The CHAIRMAN. Your reason is because those metals have been used for that purpose! Mr. POTTER. Because from time immemorial the money of the world has been gold and silver-gold and silver, and the harmony of the social universe cannot be maintained without both. The CHAIRMAN. But you said a little while ago that a certain amount of paper would circulate without depreciation. Mr. POTTER. Undoubtedly. The CHAIRMAN. Then why is not that money, to the extent that it will circulate! Mr. POTTER. So it is, by virtue of its being used as the great wheel of circulation. You can make the wheel of circulation out of paper, but it must be adjusted with reference to the precious metals. The CHAIRMAN. In short, you assume that it is a divine ordinance that money shall consist of gold and silver, because it always has been so. Before railroads were invented, the principal and the best method of transporting goods was by water. Mr. POTTER. Yes, sir. The CHAIRMAN. Now, might not a man at that time have been justified on your principle in saying it is the ordinance of God that the proper mode of transportation and travel is by water and in no other way? Mr. POTTER. I think not. The world got along without railroads, but not without gold and silver for money. It is true that Lycurgus issued iron money, but his object was to repress commerce, and he succeeded. The CHAIRMAN. It seems to me so. Mr. POTTER. Mr. Chairman, there are propositions of natural law which are true, and yet all we know about them is that they are so. There are certain things in the universe which are mysterious, but which exist, and all we have to do is to accept them. We cannot explain them; we cannot explain God. Aristotle tried to find him out, but did not succeed. I suppose there is some power outside of and superior to the government which prescribes to us the use of the precious metals as money, or as a standard by a reference to which we must adjust our circulation if it consists of paper. I do not know of any external and superior power but God, who is the author of the social universe. The precious metals "became universal money," said Turgot, "not because of any arbitrary agreement among men, or of the intervention of any law, but by the nature and force of things." The CHAIRMAN. I will not go into that discussion, because it would not help us at present. Mr. POTTER. Now we have 650 millions of paper in circulation. We find that the law of distribution of the precious metals has limited us to 200 millions, and our government has been selling down gold to par and trying to resume specie payments, but the attempt will not succeed; it will break down. I say it on the authority of law, it will break down, and perhaps amid disaster. Of course when you increase the metallic equivalent of the circulation, you have a depreciated currency. Mr. McCulloch sold gold down on an undiminished paper circulation, and I went to Washington in the winter of 1867-'68 to tell him of this law, and had several interviews with him, trying to make some headway with him, but he did not seem to understand it and I gave up the attempt. It is an axiom that, given the volume of inconvertible currency, the depreciation is in inverse proportion to the agio. The CHAIRMAN. Inasmuch as the volume of paper has not been materially diminished since then, how do you account for its gradual approximation to the value of gold? Mr. POTTER. By the increased sluggishness of the circulation. The value of money depends on its quantity multiplied by the rapidity of the circulation-by its momentum, and we have a sluggish circulation. That is what is the matter. That is what explains it. We have a sluggish circulation, and so we have prices and wages and gold down, notwithstanding our six or seven hundred millions of paper monetary units, but if the country were in a prosperous state, as it would be under good statesmanship, then with such a volume of circulation as we have, prices would be up and gold would be up. The CHAIRMAN. Gold would rise then? Mr. POTTER. Yes; gold would rise; gold ought to rise; and we ought to have legisation to put it up. The CHAIRMAN. Then, according to your view, when prosperity comes we shall have the old premium on gold? Mr. POTTER. Yes; that is what I want. Old things are good after all. The CHAIRMAN. Do you think it desirable that we should have a paper currency in circulation which is not convertible into gold? Mr. POTTER. I think we cannot help it. By convertibility I understand you to mean convertible at its face denomination into coin of present standard. The CHAIRMAN. Can't we retire it? Mr. POTTER. No, sir; there is no instance in human experience where such a currency has been retired. It cannot be done. The CHAIRMAN. Why not? In France, recently, they have been under suspension and they have been reducing the amount of notes steadily until they have got back to resumption. Mr. POTTER. I stated a while ago what they did in France, and Victor Bonnet has stated that it was a complete vindication of the economic law. France supplanted her metal with paper, and then supplanted her paper with metal, but at no time was she above her natural volume. The CHAIRMAN. But we did retire twenty-eight millions in 1874. Mr. POTTER. Yes; but we put silver in its place. The CHAIRMAN. But your proposition is that we can go one way, but not the other; that we can enlarge, but we cannot contract. Mr. POTTER. Yes; that is my proposition; the descent to hell is easy, but we cannot get back. The CHAIRMAN. Thus far I have been able to follow you with great satisfaction, but I really cannot see why this government cannot sell one or two millions of its bonds for greenbacks and take the proceeds and tear them up. Mr. POTTER. The moment you begin to sell bonds and retire paper you raise the value of paper, because that is the object of retiring paper, and you begin to produce such a state of things as we had in 1873. You raise the value of paper, and conse quently precipitate bankