silver there- 1 I have stated the price here, for simplicity, in terms of so much per ounce of standard silver,/, e., silver containing 10 per cent, of alloy. The usual quotation in the United States is per ounce of fine silver. 4 THE ECONOMIC SITUATION. fore yielded more than two million silver dollars, the amount being obviously greater as the price of silver went lower. On the average, the monthly yield was not far from two and a half millions of silver dollars. So much each month, therefore, or thirty millions of silver dollars a year, was roughly the addition to the currency of the community from the act of 1878. An important provision of the act of 1878 was that authorizing the issue of silver certificates against the deposit of silver dollars. This authority was limited at the time to certificates in denominations only of ten dollars and upward : a restriction which, as we shall see, proved to be of great importance. At the time it does not seem to have been expected that the silver certificates would enter directly into the circulating medium ; we may infer from the restriction to large denominations that no such ex- pectation was entertained. But in fact it has been chiefly in the form of certificates that the silver has entered into circulation. These certificates, it is true, arc not, like the dollars themselves, a legal tender ; but they are receivable for all public dues, customs included, and they pass from hand to hand at least as readily as the bulky pieces which they represent. The government pays them out directly, retaining an equal amount of silver dollars in its vaults, and treating these as a special deposit by the holders of the certificates. The quantity of actual coined dollars which the community would use reached an early and stubborn limit ; but in the form of certificates, much wider play was given to their use. The dollars and certificates between them con- THE ACT OF 1878. 5 stitute what we may call the silver currency of the act of 1878. The passage of that act was due to causes easily described. It was part of the opposition to the contraction of the currency and the resumption of specie payments, which forms the most important episode of our financial history between 1867 and 1879. The resumption of specie payments had been provided for by the act of 1875, and was to take place on January I, 1879. I" t ne meanwhile, the long- continued depression which followed the crisis of 1873 intensified the demand for more money and higher prices. That demand led to the inflation bill passed by both Houses of Congress in 1874, and killed by the veto of President Grant. The same feeling led to the silver act. The great fall in the price of silver, beginning in 1873, and showing itself markedly in 1876, made silver, at the old ratio, a cheaper currency than gold, and so caused the opponents of the return to specie payments to prefer silver to gold, as they preferred paper to either. No doubt some additional force was given to the move- ment in favor of the use of silver from the desire of the silver-mining States and their representatives, that the price of the metal should be kept up through a larger use of it for coinage. But this element, while sometimes prominent in the agitation, was not then, as it has not been in more recent years, of any great importance by itself. The real strength of the agitation for the wider use of silver as money comes from the conviction of large masses of the people that the community has not enough money : 6 THE ECONOMIC SITUATION. a conviction which may be fostered by the selfish interests of mine owners, and doubtless has often been based on arguments ludicrously fallacious, but which rests, nevertheless, on a foundation not entirely selfish, and has some support from economic reason- ing that deserves candid and attentive discussion. Although the specific measure passed in 1878 thus rested on a long train of historical causes, it con- tained details that were essentially new, not only in our own experience, but in that of the world at large. It provided for the injection into the cur- rency of a large annual increment of overvalued coin. It did not establish bimetallism proper ; for the coinage of silver was not free, but was under- taken by the government on its own account, the Treasury reaping the profit which would accrue so long as the coins Were kept at a higher value than that of the bullion put into them. It did not estab- lish anything like a subsidiary coinage ; for the new coins were legal tender to an unlimited amount, and no attempt was made to adjust their quantity to the needs of the community for the convenience of small change. It simply provided for a regular mechanical addition of large amount to the general circulating medium. No precise experiment of this kind had ever before been tried. It is true that Germany and the countries of the Latin Union possess, in their circulating medium, large quantities of overvalued thalers and five-franc pieces which are exactly like our silver dollars. They also are legal tender with- out limit; their total quantity is limited; and it is only by this limitation of the quantity that their THE ACT OF 1878. 7 value is kept above that of the bullion contained in them. But the thalers and francs in these countries are not new additions to the currency. They are remnants from an earlier period, when Germany had a silver standard, and the Latin Union a complete bimetallic standard. No addition whatever to the thalers is made in Germany ; and if some coinage of five-franc pieces takes place in France and in other countries of the Latin Union, the additions are meant merely to fill the place of abraded coins, to provide for the ordinary losses from daily use, and to make any additions to the supply which may be needed for convenience in making small change. No other country has ever entered on an addition of overvalued coin to its circulating medium having the object and extent of that made by our silver act of 1878. This characteristic of the measure, it need hardly be said, was the result not of any deliberate intention to try a new experiment, but of the spirit of compromise which explains so many anomalies in the legislation of democratic communities. The silver act, as passed by the House of Representatives, provided for complete bimetallism, — for the free and unlimited coinage of the silver dollar at the old ratio of 16 to 1. In the Senate, it was amended by the substitution of the provisions for a limited coinage, which were finally enacted. The compromise was meant to satisfy both those who objected to the cheaper standard and those who wanted more money ; and it afforded a welcome escape to the legislators who were trying to satisfy all parties. At the time, no one probably expected that the meas- 8 THE ECONOMIC SITUATION. ure would remain in force for any great length of time. The conservative element hoped that it would be repealed after a short trial ; the inflationists (for by that name they might, then at least, fairly be called) believed that it would soon be superseded by the free and unlimited coinage of silver. As it hap- pened, the act remained in force, unamended, and indeed without very serious attempt at amendment, for over twelve years ; and the measure which suc- ceeded it in 1890, though different in many details, followed the same method of forcing a large regular injection of money into the circulating medium, based on silver purchases by the government. On the general principles which are expounded in standard books on political economy, the effects of this novel experiment were not difficult to predict. Each new dose of silver money would push out, — after the resumption of specie payments had taken place, — an equivalent amount of gold. This process would continue until all the gold in circulation had disappeared. So long as any gold money was left in the country, gold and silver would circulate side by side, and the silver dollars would be equal in value to the gold dollars. After the gold had disappeared, silver alone would be the basis of the monetary sys- tem. Prices would accommodate themselves to the new measure of value, and would become somewhat higher than they had been under the gold standard. If thereafter the government still continued to coin and issue the annual increment of si)-, er, the effect would be simply a corresponding outflow of gold from the country. THE ACT OF 1 878. 9 Something of this sort was probably expected at the time by most persons familiar with economic reasoning ; and such doubtless would have been the working of the measure if no complicating forces had intervened, and if the effects of an increased issue of money had proved to work themselves out with that mechanical simplicity which is assumed in the usual statements of the theory of money and of prices. But neither of these conditions has been fulfilled. Complicating forces have, in fact, inter- vened. There have been changes in other parts of the circulating medium, and great changes in the general economic conditions of the community, which must necessarily have modified to a great extent the expected effects, even if the second assumption, of mechanical simplicity in operation, had held good. But this second assumption also has proved to need important correction. Our experience under the act of 1878 has shown that, in this class of economic phenomena as in others, the working of the economic forces is far from simple. The clear- cut fundamental doctrines, while they remain true at bottom, and while they are confirmed by experience in the long run, need correction and qualification such as experience alone can supply. For this reason, the actual working of the act of 1878, and, it may be added at once, that of the act of 1890, are of interest not only as a matter of present political importance, but as a lesson of permanent instruc- tion for the economist. The sort of corrections of accepted doctrines which are supplied by our expe- rience will be explained in detail in due time; but it IO THE ECONOMIC SITUATION. may not be amiss to state at the outset that the modifications by no means destroy the validity of the accepted conclusions. They rather supplement them, and show with what variations they apply under new conditions. The general theory of money, as worked out by Ricardo, and expounded on his lines by every writer of note since his time, remains intact ; but something is added to it, and, more par- ticularly, the need of care and discretion in making predictions based on it is illustrated to perfection. II. The Silver Circulation. So much by way of preface. Turning now to the actual working of the act of 1878, the first fact to be noted is the attitude of the banks to the silver cur- rency, which was and is a factor of prime impor- tance. From the outset, the banks, especially in the large cities of the East, fought shy of the silver money. They were unwilling to use large quantities of it, and still more unwilling to allow large quanti- ties to accumulate on their hands. This disposi- tion no doubt may be ascribed in part to their close connection with the creditor class, to whom a lower- ing of the standard of value must be objectionable. But in good part it is due to causes of a different sort. The desire for a steady and unvarying basis for credit transactions results naturally from the conditions of the banker's business ; and all trans- actions connected with foreign trade must of neces- sity rest on a gold basis. Not least important is the simple public-spirited preference for gold as the better standard of value in the interests of the community at large — a preference, to be sure, which rests on tradition quite as much as on a clear weighing of the merits of the case. At all events, in November, 1878, shortly after the passage of the 12 THE ECONOMIC SITUATION. silver act, and immediately before the resumption of specie payments, the banks of the New York clear- ing-house adopted a rule prohibiting " the payment of balances [i. e., between banks at the clearing- house] in silver certificates or silver dollars, except as subsidiary coin in small sums (say under ten dol- lars)." ' In 1882, Congress tried to break up the practice so established by inserting in an act of that year, for extending the corporate existence of national banks, a proviso that no national bank should be a member of a clearing-house at which silver certificates were not receivable in payment of balances. The rule of November, 1878, was there- fore dropped by the New York banks. But their practice remained unaltered. Congress can compel a national bank to receive silver certificates, but cannot compel it to offer them. The banks by tacit consent refused to make the tender. In fact, the silver currency was not allowed to enter into trans- actions between banks. The banks did not " boycott " the silver currency, as it has sometimes been put. They received it on deposit, and accepted it in tender of debts when 1 These rules are printed in the Comptroller's report, in Report on the Finances for 1878, p. 169. It is there stated that the Boston banks adopted the same rules ; but the practice of the Boston banks did not become settled until after the events of 1885, to which refer- ence is made below at p. 29. The usage of the banks in the West varies from that of the Eastern banks. Philadelphia follows the example of New York and Boston in the refusal to use silver currency. But in Chicago, St. Louis, Kansas City, and Denver, silver certificates, and bank notes as well, pass between banks as freely as any form of currency, though in fact no large amounts are used. THE SILVER CIRCULATION. 1 3 offered. But they endeavored to hold as little of it as possible. They paid it out first from the cash flowing through their hands, and still so pay it out. If the silver dollars or certificates which accumulated on their hands were not carried off by the calls for cash from persons presenting checks, the excess was got rid of in another way. Both silver dollars and certificates are receivable for all public dues, customs included ; and when they began to accumulate in the banks, they were turned over to the Treasury, chiefly through the hands of importers and custom-house brokers who had payments to make for customs dues. The signal importance of this attitude of the banks will soon appear. The history of the working of the silver currency is most easily followed on the chart appended to this paper, which is continued as nearly as may be to the present time, and therefore bears on the act of 1890 as well as on that of 1878. The part of the chart to which the reader's attention is chiefly called is the dotted line, which begins at the bottom on the left hand, and ascends irregularly but steadily upward athwart the page. It indicates the amount of silver currency (dollars and certificates added together) actually in circulation from month to month. Above it runs an unbroken line, almost straight, which soars up the page without a break, and indicates the total coinage under the act of 1878. After July, 1890, this straight line stands for the issues under the act of 1890, which will be described in their place in the pages to follow. It will be noticed that the rate of increase is markedly greater in 1890, in conse- 14 THE ECONOMIC SITUATION. quence of the legislation of that year. Still another important line is the broken one which runs across these two, and represents the net amount of gold held by the United States Treasury. The fluctua- tions which it indicates are marked, and some of them — especially for 1884-85 and 1890-91 — are of much significance. Of least importance, though of interest as a matter of curiosity, is the lowest line, of asterisks, which represents the amount of actual silver dollars in the hands of the public. Certain preliminary points suggested by this chart may be disposed of, before proceeding to the more important general features which it indicates. Look- ing at the line which represents the amount of silver currency in actual circulation, we observe a very distinct increase in the outgo or circulation of silver in the latter half of each year. That increase shows itself regularly, even in years like 1885, when the general movement was strongly toward a reduction in the volume outstanding. In the first half of each year, on the other hand, there is either a decline or a distinct retardation of the rate of increase. These regular fluctuations are clearly due to what is called " moving the crops," — the flow of currency to the West and South, to effect of exchanges which accu- mulate at the time when the staple agricultural products pass from the hands of the farmers and planters. The steadiness of this particular phenom- enon, maintaining itself throughout the irregularities of the general movement, points to a conclusion of which ample confirmation will be found in other directions : that the outgo of silver money into circu- THE SILVER CIRCULATION. I 5 lation has by no means proceeded with that regular- ity which the legislature expected and intended, but has been very greatly affected by circumstances beyond legislative control. Another point, of some interest though of no great importance, is the circulation of the actual coined dollars, which is represented by the lowest line of the chart. In one respect, their circulation follows those fluctuations which have just been noted in the silver currency as a whole. The volume almost invariably increases at the close of each year, and as regularly decreases at the beginning of the year. Apart from these periodic changes, there is a general slow increase until 1886, and thereafter the amount outstanding remains practically stationary. There seems to be room for about sixty millions of the dollars, and for no more. The government has made every effort to get the dollar coins out of its hands. Congress has annually appropriated a sum to enable the Treasury Depart- ment to ship them, free of expense, to all applicants in any part of the United States. The premium so offered to persons who have occasion to use money in small denominations, and especially to employers having large pay-rolls, has sometimes led to consid- erable call for them. But the great bulk of the coins thus got out of the Treasury return to it almost at once. The employees, to whom they are paid, get rid of them as fast as they make purchases; the shopkeepers, in whose tills they accumulate, finding their customers averse to taking them in change, turn them into the banks on deposit ; and the banks l6 THE ECONOMIC SITUATION. finally turn them into the nearest sub-treasury in payment of public dues. The round-trip from Treasury back to Treasury is easily made, in some districts, in the course of a single week. The degree of favor which they meet of course affects this movement, and varies in different parts of the coun- try, apparently reflecting in a curious way the popular feeling as to the desirability of having silver currency at all. They circulate very little east of the Alleghanies, but are used more freely and perma- nently in the Mississippi valley. Among the negroes of the South the big pieces are said to be favorites, and find a permanent lodgment. Their greatest circulation, as we have seen, was reached in 1886; after that time the change in the denominations of silver certificates, to be discussed later, caused a decline in the amount used. 1 We may now return to the movements of the silver currency as a whole, indicated by the irregular dotted line of the chart. Between that line and the unbroken regular line above it, indicating the maxi- mum issue authorized, there is a gap representing what we may call the dead silver. The gap stands for the dollars coined (or, after 1890, for the ounces of silver purchased), which lie in the Treasury, but are not injected in any form into the circulating medium. As a glance at the chart shows, it is very variable. It was greatest in 1885 and 1886, the 1 The practice of paying express charges on shipments of silver dollars has ceased to be of importance since 18SC, when the issue of silver certificates in small denominations was authorized. After that date, as will be presently explained, there was no occasion for stimu- lating the circulation of dollars rather than of certificates. THE SILVER CIRCULATION. 1 7 maximum being reached in July of the latter year, when the dead silver was no less than ninety-four million of dollars. It was least in 1881, and again in the last few months of 1889. The variations show the greater or less success with which the silver currency made its way into the working money of the country. By them we may divide its history into four periods. The first runs from 1878 to 1884 a period on the whole of ready circulation. Then comes a break, in 1885 and 1886, when the silver currency contracted, and the dead silver accumulated in the Treasury, — much the most interesting and instructive of the three stages. The third period begins in 1886, when the volume in circulation ex- pands, and gains rapidly on the total coinage, caus- ing a steady decline in the amount of dead silver Finally, with the act of July, 1890, the whole silver question enters on a new phase, which can best be discussed by itself. These four periods I shall take up in succession. III. 1 878- 1 884. The first silver dollars were coined in March, 1878, and in the course of that month 190,000 of them went into circulation, while 810,000 remained in the Treasury. Something like this proportion was main- tained through 1878 and the first half of 1879: not more than one fifth of the coins made their way into the hands of the public. Silver certificates practi- cally did not make their way into circulation at all. The history of the certificates at this time is curious and significant. When the first purchases of bullion were made, in the course of 1878, checks in payment were drawn by the Director of the Mint, payable in silver dollars. The purchases were made chiefly at San Francisco. There the payees drew, instead of silver dollars, silver certificates of large denominations. These were sent at once to New York ; and within ten days from the day of issue they found their way into the Treasury through the New York custom-house. Had the revenues col- lected by the government in San Francisco been larger, they would probably have been turned in at that port within forty-eight hours.' The rapidity 1 See the Report of the Treasurer in the Finance Report for 1879, p. 350. Up to June, 1879, there had been issued .$7,843,o(xj of cer- tificates of denominations of $1,000, of which $6,683,000 had been redeemed. 18 1 878-1 884. 19 with which they came back at first nonplussed the officers of the Treasury. It was some time before they learned how impossible it was to get the certi- ficates of large denominations into circulation : a result, however, which followed inevitably from the unwillingness of the banks, who alone can con- veniently use the large certificates, to hold them or use them. It was certain from the start that the only form in which the silver currency of 1878 could get into permanent circulation was in the denominations which serve for every day retail transactions. In the first year no special effort seems to have been made by the Treasury to get out the certificates of the smaller denominations permitted by law. Conse- quently the dead silver accumulated rapidly. At the end of June, 1879, out of a total coinage of thirty-six millions, the Treasury held in its vaults, unrepresented by certificates in circulation, no less than twenty-eight millions. These twenty-eight mil- lions represented so much revenue paid out by the government for the purchase of silver which was simply stored away in its vaults. As the revenue then greatly exceeded the expenditure, the process caused no financial embarrassment ; but clearly it was one which could not go on indefinitely. This phase, however, did not last long, nor was it characteristic of the general movement during the first of the three periods. About the middle of 1879 a slight upward movement began, both in the circu- lation of dollars and of certificates. Towards the end of 1880, as the chart indicates, this movement attained laree dimensions. The amount of silver 20 THE ECONOMIC SITUATION. certificates in circulation increased with a bound, rising from less than eight millions in August to more than thirty-six millions in December, and leav- ing only a narrow margin of dead silver in the Treasury. In the first half of 1881 there was a check to the increase ; but in the second half of that year the upward movement was resumed. By the end of December, 1881, the silver certificates in the hands of the public amounted to over sixty-two millions, and the circulation of dollars and certificates com- bined was within seven millions of the total amount coined. Some explanation of this sudden and extraordinary change is to be found in a new measure adopted by the Treasury Department for the purpose of pushing the silver into circulation. In September, 1880, the Treasury issued a circular by which, in exchange for deposits of gold coin with the assistant Treasurer in New York, drafts were offered on the sub-treasuries in the South and West, payable in silver certificates. In other words, the Treasury undertook to save the expense of the transportation of cash to all persons who had occasion to remit to the South and West. The bait took : large amounts of certificates were paid out, in exchange for deposits in New York, by sub-treasuries at New Orleans, St. Louis, Chicago, and Cincinnati, 1 The payments, as we might expect, were almost entirely in certificates of the two 1 See the Report of the Treasurer for 1SS1, in the Report on the Fi- nances, p. 430. Between October 15, 1882, and March 2, 1883, this practice was suspended, and it was finally discontinued in January, 1885. By far the largest part of the silver certificates issued under it were paid out by the sub-treasuries of St. Louis and New Orleans, — a clear indication ofthe region from which the demand for money came. 1 878- 1 884. 21 smallest denominations then allowed by law, — for ten and twenty dollars. 1 It is obvious that a device such as the Treasury resorted to in 1880 would have had no effect on the movement of the silver currency out of the public vaults, if the demand for cash to be shipped west- ward had not caused exchange in New York on the West to be at a premium. The conditions of the time led to such a demand, and it was inevitable that there should be in some form or other a west- ward movement of cash. Had there been no silver currency, there would certainly have been an inflow of gold from abroad even greater than in fact took place. It is not necessary to do more than recall to the reader's mind the salient events of these unusual years, which concurred so luckily to assure the success of the resumption of specie payments, and to make possible the absorption of the silver 1 The denominations of the silver certificates outstanding at the close of the fiscal year 1882 are given below. I have added figures for 1886, by way of illustrating the form in which the silver currency went into circulation at the period here under consideration. Silver certificates. 1882. 1886. 29.2 25.0 3-3 4.0 '•7 2.9 S°- 3 45.0 7-4 96 1 8 1.9 It must be remembered that " outstanding" here means issued by the Treasury, and includes certificates held by the Treasury against itself ; and the chances are that, even of the small amounts of large certificates, a good part was held by the Treasury in its cash. Com- pare the footnote to p. 43 below. 22 THE ECONOMIC SITUATION. currency. The crops of 1878 to 1882 were abundant, even after making allowance for the comparatively lean year 1881 ; the crops in Europe were meagre; our exports suddenly swelled, and attained in the fiscal year 188 1 a volume which was not again reached until 1891-92, when similar conditions resulted in even heavier exports. Large quantities of gold flowed in during the fiscal years 1880 and 1881. The long- period of depression which began with the crisis of 1872 was likely to have been followed in any case by a renewal of activity ; the sudden turn in foreign trade contributed not a little to stimulate the general re- vival. In all directions new operations were begun, and old ones pushed on a larger scale. The building of railroads and the production of iron, both supposed to be barometers of trade, advanced with extraordL nary steps. Most significant of all, bank loans * and 1 For convenient reference, some significant figures as to bank oper- ations are here given for the whole period from 1878 to 1889. The figures (except for the last column) indicate millions. Oct. 1, 18 1879. 1884. 1885. 1886. 1887. 1888. Total deposit* in all nationa banks. 679 769 968 1,112 1,119 1,168 1,099 1,248 1,301 1,388 1.543 1,655 Total specie and lawful money held. 127.7 138. 1 172.5 172.6 1748 188.4 219.8 263S 225.1 245 o 268 2 263.0 Reserve held by banks of N :w York. 5°-9 S3 I 7° 6 62 5 64 4 70 8 90 8 115 7 77 No 1 q6 4 84 9 Proportion of reserve to deposits in New York, 26.8* 25-3 26.4 23-3 25-4 26.5 35-6 37-o 27.2 28.2 28.2 25.1 The reader will note the rise in deposits, and the stationary reserve, in 1880-84. The slackening of the growth of deposits in 1884-85 and the marked accumulation of cash at that time will be considered later, when we come to the second phase of the silver situation. 1878-1884. 23 deposits swelled rapidly ; the reserve of lawful money after 1880 remained nearly stationary ; the national bank circulation rose, and reached its highest point in the latter part of 1882. All this activity meant a greater use of money in paying wages, in the retail transactions of every-day life, in " moving the crops." The rapid growth of population, especially in the West and South, would have in any case brought about a greater demand for what we may call large change. The conditions under which national bank notes could be issued were already becoming so unpromising that no consider- able increase in their quantity could take place ; and the silver currency consequently found a ready and permanent circulation. The Treasurer of the United States, in his report for 1881, thought himself justified in saying that their issue " averted what might have proved to be a serious public inconvenience." No doubt the absence of any increase in the currency would have been an inconvenience. But if there had been no silver, other sorts of money would not have failed to supply the need. As it was, the issue of bank-notes increased under the influence of the same causes that led to the greater use of silver ; a large importation of gold took place. In one or both of these forms, the money supply would have adapted itself to the demand. In the absence of silver, an even greater importation of gold would have taken place, and the every-day circulating medium would have been made up in large proportion of that metal. These general conditions were little changed 24 THE ECONOMIC SITUATION. through the years 1882 and 1883. There was no such decided swing in business operations as there had been in the two years preceding; but some advance continued. The volume of bank loans and deposits, as shown by the Comptroller's reports on the national banks, steadily increased, though at a slackening rate, until the close of 1883. While the conditions thus continued favorable for an increase in the amount of money in active circulation, the decline in the circulation of national bank-notes, which began after the maximum had been reached in the early part of 1882, contributed still more to make way for a growth in the volume of silver used by the community. Accordingly, while there was some check in 1882 to the upward movement of outstanding silver, that movement was resumed in 1883; and on the whole, for the three years 1881, 1882, and 1883, the silver currency was absorbed by the public as fast as the dollars were coined at the mint. IV. 1885-1886. The signs of a general reaction, such as all experience would lead us to regard as inevitable showed themselves with the beginning of 1884. The extraordinary failures of the Marine National Bank and of the firm of Grant & Ward took place in May, 1884, and were followed by other bank suspensions, by the failures of various private bankers and brokers, and the break-down of large railway enter- prises, notably of the West Shore Railroad. While there was no acute crisis like that of 1873, all the signs of a period of depression showed themselves. The building of railroads almost ceased ; the pro- duction of iron fell off ; bank loans and deposits declined. With this general break-down, the cir- culation of the silver currency entered on its sec- ond phase. As the chart indicates, the beginning of 1884 showed some decline in the amount of silver dollars and certificates held by the public. This was fol- lowed in the autumn months by the usual increase ; but in the early part of 1885 there was a sharp de- cline. No appreciable growth took place in the autumn months of 1885, at the time when a growth was most likely to take place ; and the little that was 25 26 THE ECONOMIC SITUATION. gained was lost again in the first half of 1886. On the whole, the silver currency in the hands of the public remained stationary from the beginning of 1884 till the middle of 1886. Under these conditions the regular coinage of silver dollars necessarily caused dead silver to accumulate in the Treasury, and in July of 1886 the dead silver reached its maximum, nearly ninety-four millions of dollars. The explanation of the stationary volume of the silver currency is not difficult to find. With the general standstill or decline in business activity, the occasions for the use of money for transfer from hand to hand ceased to grow, even became less. The bank deposits, and the clearings of the banks in the cities, shrank appreciably, indicating a decline in wholesale transactions. The currency of retail and consumer's transactions, in which the silver had hitherto found room for expansion, showed a similar tendency. As is usual in periods of de- pression, the unused money of the public accumu- lated in the vaults of the banks, and what is called a plethora of money continued through the year 1885. The general conditions which caused cash to ac- cumulate in the reserves of the banks, caused the silver certificates to accumulate in the vaults of the government. The silver certificates in general now went through the same course which we have seen in the circulation of the silver dollars and of the certificates of large denominations. The people had less occasion for using money than before ; they cer- tainly had no occasion to use the additional silver currency which the regular monthly coinage was 1885-1886. V creating; the banks would not let the silver accu- mulate on their hands ; consequently it found its way back into the government vaults. The figures as to the customs receipts of the government at New York show exactly when and how this back-flow took place.' During 1S82 and 1SS3 gold and gold certifi- cates had formed between 70 and 80 per cent, of the customs receipts at New York, — the largest single point of collection for the public revenue. Begin- ning with 1884, the proportion sank, and for the fiscal year 1884-85 it was less than 35 percent. Silver, in the form of dollars and certificates, accumulated in the Treasury, while from the beginning of 1885 till the middle of 1886 the silver currency in the hands of the public declined. The situation of the Treasury under these circum- stances was, if not dangerous, at least suggestive of the danger of a break-down in the policy which the government has succeeded in pursuing ever since the resumption of specie payments, — that of paying gold to every creditor who chooses to demand it. The amount of gold in the government's revenue was shrinking; and, moreover, with the depression in 1 The receipts from customs at New Vork were made up as follows : Gold coin and Silver coin and United States certificates. certificates. First six months of 883.... 75-8* 17.8* 6.4* Second " 883.... 77-5 16.8 5-7 First " 884.... 59-8 27.9 12.3 Second " 884 ... . 34-7 34-9 3°-4 First 885.... 36.0 366 27-4 Second " " 885.... 55-3 14.6 3° 1 First [886.... 28.2 12 5 59-3 Second " " " [886. . . . 47-3 11. 6 41. 1 28 THE ECONOMIC SITUATION. trade, customs receipts diminished, and the total revenue was also falling off. On the other hand, the ordinary gold liabilities and payments showed little decline, if any. The chief point of disbursement of the government is through the sub-Treasury in New York, which is a member of the New York clearing- house, and has regularly larger amounts to pay than to receive. The banks, who are its creditors at the clearing-house, prefer gold. The result, from the beginning of 1884, when silver began to crowd gold out of the public receipts, was a heavy drain on the government's reserve of gold. If the reader will turn to the chart, and observe the line representing the government's gold holdings, he will see that the amount fell from over one hundred and fifty millions in the beginning of 1884 to less than one hundred and sixteen millions at the close of May, 1885. The policy of the Treasury during this period was simple, though not always easy to maintain. After the death of Secretary Folger in September, 1884, Mr. Gresham was put in charge of the Treasury, but was succeeded in a month by Mr. McCulloch, who remained in office till March of the following year, when the new administration brought Mr. Manning into the office. Both Mr. McCulloch and Mr. Man- ning refrained from pushing silver certificates into circulation where they were not wanted ; paid out silver currency whenever it was likely to stay out ; ceased to pay out funds for the redemption of bonds ; and endeavored to strengthen the reserve of gold. As to the silver certificates, the policy of the Treas- ury is shown by the events in Boston during the 1885-1886. 29 early part of the summer of 1885. At the sub- Treasury at Boston, silver certificates had been paid out less sparingly than at New York. Silver cur- rency consequently became so plentiful that hardly any other form of money was to be had. A turn in the balance of payments between New York and Boston brought occasion for remitting cash to New York. For such remittances, the tacit understanding of the banks made silver unavailable. Consequently exchange on New York came into demand, and went up to a premium of a dollar a thousand. The express charge for carrying cash to New York is only fifty cents a thousand ; but cash available for New York payments, — namely, gold or greenbacks, — was scarce ; hence the unusual premium on New York exchange. The Boston banks thereupon appealed to the Secretary of the Treasury to cease paying out silver certificates at the Boston sub-Treasury. Their request was granted ; and a repetition of this sort of embarrassment was thereby prevented. 1 On the other hand, the Treasury made an effort to check the return of silver currency into its vaults by getting more silver dollars into permanent cir- culation. At this time the currency of the denom- ination of one and two dollars consisted almost exclusively of United States notes, or greenbacks. 2 1 It was at this time that the Boston banks adopted definitely the New York practice of not using silver certificates in payment of clearing-house balances. See the note to page 12, above. The rev- enue payments to the sub-Treasury at Boston were comparatively small, and the Boston banks accordingly had not so ready a means of getting rid of their silver certificates as those of New York. 2 Bank-notes of less than five dollars had not been issued since 1879, tnc resumption act having prohibited their issue after that date. 30 THE ECONOMIC SITUATION. In June, 1885, the issue of greenbacks in denomina- tions of less than five dollars were stopped, in the hope of bringing about a greater use of the coined dollar. The effects of this measure could only be gradual. The one dollar and two dollar notes already in circu- lation could return to the Treasury only as they be- came dirty and unfit for use and so were sent in to be exchanged for clean notes. The old notes could then be destroyed, and new notes of larger denomi- nations furnished in their place. As it turned out, the public had a strong preference for notes rather than coin, and when it appeared that new notes of small denominations were no longer to be supplied, the old ones were kept in use long after they had become unfit for circulation. Dirty notes were pre- ferred to bulky dollars. Consequently, the success of this measure was not great. Nevertheless, some- thing was secured; for in the second half of 1885, when the general conditions were unfavorable to an increase in the outstanding circulation, and when the silver certificates in the hands of the public in fact showed a decline, the amount of silver dollars out- standing showed an increase of ten millions. The gain was made chiefly in the South, and, so far as it went, helped in preventing the Treasury from being overwhelmed by the accumulation of silver. Much more important as a means of tiding over the period of depression was the cessation of the payment of the public debt. In 1885 there were still outstanding about two hundred millions of 3 per cent, bonds, issued in 1882 in place of older bonds bearing a higher rate of interest, and redeemable at 1885-1886. 3i par at the pleasure of the government. The process of calling them in, and reducing the public debt by their payment, had begun immediately after their issue, and had gone on steadily until late in 1884. Then it ceased, although the government revenue still continued to exceed its expenses. From Sep- tember, 1884, until December, 1885, a period of more than a year, no bonds were called, and the interest- bearing public debt remained stationary. 1 In other words, the surplus revenue of the government, in- stead of finding its usual vent in the redemption of bonds, was devoted to increasing the dead silver in the Treasury vault. Every month two millions were spent in buying silver bullion and coining it into dollars, which were stowed away in the Treasury vaults out of harm's way. In addition, large quanti- ties of silver certificates were received in payment of public dues, and then allowed to lie idle in the Treasury. In August, 1885, there were nearly forty- three millions of silver certificates in the Treasury, the largest holding since the passage of the act of 1878. The result of this cautious policy was to retire the redundant silver certificates : as this was accomplished, less of them were turned in to the Treasury in payment of public dues ; more gold flowed in, and the government's gold reserve rose. 1 This does not appear in the annual reports of the Secretary of the Treasury, which run for the fiscal year ending June 30th. Bonds were called in the first half of the fiscal year 1884-85, and in the sec- ond half of 1885-86, so that the reports for each year states a decline in the bonded debt. But the 131st rail for bonds matured on Novem- ber 1, 1884 ; the I32d, on February 1, 1886. Between those dates the 3 per cents, outstanding remained stationary, at 194.2 millions. 32 THE ECONOMIC SITUATION. It is obvious that the Treasury could pursue with success the course just described only because its income exceeded its expenditure. In the eighteen months between the beginning of 1885 and the mid- dle of 1886, the government received over twenty- six millions in silver certificates which it did not reissue ; paid out, in addition, some thirty-six millions for silver bullion, which was coined into silver dollars, and in that form stowed away in the Treasury vaults; and materially increased its net holdings of gold. These enormous sums of course represent an excess of income over outgo. Notwith- standing the decline in its receipts as compared with earlier years, the government still had a surplus so large as to enable it to hoard sixty millions of silver currency, and to add twenty-five millions to its hold- ings of gold, before it resumed, in the beginning of 1886, the repayment of the public debt. In the financial history of any other country such a surplus would be considered a rare piece of good luck. We had it for so many years that we did not fairly realize what risks it enabled us to run without coming to grief. Further aid came in 1885 from the willingness of the New York banks to support the Treasury. In July of 1885, when the gold reserve was at its lowest, the banks of New York, through the clearing-house, turned over to the Treasury $5,915,000 of gold, in exchange for fractional silver. 1 The transaction was 1 The correspondence relating to this transaction is printed in the report made by Secretary Manning in March, 1886, in answer to an inquiry from the House of Representatives. House Executive Docu- 1885-1886. 33 called an " exchange " ; it was to all intents and purposes a loan. The banks moreover expressed their willingness to lend more, if more should be needed. The avowed object was to enable the Treasury to maintain gold payments until the meet- ing of Congress in December, when legislation for stopping the silver issues seems to have been ex- pected. It is an open question whether at that juncture the situation was such as to make necessary this call on the banks for aid. There was certainly a strong feeling of doubt as to the Treasury's ability to main- tain its policy of paying gold to any creditor who wanted it. That feeling showed itself in the pages of leading financial journals, like the Financial Chronicle, which steadily represented the situation to be full of danger ; and it was reflected in the con- cluding chapter of Professor Laughlin's History of Bimetallism, published in the course of 1885. It was shown in a more practical form by the striking increase in the holdings of gold by the banks, and by their disposition to turn into the Treasury not only silver, but greenbacks as well. The specie held by the banks of New York, for example, rose from about seventy-two millions in the early part of 1884 to one hundred and thirteen millions in the middle of 1885.' The larger part of this gain of specie was menis, 4gth Congress, ist session (1885-86), vol. 30, No. 100. At the end of October, 1885, when the Treasury gold had risen to % 142, 000,- 000, the banks asked for a return of part of their gold, and were told by Acting-Secretary Fairchild they could have the whole of it. 1 The reports of the Comptroller of the Currency state the hold- ings of specie and of legal tenders by all the national banks, at the 3 34 THE ECONOMIC SITUATION. in gold ; but some part probably was in silver certifi- cates, which are accounted " specie," and which were accumulating in the tills of the bank, and were turned over to the Treasury as fast as possible in customs payments. The greenbacks, which, like the silver certificates, flowed into their tills in the course of the depression, were also turned over to the government in payment of public dues. As the figures given a few moments ago show, the govern- ment was getting thirty, forty, fifty per cent, of its customs receipts at New York in the form of green- backs. 1 Such an inflow of greenbacks was an unmis- takable sign that general confidence in the ability of the Treasury to maintain gold payments was shaken. Gold in hand was preferred to the greenback, the government's promise to pay gold. A word may be said here as to the position of the United States notes, or greenbacks. The amount of dates stated below ; to which I have added, from the weekly state- ments in the Financial Chronicle, the holdings by the New York banks at the same dates : All national banks. Banks of New York. Specie. Legal tenders. Specie. Legal tenders. 122. 1 114. 7 109.7 128.6 J 39-7 167. 1 ■77-4 177.6 '74-9 165.4 171. 6 157-5 1490 75 R 71.9 58.2 5i-3 73 8 86.8 103.8 113.0 H3-9 29.7 28.1 77 76 77 76 71 77 79 69 67 67 79 64 7 9 4 3 7 7 6 6 28.8 30.4 37-7 32.0 3a-7 43-6 Oct i 91.0 27.2 89.7 31.7 66.5 40.0 68.6 25.7 1886 March 1 1 See the note to p. 27, above. 1885-1886. 3S these obligations outstanding was fixed by the act of May, 1878, at the point where they then stood, — $346,681,016. The resumption of specie payments in 1879 m ade them redeemable in coin; "coin" being then undoubtedly supposed to mean gold. The Treasury has ever since held itself willing to redeem in gold any notes presented ; but Congress has never made any specific provision as to the amount of gold to be reserved for that purpose. The Resumption Act itself, passed in 1875, simply directed the Secre- tary of the Treasury to redeem the notes after January 1, 1879, anc ^ authorized him to accumulate gold for that purpose by selling bonds ; but how much gold he was to accumulate or to keep on hand, was left to his discretion. The only approach to the statement of a specific reserve is to be found in an act of 1882, in which a section authorizing the issue of gold certificates is qualified by the proviso " that the Secretary of the Treasury shall suspend the issue of such gold certificates whenever the amount of gold coin and bullion in the Treasury re- served for the redemption of United States notes falls below one hundred millions of dollars." ' This proviso has been construed by some Secre- taries of the Treasury with greater strictness, by others with less ; but all Treasury statements since 1 The act was one for extending the corporate existence of national banks : the section here referred to had nothing to do with its main provisions. See Dunbar's Laws Relating to Currency, Finance, and Banking, p. 223. As to the history and meaning of the proviso as to the hundred millions, see Horace White, " The Silver Situation," in the Quarterly Journal of Economics, July, 1S90, vol. iv., p. 397. 36 THE ECONOMIC SITUATION. its enactment have set aside, in some form, one hun- dred millions of gold as a separate fund among the assets. On the face of it, the only legal duty im- posed on the Secretary of the Treasury seems to be that of suspending the issue of gold certificates when the gold in the Treasury is less than one hundred millions. It can hardly be maintained that, when his gold reaches the hundred-million line, he must refuse to pay it out for any purpose except the re- demption of United States notes. But practically it is immaterial what precise legal interpretation is given to the section in regard to the gold reserve. Even in 1882, the greenbacks did not stand alone, as they doubtless were supposed to do ; since, for all practical purposes, the silver certificates constituted an obligation bearing on the gold reserve as much as did the greenbacks. Certainly at present, when the act of 1890, as we shall presently see, has added a new and large mass of notes constituting a direct liability against the government's gold, it is quite out of the question for the Treasury to adopt any policy which treats the greenbacks as a distinct and peculiar claim on its holdings. The currency which the government now issues includes not only the greenbacks, but also the silver certificates, the silver dollars, and the Treasury notes of 1890. All of these it tries to keep equal to gold : the green- backs and the new notes by the direct offer of im- mediate redemption in gold ; the silver dollars and silver certificates by its willingness to accept them in all payments to itself, coupled with the offer to make all payments to its creditors in gold. The 1885-1886. 37 money which rests on the government gold reserve therefore now includes much more than the green- backs. If one hundred millions was thought a minimum reserve for the greenbacks alone, certainly no less sum will suffice for the larger mass. Hence any approach to a hundred millions in the Treasury holdings of gold must be a source of anxiety to a conservative Secretary ; and the tradition of a re- quired reserve for the greenbacks, whether or no it has a clear legal basis, makes that limit important in the eyes of the public as well as of the govern- ment officers. The low level reached by the gold reserve in the middle of 1885 was, therefore, a natural source of the uneasiness which, as we have seen, the Treasury and the public then showed. On the other hand, there were elements of strength in the situation in 1885. By far the most important of them- was the surplus of revenue over expenditure, which was used as a means of preventing the silver cur- rency from being put in circulation in excessive quantities. Some revival of business activity set in during the second half of 1885, helping the Treas- ury in both directions. It caused an increase in the receipts from customs duties and other sources ; it also caused an increased use of silver currency in the reviving business of the people. The decline in the volume of the silver currency outstanding came to an end in the autumn of 1885, while the gold reserve showed a considerable upward movement. The period of real embarrassment lasted only a few months, in the spring and summer of 1885. By the end of that year the situation could no longer cause anxiety. V. 1886-1890. The third of the periods into which we have divided the historical account begins with the year 1886. If the reader will turn once again to the chart, he will observe, in the middle of 1886, a sharp upward movement in the line showing the volume of silver in use with the public. The change marks the beginning of a new stage. The situation at this period was modified by two factors of importance : first, the sharp decline in the national bank circula- tion, and, second, the issue of silver certificates of very small denominations. The decline in the national bank-note circulation presents a set of questions different from those dis- cussed in the present paper. A very brief statement of its causes and extent will suffice to make clear its bearing on the present subject. The steady improve- ment in the credit of the United States, causing its bonds to yield a lower and lower rate of interest, tended to cut down more and more the profit on the issue of national bank-notes, until by 1883 that profit had practically disappeared. After the revival of activ- ity in 1880, the amount of bank-notes in circulation increased, with little interruption, until the close of 1882, when it reached its maximum. Then a de- cline set in, which continued without interruption 38 i 886- i 890. 39 ur>til 1890. The immediate cause was the steady redemption by the government of the 3 per cent, bonds of 1882, of which -the banks held largely. Other bonds in the market, — the 4 and 4}^ per cents., and the Pacific railway 6s, — were at too high a premium to make it profitable to buy them as a basis for cir- culation. During the years 1884 and 1885, when, as we have seen, the process of debt payment ceased for a while, the decline of the bank circulation natu- rally slackened ; but when the improvement in the government's financial condition made it possible to resume the redemption of bonds, the decline again set in sharply, and caused a rapid contraction of the bank-notes. A word may be said as to the exact mode in which the contraction of the note issue was brought about. The provisions of the national banking acts permit a bank which wishes to retire its circulation, to de- posit in the Treasury lawful money to the amount of its notes outstanding, and thereupon to receive the bonds held as security for the notes. The liability of the bank for the notes thereupon ceases, the gov- ernment assuming the obligation to pay them. The notes, however, may remain in general circulation for some time after the bank has done with them, and, in fact, are likely to come in for redemption only so fast as dirt and wear render them unfit for use. The Treasury, meanwhile, does not hold the lawful money left in its hands by the banks as a special deposit, but treats it as part of its general quick assets. 1 The effects of this process have been, 1 Indeed, the silver act of I Sep, presently to be explained, specifi- cally prescribed that " the balances standing with the Treasurer of the 4 o THE ECONOMIC SITUATION. on the one hand that the government's nominal hold- ings of cash have been considerably swelled, and on the other hand that the bank-notes outstanding have diminished less fast than the banks have given up their circulation. There has been steadily outstand- ing, during the last ten years, a considerable amount of bank-notes which we may call doomed, — notes which the banks have given up, but which have not yet come into the Treasury for payment and destruc- tion. In the foot-note are given the figures for re- cent years as to the gross circulation of notes, — namely, those actually in use by the public, — and as to the net circulation, ascertained by subtracting from the gross amount the money deposited by the banks with the Treasury.' United States to the respective credits of national banks for deposits made to redeem the circulating notes of such banks, and all such deposits received hereafter for like purpose, shall be covered into the Treasury as a miscellaneous receipt, and the Treasurer of the United States shall redeem from the general cash in the Treasury the circu- lating notes of said banks which may come into his possession subject to redemption." 1 National bank-notes outstanding (in millions of dollars) : Gross (total outstanding). Net (less lawful money deposited). 362.7 352.0 333- 6 315.8 3°i-5 272.0 239.4 202.0 179-8 172.2 172.4 3 2 4-3 316 291 8 276.3 2197 169 2 " 1883 " x 884 " 1885 " 1886 " 1887 " 1888 " 1889 '3 6 7 1 ,7.2 During the years 1885-88 much the largest part of the lawful money deposited for the payment of notes came from banks which were re- ducing their circulation under the conditions referred to in the text. i 886-1 890. 41 Looking at the gross circulation, which represents the notes passing from hand to hand in the commu- nity, we find a diminution of one hundred and twenty millions between 1886 and 1890. Our bank-notes have always been made up of the smaller denomina- tions. Since the resumption of specie payments, when the banks were no longer allowed to issue new notes of less than five dollars, they have been mainly in denominations of five, ten, and twenty dollars. As these notes disappeared, a void was made in the every-day money of the public, and a place so made for the silver certificates. The decline in the bank- notes was great and rapid after 1886, and the silver certificates consequently were easily absorbed into the circulating medium. The other important factor in the situation after 1886 was the legislation of that year in regard to the denominations in which silver certificates could be issued. The act of 1878, it will be recalled, had permitted the issue of certificates only in denomina- tions of not less than ten dollars. The circulation had been almost exclusively in denominations of ten and twenty dollars; and the limitation to these denom- inations was of great and probably unexpected effect in preventing the silver currency from finding its way into the only place where it was likely to stay, — in the every-day money of the people. In the general appropriation act of 1886, a rider was in- serted in the appropriation for the Bureau of Kngraving, authorizing the printing of certificates of one, two, and five dollars.' We have already seen that the Secretary of the Treasury made an 1 Statutes at Large, vol. xxiv., p. 227 ; June 30, 1886. 42 THE ECONOMIC SITUATION. endeavor, even before this change was author- ized, to promote the circulation of the silver dollars, first by cutting down the number of legal- tender notes of small denominations, finally by ceas- ing to print them altogether. Under these circum- stances, the small silver certificates, of which the issue began immediately after Congress authorized them, were rapidly, almost eagerly, absorbed by the public. In the autumn months of 1886, the cer- tificates for one, two, and five dollars were issued as fast as they could be printed. As it happened, the revival of business activity became more pronounced at this same time, and there was room for a general expansion of the retail currency of the community. The volume of silver currency gained almost steadily on the total coinage of the dollars; and with the beginning of 1889, prac- tically all the dollars coined were in circulation, chiefly, of course, in the form of certificates. The increase, it need hardly be said, was mainly in the certificates for one, two, and five dollars. These small certificates took the place of small United States notes ; while the decline of the bank-note circulation made way for the additional amount of larger United States notes issued in place of the small ones retired. Withal, there was a steady growth in the aggregate amount of the money of these denominations used, — the natural result of the steady growth of the community in population and wealth. We may summarize the results of the changes described in the preceding pages in tables, giving 1 8 86- 1 890. 43 the amount of large change, or money in denomina- tions of twenty dollars and less, outstanding at three important dates, — at the close of the fiscal year (June 30) in 1878, 1886, and 1890. To these is added a statement of the same sort for 1892, which indicates the changes under the act of 1890, and will be referred to when the effects of that measure are taken up. 1 [Figures indicate millions of dollars.] 1878 $1 $2 $5 $10 $20 Total 20.9 4.0 20.9 2.8 54-7 93-9 65.5 IC4.1 .1 62.7 68.6 224.7 273-4 . 1 •9 -9 Total 25.8 23.7 148.6 169.7 I3I-3 499.1 1 The figures are compiled from those given in the Reports of the Treasurer. It should be noted that silver certificates " outstanding" here include certificates which have been paid into the Treasury, and are held by the Treasury against itself ; to this extent the figures do not indicate certificates held by the community. In recent years, the Treasury cash has included very few of the smaller certificates, and indeed not many certificates of any kind. On the other hand, the Treasury held in June, 1886, nearly twenty-eight millions of certifi- cates, in which are doubtless included a considerable number of the ten- and twenty-dollar pieces counted in the text as in circulation. The real increase in the large change of the community since 1886 has therefore been greater than the figures indicate. The bank-notes of $1 and $2 reported as outstanding in 1SS6 and 1890, are chiefly notes which, having been lost or destroyed, have not been presented for redemption. They are therefore only nominally " outstanding." 44 THE ECONOMIC SITUATION. 1886 $1 $2 $5 $10 $20 Total 17.6 •4 18.2 .2 8s. 6 83-3 66.6 101.5 50.3 55-1 73-0 44.9 243.1 258.4 95.2 54-i 54.1 Total 72.1 18.4 168.9 218.4 173.0 650.8 1890 $1 $2 $5 $IC $20 Total U. S. notes Silver certificates 3-3 •4 3i- 1 56.1 2.9 .2 22.5 57-7 52.0 102. 1 90.4 59-5 in. 5 in. 5 45-5 26.3 265.8 157.6 293-5 56.1 Total 90.9 25.6 211. 8 261.4 183.3 773-Q 1892 $1 $2 $5 $10 $20 Total Silver certificates 4.1 •4 27-3 59-6 5-5 3-i .2 17. 1 61.6 49-7 106.4 92.6 54-5 no. 6 113. 2 4i-3 44.1 274.6 146. 1 305-5 59-6 79-4 Treas.notesofi890 8.6 23.2 30.7 11. 4 Total 96.9 29.0 240.9 288.4 210.0 865.2 It will be seen that the one-dollar and two-dollar notes, which in 1878 were greenbacks and bank- notes, were in 1890 almost entirely silver certificates. There is a very striking increase, between 1878 and i 886- i 890. 45 1890, in the total number of one-dollar pieces out- standing ; but this increase, so far as actual circula- tion goes, is in some part more apparent than real. A large part of the silver dollars which are out of the Treasury arc not in use as money. Some are doubtless hoarded : it is said that the negroes in the South have hoarded considerable numbers. Some have been melted by jewellers and others for use in the arts.' Though permanently out of the Treasury, the fifty or sixty millions of silver dollars are prob- ably not all in actual monetary use. In the larger denominations, the proportion of silver certificates grows steadily less. They formed in 1890 about one half of the five-dollar pieces, two fifths of the ten dollars, and but little more than one sixth of the twenty dollars. If we were to carry the figures to the higher denominations, we should find the silver currency in less and less proportions. They form about eight per cent, of the fifty-dollar notes " outstanding," and less than this proportion of the one-hundred-dollar notes. In the denominations above one hundred dollars, their use is insignificant, or ceases entirely. 2 1 It may seem strange that jewellers should melt silver dollars, when they can buy with them, as money, 20 or 25 per cent, more silver bullion than the dollars contain. No doubt large manu- facturers are careful not to incur such a loss. But a jeweller using silver on a small scale, and producing an article whose value rests little on the bullion used, and chiefly on the labor put into fashion- ing it, may procure his silver by the handy process of melting down a dollar or two. I am assured by Mr. Leech, the Director of the Mint, than whom there could be no better informant, that this takes place to no inconsiderable extent. 2 See the figures given below, at p. 58. 46 THE ECONOMIC SITUATION. The whole amount of money in these denomina- tions was, in 1890, seven hundred and seventy-three millions of dollars. In 1878 it was very nearly five hundred millions. The increase in twelve years, therefore, was two hundred and seventy-three mil- lions. That increase came chiefly from the addition of the silver dollars and certificates to the circulating medium. There was also some increase in the use of greenbacks of denominations of twenty dollars and less, notwithstanding the great shrinkage of the one- and two-dollar notes. In 1878, the greenbacks of larger denominations were used more than they are now, being held by banks for reserve and for use in clearing-house payments. Gold has taken their place in large part for these purposes ; which accounts for the increased circulation of greenbacks of the denom- inations of five, ten, and twenty dollars. The gain in silver and in greenbacks has much more than offset the decline in the bank-notes. Between 1878 and 1890, then, the total gain in these denominations was two hundred and seventy- three millions, or at the rate of between twenty-five and thirty millions a year. Between 1886 and 1890 the gain was at the rate of fully thirty millions a year. That sum probably represents the amount of money for every-day use which is called for each year by the regular increase of population and wealth. A figure not varying much from this is reached if we calculate the annual increment in another way. The total amount in 1890 was seven hundred and seventy- three millions. To this should be added the gold in general use, while a deduction should be made for i 886- i 890. 47 the silver dollars which are outstanding, but not in use as money. As to the gold in the country, there are some perplexing questions, to which allusion will be made at a later stage of this discussion. But it is certain that, except on the Pacific coast, gold appears but rarely in every-day use. Ample allow- ance will certainly be made for the gold which is in every-day circulation if we put it at one hundred millions or thereabouts. In other words, we shall probably err on the side of excess if, to allow for the gold in use, we raise the sum of seven hundred and seventy-three millions, as just reckoned, to the round sum of nine hundred millions, and name the latter amount as the total volume of money used in denom- inations of twenty dollars or less. This would mean for a population of sixty-two millions about fifteen dollars a head. The occasion for the use of money of this kind increases with the growth of population ; not indeed in any exact correspondence, with a check at one time and a rapid start at another, yet on the whole in a rough proportion to the increasing num- bers of the community. If the population grows each year at a rate of between 1,300,000 and 1,500,- OOO, we shall have room for an increase, in round numbers, of about twenty million dollars a year in the money for every-day use. Calculations of this sort are always uncertain, and the results just reached cannot pretend to anything but a rough approximation to the truth. But they rest on a fairly secure basis of fact, and certainly help in giving an answer to the question which has often been asked in recent years : How much addi- 48 THE ECONOMIC SITUATION. tional money can be used and absorbed, under existing conditions, by a country growing as rapidly as the United States? Those channels of circulation in which alone the silver currency issued under the act of 1878 succeeded in making its way, — those, we may add, in which it is comparatively harmless, so far as the maintenance of the gold standard is concerned, — will take up twenty or thirty millions a year. In other words, so much additional money, in denominations of twenty dollars and less, might be put forth by the government year by year, and would find a steady and permanent use. In years of depression like 1884-85, it would make its way into circulation sluggishly ; in years of great activity like 1880-81, more could be easily absorbed ; but the average would be somewhere near the figures just stated. It appears, then, that the issue under the act of 1878 was not on the whole excessive. By a lucky accident, it corresponded with sufficient closeness to what the community was in a position to use for its growing transactions. VI. The Act of 1890. We have now completed the history of the first three periods in the silver situation, and may proceed to consider the fourth and last, in the midst of which we now are (January, 1893). The act of July 14, 1890, repealed the silver act of 1878, and so brought to a close the precise experiment tried under that measure. The new experiment has been in progress but a short time, and any discussion of its working must therefore be provisional. But the new act, notwithstanding some important differences, con- tinued in essential points the policy of its predecessor, so that the working of the latter throws light on the events of the years just elapsed and on those to be expected in the future. The act of July 14, 1890, is even more remarkable than that of 1878. It is unique in monetary history. It provides that the Secretary of the Treasury shall purchase each month at the market price four and a half million ounces of silver bullion. In payment he shall issue Treasury notes of the United States, in denominations of between one dollar and one thousand dollars. These Treasury notes, unlike the old silver certificates, are a direct legal tender for all debts, public or private, unless a different medium is 4 49 50 THE ECONOMIC SITUATION. expressly stipulated in the contract. They differ from the silver certificates in another respect ; they arc redeemable either in gold or silver coin, at the discretion of the Secretary of the Treasury. The indirect process of redemption which, as we have seen, was applied to the silver certificates, is replaced for the new notes by direct redemption. The avowed object is to keep the silver money equal to gold, for it is declared to be " the established policy of the United States to maintain the two metals at a parity with each other on the present legal ratio, or such ratio as may be provided by law." The act of 1878 is repealed ; but the coinage of two million ounces of silver into dollars is to be continued for a year (until July I, 1891). Thereafter it is directed that only so many silver dollars shall be coined as may be needed for redeeming any Treasury notes presented for redemption. Practically, this means that the coinage shall cease ; redemption in silver dollars' will not be called for. The coinage of silver dollars ac- cordingly was suspended by the Treasury on July 1, 1 89 1 ; a change which was the occasion of some vociferous abuse and equally vociferous praise, but which in reality was of no consequence whatever. The monthly issues of the new Treasury notes vary, like those of the old silver certificates, with the price of silver. But the new issues vary directly with the price of silver, while, as we have seen, 1 the old issues varied inversely with the price. The volume of Treasury notes issued is equal to the market price of four and one half million ounces of 1 See p. 3. THE ACT OF 189O. 5 1 silver. If silver sells at $1.20 an ounce, the monthly issue of notes will be $5,400,000; if at $1.00 an ounce, $4,500,000. For a month or two after the passage of the act, the price of silver advanced rap- idly, and at its. highest, in August, 1890, touched $1.21. But the rise proved to be but temporary. After September a steady decline set in, and con- tinued almost without interruption through the rest of 1890, through i89i,and through 1892. The year 1891 opened with silver at a price of about $1.00 an ounce ; by the close of the year the price had fallen to about 95 cents. In 1892 a still further and more marked decline set in, and by the close of the year the price had gone as low as 85 cents. This unmistakable decline, in face of the increased purchases of the United States, was surprising both to those who advocated and those who opposed the efforts to enlarge the monetary use of silver. It was at first ascribed to temporary causes acting dur- ing 1890-91, and especially to some shrinkage in the demand for silver for shipment J;o India and the East. But the continuance of the fall indicated that it was due to permanent causes, — the steady increase in the product of the mines, and the marketing of more silver bullion than could be disposed of with- out a fall in its price. At all events, it became obvi- ous that the act of 1890 had failed to secure one result which had in some quarters been expected, — the rise of silver to " par," that is, to the price of $1.29 an ounce, at which the market value would correspond to the coinage value. At that price, the silver dollar is not depreciated as compared with 52 THE ECONOMIC SITUATION. gold, and the silver problem may be plausibly said to have solved itself, at least for the United States. But clearly this solution was not reached, and, it is now certain, will not be reached, under the act of 1890. In this regard, the measure proved a com- plete and unmistakable failure. The fall in the price of silver brought with it another unexpected result. The issue of new currency under the act of 1890 was appreciably less than had been expected. At a price of $1.00 an ounce, the yearly issue of notes would be $54,- 000,000; at a price of 85 cents, the yearly issue would be about $46,000,000. In fact, the issues dur- ing the years 1891 and 1892 were at the rate of about $50,000,000 a year. 1 For the future, they seem likely to be in smaller volume, and, if the price of silver continues to fall, in considerably smaller vol- ume. The experience of the last twenty years indicates that, so far as it is safe to make any predic- tions as to the price of silver, the probabilities are that it will fall still further. If the price continues to fall as rapidly as it did in 1891-92, the point will before long be reached at which the issues under the act of 1890 will be no greater than they would have been if the act of 1878 had remained in force. At a price of about 75 cents an ounce, the annual issue under cither act would be the same,— in round num- bers, forty millions a year. At a lower price, the act of 1890 would bring actually smaller issues than that of 1878. 1 The issues of Treasury notes were : During the fiscal year 1890-91 (11 months) . 50.2 millions. " " " " 1891-92 .... 50.6 " THE ACT OF 189O. 53 In any case, however, we must expect for some years to come a much greater issue of silver currency than the terms of the earlier legislation and the price of silver brought in the years before 1890. The annual increment will probably be between forty and fifty millions. And this increase in amount is the most important change in the situation from the new meas- ure. The method of making the addition to the currency is different, and the Treasury notes of 1890 are different in externals and in some legal respects from the silver certificates of 1878 ; but the important difference for the community arises from the fact that their quantity is greater. One other change in the currency situation after 1890 must be noted. The decline in the volume of the national bank-notes ceased for the time being. As a reference to the figures given above (page 40) will show, the gross circulation remained very nearly stationary after 1890. With the causes of this change we are not here concerned ; it suffices to point out that in this direction no room was made for an increasing circulation of silver currency. In the absence of further legislation by Congress, it is probable that some decline in the bank-notes will again take place in the future; but it will . roceed slowly, and cannot again be a factor of such im- portance in the silver situation as it was in the years 1885-89. We may proceed now to some account of the manner in which the act of 1890 worked in the first years after its passage. So far as the volume of the silver currency in actual circulation goes, the situation was simple ; practically all of it went out. 54 THE ECONOMIC SITUATION. In the same session in which the silver act was passed in 1890, Congress, by the tariff act of that year, made a sharp reduction in the public rev- enues, chiefly by removing the duty on sugar. At the same time appropriations and expenses were increased. Consequently, the receipts exceeded the expenditures by very little, if anything, and the Treasury was not in a position to hoard silver currency, even though it tended to accumulate in its tills. As it happened, some events of the fall of 1890, presently to be described, caused the Treasury to make large disbursements, which drained away the surplus then on hand. The Treasury after the passage of the act of 1890 had no considerable work- ing surplus ; it has had to pay out all that it took in. The volume of silver currency, therefore, expanded steadily after the passage of the act of 1890. On the chart, the reader will note how the unbroken line indicating the total silver currency makes a distinct angle at the date when the act went into effect (Aug. 14, 1890). It soars rapidly upward, marking the greater issues. The dotted' line indi- cating the silver currency outstanding responds to the upward movement, with some irregularities, it is true, but on the whole with close correspondence. The same movement took place in the year 1892, which the chart does not cover. About one hun- dred and twenty-five millions of the new Treasury notes were added to the circulating medium between mid-summer of 1890 and the close of 1892; and practically all of this enormous amount went into actual circulation. THE ACT OF 189O. 55 The bulk of the addition to the currency naturally took the form of the smaller denominations. Turn- ing back to the figures given on pages 43 and 44, the reader will observe the great increase in the quantity of money in denominations of twenty dollars and less. Between the middle of 1890 and of 1892, the decline in the national bank circulation having almost ceased, the new issues brought an addition to the volume of large change amounting to over ninety million dollars in two years. But it will also be observed that not all the issues of Treasury notes have been in the smaller denominations; for reasons presently to be set forth, a considerable portion of the new issues was in denominations of over twenty dollars. On the other hand, a very striking change took place in this period in the extent of the Treasury gold reserve. Before the period of financial embar- rassment in 1885, the gold reserve had risen rapidly, and from 1887 to 1890 had been over one hundred and eighty millions of dollars. But in August of 1890, some heavy disbursements by the Treasury caused a loss of some forty millions ; and in the spring of 1891, there ensued a further great decline, bringing the reserve by mid-summer of 1891 to one hundred and seventeen millions. From that great loss the Treasury did not recover through 1891 and 1892. Some significant gains and losses took place, presently to be noted ; but the reserve settled to a very much lower range, standing sometimes above, sometimes below a sum of about one hundred and twenty millions. The change was great, and ap- 56 THE ECONOMIC SITUATION. parently permanent. While the volume of cur- rency resting on the gold reserve increased heavily, the reserve itself went to a definitely lower level. 1 Another change took place during this same period, not shown on the chart, but closely con- nected with the decline in the Treasury gold, — a change in the character of the money taken in by the government for taxes. The receipts from cus- toms at the port of New York indicate the nature of this change. Since 1885, when, it will be remem- bered, the gold receipts showed an ominous decline, the payments on account of customs had been almost exclusively in gold ; and they so continued during the first half of 1890. The figures in the note show that in the fall of 1890 there was a distinct drop ; 1 The net amounts of gold held by the Treasury were, in millions of dollars, at the close of the months mentioned: 1890 1891 January '77-3 January 141.7 February 187.9 February 149-7 March 185.2 March 148. 1 April 186.2 April 141.7 May 1905 May '33-2 June 190.2 June 117.6 July 184.0 July 121. 1 August 185.8 August 132.4 September 147-9 September 132.5 October 156-3 October 1276 November 1624 November 129. 1 December 148.9 December , 130.7 1892. January "9-5 February 122. 1 March 125.8 April 1199 May 114. 2 < June 114.3 July no. 4 August 114. 1 September 119.3 October 124.0 November 124. 4 December 121.2 1893 January 108. 1 THE ACT OF 189O. 57 then a recovery at the close of the year ; followed in the first half of 1 891 by an almost complete collapse. The percentage of gold in the customs receipts fell to 60, 40, and during the summer months to 20 and 10 per cent. Legal-tender notes of the old and of the new issues formed by far the greater part of the receipts. In the fall of 1 891 there was again a revival of the gold inflow, the receipts going up to 65 and 66 per cent, in December of 1891 and Janu- ary of 1892. The improvement in this season was to be expected ; the westward movement of cash in the later months of the year usually carries off the various forms of paper money, and gold remains for the customs payments to the Treasury. As we shall presently see, the conditions of the fall of 1891 might have been expected to bring about an even greater use of gold in the customs payments. The gain, however, was but partial and of very short duration. After January of 1892 there was a second and more complete breakdown. Gold receipts again began rapidly to shrink, and in a few months virtually dis- appeared. In the second half of 1892, practically no gold was taken in ; between eighty and ninety per cent, of the receipts were in legal-tender notes. The change was much more striking than that of the period of embarrassment in 1885 ; the collapse of gold receipts at New York was complete. 1 1 The following table shows the monthly receipts for customs at New York in the years 1890, 1891, and 1892, and the percentage of the various kinds of money received. Gold and silver coins, it should be said, form only insignificant items ; practically all the specie receipts, as stated in the second and third columns, are in gold and silver certificates. 58 THE ECONOMIC SITUATION. Under these circumstances, the Treasury must have been brought to serious embarrassment if the 1890. January February March April May June July August September. . . . October , November. . . . December. . . . 1S91. January February March April May June July August September. . . . October November. . . . December. . . . 1892. January February March April May June July August September. . . , October November. . . . December. . . . 1893. January 15.2 i 3 -8 12-5 13.6 10.6 14.4 17.1 12.9 '5-7 16.0 10. 1 10.7 16.7 13. 2 IO.5 7-7 7 4 9.1 n-3 10.4 9.9 9-3 8.5 9-3 S « V §3* 88.6 81. 1 65.2 47.2 28.0 12. s 15.1 12.8 11. 8 20.0 43.6 65.4 25.9 18.8 •5 > 10. 8.2 13.9 12. 1 36 6.7 7 9 4-4 8.9 o£u 2 I 6.6 16.5 20.0 26.8 14.0 8.5 5'2 4 4 4.4 2.8 3-1 4-3 9-3 5-7 6.9 13 o 15-9 '5-5 10 4 10 9 6.4 6.3 9.2 15.8 o r 2o 4.6 3 ° 4.1 . 5° 6.0 7.2 15° 44.6 49.0 50-5 S5-3 44.0 31.3 14.8 15.0 36.2 42.5 464 40.6 26.8 28.4 25-6 45.8 5'-9 52.8 46.4 3-S 11.0 •55 14.6 6.9 5-2 7-3 12.4 25.6 30.2 28.9 27-4 3'-5 28.4 31.6 22.3 16.7 '4-5 28.6 33.0 31.6 36- 4 49.1 42.2 Si-9 397 35.0 330 40 o THE ACT OF 189O. 59 notes of 1890 had stood in the financial community on the same ground as the silver certificates. But, fortunately for the Treasury, an important change took place from the situation as it was before 1890, in the mode in which the banks dealt with the new issues. Shortly after the passage of the act, some sort of understanding seems to have been reached between the Treasury department and the banks of New York. The banks came to an agreement that the new notes were to be treated as " current funds," receivable in all payments, clearing-house settlements included. No doubt the fact that they were given the legal-tender quality, and were made directly redeemable in gold on demand, had something to do with this change of policy. There is no ground for any distinction between the Treasury notes based on silver purchases, and the old United States notes, or greenbacks ; both sorts of notes being legal ten- der, and both direct claims on the Treasury gold reserve. But the willingness of the banks to accept the new notes freely is also to be ascribed to their disposition to throw no obstacle in the way of the Treasury in its action under the new regime. The experiment of trying to keep the large issues of 1890 at par with gold therefore tried under conditions more favorable than those under which the old silver issues were put forth. This change proved of great importance. The Treasury notes of 1890 have been used in large and increasing proportion, both in payments by the New York sub-Treasury to banks and in clearing-house settlements between banks. The figures in the note 6o THE ECONOMIC SITUATION. show that the sub-Treasury in New York in 1890 had made practically all of its payments in gold. But in 1 89 1 gold was used in only two thirds of its payments, and in 1892 in but two fifths. A similar change took place in the cash used by banks in clearing-house settlements between themselves. There gold was displaced in very nearly the same proportion, being used for 65 per cent, of the pay- ments in 1891, and for but 42 per cent, in 1892. Evidently the two forms of legal-tender notes, and especially those of the issue of 1890, travelled to and fro between the banks and the Treasury. The government paid them out to the banks in settle- ment of the balances against it at the clearing-house ; from the banks they worked their way back again into the sub-Treasury in the form of customs receipts. Meanwhile, as between banks, they passed in settlement of clearing-house balances, with an evident tendency to drift before long into the sub- Treasury vaults, thence to start again on the round trip. 1 1 From the reports of the Comptroller of the Currency it appears that the payments by the New York sub-Treasury to the clearing- house banks have been with money as follows : Amounts. (In Millions). Per Cent. 1890. 1891. 1892. 1890. 97-7 '•7 .6 1891. 1892. Gold 249.6 4 5 1 3 255-4 I38-7 41. 1 25.0 83-4 75-3 47-9 206.6 67.7 20.1 12.2 4°-3 36.4 23-3 Treasury Notes of 1800 Total 204.8 THE ACT OF 189O. 6l The use thus made of the new notes caused a change, such as might be expected, in the denomi- nations in which they were issued. For the purposes of the sub-Treasury and the New York banks, large denominations were convenient. Consequently a considerable proportion of them were issued in denominations of one hundred and one thousand dollars ; offering in this regard a marked contrast to the silver certificates. In addition, the Treasury was called on during 1891 and 1892 to furnish in larger quantities than before " currency certificates," which are virtually legal-tender notes of very large denominations. These are issued, for sums of $5,000, and $10,000, on the deposit of legal-tender notes in the Treasury, in the same manner as gold and silver certificates are issued on the deposit of specie ; and they form virtually legal tenders of large denomi- nations. Since the resumption of specie payments they have, as a rule, been but sparingly used. But in 1885 their issue had increased; and in 1891 and 1892 it increased again. In both cases the changes were part of a series of phenomena, all indicating a With these general figures may be compared the statement by months given in the Treasurer's report for 1892, Appendix No. 26. From the Comptroller's report it appears that the balances between banks have been settled thus (the figures again indicate millions) : Year Ending Oct. Gold Treasury Notes of 1890 Treasury Legal Tender Certificates.. Legal Tenders and Change Per Cent, of Gold in Total Payments 1890 1.735-3 1,0 -.4 6.9 102.4 5° 353-5 5-8 100.2 1891 1892 791.0 357-3 483.3 220.2 •4* 64.9 £ 42-5 % 62 THE ECONOMIC SITUATION. redundancy of the total volume of the paper and silver currency. 1 Such were the salient facts in the currency situa- tion in the years immediately following the passage of the act of 1890. For their better understanding some account may be given of the chief events of this period. The first issues of the Treasury notes were made in the latter half of August, 1890. In that part of the year an upward movement in the silver currency in circulation generally begins. The autumn months bring a flow of currency to the West, and it was to be expected that during this first stage there would be no difficulty in getting the new notes in circula- tion. The regular expansion of the silver currency accordingly took place. 1 The following figures give, in millions, the denominations out- standing of the Treasury notes of 1890 and of the silver certificates, on June 30, 1892. Notes. Treasury Notes of 1890. Sil /er Certificates. $ t 5-5 27-3 2 8.6 17.1 5 23.2 106.4 10 30.7 1 10.6 20 11.4 44.1 5° .... 11.7 100 10.0 15.8 5°° 1.2 1,000 11. 4 1-4 Total, 100.8 335.6 Over twenty per cent, of the Treasury notes were in denominations of $100 and over ; only about five per cent, of the silver certificates. The currency certificates outstanding (all in denominations of $5,000 and $10,000) were : June 30, 18 80 M 3 trillions. June 30, 1887 9.0 millions. 81 11. 6 " 88 14.9 61.7 48.0 70.1 37-7 81.9 29.2 89.8 32 5 104.6 41.6 99-7 50.0 IOI.1 52.0 101.0 57-6 90.1 61. 1 75-7 52.1 77.8 39-8 76.0 42.0 66 THE ECONOMIC SITUATION. As it happened, a turn in the balance of interna- tional payments, due chiefly to the complications brought on in Europe by the Baring failure, led at the same time to a heavy export of gold from the United States. The drain was exceptionally large, and fell entirely on the Treasury. Between Feb- ruary and July, the outflow of gold from the country was no less than seventy millions of dollars. Prac- tically all of this was furnished by the sub-Treasury in New York. The Treasury was able to gain gold in other directions, so that its net loss during this period was not more than thirty millions. But this loss, with the earlier one incurred during the fall of 1890, made a total decline during the fiscal year of seventy millions, and brought the gold reserve at the close of the fiscal year, in June, 1891, to the figure of one hundred and eighteen millions. It has just been said that the Treasury, while losing gold withdrawn for export, gained it from other sources. The drain of seventy millions for export in the first half of 1891 was offset for the Treasury by a gain of forty millions elsewhere, reducing the net loss in the gold reserve to thirty millions. This compen- sating gain was secured chiefly by the adoption of a policy similar to that which had been resorted to in 1880 in order to further the circulation of silver cer- tificates. We have seen that in 1880 a virtual pre- mium was offered to banks which would deposit gold in New York and remit to the West, through the sub-Treasuries, in silver certificates. In the period from 1890 to 1892, the same thing was done. The Treasury undertook, at an insignificant premium, to THE ACT OF 189O. 67 make transfers of money to distant banks on deposit of gold in New York ; or to make transfers to New York on deposit of gold elsewhere. During 1891 and 1892 this device was freely used, and served effectively to strengthen the gold reserve. That ft was wise to resort to it under the circumstances, is beyond doubt ; that it was necessary, showed that the time had come for careful and even anxious hus- banding of the Treasury's stock of gold. 1 With the fiscal year, 1891-92, another turn came in the industrial and financial situation. The crops of 1891 were exceptionally large, the wheat crop especially being by far the largest ever raised. At the same time, the crops in Europe were small, and the demand for breadstuffs for export was great. The situation promised to be like that of the golden years, 1879 anc ^ 1880, when the conditions of the 1 The Treasury makes a charge of 25 cents per $1,000 for these trans- fers. On deposit of gold coin in New York, the Treasury sends an order by telegraph to the sub-Treasury at the place desired, for pay- ment to the correspondent designated by the New York bank. The New York bank is thus able to make an immediate remittance at tri- fling expense. The Treasury prepares for the operation by sending, in advance, money of the denominations likely to be required, to the sub- Treasuries in the West and South. Where remittances to banks not in sub-Treasury cities are desired, cash is sent from Washington on similar terms, in exchange for deposit of gold in New York. This arrangement would be convenient for the government under any circumstances, apart from the need of strengthening the gold reserve ; since the payments by the sub-Treasury in New York are normally much greater than the government's collections for customs and internal revenue at that point. But since 189O the main object of the practice has been to strengthen the gold reserve. See the Re- port of the Treasurer for 1889, p. 12 ; for 1S91, pp. 13, 17 ; for 1892, p. 17. 68 THE ECONOMIC SITUATION. same sort brought a sudden burst of prosperity, a large inflow of gold, and a marked and permanent expansion of the currency in actual use in the com- munity. In part, the expected results ensued. Some specie flowed in from abroad, and large sums of money were sent to the West. As the legal tenders were thus carried off from the New York banks, the Treasury receipts of gold at New York again rose. As a glance at the figures on page 58 will show, the customs gold receipts at the close of the year 1891 were again two thirds of the total. The Treasury gained gold in its reserve, which at this time went as high as one hundred and thirty millions. Some ex- pansion took place in all forms of the currency. Bank loans and deposits increased ; and an increased cir- culation took place of the form of currency which I have called large change. But the revival of activity was much less pro- nounced than it had been in 1880 ; and the effects on the currency were less striking than those of the earlier period. The exports, it is true, were enor- mous, and for the fiscal year 1891-92, exceeded the imports by the extraordinary sum of two hundred millions of dollars. But this heavy balance of pay- ments in favor of the United States caused no such inflow of specie as that of 1880. While some gold came in during the last months of 1891, the great sums due the United States by foreign countries seem to have been paid chiefly by the transmission of American securities held by foreign investors and sent by them for sale in the United States. With the beginning of 1892 the effects of the crops and ex- THE ACT OF 189O. 69 ports of 1 891 were no longer felt. The total volume of bank deposits, as reported by the Comptroller, had risen from a level of about 1,5 50 millions in the spring of 1891 to about 1,750 millions in the spring of 1892 ; then the upward movement ceased. While it lasted, there was presumably a corresponding expansion of the every-day money in use by the community ; and the greater part of the steady issues of new Treasury notes doubtless found a permanent circulation in this growth of trade and transactions. But as the year 1892 advanced, the phenomena of the preceding year repeated themselves. The regular return-flow of currency to the Eastern cities, and especially to New York, set in. Legal tenders accumulated in New- York more markedly than in any previous year, and by mid-summer the holdings of this form of cash by the New York banks reached the unexampled figure of over sixty millions. 1 With such a plethora of paper, the Treasury naturally received no gold ; its gold receipts for customs again melted away. A demand for gold for export set in, such as is common during the spring months, and it fell, inevitably, on the Treasury. The reserve of gold was reduced to the lowest point reached at any time since the resumption of specie payments, — one hundred and ten millions at the close of July, 1892. As the season advanced, and the autumnal flow of money to the West set in, the banks began to lose legal tenders ; and what was more important to the Treasury, they took advan- tage of the facilities offered by the Treasury for the transfer of currency in exchange for gold deposits 1 See the figures given on p. 65. JO THE ECONOMIC SITUATION. in New York. This device enabled the Treasury to strengthen its gold reserve, even though the redun- dancy of paper in New York was so great that the gold receipts for customs showed no gain in those autumn months. It is a striking fact that in 1892, for the first time since the resumption of specie pay- ments, the gold receipts for customs in New York showed no tendency to rise in the autumn months. The Treasury gold reserve rose, by the end of 1892, to something over one hundred and twenty millions, only because of the premium offered in the cheap and ready transfer of money to the West and South in exchange for gold deposits in New York. 1 The history has been brought to the close of 1892. The events of the two years, 1890-92, all point in the same direction. The decline in the gold reserve ; the growing use of legal tenders in government pay- ments ; the collapse of customs gold receipts in New York; the accumulation of currency in that city ; the devices resorted to by the Treasury to draw gold into its hands, — all give evidence of a redundancy of money, and all seem to indicate that the issues of 1890 are greater than can continue to be long put 1 In the Report of the Treasurer for 1892, p. 17, we read that in the fall of 1892 "the gold reserve, which had suffered severely, once more began to build up, under careful management. Advantage wastaken, to this end, of the'autumnal flow of currency to the South and West, by giving preference to gold for deposit in exchange for the paper desired for shipment. This plan worked well, and the result can be seen in the improved condition of the reserve." After these lines were written, the month of February, 1893, brought a new low-water mark in the gold reserve, which fell to one hundred and three millions at the close of the month. THE ACT OF 189O. /I forth without causing a cessation of gold payments by the Treasury. It would be rash and idle to make predictions for the immediate future ; and indeed this discussion of events too recent to permit a com- plete view has been introduced chiefly by way of illustrating the complicaf:ed details of the monetary situation and the variety of conditions which affect the working of the act of 1890. VII. General Conclusions. If now we review the history of the silver situa- tion, we find it leading to one conclusion much at variance with the usual expectations and predictions. The expansion of the silver currency has followed, and not preceded, the rise in prices, the speculative activity, and the other phenomena which are associ- ated with an increase in the supply of money. The general impression derived by the reader of most text-books on political economy is that an increase in the quantity of money is the direct cause of a rise of prices. But the increase of our silver currency seems to have been effect rather than cause. When it was first issued, in 1878, at a time of quietude in business operations, it caused no expansion or infla- tion ; on the contrary, the Treasury was unable to get the silver into circulation. When the general revival set in during 1880-81, it went into circulation rapidly and in large amounts ; but the movement of silver followed, and did not precede, the general industrial change. When the period of depression began in 1884, the Treasury went through another period of slow circulation, and the regular issue of silver cur- rency had not the slightest effect in checking the tendency to depression and falling prices. The 72 GENERAL CONCLUSIONS. 73 attempt to get out the silver money simply led to embarrassment ; it flowed back to the Treasury in tax receipts. The phenomenon repeated itself in 1890-92. The attempt to put forth more silver money had the same effect as it had in 1885 ; it caused a back-flow into the Treasury. For an easy and ready circulation of the new issues, — if that is to come at all, — we must await a revival of general industrial activity. This contradiction between current expectations and the facts as they have actually appeared is a case of a sort not uncommon in the economic field. The growth of our knowledge, or at least its spread, has not kept pace with the development of the phenomena themselves. Ex- planations which held good half a century or a century ago, and were then propounded by the economists, have gradually filtered into popular knowledge ; but by the time they have become public property, the phenomena themselves have so changed that a new or modified explanation becomes necessary. That the general range of prices depends on the quantity of money, and that an increase in the quantity of money will bring about a general rise in prices, has become one of the commonplaces of economic theory. In this simple form of statement, "money" means what we usually denote by that term, — coin, government notes, bank-notes. Five hundred years ago, even a hundred years ago, when almost all purchases were made with actual coin or notes, the proposition in all essentials was true. But the enormous development of credit in modern 74 THE ECONOMIC SITUATION. times compels a modification which has not indeed failed to receive attention from economic writers, yet has rarely been explained as fully, and certainly has not been kept in mind as constantly, as it needs be. The importance of the new conditions is indeed dawning on the public at large ; but their full bear- ing is rarely perceived. The true way to state the conditions on which, in our day, the general range of prices depends, is to compare the quantity of commodities offered for sale with the total volume of purchasing power in terms of money. In this volume of purchasing power the largest item consists in our day not of actual money, but of credit in various forms. In countries like England and the United States it consists chiefly in the form of credit supplied by deposit banks, — bank deposits and bank checks. That bank deposits and checks are the means of payment in all large trans- actions, and in many small ones ; that the exchanges carried on through them are greater than those car- ried on with any other form of currency ; that they are completed through the machinery of clearing- houses, with the use of an insignificant amount of coin or notes, — these are facts familiar enough. Indeed, the effects of credit as a substitute for money have been explained in economic text-books so fully that they may be assumed to be well under- stood : it is the extent rather than the nature of the effects that needs to be insisted on.' At any one 1 While the general effects of credit as a substitute for money have been much dilated on, the peculiar effectiveness of bank deposits as currency, and their preponderating importance in the machinery of GENERAL CONCLUSIONS. 75 time, and for considerable lengths of time, the gen- eral range of prices, with a given volume of trans- actions, depends not on the quantity of money simply, but on the volume of credit used as purchasing power; and of this volume of credit the chief itern_ in countries like England and the United States is bank currency in the form of deposits and checks. In such a state of things the increase of other forms of currency can have, in itself, only a minor effect. Indeed, more than this; so long as the vol- ume of credit, and especially that of the bank cur- rency of checks and deposits, is not affected, there is a strict limit to the quantity of any other form of currency which will in fact be used. It is obvious, for instance, that the quantity of dimes and quarter dollars which will keep in circulation in any com- munity, at a given range of prices, is a definite and determined amount. People need a certain number of small coins for the convenience of making change. If more are issued than are needed for such pur- poses, the coins will not remain in circulation. They will accumulate in the tills of shop-keepers, street- car companies, and other receivers of small pay- ments, and then make their way into the hands of the banks ; finally, the excess will work its way into the government Treasury. Under our very sensible exchange in England and the United States, have received compara- tively little attention. For a systematic exposition, see Professor C. F. Dunbar's Chapters on the Theory and History of Banking; and for an examination of the part played by bank deposits as currency in the United States, see a paper by the same writer in the Quarterly Journal of Economics, vol. i., p. 401, July, 1887. j6 THE ECONOMIC SITUATION. legislation on subsidiary coins, the government not only issues such pieces in any quantity desired, but redeems them in any quantity. The amount out- standing is allowed to regulate itself, and, so far from being a factor in determining the general range of prices, is itself determined by the general range of prices. At a higher range of prices more of them will be called for, and the larger denominations may form a greater proportion of the whole ; at a lower range of prices less will be called for, and in smaller denominations. What is true of the subsidiary coins is equally true, in all essentials, of the dollar pieces, the five dollars, the ten dollars. The dimes and quarters and half dollars are the small change of the people ; the dollars and five dollars and ten dollars are the large change. They, too, in a country where credit has reached as high a state of development as in the United States, are a sort of subsidiary money. Credit, chiefly in the form of bank deposits, is the main factor in affecting the ups and downs of prices; and the expansion or contraction of credit depends on conditions among which the quantity of money (in the ordinary sense) plays at any given time no important part. The quantity of money which may affect its fluctuations is not, in any case, the general supply in the community, but the supply held as reserve against deposits in the vaults of banks. Even as to this, the connection with the variations in purchasing power used by the community in the form of bank deposits and checks is only a loose and indirect one. GENERAL CONCLUSIONS. JJ At all events, the silver money of recent years has not had any direct effect in stimulating the growth of this bank currency, the largest and most important part of the circulating medium. The attitude of the banks toward the silver currency of 1878-90 prevented it from accumulating on their hands, or forming any part of their effective reserves. The contraction or expansion of the currency of bank deposits and checks therefore was not directly affected by it. The silver issues supplied, in great part, what I have called the large change of the community; but the total volume of the currency, and the general range of prices, were not directly affected by them. This is the key to the history of the silver cur- rency under the act of 1878. It did not cause any expansion in prices. The volume used by the public was effect and not cause. In times of activity, more of large change was called for ; in times of depression, less ; but the large change, for which the silver issues have been used, were not the cause of either rising or falling prices. On the whole and in the long run, and barring periods of difficulty such as the years 1884-85. the quantity issued under the act of 1878 was not greater than was readily used in the retail transactions of a community growing as rapidly in wealth and population as the United States. The contraction of the national bank-notes aided in mak- ing a ready place for them in such uses. The silver currency under the act of 1 878 simply supplied the community with the increasing amount of money needed for its every-day retail transactions. 78 THE ECONOMIC SITUATION. It may indeed be said that in the absence of the silver there would have been severe contraction. Prices, in fact, have probably fallen somewhat, not- withstanding the silver issues, — a phenomenon of which the meaning will be discussed in the second part of this paper ; and it may be said that the fall would have been even greater, and its effects more serious, if there had been no silver. But in that case it cannot be doubted that some other form of large change would have come into use. It is idle to say what sort of currency would have taken the place now occupied by silver: whether Congress might have rescued the national bank circulation from slow extinction, whether other forms of credit money would have been issued by the government itself, whether still larger amounts of gold would have flowed in from abroad. The only thing certain is that in a country like the United States no real inconvenience or suffering from a scarcity of this sort of money would have been permitted. The fact has been that the silver currency supplied the need, for good or evil, supplanting the bank-notes, and supplementing the greenbacks. VIII. The Probable Future. — Free Coinage. So much for the explanation of the past, and especially of the effects of the act of 1878. We may turn to some consideration of the probabilities of the future and of the working of the act of 1890. That consideration must be brief, and must be rather a forecast of possibilities than a prophecy of events to come. The act of 1890 practically doubled the issue of silver currency. What will be the outcome ? ' In considering this question, some allowance must be made for the change in the policy of banks in regard to the new notes, which may lead to a wider use of them in bank reserves and in clearing-house settlements. We have seen that the banks of New 1 There were some minor sources of addition to the silver currency, which may be briefly referred to here : (i) In a rider to an appropria- tion act passed at the session of 1890-91, Congress directed that the trade dollars redeemed under the earlier act of 1 888, should be coined into standard silver dollars. The bullion in the trade dollars amounted to some five millions, against which, when coined, silver certificates could be issued. (2) There was a profit, or seniorage, on the silver dollars which were coined under the act of 1890, between its passage and the cessation of coinage en July 1, 1891. Against this profit, amounting to four and one half millions, the Attorney- General concluded that the Treasury could also issue silver certificates. 80 THE ECONOMIC SITUATION. York have not only accepted the Treasury notes of 1890 in payments from the Treasury, but have used them in settlement of clearing-house balances among themselves. A general use of the new notes for bank reserves and payments obviously would open a new place for their absorption, and would aid in preventing them from becoming redundant. The cash holdings of the banks increase year by year with their increasing deposits and business ; not indeed in the same ratio as the increase of their business, yet in some proportion to it. If the new notes should be freely held by the banks, their absorption into use would be easier than that of the silver certificates was ; and, moreover, their effects on trade and industry might be different. We have seen that they play already no inconsiderable part in clearing-house transactions ; although it is clear that on the other hand they show a tendency to flow back in the government's hands, indicating that they are not welcomed in bank holdings. The cash held by the national banks increases, one year with another, at the rate of ten or twelve millions a year. Here there is a possibility for a use or absorption of the new issues which may prevent their circulation from being restricted within the comparatively nar- row field of the old silver certificates. This is not the only element of uncertainty among the factors on which the working of the act of 1890 depends. No one can foresee what will be the growth of the population and trade of the country ; what will be the nature or amount of the currency which, under the gold standard, will be called for to THE PROBABLE FUTURE. 8l meet the convenience of the public ; what will be the alternations of business activity, what the fluctua- tions of international trade. The very volume in which the Treasury notes are issued is uncertain, depending as it does on the price of silver. A further marked fall in the price of silver would reduce the quantity of the issues, while a rapid growth of the community would enlarge its use of currency of every sort. It is not impossible that two movements of this sort might unite to make the issues of 1890 comparatively harmless. Fortune has favored this country more than once in its venturesome financial experiments, and may again prove the fears of the sober and conservative to have been groundless. Nevertheless, the indications are that the Treasury notes of 1890 will be excessive in a sense in which the silver currency of 1878 was not. At the rate of fifty millions a year, they probably bring more new currency into the circulating medium than can be easily absorbed even by a community like the United States. Unless Congress wipes out entirely the national bank-notes, or a remarkable change takes place in the habits of the community, the notes will not be able to circulate in the channels in which the old silver certificates and dollars found their easy place ; and such additional play as they may have will hardly suffice to prevent their becom- ing redundant. Certainly some significant signs of redundancy showed themselves in 1891-92. Predic- tion in matters of this sort is always hazardous, and it is not possible to say unhesitatingly that we are doing more than sailing very close to the wind. But 6 82 THE ECONOMIC SITUATION. it may be instructive to consider what will be the final effects of excessive issues — if such they prove to be, and when and how they will operate to drive out gold and cause a change in the general level of prices. Whether or no the ultimate consequences are clear, the precise mode in which they will be brought about certainly is not clear. That the immediate occasion and the immediate effects of a suspension of gold payments by the Treasury are not easy to forecast, is evident from the striking inconsistency in the predictions made by those who agree in thinking the result a catastrophe. On the one hand, we are told that the effects will be similar to those of the issue of inconvertible paper : inflation, specu- lation, feverish activity, eventual collapse. On the other hand, we are told to expect contraction. Gold, it is said, will disappear from circulation, and a sharp fall in prices will ensue. The uncertainty as to the probable immediate effects of the change from a gold to a silver standard, of which these different predic- tions give evidence, is the result largely of the same fundamental misconception of money and monetary phenomena to which I have already re- ferred, — the failure to recognize the vital part played by bank currency in the form of deposits and checks.. Any attempt to reach conclusions as to the effects of the new notes, which neglects this part of the medium of exchange, must be futile. But the opera- tion of this medium is of a peculiarly unpredictable sort. Its expansion or contraction depends, to re- peat once more, not on the quantity of "money" THE PROBABLE FUTURE. 83 in the ordinary sense, but mainly in the temper and the expectations of the banks and of the business public. These are things impossible of prediction. The best that can be done is to point out how- matters will work under one or two probable sets of circumstances ; and this form of prediction I will venture on. In the first place, we may suppose the time when notes reach the stage of issue in excess of the demand for large change to be one of the ordinary periods of depression and business inactivity, such, for ex- ample, as has prevailed during the greater part of .1891. At such times the banks have plenty of cash in their vaults ; they find it difficult to induce busi- ness men to increase their credits and deposits ; the industrial current is sluggish, and it is not easily moved by a fresh inflow. The notes which the gov- ernment would pay out to bullion-sellers, or to other creditors, would accumulate in bank vaults, and thence more and more of them would flow back into the Treasury. A larger and larger proportion of the government's revenue would be received in these notes, or in some sort of money other than gold. Meanwhile, gold would be paid out to such as called for it. If the period happened to be one of an un- favorable balance of trade, and if there were a need of shipments of money abroad, the drain would fall entirely on the government. By a process of this sort, the Treasury might be drained of its gold, and brought to a suspension, while yet no effects in the direction of inflation or of rising prices had showed themselves. 84 THE ECONOMIC SITUATION. Assume now conditions of a different sort : good times and active business, hopefulness on every side, large new investments of capital, a burst of specula- tive activity. An additional amount of large change will then find its way into use with greater ease. At the same time, accommodation from the banks is in demand, their loans and deposits increase, their re- serves are small in proportion to deposits. These are the conditions under which a free use of the new notes by the banks would be most likely to have important effects. If the new issues, so far as not absorbed by the public, were readily used by the banks for reserve, they would aid in enabling bank loans and deposits to mount higher and higher. Then both forms of the currency would expand : the money of every-day use, as well as the bank cur- rency of large transactions. All the phenomena which precede a commercial crisis might be looked for, — active speculation, more or less of rash in- vestment, over-trading, rapidly rising imports. The rise in imports would necessitate sooner or later an outflow of gold ; while the speculative activity would culminate in the crisis. The drain of gold, which might come before the crisis and so aid to precipi- tate it, or might come after it in the subsequent period of dulness, must fall on the Treasury. In this case, the phenomena of inflation and rising prices precede the conditions under which a suspension of gold payments by the Treasury becomes possible or probable. If the stage of suspension of gold payments were reached, the immediate results in all probability THE PROBABLE FUTURE. 85 would not be of a disastrous sort. Gold would doubtless command at once a premium over other forms of money. The extent of that premium would depend partly on the urgency of the needs of bank- ers, importers, and others having gold payments to make abroad or at home ; but it would be in large part a matter of speculation as to the future policy and the financial prospects of the Treasury. Gold would not disappear from circulation, for the simple reason that there is none of it in circulation to dis- appear. It would carry us too far from our subject to examine the extent and location of the gold supply in this country. The Treasury officers publish regu- larly certain statements as to the amount of gold in the country, of which I can here say only that they rest on an uncertain basis, and in my opinion exag- gerate our holdings of that metal. At all events, the only amounts of substantial importance for the cur- rency situation are those held by the banks and by the Treasury. 1 The amount held by the Treasury, 1 For July 1, 1892, the monetary stock of gold in the United States was officially stated thus : In the Treasury 255-6 millions. In national banks 96.7 " In other banks and in individual hands. . 311. 9 " Total 664.2 The stock here credited to the Treasury is that physically in its possession. Of this stock, the Treasury owned, deducting gold cer- tificates outstanding, 1 14. 3 millions ; while the national banks owned, adding gold certificates held by them, 191. 2 millions. It will be seen that over three hundred millions are stated to be in "other banks" (state and private banks) and in individual hands. There are no means of ascertaining w ith accuracy how much gold these " other banks " held ; but if gold bore the same proportion to their total cash, 86 THE ECONOMIC SITUATION. after the suspension of gold payments, would be simply a hoard. That of the banks would continue to perform, after the break-down as before, the func- tion of a reserve for deposits. No depositor or creditor could get hold of it ; if he insisted on pay- ment from his bank, in expectation of getting gold, he would receive only "current funds," which would be at a discount compared with gold. If the premium on gold lasted for some time, if the Treasury failed to resume, or if Congress took no steps toward a return to gold payments, the banks doubtless would dispose of their gold from time to time at a premium, and reap the profit of the operation. This was their good fortune during the Civil War, when, at one time or another between 1862 and 1865, they dis- posed of their gold at a high rate in exchange for the depreciated greenbacks. as the gold held by national banks bore to the total cash held by these, they would have had in the neighborhood of fifty millions of gold coin. (See the figures given by the Comptroller of the Currency in the Report for 1892, p. 86.) This would leave probably two hundred and fifty millions of gold — certainly a good deal over two hundred millions — "in individual hands," that is, in every-day circulation. As the total bank-note circulation at the same date was one hundred and eighty-six millions, of which over twenty millions was in bank vaults, we should expect gold coin to be at least as plentiful in every- day circulation as bank-notes. But certainly it is not so common. Except on the Pacific cost, it is very rarely seen. Some sums may be in hoards ; yet any considerable amount of hoarding in a community like the United States is exceedingly improbable. It is much more probable that there is a mistake in the official estimates. These rest on intricate calculations as to the imports, exports, domestic produc- tion, consumption in the arts, and other factors, some of which bring large possibilities of error. On the whole, I have little doubt that the Treasury estimate is greatly in excess of the actual stock. THE PROBABLE FUTURE. 87 The question is now easily disposed of whether there might be a contraction of the currency in con- sequence of the suspension of gold payments. It has just been said that there would be none from the disappearance of gold. But there might be a con- traction of credit which would have the same effect, — indeed, a greater effect than a diminution in the quantity of coin or of paper money. The final step of suspension of gold payments by the Treasury might cause, more or less reasonably, an uneasiness among the mercantile public, the banks, the foreign and domestic holders of securities, which would lead to a sharp contraction of credit, and especially of bank credits and deposits. Such a change would mean a real, perhaps a serious, contraction of the circulating medium, and a real fall in prices. Certain other factors may be noted, affecting the permanent and the temporary situation of the Treas- ury under such contingencies as have just been described. At any given time, the financial condition of the Treasury will be of importance. A large sur- plus, or a large excess of revenue over payments, will enable it to hold its own and maintain gold payments without serious difficulty under conditions which would lead to a break-down if the cash holdings were small and the expenditure exceeded the revenue. In 1884-85 and in 1890-91 the outcome would have been at least uncertain, if the Treasury at both times had not begun with a large accumulation of gold. Further, it is conceivable that a drain setting in at a time when the Treasury gold is low, may be met, and embarrassment for the time being 88 THE ECONOMIC SITUATION. warded off, by a process of borrowing gold, or of selling bonds for gold. It has been suggested that the resumption act of 1875 authorizes the Secretary of the Treasury to sell bonds at his discretion for the purpose of redeeming United States notes of the old issue, and that this power might be exercised to enable the Treasury, if in straits, to secure an additional stock of gold. It is by no means clear that such a power is conferred by the resumption act. Yet the present Secretary of the Treasury has publicly intimated his intention to resort to this power in case of need ; and some such expedi- ent might serve to tide over a period of temporary embarrassment, or ward off for a time the results which may be expected from permanent sources of danger. 1 A permanent break-down of gold payments by the Treasury, and a permanent adjustment to a silver basis, can come only from a foreign drain of gold. It is true that a suspension is possible without it. A heavy deficit in the finances might lead to it ; or an inpouring of notes and silver, instead of gold, in the tax receipts. From embarrassments due to these 'In a public address at the dinner of the New York Chamber of Commerce, on November 17, 1 891, Secretary Foster stated his opinion that the resumption act gave authority for the issue of bonds U replace or increase the reserve fund of one hundred millions, and in- timated that he would make use of the authority in case of need. The language of the resumption act is that, " to enable the Secretary of the Treasury to prepare and provide for the redemption " of the notes, he is authorized to sell bonds " to the extent necessary tocarry this act into full effect." It may be a question whether the language confers authority to sell bonds for an indefinite period after resump- tion has once been accomplished. THE PROBABLE FUTURE. 89 causes, however, uncomplicated by a foreign drain, the Treasury may recover with comparative ease. But if the gold does not stay in the country, and flows abroad, the loss and the danger are permanent. A foreign drain may come at any time, and from various causes : from higher prices leading to heavier imports, from short crops, from heavy sales in this country of securities held by foreign investors, from any cause leading to a large demand for ready cash in the commercial centres of Europe. Any gold that flows abroad is not likely to return. It would be rash to say that the return of part of it is impossible or improbable ; but our issues of Treasury notes are filling up the channels of circulation so rapidly that its return is improbable. Exceptional conditions of international trade may indeed reverse the normal state of things, and cause a large quantity of gold again to flow to the United States. The possibilities in this direction have already been referred to, and serve to emphasize what has been said more than once in this paper as to the hazard of specific pre- diction in regard to the results of any monetary experiment. The doubts which have been expressed in the pre- ceding paragraphs as to the mode in which the issues of more silver money will work, and the corrections which have been suggested as to current predictions and expectations, may leave the reader uncertain whether there is anything clear and specific to be said as the effects of the silver legislation. But it is only as to the promptness of the effects, and the mode in which they will be brought about, that there go THE ECONOMIC SITUATION. need be any real doubt. Eventually, it remains true that an increase in the quantity of money leads to higher prices. In any community whose habits and ways in the use of credit are constant, the super- structure of credit will be, in the long run, propor- tional to the amount of money permanently out- standing. A permanent increase in the cash forming the basis of the machinery of exchange will be fol- lowed by an expansion of credit, both in the form of bank credit and in other forms, and by a rise in prices. The correspondence between the increase in the quantity of money and the rise in prices will show itself only in the course of time, and will prob- ably never be exact ; but in the long run there will be some rough sort of correspondence. The extent of the rise in prices, however, is another subject on which it is hazardous to make any attempt at precision of statement. The premium on gold is usually assumed to measure the depreciation of in- convertible paper or of a silver currency. But the real depreciation, and the serious effect, of the issue of more money, is in the general rise of prices ; and of this the gold premium is by no means an accurate gauge. We have seen, in the preceding pages, that the gold premium may set in during a period of depression, of restricted credit, of falling prices ; while, on the other hand, a rise in prices, partly the effect of new issues of silver notes, may exist for a time without the accompaniment of a gold premium. Eventually, no doubt, the steady excessive issue of silver notes would bring about both the gold pre- mium and the higher prices. No doubt, too, if the THE PROBABLE FUTURE. 91 suspension of gold payments proved permanent, the gold premium in time would correspond roughly to the difference between the intrinsic values of the gold and silver dollars, as measured by their power of purchasing commodities. General prices and money incomes, in other words, would rise in about the same proportion as the gold premium. But the rise would be different with different articles, and would take place more slowly with some than with others. It would never show that uniform adjust- ment to a higher level which we are sometimes to expect. Money incomes, wages, rents, as well as the prices of commodities, would gradually rise, some more, some less, by an irregular and perhaps spas- modic process. Wages of manual laborers probably would advance late ; though this again would depend on the state of the demand for laborers, and on the effectiveness of the labor organizations. It would carry us too far to enter into a discussion of the process by which a general rise or fall in prices and money incomes is brought about. Briefly, it may be said that so far as commodities which are the subject of international trade are concerned, the changes in prices would accommodate themselves with comparative rapidity and exactness to the gold premium. Exports and imports would be on the silver basis more quickly ; other commodities and general money incomes, much less quickly and exactly. In the end, the rise would be general. One subject more may be touched on, before con- cluding the first part of this paper ; namely, the prob- able working of an act for the free coinage of silver 92 THE ECONOMIC SITUATION. at the present ratio. The consequences of such a measure would differ in degree rather than in kind from those likely to ensue from the present legisla- tion. The break-down of the gold standard would come sooner ; the effect on general prices would also ensue, though less promptly and less certainly. If a measure for free coinage should pass, it would probably contain provisions similar to those of the act of 1890, for the issue of paper representations of silver. Legal-tender notes of any desired denomina- tion would be given in exchange for deposits of silver from any quarter and in any amount, at the rate of one dollar for each 37 1| grains of pure silver, or 412^- grains of standard silver. The result must be the issue of more currency than is now put forth, and a hastening of the effects. No doubt we cannot be sure that the flow of silver to the United States mint would be as prompt and as enormous as is sometimes predicted. It is impossible to say how- great and how rapid the presentation of silver would be. For one month or for six months, perhaps even longer, the amount presented might conceivably not be such as to swamp the Treasury; and for a while the predictions of the free silver advocates as to the concurrent circulation of silver and gold might be fulfilled. 1 I do not indeed believe that such a tern- 1 The reader will find an able and ingenious argument to show that free coinage would not drive out gold, in the report of the minority of the Committee on Coinage on the silver bill of 1890-91 ; printed in Reports of Committees, 51st Congr., 2d session, Report No. 3967, PP- I 5 - 3°- Eor a sober statement of the probabilities the other way, see the testimony of Mr. Leech, the Director of the Mint, in the Hearings appended to the same report, pp. 32-36. THE PROBABLE FUTURE. 93 porary success would be attained ; for the passage of the measure might be expected to ruin confidence in the Treasury's ability to maintain gold payments, and lead to the presentation for payment in gold of greenbacks and Treasury notes now outstanding. But even if this direct cause did not bring about the break-down of gold payments, the indirect one of cessation of gold receipts by the Treasury would speedily bring it about. The United States would be the tempting market for the disposal of all the silver in the world available for transmission to this country; and the inflow of silver could not fail in a very short time, by one process or another, to destroy the Treasury gold reserve, and so put an end to the gold standard. But while the break-down of the gold standard and the appearance of a gold premium would be the early, if not the immediate, results of free coinage of silver, the effects on general prices would be much less prompt. It is not necessary to repeat the grounds for this statement. The part which the silver coin or notes would play in the circulating medium would be the same as that of the silver currency of the past and present, and the action of credit payments and of bank currency must again be taken as much into account. The train of events to be expected would be in essentials similar to those sketched already, as not improbable results of the present issues. In the first instance we might look for falling rather than for rising prices. The break-down of the gold standard might easily be followed by a shock to confidence and a contraction 94 THE ECONOMIC SITUATION. of credit which would cause prices to fall. Event- ually, when the gold premium had become definitive, and the commercial and financial world had accom- modated itself to the new basis, we should reach that stage of higher prices which it is the object of the free-silver advocates to secure. But the result would not come with the mechanical precision which they expect. It would come gradually, by movements affecting first one group of commodities and then another, very likely with occasional re- lapses to lower prices. The final outcome would probably be delayed so long, and be so much cov- ered up in the meanwhile by other causes affecting the general range of prices, that the ardent cham- pions of free silver would be grievously disappointed in the immediate and visible effects of their panacea. PART II. THE ARGUMENT FOR SILVER. I. The Bimetallist Argument. We turn now to the second main division of this paper : the discussion of the general questions of policy involved in the currency controversy. Is it desirable that we should have more money ? Does the maintenance of the gold standard involve in- justice or hardship to debtors, or to any class in the community? Does it have any ill effects in hamper- ing industry or checking the advance of production ? Is the free coinage of silver, or any measure leading ultimately to a silver basis, fairly open to the objec- tions commonly urged against it on the grounds of dishonesty and injustice ? In considering these questions, we must look to the ultimate and permanent results of the silver standard. The details discussed in the first part of the present paper, as to the mode in which the silver issues circulate and the degree of promptness with which they will affect prices, are here of no great im- portance. Under a silver standard the rise in prices 95 96 THE ARGUMENT FOR SILVER. will take place in the end ; and we are concerned with the social consequences of such an eventual result. One word more by way of introduction to this subject. I shall not endeavor to discuss all of the arguments used on one side or the other, still less to repeat the elementary reasoning which suffices to dispose of many of them. We have had in the last year or two a revival of the crude talk of which so much was heard in the days of the inflationist move- ment, about the blessings of a large supply of money, the lowering of the rate of interest by increasing the currency, and indeed the attainment of universal prosperity by the simple process of putting forth an abundance of money. The same ancient fallacies which were advanced in the years from 1867 to 1879 to show that plenty of greenbacks were the one sav- ing thing for the republic, reappear now to show that plenty of silver will save us from ruin. The reader who wishes a discussion of arguments of this sort must turn to the books on the elements of political economy. I propose here to take up chiefly one set of serious arguments, — those which rest on the changes in gen- eral prices which have taken place throughout the civilized world in the last twenty years. The con- clusions in favor of a wider use of silver, drawn from such changes, have been maintained by distinguished economists. It is true that the particular plans for the use of silver which are now in vogue in the United States have generally been opposed by these economists. They have urged international agree- ments for the wider use of silver, and have depre- THE BIMETALLIST ARGUMENT. 9/ cated independent action by any one nation. But the more thorough-going advocates of free silver in the United States say, certainly with much force, that an international agreement has proved to be simply impracticable, and that if the wider use of silver is to be deferred until there is concerted action by the great nations, it will never come. If anything in this direction is to be done, some one country must be courageous enough to take the lead, trusting that others will follow in due time. And certainly it is true that the scheme for international bimet- tallism has practically no prospect of adoption ; while, on the other hand, the serious arguments urged by its advocates tell, in some degree, in favor of any scheme for enlarging the use of silver as money. These arguments, moreover, are of weight, and deserve a more painstaking consideration than is often admitted by those who oppose the silver legis- lation of the United States. The serious and important arguments, then, among those who, both in this country and in Europe, ad- vocate a greater use of silver as money, are derived from the general fall in prices which has been so con- spicuous among the economic phenomena of the last twenty years. To that fall they ascribe two evils: first, an unjust increase in the burdens of debtors ; and, second, a check to enterprise and to the efficient working of the productive machinery of the com- munity. The increase in the burdens of debtors is one which all economists have pointed to as the result of a general fall in prices, or rise in the value of the circulating medium. The debtor who borrows 98 THE ARGUMENT FOR SILVER. a hundred dollars now, and repays them five years hence, when all prices have fallen, gives back more than he received. On debts running for short periods of time, changes in general prices are not likely to be great enough to cause serious hardship ; but on debts running over long periods the loss to debtors and the gain to creditors will be great and continuing. But such a steady and continuous fall, it is urged, has taken place since 1873 ; and the fall is likely to continue further, and to renew its hardships on each new act of borrowing, because its cause is a permanent one. That cause is found in the growing scarcity of gold, which has been selected as the sole standard of value among civilized countries. The production of gold, after having increased with great rapidity in the twenty years following the Californian and Aus- tralian discoveries in 1850, has gone on but slowly since 1870. Meanwhile, the population of the civ- ilized countries, their wealth, their production of commodities to be exchanged, have increased with extraordinary rapidity ; and the adoption of the gold standard by Germany in 1873, and the resump- tion of specie payments by the United States in 1879 and by Italy in 1883, have added to the demands for which the scanty annual supply of gold must suffice. Hence the general fall in prices ; in other words, the appreciation of gold. The second effect of the appreciation of gold, in checking industrial progress and promoting industrial depression, has been less insisted on in the United States than in European countries. The classic economists had generally reasoned that a general THE BIMETALLIST ARGUMENT. 99 rise or fall in prices was indifferent, except in regard to the relations of debtor and creditor. If money became scarce, if its value rose and all prices fell, every producer, to be sure, would receive a smaller money income than before, and would have a smaller money capital. But he would be able to buy as many commodities and as much labor as before, and would be in reality just as rich and prosperous. In the middle of the eighteenth century, when economic thought was just beginning to assume its modern form, David Hume had argued that though a fall in prices is at bottom indifferent to everybody (except as debtor or creditor), it would yet, in its effects on men's spirits and expectations, which are all con- nected with money and with terms of money, exert a depressing influence on industry, and would so be harmful ; while rising prices, though also really in- different to all, would stimulate hope and confidence, and so arouse to more active exertion and more plentiful production. The younger Mill, in his Political Economy, thought it worth while to enter on a careful refutation of Hume's reasoning. But the bimetallists of our time arc disposed to agree with the shrewd Scotchman. They say that the active manager of industry, the business man or entrepreneur, in the first place is always more or less in debt ; in the second place, is always buying labor, or materials, or goods, with the intention of selling a product at a later date at an advance in price. He habitually measures his gains in terms of money, and not in terms of the commodities he can buy with the money. In times when prices are falling, he IOO THE ARGUMENT FOR SILVER. finds it harder to meet his debts, and to dispose of his goods in hand at a money advance over what they cost him. But the business man, or entre- preneur, in our day is the director and initiator of industry. He employs labor, borrows capital, sets the wheels of industry in motion ; it is his expecta- tions and fears and hopes which determine primarily whether the investment of capital shall take place in large or small amount, and whether the machinery of production shall move smoothly and effectively, or slowly, hesitatingly, inefficiently. The argument certainly does not lack plausibility ; nor can it be said to have often been squarely met. No doubt it takes the form, in the United States, more frequently of confused encomiums on the inspiriting effects of plentiful money, than of direct reasoning as to the ill effects of too little money, such as I have endeav- ored to state with fairness in the preceding sentences. Yet it does not lack weighty backing. So eminent an economist as President Francis A. Walker has, within a year or two, insisted on the evils of a deficient supply of money as strangling the arteries of industrial life. 1 1 " The money supply is not a matter of no consequence. Alike considerable excess and considerable deficiency inevitably become the source of direful ills and woes unnumbered. If of an irredeemable and fluctuating paper currency, that alcohol of commerce, it can be said that ' it biteth like a serpent and stingeth like an adder,' with equal truth may it be added that strangulation, suffocation, are not words too strong to express the agony of the industrial body when embraced in the fast-tightening folds of contracting money supply. Unfortunately those who should now be on deck as pilots to guide the ship of State through the narrow sea that separates the whirling gulf of silver monometallism, with a premium on gold and THE BIMETALLIST ARGUMENT. IOI On the whole, however, the other argument, bear- ing on the increase in the burdens of debtors under falling prices, has been more often heard in the United States, and certainly has been of more effect. Prosperity, activity, general industrial advance, have been in this country so great and so obvious that the argument as to any check to industry could take serious hold only in occasional periods of depression or slackened advance. The burden on American debtors from falling prices has therefore been much more steadily complained of, chiefly in regard to the debts of the farmers and other borrowers on a com- paratively small scale. No doubt there are other debtors whose burdens are affected at least as much, notably the railways, among whom the practice of borrowing heavily on long time has sometimes had its serious effects. But it is the farmer whose case has received most attention, and in some ways doubtless has deserved it most. The discussion of the relations of debtors and creditors under the gold standard has led to some further conclusions as to the " honesty " of the gold and silver standards. Those who oppose a silver basis speak of the silver dollar as a " dishonest " coin. But those who attack the gold standard retort that the really dishonest dollar is that of gold. It is a debased coinage, from the bare and jagged rocks of gold mono- metallism, with increasing monetary stringency and falling prices, have discredited themselves with captain and crew by denying the very existence of Scylln, and declaring that on that side is the broad and open sea." — Address of President Francis A. Walker before the American Economic Association, December 26, 1890 ; in the Publica- lions of the Association, vol. vi., p. 32. 102 THE ARGUMENT FOR SILVER. pointed out by them that the fall in the price of silver which has taken place since 1873 has not been greater than that in the prices of commodities gen- erally. As compared with commodities, therefore, silver has been more steady in value than gold. The fall in the gold price of silver, which is adduced by the monometallists to show that silver is not a good standard of value, is said to be the very thing which proves it to be a good standard of value ; for a given amount of silver will buy the same amount of com- modities, roughly, as it would twenty years ago, while a given amount of gold will buy more. If debts had been expressed in terms of silver, the debtor would have had to repay the creditor the same amount of commodities that he received,- — not more commodities, as he has had to do, with debts measured and repaid in terms of gold. So far as the attainment of the closest possible approach to ideal justice is concerned, a silver standard would have served the purpose better than a gold one. It would extend this paper to undue length if I were to enter on any detailed consideration of the intricate questions which arise in regard to the history a-nd statistics of general prices. By far the best and most convenient source of information is Professor Soetbeer's well-known Materials on the Precious Metals and the Question of Standards, published in Germany in 1887. 1 For convenience of reference I give below Professor Soetbeer's " index numbers," indicating the average annual prices of 1 14 articles 1 An English translation is in Mr. Edward Atkinson's " Report on Bimetallism in Europe," printed in the United States Documents, Senate Exec. Doe., 50th Cong., 1st session, Xo. 34. THE HIMETALLIST ARGUMENT. IC at the free port of Hamburg: undoubtedly the most complete and satisfactory compilation of the sort which has yet been made. The figures, as given in the Materials, run through the year 1885. For the years from 1886 to 1890 I have added index numbers based on the same sources, which Professor Soetbeer has kindly supplied to me. Unfortunately the ma- terial on which these figures are based has not been available since 1888. I need hardly say that the method of measuring prices by index numbers based on simple arithmetical averages is far from perfect. The figures are given chiefly by way of illustrating in some concrete way the tendency to falling prices. For convenience, I have added the price of silver in terms of dollars per fine ounce, as given by the Director of the United States Mint. Average of 1847-50 " '^5i-55 '• 1856-60 " 1861-65 " 1866-70 Yeai 1871 " 187* ' «8 7 3 " 1874 " 1875 " 1876 " '877 " 1878 " '^79 " 1SS0 " 1S81 " 1882 " 1883 " 1884 " 1885 •' 1886 " 1887 " 1888 " 1889 " 1890 Index Number of General Prices. Price of Silver per Ounce in Terms of Gold. IOO 112.22 I2O.9I ■23-59 123 57 127.03 $1,326 135.62 1.322 138.28 1.298 136.20 1.278 129.85 1.246 128.33 1. 1 56 127 70 1. 201 120.60 1. 152 117. 10 1.1 23 121 89 1. 149 121 07 1.138 122.14 1.136 122.24 1. 110 114.25 1. 113 108 72 1.065 103 99 •995 102 20 .978 101.93 •939 106.13 •935 108.. 13 1.046 II. The Effect of Improvements in Production. The bimetallist agitation for a return to the wider use of silver concurrently with gold first became prominent in the years of depression which followed the crisis of 1873. For some time those who opposed it took the ground that the alleged evils did not exist, — that in fact there had been no permanent fall in general prices. The decline in the years after 1873 was supposed to be simply the usual reaction from the rise in prices which marks a period of spec- ulative activity. It was expected that the upward movement of the next period of activity would bring the average range of prices as high as it had been before. The general revival which set in after 1879 in all civilized countries did indeed check the down- ward tendency, and in some countries brought about an appreciable rise. But this counter-movement by no means offset the marked fall which had preceded it ; and in any case it soon came to an end, and was followed by a new fall, which has continued with no considerable interruption to our own time. It is true that some part of the fall is no more than a recoil from the abnormally high prices of the years 1 871-73. It is true, also, that some commodities have shown a tendency to rise, and that in one very important 104 EFFECT OF IMPROVEMENTS IN" PRODUCTION. 105 respect, — in money incomes and the money rate of wages, — there has been a striking exception to the general movement. Further, it must be borne in mind that even the lowered level which has now been reached cannot be described as abnormally low, being still as high as that which obtained at the middle of the present century. But, on the whole, the fact of a general fall in the prices of commodities during the last fifteen or twenty years cannot be denied. The fall has not been uninterrupted; it has not been so rapid or general as to bear on the face of it proof of harmful results ; but it has been steady, and, in the opinion of the present writer at least, is likely to continue slowly and steadily for some time to come. Recently, therefore, those who combat the bi- metallist reasoning have taken a different position. They have reasoned that while prices may in fact have gone down, the fall is not due, as the bimetal- lists allege, to an appreciation of gold. It is to be accounted for, they say, by other causes, notably by the extraordinary improvements in the production of commodities. New inventions and the perfecting of old ones have cheapened almost all manufactured articles. Raw materials and food products have been cheapened partly by the discovery of new r sources of supply, and partly by that improvement which has been transforming the industrial situation more radi- cally than any other, — the wonderful cheapening of transportation by railways and steamships, which has made the resources of the plains of our West and of the sheep-runs of Australia available for the supply of the markets of London and New York. 106 THE ARGUMENT FOR SILVER. So far as this train of reasoning undertakes to explain the mode in which the fall in prices has been brought about, it seems to me impregnable. But in so far as it endeavors to disprove the appreciation of gold, or to show that the general fall is not due to this appreciation, I have never been able to see its force. In truth, both the bimetallists and their opponents seem to confuse the question when they speak of the appreciation of gold as causing lower prices. The appreciation of gold is the general fall in prices. The two are not related as cause and effect ; they are simply two names for one and the same thing, — namely, a different rate of exchange between gold on the one hand and commodities in general on the other, by which the same amount of gold buys more commodities than before. When the general fall in prices is admitted, the case of the bimetallists as to the appreciation of gold is estab- lished once for all. Improvements in the production of commodities may explain how it happens that they are more abundant, and exchange on less favorable terms with gold, of which the quantity has not been increased by new rich mines or great improvements in production ; but the fact of the depreciation of commodities, or of the appreciation of gold, is not thereby explained away. Nevertheless, the improvements in production do seem to me to have an important bearing on the question in hand : a bearing not on the simple fact of the appreciation of gold, but on the social conse- quences which are said to flow from it, and therefore on the questions of policy which are here under EFFECT OF I IMPROVEMENTS IN PRODUCTION. I07 consideration. A moment's thought will show, fof example, that a general increase in the efficiency oi labor affects very materially the mode in which a fall in prices acts on the relations of debtor and creditor. If A lends to B a hundred dollars, re- payable in five years, and if at the end of the five years prices in general have fallen to one half of the previous rates, B, in paying back to A the one hun- dred dollars, clearly returns twice as many commodi- ties as he got. But if, at the same time, the efficiency of labor has been doubled by improvements in pro- duction, B can produce with the same labor twice as many commodities as before ; and he returns to A the product of the same quantity of labor as he received. The classic economists and the socialists (at least some schools of socialists) have maintained alike that the ideally perfect standard of justice in the exchange of commodities and service is equality of sacrifice or labor; that, if things so exchanged for each other that equal sacrifice got the same reward, complete justice would be attained. Applying this test to the relations of debtor and creditor in the case supposed, we find it not one of hardship to the debtor, but apparently one of justice to both parties. It is true the creditor gets more commodities than he gave ; but he gets the product of the same amount of labor as he devoted to the commodities originally lent ; and why should he not share with the rest of the community the benefits of a general increase in the productiveness of labor? This line of reasoning will become simpler and more concrete if we approach it from another point I08 THE ARGUMENT FOR SILVER. of view. Reference has already been made to the most striking and important exception to the general tendency of prices to fall, namely, that money wages and incomes in all civilized countries have shown a tendency not to fall, but to rise. Whether the in- comes of the rich have increased faster than those of the poor, or whether the movement has shown itself with rough uniformity for all classes, is immaterial for the present discussion. The admitted fact of a general upward movement alike among rich, middle class, and poor, is the significant thing. In other words, there has been an inverse movement of money wages and of the prices of commodities, the one going up while the other went down. Now, such an inverse movement is what must take place in case of any real improvement in material welfare. The only concrete way in which civilized people can become better off, is by being able to buy more, — by their money incomes going further in the purchase of commodities. The improvement may take the form either of higher money incomes, with stationary prices ; or that of stationary incomes with lower prices; or the intermediate form, which in fact seems to have occurred, of money incomes rising somewhat and prices at the same time falling somewhat. If we assume a monetary supply that is limited, or does not increase as fast as improved means of production cause the quantities of commodities to increase, one or the other of the two forms last mentioned must be found. 1 1 Such an inverse movement of general wages and prices was pre- dicted by Cairnes before the bimetallic controversy had attracted EFFECT OF IMPROVEMENTS IN PRODUCTION. IO9 In such a state of things there can hardly be said to be any real hardship for the debtor. It is true that prices have fallen, and that the money he repays the creditor will buy more goods than it did when the loan was contracted ; but his own money income has risen, or at least has not fallen, and the repay- ment of the loan can cause him no special hardship, — none greater than he must have expected. The case clearly differs fundamentally from that of a simple rise in the value of money, or general fall in both prices and wages. In the latter case, money incomes as well as the prices of commodities fall, and the debtor really pays back more than he got, not only in terms of commodities, but in terms of labor or sacrifice or income. This result ensues, for ex- ample, whenever there is the return to specie pay- ments from a period of excessive paper-money issues, such as the United States went through after the Civil War. The return to specie payments, and the general fall in both prices and incomes, then meant an increase in the burden of debts contracted in the time of inflated paper prices. The return to specie payments, instead of taking place quickly and deci- sively after the financial stress of the war ceased, was postponed, and was not finally accomplished until 1879. I n tne years before the crisis of 1873, when the paper issues were still excessive, and other causes also helped to keep prices high, borrowing took place on a large scale, — borrowing by farmers and individuals, as well as by large corporations. general attention to the problem ; see his Leading Principles of Political Economy, Book II., ch. ii., § 8. IIO THE ARGUMENT FOR SILVER. The general fall which began even before 1873, and became great after that year, undoubtedly increased the burden of these debts, adding another illustration of the evils which ensue from the excessive issue of inconvertible paper money. The harsh experience of that time undoubtedly did much to strengthen the inflationist movement ; and the after-effects of it, as well as the memory of it, contribute to the silver agitation of the present. But the fall in prices in the United States since 1879, an< ^ tnat ni European countries in the period since 1873, are the result, on the whole and in the long run, of very different causes. They have been due chiefly to the general improvements in production ; they have not been accompanied by a fall in money incomes, and they cannot be said to have caused an increase on the burden of debtors. The reasoning of the preceding paragraphs bears also on the second part of the bimetallist indictment, — that, namely, as to the depressing effects of falling prices on industrial enterprise. Whether a simple rise in the value of money, unaccompanied by any other circumstance, would have the depressing effects which the bimetallists predict and the classic econo- mists deny, is a question radically different from that which in fact presents itself. It may be that in this simple case the bimetallists might prove to be, in some degree at least, in the right, and that the classic reasoning, here as on many other subjects, while sound in the long run, would need some qualifications and correction. In the long run, no doubt, it is im- material whether prices are high or low, whether EFFECT OF IMPROVEMENTS IN PRODUCTION. I 1 I money returns fall or rise; and yet it might turn out that the habitual association of gain or loss with " making money " would cause a period of simple falling prices to be one of hesitating investment of capital and unenterprising conduct of business. But what the world in fact has seen has been the complex case of a fall in prices accompanied by great im- provements in production. The business man and capitalist has had, to be sure, to deal with falling prices ; but the same amount of capital and labor has turned out more commodities than before ; and his total money returns, so far from declining, have generally increased. The money incomes of the managers of industry have shown the same upward movement as the money incomes of other classes in society. So long as this is the case, it is idle to talk of a depressing effect on enterprise from the fall in prices, or of a strangling of the industrial organism from insufficiency of the circulating medium. In fact, the immediate cause of the fall in prices has been the pushing on the market for sale of larger and larger quantities of commodities, produced with profit at lower and lower cost : a state of things fortunate for the community, and surely not depressing for the business man. No doubt the fall in prices has been depressing to those producers who were not so shrewd or so fortunate as to possess themselves of the improved means of production, and who have had to sell the same quantity of goods, brought to market at as high a cost as ever, at lower pricey than before. But these unlucky or incompetent persons would have had to go to the wall in any case, whether 112 THE ARGUMENT FOR SILVER. prices maintained themselves or went down, and their case does not represent the general trend of industrial operations. This effect on the entrepreneur of improvements and of falling prices combined, doubtless accounts for the failure of the bimetallist agitation to secure any appreciable hold in the business world. The bi- metallists, both in England and on the Continent, have labored zealously to engage support among the business men, but never with a degree of success at all proportionate to the energy displayed. The sim- ple reason is that the business world has not been in any state of chronic depression. In the ups and downs of industrial activity there have been periods which seem to confirm the pessimistic accounts of the bimetallist and of other persons malcontent with the present order of things ; but in due time the tide has always turned. The industrial situation, while far from perfect in the eye of the social philosopher, and by no means warranting any confident optimism as to the final outcome, has certainly not been such as to dissatisfy the active manager of industry, or to check his ambition or enterprise. On the whole, then, the fall in prices, when con- sidered in connection with the other great changes which have accompanied it, does not afford so much countenance to the bimetallist proposal as at first sight it seems to. The rise in money incomes and the improvements in production disprove any in- tolerable burden on debtors, and make it highly improbable that the change has had any general depressing effect on industry. III. The Case of the Farmer. Nevertheless, there is something more to be said, in explanation and justification of the discontent with falling prices, and of the currency agitation which rests on that discontent. While the effects of the fall in prices on debtors as a class and on producers as a whole have not given real grounds for complaint, certain particular debtors and producers have un- doubtedly been injured. The case of these latter has given plausibility to the general arguments of the bimetallists, and, what is more important at the present juncture, has given strength to the move- ment in the United States for more money and more silver. The situation will be best understood if we con- trast for a moment the different modes in which the improvements in production have been brought about in manufacturing industries on the one hand, in agriculture on the other hand. In manufactures the improvements have been better machinery, new- processes, labor-saving inventions, the conduct of business on a larger scale, and so the greater and more effective division of labor. In agriculture the main cause of cheaper production has been different : it has been the opening up of new lands and new 8 113 114 THE ARGUMENT FOR SILVER. sources of supply. No doubt there are important exceptions to these general statements. In agri- culture there have been advances in the arts, — new plants, better fertilizers, improved implements, more effective ways of cultivating the soil. In manufac- tures, on the other hand, there have been important changes due to the discovery of new and rich mines of materials, such as coal, iron, copper. But, on the whole, the difference holds good. In agriculture undoubtedly the opening of new lands through the improvements in transportation has been the most important single cause at work. The cheapening of agricultural products has been due not so much to the more effective use of the soil already under cul- tivation, as to the development of soil not formerly available for the supply of the market. The changes in production and prices have conse- quently affected the producers in these two branches of production in very different ways. In manufac- tures all alike have felt them, and have been able to accommodate themselves to the effects. No doubt the shrewder producers adopt improvements and new inventions first, and, so long as they keep it in the lead, have the advantage of their competitors. They gain by doing a large business at lower prices, while for the time being their slower competitors lose. But new processes and new inventions spread over the whole field in no long time. The opening of a new source of supply, on the other hand, cheap- ens production through a process which the holders of the old source of supply cannot avail themselves of. If wheat is raised in large quantities in Dakota, THE CASE OF THE FARMER. I I 5 the price goes down as effectively as if the wheat fields of England and New York had suddenly be- come more fertile ; but as those wheat fields produce no more than before, the farmer or land owner on the old soil has nothing to offset the lower price. This is the explanation of the agricultural distress of which so much has been heard in Europe in re- cent years, and which has been the main occasion of the revival of protectionist feeling in France, Ger- many, and other countries of the Continent. The farmer on the old lands does not find in improve- ments in production any compensation for lower prices. If he owns the land, he must pocket the loss, and perhaps in the end abandon his land and turn to something else ; such has been a common case in New England. If he is a tenant on the land, he will probably, after a period of struggle and hardship, get lower rents, leaving the landlord as the perma- nent sufferer ; such has been the outcome in old England. If he was in debt before the change took place, he will find his debts growing more burdensome as his money income goes down : such has been the result with many a western farmer. It is in causes of this sort that we find the expla- nation, in part at least, of the restlessness among the western farmers of which the silver agitation is one sign. The fall in the prices of wheat, corn, and other staples, has been due to enormously increased produc- tion in regions which were formerly out of reach of the market : in India, Australia, Russia, as well as in California, Dakota, Washington, Oregon, and the far West generally. In the States where the land has Il6 THE ARGUMENT FOR SILVER. been under cultivation for a generation, like Michi- gan, Wisconsin, Indiana, Illinois, Iowa, Missouri, — almost the whole of the Mississippi valley proper, — the fall in the prices of agricultural staples has meant a serious loss to the farmer, and serious embarrass- ment to him if in debt. He had expected with a bushel of wheat to meet a dollar of interest or repay a dollar of principal ; he finds he needs two bushels. It is not surprising if in the United States he wants higher prices to be attained by the issue of more silver or more money of some sort, and if on the Continent of Europe he asks for protective duties on the products which stream in from distant countries. We touch here the question, so much discussed of late, as to the causes of the recent agricultural depres- sion in the United States. That depression has been by no means due exclusively to the change in pro- duction and prices just described. Other causes must be taken into account if the situation is to be fully and fairly explained ; and a few words in regard to them will not carry us too far from the main sub- ject of this paper. In the first place, it is probable that some of the complaints in regard to the burden of debt on the farmers are simply a legacy from the old days of inflated paper money. Not a few of the debts of the present go back to the years before 1870, when we had prices high in terms of over-issued paper money. These debts have been renewed and con- tinued, in whole or in part ; and the fall in prices has made them heavier and heavier to bear. The evil here again is real, and a remedy is now hard to find. THE CASE OF THE FARMER. 117 The only conclusion which can be laid down with perfect conviction is that we should make sure of preventing the recurrence of a new era of excessive paper money. Next, the fall in prices happens to have been inten- sified in the last few years by one of those periodic stages of general depression which have recurred again and again in our economic history. The process of settling the country and taking up the new lands of the United States has never taken place by regular and steady steps. It has taken place by spells of great activity, accompanied by land speculation and rapid railway building, followed by periods of dul- lness and reaction, in which the advance for the time being has almost ceased. At intervals of ten years, more or less, the population has gone West too fast, and then has waited to recover and take breath for a new effort. In general, the tendency has been to take up new lands quite as fast as, if not faster than, there was profitable use to be made of them. The desire to secure the almost certain future rise in value has caused men to appropriate land and use it before the world really needed its product. Such a rapid advance seems to have taken place in the years 1887 and 1888, indicated by the enormous railway build- ing and the rapid increase in the population of the far West. The usual reaction has followed, with its lower prices of agricultural products and of farming land. Some part of the agricultural depression of 1889 and 1890 represents no more than this periodical downward turn. The next turn upward may be expected to come in due time ; and with it we shall Il8 THE ARGUMENT FOR SILVER. probably hear less of depression in farming, and may expect the silver agitation, the Farmers' Alliance, and kindred movements, to wane, and perhaps to disappear entirely. Still another important circumstance is the general transition in agricultural methods inevitable in those western States which have been settled for a genera- tion or more. When new land is first taken into cultivation the most effective use of it is found in the continuous production of some staple crop like wheat and corn, which can be grown, so long as the cream of the soil is not exhausted, year after year with large returns. After a while, however, the land begins to show signs of exhaustion. The staple crops do not yield as largely as before, and less crude methods of using the soil must be resorted to. Manures have to be applied, and the rotation and selection of crops practised. Meat and dairy pro- ducts, vegetables, fruits, and the miscellaneous agri- cultural articles, must take their place in rural economy. This change has been carried through very largely in States like New York, Pennsylvania, and Ohio. In the heart of the Mississippi valley it is now under way ; but the transition is trying, and to some of the farmers it is impossible. A good share of the American agricultural population has been so steadily bred to the easy and careless use of virgin soil that it cannot accommodate itself to more intensive methods. It is constantly mov- ing westward ; settling for a generation in one spot, and then, as the land shows signs of exhaustion, moving farther west. The more intelligent and ver- THE CASE OP THE FARMER. I 19 satile stay behind, adapt themselves to new condi- tions, and in time prosper under them. The least active also stay behind, and flounder hopelessly in the old ways. But a large number are always mov- ing west. In every State between the Alleghanies and the Missouri River there are large tracts formerly cultivated by native settlers, who have sold their lands, as they showed signs of giving out, to German or Swedish immigrants. These latter have not in- frequently paid good prices for the lands ; but they have been bred to intensive farming, to careful and varied use of the soil, and they have prospered where their native predecessors have been unwilling or unable to adapt themselves to the new conditions. The period of transition is a hard one for all of the native farmers, whether they stay behind or move on, and the lesson of using the soil with more skill and care is learned only under the pressure of neces- sity. In such periods all sorts of remedies for hard times make their appearance and have their run. 1 1 Since these lines were written, Dr. T. B. Veblen has published, in the Chicago your mil of Political Economy, vol. i., No. 1, a valuable paper on the price of wheat since 1867, to which the reader is referred for an investigation of the recent history of agriculture in the United States. IV. The Silver and Gold as Standards of Value. The simple answer to those who propose a greater use of silver as money has been given in the preced- ing pages. They have not made out their case against the existing order of things. There are no serious evils due to an insufficient supply of money. General depression does not exist. Debtors as a class are suffering no hardships. The agricultural depres- sion is not due to the general fall in prices, but to the particular mode in which the changes in the production in agricultural commodities have been brought about, reinforced in the United States by some other causes in no way connected with the cur- iency situation. These negative reasons apply to the arguments both of those who favor international bimetallism and of those who urge the independent use of silver by the United States. When we consider the im- portance not only of stability in the medium of exchange, but of general confidence in that stability, the negative reasons ought to suffice for rejecting the proposals of the silver advocates. But there are positive reasons in addition. 120 SILVER AND GOLD AS STANDARDS OF VALUE. 121 The eventual effect of a silver standard, as we have seem, must be to cause a general rise in prices. The rise, no doubt, would not be immediate, and the change not so prompt or its effects so directly felt as is generally predicted. But come it would ; and the phenomena of rising prices and incomes would in due time appear.' If the present tendency to falling in prices, with stationary or rising money incomes, which are the characteristic features of things as they are, work no hardship to debtors, the contrary case of rising prices and rising money incomes must work hardship to creditors. No doubt that hardship is not so easily seen in the case of a gradual and uneven rise in prices, as it would be if there were an immediate jump of twenty per cent, in all prices. But it is none the less real and serious. With money in- comes rising more decidedly and rapidly than they have been rising of late years, debtors would find it easier to discharge their obligations. Creditors, re- ceiving the same amount of money as they had given, would find the purchasing power of that money lessened. Not only would they be debarred from that participation in the improvements in produc- tion which the present conditions give them, but they would find their possessions, in terms of com- modities, cut down by the extent of the general rise in prices. 1 It is conceivable that the rise in prices might be counteracted to some extent by that more easy and abundant production of com- modities which now causes the tendency to fall. But this cause works out its results very slowly, — more slowly than the silver issues might be expected to work out their effects in the direction of rising prices. 122 THE ARGUMENT FOR SILVER. If we consider now not only the effects of a silver standard on the relations of debtors and creditors for the time being, but its working as a permanent measure, after the period of transition is past, we find further positive reasons against its adoption. These lie in the conditions of the production and use of silver at the present time. It would carry us too far to enter on any detailed discussion of the history and prospects of the production of silver; the salient and important facts can be stated in a few words. The total production of silver has quadrupled within the last three decades, and more than doubled within, the last two decades ; and in the five or ten years of the immediate past there have been no signs of a relaxation of the rate of increase. The following figures, which state the average annual production for five-year periods from 185 1 to 1885, and the annual production in each year since 1885, tell their own story ' : 1 I have used the figures of Professor Soetbeer, as given in his Materials on the Silver Question and continued in the yahrbiicher fur Nationahzkonmnie, vol. i. (3d series), p. 561. His estimates are slightly larger than those of the Director of the United States Mint, who puts the product in 18S9 at 122.8 million ounces troy, equal to about 4,000,000 kilograms ; against Soetbeer's estimate of 4,237,000 kilograms in 1889. The difference arises chiefly because Soetbeer puts a higher estimate than the Director of the Mint on the product of the minor countries, i. e. , those other than the United States and Mexico. As to the rate of increase in the total product, the two authorities agree. In 1891 there was another marked increase over 1890. The Direc- tor of the Mint estimated the world's product in 1890 at 134.4 million ounces ; in 1891 at 144 million ounces. The United States mine about two fifths of the total product of SILVER AND GOLD \s STANDARDS OF VALUE. 123 The average annual product of silver in 1851-55 was 8S6 thousand kilograms. " " 1856-60 " 905 " " 1861-65 " 1,101 " " 1866-70 " 1,339 " " 1871-75 " 1,969 " " 1876-80 " 2,450 " " " " 1881-85 " 2,862 " " The product in the year 1886 was 3, 021 " " 1887 " 3,324 ' 188S " 3,673 1 1889 " 4,237 " " 1890 " 4,600 " How long and how fast this extraordinary increase will continue, it is impossible to say. Geologists are disposed to believe that it will not continue very long ; but for recent years the hard facts of experi- ence are against them. Certainly the indications for the immediate future point to a further increase in the total amount of silver mined. Meanwhile, the monetary field over which this growing volume of silver can spread is very limited. In this regard there is a vital difference between the present silver situation and the gold situation at the time of the great gold discoveries of 1848-50. From 1850 to i860 the production of gold increased at an unexampled rate ; but practically all the mints of the civilized world were then open to it, while the half- civilized countries also absorbed large quantities. At the present time the United States is the only civilized country which coins silver except as a sub- sidiary coin, or which proposes to do so. The coun- silver, and under the act of 1890 buy almost exactly the same amount. The Director of the Mint estimates the silver product of the United States in 1890 at fifty-four million ounces, exactly the amount which the Treasury is required to buy each year under the present law. For 1S91, he stated the product to be 58.3 million ounces. 124 THE ARGUMENT FOR SILVER. tries in which silver is freely coined are India, Mexico, Japan, and a few South American countries. The field for the use of silver in these countries is considerable ; but it is at least doubtful whether they will absorb the steadily growing product at existing prices. The United States, at all events, is the one civilized country in which there is a serious proposal to take the risks which lie in the future production and value of silver, and to rest the circulating medium on a basis so narrow and unstable. On the other hand, gold is freely coined, and is now the basis of the medium of exchange, in all civ- ilized countries. The wider the field over which a given medium of exchange is used, the less likely is it that changes in its quantity will affect its value. The wide use of gold among the countries with which our commercial relations are most intimate and im- portant gives a guaranty that no great and violent fluctuations will take place in its value, or in the general range of prices which in the long run is determined by its value ; a guaranty which we should certainly not have if the United States alone were to use silver. In fact, gold performs the functions of a measure of value and of a standard of value with as close an approach to perfection as there is any reasonable ground for expecting from any monetary system. Fluctuations in general prices no doubt take place under it ; especially the fluctuations due to the varia- tions in the volume of credit currency outstanding, such as have been referred to frequently in the pre- ceding pages. But these are inevitable under any SILVER AND GOLD AS STANDARDS UF VALUE. 125 system of coinage ; and they are certainly mitigated in their effects by the use of gold as a basis, since the easy flow of that metal from country to country serves to correct sooner or later any exceptional rise or fall in an individual country. Over long periods of time, and for the whole civilized world, we have had, in recent years, that general downward move- ment of prices, connected with the general improve- ments in production, as to which I have already stated the reasons for not thinking the working of the gold standard to give grounds for serious com- plaint. The same trend of events may be expected as far in the future as we can make any sort of prevision. All the indications, so far as we can see, are that the advance in the arts will not relax, that commodities will be produced more and more cheaply and abundantly, that the general trend of prices in civilized countries will be downward, while money incomes will continue to be stationary or rising. The present monetary situation, and that for the visible future, seem to be on the whole satisfactory. For this reason the schemes proposed by various eminent economists for a tabular or multiple stand- ard of value, do not seem to me to be called for by any serious exigency not met by the maintenance of the gold standard ; apart from the fact that the habits of the people, and the difficulties of securing accurate gauges of general changes in prices, make these schemes in any case quite impracticable. The only contingencies with which the gold standard does not deal to reasonable satisfaction are those that may arise in connection with contracts run- 126 THE ARGUMENT FOR SILVER. ning over very long periods of time. When a government incurs a huge national debt, with no ex- pectation or intention of paying it for centuries to come ; or when a railway company, to cite a recent case, issues bonds payable after the lapse of a hun- dred years, — chances are taken as to the economic de- velopments of the future which must remain chances whatever the way in which the contract is framed, whether for payment in gold, or silver, or grain, or by a multiple standard. There is only one certain way of guarding against the difficulties that may arise from such contracts, — to make none of them. Lastly, there is an objection to a change to a silver standard, or to any proposal of the sort, less tangible perhaps than those stated hitherto, yet more import- ant and fundamental. It is an objection to the morale of the thing ; to the disposition to tinker with the currency as a remedy for real or fancied evils. The present agitation in the United States for the use of silver is not the result of those considerations which have been discussed in this paper, and which have moved economists of eminence to advocate bimetal- lism. The reader may have been struck by the fact that the reasoning of the preceding pages touches only a small part of the ordinary arguments advanced in this country by the silver advocates. Most of their arguments are for an increase in the currency on general principles. These apply in favor of the issue of a flood of paper money as readily as they do in favor of the silver standard, and are mingled with schemes that can have no respectable backing, like that for government issues on the pledge of grain or SILVER AND GOLD AS STANDARDS OF VALUE. \2J land. Such reasons of real weight as may be ad- vanced in favor of bimetallism are not to be rejected merely because they keep bad company. But the general character of the present silver agitation is certainly a strong argument against it. It is born of restlessness and ignorance. Whenever an era of real or apparent depression sets in, some portion of the community ascribes it to a single cause — the tariff, the railways, the currency, — and looks for great things from the removal of that one cause. The most com- mon panacea is the increase of the currency ; and the silver agitation is only one form of the resort to this panacea. No lesson just now is more important for American democracy than that stability is the first quality needed in the medium of exchange, and that only harm can result from experimenting with it, and looking to changes in it for the cure of real or fancied evils. V. The Expansion of the Currency. In conclusion, we may take up the question of the expansion of the currency of the United States, and the mode in which the circulating medium may best be made to accommodate itself to the growing wealth and transactions of the community. So far as the past is concerned, the evidence is ample that the circulating medium has grown regularly and steadily, and has not left the people of the United States with any dearth of means for carrying on their ex- changes. The circulating medium of a country like the United States consists of two different kinds. The one, which I have called large change, serves for every-day retail transactions ; the other carries on the larger exchanges, chiefly of wholesale trade and production. We have seen, in the first part of this paper, how rapid and steady has been the in- crease in the supply of large change. Equally rapid, and even more striking, has been the increase in the medium of exchange for large transactions. That medium, to repeat once more, is to be found in bank deposits, bank checks, and bank clearings. The vol- ume of these has shown, year by year, a steady and rapid increase. Since 1878 the volume of individual 128 THE EXPANSION" OF THE CURRENCY. I 29 deposits in national banks alone has more than doubled, rising from an average of six hundred and fifteen millions in 1878 to an average of over seven- teen hundred millions in 1892. 1 An increase at a rate even more rapid has taken place in the deposits in State banks and trust companies. These institu- tions, and especially the trust companies, play a much more important part in the mechanism of exchange now than they did in 1878 ; and their deposits in 1892 amounted to over a thousand millions. The accurate figures which we are so fortunate as to possess in regard to the operations of the national banks show that this form of currency has accommo- dated itself closely to the growth of business trans- actions : rising rapidly from 1878 to 1882, slacken- ing with the period of depression which was marked by the panic of 1884, and again rising regularly in the last five years. This part of the circulating medium, at any given time the most important and 1 The individual deposits in the national banks, >>n or about Octo- ber 1st, have been as follows since 1S78 : 1878 620.2 millions. 1879 719-7 " 1880 8735 1881 1,071.0 " 1882 1,122.5 " 1883 1,049 -4 " 1884 975.2 1885 1. 102. 4 1886 1, 1730 " 1887 1,249 5 " 1888 I-3SO-3 " •889 1.475-5 1890 1, 521.7 1891 1,588.3 1892 J.753-3 These are the figures as to the national banks only ; to which must be added the deposits in State and private banks. For an estimate of the growth of deposits in all banking institutions, see the Quarterly Journal of Economics, vol. i, p. 40S, and vol. v, p. 240. 130 THE ARGUMENT FOR SILVER. effective in the whole, will grow in the future as it has grown in the past ; and in this direction we may be sure that there will be no failure of the medium of exchange to grow in response to increasing busi- ness transactions. As a basis for deposit and check currency, a certain amount of cash must be kept in bank reserves. That cash in European countries consists mainly of gold ; and since the resumption of specie payments, 1 it has been made up very largely of gold in the banks of the United States also. But it cannot be said that the world finds its supply of gold inadequate for this purpose. A comparatively small amount of gold suffices, and all the evidence goes to show that there has been no difficulty in securing enough. The holdings of gold in the reservoirs of the great banks, so far from declining, have shown a consider- able increase ; and that this increase has not been due to any struggle for gold, and has not been ac- companied by any disturbing effects, is shown by the fact that the rate of discount has not been high % and has not shown any unusual fluctuations. So far as that other part of the currency which I have called large change is concerned, it is beyond question that the direct use of gold coin in all civil- ized countries, or even in the United States alone, would absorb more gold than the annual production could easily supply. The question is, what form of currency, resting on a gold basis, shall be used to 1 Or rather, since the great inflow of gold into the United States in the years 1880-81, which was the main cause in bringing about the large holdings of gold by the banks of the United States. THE EXPANSION OF THE CURRENCY. 13I supply that need? Ideally, the best currency of this sort consists of bank-notes, issued under condi- tions insuring beyond doubt both ultimate payment and immediate redemption in specie. This form of large change adapts itself most readily and easily to the needs of the community, and offers least oppor- tunity and temptation for issue to excess. But for the silver issues which began in 1878, it might have been expected, when once the resumption of specie payments was settled, that the United States would look to the national banking system for the supply of this want of money. As at present issued, how- ever, national bank-notes are permitted to occupy the field only in small part. Whether the condi- tions of their issue will be so modified as to permit a renewed growth of this form of the circulating medi- um remains to be seen. The suggestion that State- banks be again permitted to issue notes, by repeal- ing the ten per cent, tax imposed on them in 1865, brings with it an undeniable danger of an uncertain and irredeemable currency, such as to make the pro- posal in its bald form no less objectionable than the silver legislation of 1890. But undoubtedly it would be possible (assuming that no insuperable constitu- tional difficulties stood in the way) to frame a safe and sound system of issues by banks incorporated in the States. With central supervision and control, — which must necessarily be by federal authority, — and with provision for unfailing redemption of the notes, a sound currency could be secured respond ing in its volume to the growing needs of the com- munity. Such a change would be virtually a remod- 132 THE ARGUMENT FOR SILVER. elling of the national banking system. Eventually, it may be hoped that the United States will leave the path of direct government issues, whether paper or silver, and will put the provision of the form of cur- rency which its paper and silver have supplied into the hands of banks, under a system enabling them at once to put forth an unmistakably sound currency and to offer their services to industry with the mini- mum of restraint. But no steps in this direction can be hoped for until the questions as to the disposal of the government currency are settled ; and, among these, first of all, the question whether that currency, and all the circulating medium, shall rest on a gold or on a silver basis. POSTSCRIPT. Since the preceding pages were written, events have marched fast. The act of 1890 has been re- pealed. The Treasury in consequence has had to sustain, not a constantly increasing volume of silver currency, but a stationary mass. Nevertheless, the crisis of 1 893 and its after-effects have made its task- in almost every way more difficult than it had ever been before, and its operations more instructive as to the dangers and anomalies to which the currency legislation of the past has led. At the same time, the demand for the free coinage of silver has been raised more loudly and insistently than ever, and has become the issue of a national campaign. The time is not ripe for a detailed account of the experiences of the last three years ; still less for any attempt to state the probable ultimate outcome. But it will be convenient to narrate briefly the salient events to the present date, 1 and to point out some further lessons, even though of a sort very similar to those of earlier years, from the troubles of the immediate past. It has been seen ~ that in the years 1891 and 1892 there was activity and prosperity, due mainly to the 1 Midsummer of 1896. - See pp. 67, 68. 133 134 POSTSCRIPT. unusually heavy foreign demand for agricultural staples. The conditions for the moment were favor- able to the absorption and use of the large currency issues of the act of 1890. But with the close of 1892 a distinct chill was felt in the industrial world. Im- ports had increased, while exports declined somewhat. There was a considerable outflow of gold in 1892; and in the early part of 1893 that outflow continued, and assumed very large proportions. The adverse balance of international payments, indicated by this movement, was due partly to causes of every-day operation, partly to a large flow of railway securities from Europe, and especially from London, to the United States. This sale of American securities was in turn the result of mixed causes: depression in Europe, distrust of American railway manage- ment, fear of a suspension of gold payments in the United States. At all events, heavy payments had to be made abroad on American account ; and in the first five months of 1893 the exports of gold were nearly sixty millions of dollars. The drain of gold now fell directly on the Treasury. This is one striking new feature in the currency situ- ation of recent years. Before 1 890 an outflow of gold did not necessarily or indeed usually fall on the Treasury. What gold had been needed for export was readily furnished by the banks from their own supplies. There was general confidence that the Treasury would redeem legal-tenders without fail in gold ; and hence no disposition to hold the specie itself rather than the right to it. After 1890, and especially after 1892, all this was changed. The new POSTSCRIPT. 135 and enlarged silver issues had shaken general confi- dence. The use of legal-tenders in place of gold, in payments by the Treasury to the New York banks, was daily proof to the financial world that the gov- ernment's gold resources were strained ' ; and there was the ominous decline in the gold reserve. The banks no longer furnished gold to any one who asked for it. They furnished United States notes of the old issue, or Treasury notes of 1890, which could be exchanged for gold over the government's counters. This has come to be the established situ- ation. Every export drain for gold falls mainly on the Treasury, and reduces the gold reserve.' The banks, and especially the New York banks, have not indeed failed to show public spirit in coming to the aid of the government in its difficult task of maintaining gold payments. They have at various times supplied gold either by the purchase of bonds, or — what showed 1 Since 1892, practically no gold has been paid out by the Sub- Treasury at New York in its settlements with the clearing-house banks. In 1893, during the height of the panic, some gold coin was paid out, because of the temporary receipts of gold coin for customs at that time to which reference is made below. But this was an ex- ception. During the whole fiscal year 1894-95 the New York Sub- Treasury settled its balances entirely in legal tenders. See the Report of the Tt-easurer for 1S95, p. 118. — Compare p. 60, above, where the beginnings of thi 3 process are noted. 2 In 1893 a part of the gold exported still came from the supplies in the banks, and occasional amounts have come from the same source in later years. But in the main, the Treasury has had to supply the gold demanded for export ; and this more and more exclusively as time went on, and as confidence in its stability was shaken more and more. 136 POSTSCRIPT. more clearly an unselfish motive — by the deposit of gold at the Treasury in exchange for legal-tender notes. But operations of this sort, helpful though they may be for tiding over some temporary exi- gency, are a poor substitute for real strength in the Treasury, and for real confidence by the community in the solidity of the circulating medium. The gold stock of the Treasury consequently de- clined. At the close of 1892 it had amounted to over one hundred and twenty millions. In April of 1893 it fell, for the first time since the resumption of specie payments, below the traditional " reserve " of one hundred millions. The government made strenuous efforts to preserve its holdings by ex- changes of paper for gold with banks in different parts of the country. But the spell had been broken. No measures could restore the Treasury to that position of real strength and unquestioned prestige which should belong to the institution that holds the final specie reserve of the country. Since 1893, the Treasury has been almost regularly a suppliant. It has borrowed, and arranged, and transferred, and resorted to every device which might give aid for the moment. It has never been strong and inde- pendent ; and it has several times come close to virtual bankruptcy. The policy of compromise, of taking chances with risky experiments, which had been followed in the legislation of 1878 and 1890, met at last the reward it deserved. The great crisis of 1893 was in good part the result of the shock to general confidence which thus ensued. It was naturally held up by the opponents POSTSCRIPT. 137 of the silver issues as mainly an object lesson in the effects of the silver policy. To the careful student of that policy it proved quite as instructive in its after- effects as in its immediate causes and in its course. Uneasiness prevailed in the spring of 1893, and became greater and greater as gold exports con- tinued and the Treasury reserve sank. There were heavy failures, of banks as well as of mercantile houses ; and in June runs on banks began in several parts of the country. By July the well-defined phe- nomena of an acute commercial crisis appeared, and during that month and August were seen on a scale and with an intensity never surpassed. The cash reserves of banks were depleted ; no business concern knew whether its debtors would meet en- gagements, and whether in turn it could find funds to meet accruing obligations ; loans were in feverish demand, and interest rates high almost to the point of prohibition ; the banks themselves were sus- pected. — some more, some less, some with reason, some without reason, — of impending failure; actual cash was wanted by every one. Notwithstanding a resort, in practically all the larger cities of the coun- try, to clearing-house certificates as a means of set- tling balances between banks, a partial suspension of payments over the counter took place ; almost everywhere cash was for some weeks at a premium as compared with certified checks on unquestionably solvent banks. Failures followed failures, — of mer- cantile houses, of great corporations, of long-estab- lished banks. How far the crisis was due to the silver legislation, 138 POSTSCRIPT. how far to other causes, must remain impossible of satisfactory proof. Beyond question, the general uneasiness as to the currency situation and its out- come was the prime occasion of the crisis. Equally beyond question, the crisis in its course became a panic, in the literal sense of the word : an unreason- ing sanvc qui pent, which brought to the ground many business ventures that in times of calm and order would have held their own without difficulty. When fairly in progress, the panic naturally caused the overt failure of many establishments which, though in fact in a state of insolvency, might have been able, under ordinary financial conditions, to run along for some time, and indeed, by good luck or good management, might in the end have extricated o 0*0 themselves entirely from danger. While many of the failures of 1S93 were temporal}- suspensions of sol- vent banks and firms, due simply to the stress of the panic, many were real failures, due to inherent weak- ness. The more numerous and wide-reaching the industrial break-downs of this latter sort, the more probable was it that the crisis of 1893, while occa- sioned by the silver danger, was due also to the deeper causes which have brought about, in all coun- tries throughout our century, an almost regular succession of these economic storms. It is true that the years immediately preceding 1893, while they had been years of activity, had not shown the fever- ish speculation which commonly precedes the storm. Yet in some parts of the West, notably in Colorado, there had been wild gambling in land ; and, what was probably more important, there had been, in POSTSCRIPT. 139 the preceding years, from 1886 to 1890, a great deal of reckless investment in railways and in iron-making industries. Certainly some great railway corpora- tions had been living from hand to mouth for several years before 1893, borrowing heavily on short time, hoping for a turn in their favor, helped for a while by the favorable conditions of 1891 and 1892, and finally brought to bankruptcy by the panic. Other large corporations and firms undoubtedly had a similar experience ; so that the crisis of 1893 had not merely the immediate effects of a momentary financial pinch of great severity, but, in no small de- gree, the larger and longer effects of an industrial crisis leading to prolonged liquidation and substan- tial readjustment of the community's productive forces. One effect of the crisis was prompt and clear. It led to the repeal of the act of 1890. President Cleveland, at the close of June, called an extra ses- sion of Congress, to meet in early August. Through the influence and prestige of the administration, the unconditional repeal of the silver purchase act was brought about. In the House the vote for it was reached within two weeks after the session began. In the Senate the struggle was bitter, and lasted over two months. The repeal bill there was not carried until the close of October ; and it did not become law until the 2d of November, — some weeks after the panic had subsided. All the influence of the administration, all the strength of public opin- ion, all the pressure from the crisis, were required to bring about the repeal. It was not accomplished I40 POSTSCRIPT. without shattering the cohesion of the Democratic party, then fresh from its victory in the election of 1892 ; and it prepared the way for that breach in the party which took place so dramatically in 1896. The repeal of the silver purchase act put an end to the issues of 1890; and that act itself had put an end to the issues of 1878. The result was that the currency of the United States was left in a position of almost complete rigidity. The United States notes, or old legal tenders, stood at the precise amount ' at which Congress had left them in 1878. All three were fixed in amount ; the quantity in cir- culation was subject to reduction only by the possi- bility of their being hoarded in the Treasury, — a process which, to be sure, was resorted to after a while on no small scale. The national bank-notes might indeed contract or enlarge somewhat ; but under the conditions as to the purchase of bonds, no real elasticity could appear as to them. The volume of the whole mass of the paper and silver money was so settled as to be in no way responsive to the varying demands of the community for its use in circulation. One change, indeed, took place after 1893 which affected in some small degree the composition, though not the volume, of the silver currency. A certain quantity of the Treasury notes of 1890 was transformed into silver certificates. This was the re- 1 In May, 1878, Congress forbade the further retirement of United States notes, and enacted that any notes received or redeemed by the Treasury should not be destroyed, but reissued. The volume then outstanding was 346,681,016. POSTSCRIPT. 141 suit of a provision in the act of 1890 which probably was not expected to bring about any such transfor- mation.' That act made the new notes payable in gold or in silver coin, at the government's option ; it re- quired also that no greater or less amount of such notes should be outstanding than the silver bullion or coin " then held in the Treasury " against them. The government has always redeemed them in gold, when desired. So redeemed, they cannot be de- stroyed, but must be either reissued or hoarded as Treasury cash ; since redemption in gold does not affect the silver held in the Treasury against them, which determines the volume that must be outstand- ing. But it may happen that redemption of the notes in silver dollars or certificates is asked, either because some one wishes to take advantage of the government's offer to transfer silver dollars free, or because silver certificates of small denominations are wanted. When so redeemed, the silver dollars " then held in the Treasury " specifically against the notes, become less. The notes redeemed in silver are destroyed once for all, their place in circulation being taken by silver dollars and certificates. Prac- tically, the place is filled by silver certificates, for the quantity of silver dollars in use shows no tendency to grow beyond the sum (35 or 60 millions), which it reached as early as 1886. 2 The net result of this curious transformation is that the amount of Treas- 1 The act of 1890 was not repealed in toto in 1S93. Only those parts were repealed which directed the purchase of silver and the issue of Treasury notes. The rest remained in force. 2 See above, pp. 15, 16, 45. I_p POSTSCRIPT. ury notes of 1 890 is slowly but steadily declining, and that the paper which the government may be called on to redeem on presentation in gold is be- coming less by so much. The total issue of Treas- ury notes under the act of 1890 was nearly $1 56,000.- OOO. Some slight redemption in silver took place almost at once ; and by June 1, 1896, this process had been carried so far that the amount of notes outstanding had fallen, in round numbers, to $131,- 000,00. The change is (as yet) not quantitatively of great importance, and it serves chiefly to illustrate the anomalies of the situation as it has developed under the haphazard legislation of the last gener- ation. We may proceed now to consider the course of events after the crisis of 1893, and the repeal of the silver purchase act. During the crisis itself, in the summer of 1893, the Treasury suffered little ; indeed, it was able to in- crease its gold holdings. So great was then the demand for cash, that large quantities of gold were imported from Europe. At the same time, the fact that the community was little used to gold in every- day payments, caused all forms of paper money to be especially prized. " Currency " of any sort being in demand by banks and individuals, gold was used in payments to the Treasury. The curious phe- nomenon thus appeared that in the height of the crisis which the fear of the suspension of gold pay- ments had occasioned, the Treasury took in a larger proportion of gold coin than for many years. During August and September, one-half of the customs pay- POSTSCRIPT. 143 merits in New York were made in gold coin. 1 But this was a phenomenon of very short duration. The panic died down, having run its course like a fever. Lethargy succeeded. Cash, so eagerly demanded in August and September, became superabundant in October and November. The receipts of gold coin ceased : the Treasury once more, and now defini- tively, received only legal-tenders of the old and new issues, and silver certificates. What was much more serious, the Treasury had to face those condi- tions of severe and prolonged business depression which inevitably follow an acute crisis. Several factors have borne on the operations of the Treasury during the period of depression which began with the autumn of 1893. Some have been made much of in popular discussion, others have failed to receive the attention they deserve. Their efforts are inextricably intermingled ; yet, for clearer understanding of the situation, they should be con- sidered one by one. First, and not sufficiently attended to in current discussion, is the redundancy of the currency, — the existence of more cash than the transactions of the community call for. The experience of 1884-85, as narrated in the preceding pages," has been repeated, but under more unfavorable conditions and with 1 They were made in gold coin, not in gold certificates. From 1882 (when the issue of gold certificates was again authorized) to 1892, the Treasury gold receipts had come almost exclusively in the form of gold certificates. These practically ceased to appear in the New York customs receipts since the early part of 1892, nor have they appeared at any time since that date. ' 2 See above, pp. 25-37. 144 POSTSCRIPT. more unfortunate results. The decline in business activity brought with it inevitably and easily a de- cline in bank deposits. Under any monetary system, this must have brought with it an accumulation of cash in bank vaults, and a heavy surplus re- serve. Under the top-heavy and inelastic mone- tary system, or lack of system, which the United States had patched up, the accumulation took place on an enormous and unmanageable scale. Even though no longer increasing in volume, the paper currency of the community became excessive for the diminished transactions; and it flowed back to the financial centres. Silver certificates, it is true, whose volume had ceased to grow (with the exception just noticed) since 1890, continued in the main to be in active use for large change. But legal-tenders heaped up in the financial centres, and especially in New York. 1 The surplus reserve in the metropolis reached unexampled figures. The legal-tenders amounted for months at a time to more than one hundred millions. A chronic plethora of money set in at New York. A great further store of cash was 1 No distinction appeared between the old United States notes, or greenbacks, and the new Treasury notes of 1890. In the first year or two after the issue of the new notes, there had been some disposi- tion in financial circles to distinguish between the Treasury notes and the old legal-tenders, from a fear that the Treasury might maintain gold payments more unswervingly for the old issues than for the new. But as it appeared that the administration was equally steadfast for the maintenance at gold of all the government promises to pay, the legal-tenders of either issue, identical as they were in their standing at law, became one homogeneous mass in their economic aspects. Com- pare what was said at pp. 79, 80, above. POSTSCRIPT. 145 hoarded and put away at the same time, as will pres- ently be seen, in the vaults of the government. Be- yond question, under the conditions of depression which set in after 1893, the accumulated mass of paper and silver money was redundant. In this situation, the national bank-note circulation remained little changed : indeed, it rose somewhat. 1 During the crisis of 1893, some banks had bought bonds and prepared for an increase of circulation, in order to get more of the ready cash so greatly in demand during the monetary pinch. So much time was required for preparing and printing the notes that this resource was of little avail for its immediate object. It became effective after an interval so long that it served mainly to increase the cash in circula- tion when it had already become excessive. Some further increase took place afterwards, in conse- quence of the later issues of government bonds and the possibility of profit from their lower price. The changes were not of great moment, and served chiefly to show how inelastic and unresponsive to the needs of the community was the process of bank-notes issue under the bank-deposit system. The obvious and important change from the situa- tion as it stood before 1890, was that the bank-note circulation was no longer declining, and no longer 1 In continuation of the figures given on page 40, note, the bank- note circulation is here stated for recent years : Gross. Net. (Total outstanding.) (Less lawful money on deposit.) October 31, 18Q3 209.3 188.0 " 31, 1894 207.6 179.4 " 31,1895 2<3-9 190.2 146 POSTSCRIPT. making way for the government issues : leaving these to produce their full and unmitigated effects. The redundancy of the currency promoted gold exports, — the next factor among those which affected the Treasury. These took place almost steadily, and carried out of the country much more gold than was added to its stock by the mines. During 1893, it is true, the heavy imports of the panic period overcame the outflowing tide for a space ; but the gold then brought in soon went out again, and was followed by more and more. 1 Just how or why this outflow set in is not so easy to state. It was promoted, as has just been said, by the redundancy of the cur- rency. But it was not brought about through the process which is usually associated with excessive currency issues, — higher prices, larger imports, and then an outflow of specie. There were no higher prices or larger imports. The impotence of a plenty of cash to affect prices with any sureness or prompt- ness in credit-using communities, was never more strikingly illustrated than in the United States during 1894 and 1895. The plenty of cash un- doubtedly had some effect in promoting the outflow of gold, by making loanable funds abundant and cheap in New York, and so enabling specie to be with- drawn thence without any check from a rise in the rate of discount. But the exports were due directly 1 The net exports of geld during the calendar years are stated thus in the Treasury statistics : 1892, 59.1 millions. 1893, 7.0 " 1894, 81.2 1895, 72.1 P( »STS< RIPT. 147 to other causes ; probably in the main to further sales of American securities by uneasy European in- vestors. Other causes, — such as the large remittances for American travellers abroad, — also affected the balance of international payments. At all events, the balance was such that specie had to be remitted. That specie, as we have seen, was called for from the Treasury stock ; so that the government had to face both an unwieldy and excessive mass of promises to pay gold on demand, and a heavy foreign drain on its stock of the metal. These conditions were embarrassing enough ; but to them was added another source of embarrass- ment, — a declining and deficient revenue. Under any rational or deliberate system, the acci- dent of a surplus or deficit in the public revenues would not be of special importance for the stabilit3* of the monetary system. But the Treasury of the United States has such duties and obligations that the functions as custodian of the tax receipts, dis- burser of the payments, and holder of the main specie reserve for the circulating medium, are inex- tricably bound together. No special fund of gold is set aside for the redemption of its five hundred millions of demand promises to pay, nor is there any systematic provision for replenishing its stock when drained by ordinary payments. This situation is the effect of a long series of measures, no one of which looked to such an outcome. The establishment of the Independent Treasury in 1846 was designed to divorce the government completely from banks and paper currency. Then came the legal-tender issues 148 POSTSCRIPT. of the Civil War, regarded at the time as a tempo- rary resource, but, as it proved, of long duration and unexpected effect. Resumption was undertaken in 1875, and the notes, formerly inconvertible, became redeemable in specie after 1879; Du t before resump- tion was accomplished it was provided, in 1878, that even when redeemed they should remain in use as permanent government paper. The silver legislation of 1878 and 1 890 then added to the mass of currency which the Treasury was called on to sustain. That Treasury, nevertheless, was still organized on the basis of its simple functions of 1846; exposed to fluctuations in its resources from changes in the rev- enue and expenditures, and provided with no sepa- rate funds for its task of upholding a huge quantity of paper money. The anomalies and dangers of the situation were concealed for a long series of years, from 1879 to 1890, by the accident of a large surplus revenue. Less fortunate conditions were bound to come sooner or later ; and, as it happened, when they did come, they were as severely unfavorable as the earlier conditions had been in high degree favorable. At the same time that the silver act of 1890 added to the Treasury's obligations, the McKinley tariff act of 1890 made a heavy cut in the revenue by abolishing the duty on imported sugar, while adding to the expenditures by a bounty on domestic sugar. Even though the repeal of the sugar duty did not take effect till near the beginning of the fiscal year 1891-92, and though the business activity of the time caused heavy imports and larger customs POSTSCRIPT. 149 revenue, the administration of President Harrison met serious embarrassment during its last year, and during its last months lived simply from hand to mouth. Nothing ever happened more lucky for the Republican party than its defeat in 1892, and its fall from power and from obvious responsibility in 1893. The incoming administration of President Cleveland found a depleted Treasury. Then came the crash of 1893 ; imports fell, and the customs revenue with them. The Treasury was called on to meet a foreign drain of gold, and at the same time its ordinary payments exceeded its tax receipts. Some attempt was made later to remedy the fiscal situation by the tariff act of 1894. That measure, though by no means so vigorous in its provision for fiscal needs as the situation demanded, would prob- ably have produced a revenue equal to the expendi- tures had it not been for the continuing depression, and the consequent scantiness of the customs and other receipts. As it was, several years of deficit succeeded each other. For the fiscal year 1894, the excess of expenditures over ordinary receipts was seventy millions; for 1895, it was forty-three mil- lions; for 1896, it was twenty-six millions. With an insufficient revenue ; with a redundant and unmanageable mass of paper money accumulating in financial centres; with a drain for gold from abroad — with all this, it was natural that at one time and another legal-tender notes should be presented at the Treasury for redemption, even when gold was not wanted for export. A run of this sort was a simple result of the complete shattering of the Treasury's I50 POSTSCRIPT. former strong condition. The surprising thing was that runs were so scarce and slight. At one time, in January and February of 1895, there was indeed a serious run ; ' some forty-three millions of gold were withdrawn for domestic hoarding, and the Treasury stock was reduced to forty-one millions. But, in the main, the forbearance of the business and financial community has been remarkable. Banks and other holders of legal-tenders discouraged their presenta- tion for gold, except when it was wanted for interna- tional payments. The situation was indeed neither dignified for the government nor comfortable for the Treasury officials; but without the aid and forbear- ance of those having large financial resources the situation of the Treasury would have become unten- able at any moment. Under this complication of burdens and responsi- bilities, the administration resorted to a succession of bond issues, as a means both of replenishing its gold holdings and of meeting its deficit. All these loans have been made under the authority of the Resumption Act of 1875, and with the forms of bonds specified in that measure. As a mode of complying with the requirements of law, the admin- istration may be said first to have used all its cash resources, including its gold holdings, to meet the deficit in the reserve ; and thereupon to have sold bonds to replenish its gold holdings and maintain gold payments. Substantially, the bond proceeds 1 See the brief statement in the Report of the Secretary of the Treas- ury for i8q5, at p. lv. It was at this time that the Treasury resorted to the bond-syndicate loan of 1895. POSTSCRIPT. 151 have been used for the double purpose. The right to borrow in this way, under the terms of the Resumption Act, has never been seriously disputed. 1 That it was an awkward and undesirable means of meeting the exigencies of the case, was obvious. The administration repeatedly asked Congress to authorize other and more straightforward methods. But nothing could be got from Congress ; not be- cause any one was satisfied with the existing situa- tion, but because of the fundamental difference of opinion on the question whether gold should be maintained as the basis of the currency. So long as this crucial question was unsettled, a dead-lock in all monetary legislation was unavoidable. With the details of the bond sales and their man- agement we are not here concerned. Perhaps the management was not always perfect ; but probably none of the heated critics of the administration would have succeeded better had they attempted themselves to meet the extraordinary difficulties of the case." The first sale, or loan, took place in Feb- ruary, 1894, of fifty millions of five per cent, bonds. A second, of the same amount, came in November of the same year ; both being taken by the banks of New York. In February of 1895, when the com- plete run on the Treasury was going on, the much- discussed bond syndicate sale took place, by which 1 The doubts expressed above, at p. 88, have thus not stood in the way of bond sales under the Resumption Act. s On the bond-syndicate sale of 1895, which has been most bitterly criticised, see an excellent article by Mr. A. 1>. \oyes, in the Politi- cal Science Quarterly for December, 1895. 152 POSTSCRIPT. sixty-five millions of gold were got for sixty-two millions of four per cent, bonds. In February of 1896, still another loan was made, this time by the issue of one hundred millions of bonds through gen- eral subscription. In all of these transactions it was stipulated that the bonds should be paid for in gold ; but in all of them (except the bond-syndicate loan 1895) more or less of the gold paid in had been pro- cured from the Treasury by the presentation of its own notes for redemption. One further aspect of the situation now needs to be considered : the accumulation of legal-tenders in the Treasury. Legal-tender notes received by the government, whether in payment of taxes or in con- sequence of their redemption in gold, become available cash, and may be re-issued in ordinary disbursements. But they must not necessarily be re-issued. They may not indeed be destroyed : but they may be hoarded and stowed away. Whatever amounts are held by the Treasury diminish by so much the volume in circulation. We have seen that in 1884- 85, when there was danger from the redundancy of the silver currency of that time, Secretary Manning hoarded, and so put out of harm's way, a great quantity of silver dollars and certificates. 1 He was fortunate at that time in having a large surplus, and so was able to carry out his policy, with little overt difficulty, by simply ceasing to pay off the public debt. His successors in 1894-96 were less fortunate. They had to borrow largely and heavily, at times under hard terms, to achieve the same result. The 1 See above, Part T., section iv., especially p. 32. POSTSCRIPT. 153 proceeds of the bond sales were used not only to meet the deficit, but to gather in a large quantity of the redundant government issues. The operation was carried out on even a greater scale than in the earlier period. The accumulation began in 1894: by the close of August of that year, over fifty millions of legal-tender notes were in the Treasury cash. In May, 1895, the amount had risen to 84 millions; it soon arose to 100 millions, and through the greater part of 1895 and the first half of 1896, ranged steadily over 100 millions. In June, 1896, it was over 120 millions. Silver certificates, though not always easy to manage, were not accumulated in any noticeable proportions. Being in smaller de- nominations, they remained more steadily in cir- culation. It was the legal tenders, — partly of the old issue, partly Treasury notes of 1890, — which were accumulated in these extraordinary quantities. And notwithstanding this removal from active use of such an enormous mass of paper, which must have come in the first instance out of bank holdings, the reserves of the banks showed no tendency to shrink. They remained at figures which brought an easy money market : a fact which shows how greatly the total government issues had come to exceed the needs of the community for the shrunken transac- tions of the period of depression. So the situation stands. It is unbearable, and cannot endure. The large mass of government paper and silver money, even though in time the 154 POSTSCRIPT. country's advance in wealth may make it less obviously redundant, must remain full of dangers and temptations. The Treasury is exposed to great irregularities in its receipts, and to a haphazard sys- tem of appropriations and expenses. It is oppressed in one year with an unmanageable surplus, and in another with an equally unmanageable deficit ; yet is able to borrow anew, or to pay off debts of old, only under legislation devised a generation ago to meet very different conditions ; and is charged, never- theless, with the duty of maintaining at par with gold a thousand millions of fiduciary money.' Sooner or later, this absurd system must be replaced by some- thing better : either by a Treasury equipped in some way to meet its responsibilities, or — far better — by relieving it of the monetary responsibilities which have been imprudently put upon it. But before this task can be taken in hand, the question as to the basis of the entire monetary system must be settled. It is the struggle on that point which has brought about the present position of unstable equilibrium. Every endeavor to improve the Treasury's financial 1 On June I, 1896, the total amount of the several issues directly depending on the Treasury was : United States notes ! 346-7 millions. Treasury notes of 1890 i3 T -4 Silver dollars and certificates 429.3 Subsidiary silver 77 -° 984.4 millions. To this should be added the 225 millions of National Bank notes, whose value must follow that of the issues directly dependent on the Treasury. POSTSCRIPT. 155 resources, or to relieve it of some of its monetary functions, has been blocked by the preliminary struggle whether gold or silver should be the bans of the circulating medium. It is well that this ques- tion should be squarely presented for decision. Only when it has been disposed of, can the country pro- ceed to the much-needed reorganization of its currency legislation. The compromises of 1 878 and 1 890, like most compromises, in the end availed nothing. They complicated the situation enormously, and made the inevitable readjustment much more diffi- cult ; they did not abate by a jot the demands of the silver advocates ; they served only to postpone the day of settlement. The time for a definitive decision on the fundamental question had to come. On that question, it is difficult to see how any well-informed and unprejudiced person can waver in his answer. As to the indefinite maintenance of the single gold standard by all civilized countries, there may indeed be reasonable differences of opinion. The proposal for international bimetallism is sup- ported by some strong arguments, and advocated by many eminent economists. But the proposal that the United States alone should coin silver freely at the ratio of 16 to I can not be considered as any- thing but a proposal to debase the currency, and in that sense as a proposal for dishonesty. The fact that the effects of the measure, if it were enacted, would be less simple and direct than is popularly supposed ; the slowness with which general prices would respond to the change in the basis of the cir- culating medium ; the irregular rate at which the 156 POSTSCRIPT. prices of different commodities would be affected ; the whole series of interwoven factors which, as the preceding pages have shown, encircle the monetary systems of a great credit-using country like the United States, — these complications do not, after all, obscure the fact that the free coinage of silver would mean at the outset debasement and deprecia- tion, and in the end an unstable and untrustworthy basis for the currency. It is sometimes suggested that it would so raise the market price of silver as to make the silver dollar intrinsically equal to the gold dollar, and thus secure the concurrent circulation of the two metals. But those who make the suggestion can not have real faith in it. If it was in high de- gree doubtful three or four years ago whether gold payments could be maintained for a brief space after the free coinage of silver,' it can be now the subject of no doubt whatever. The shattering of the Treas- ury's position, the long-continued uneasiness as to the maintenance of gold payments even under exist- ing conditions, make it as certain as anything can be in economic prediction that a free coinage victory at the polls would lead to an immediate suspension of gold payments by the Treasury, and the immediate entrance on the road to a silver basis. As the heavy purchases under the silver act of 1890 proved of no avail in raising the price of that metal, so its free coinage would not. The question is squarely one between gold, and silver at fifty cents in terms of gold. Whatever sympathy one may have with those classes and sections which labor under real 1 See above, pp. 92-94. POSTSCRIPT. 157 economic difficulties, and whatever respect one may have for the good faith and honest intentions of many who advocate the change, the safe, stable, and expedient, and in that sense the right, conduct of the nation's affairs demands the maintenance of the gold standard and the emphatic rejection of the silver proposal. K » JUL, »MJ 88 89 "■» _ * 90 5/ ^S#- ^£- UNIVERSITY OF CALIFORNIA LIBRARY Los Angeles This book is DUE on the last date stamped below. — mni L AM 7-4 4-9 9- 1 PM Form L9-Series 444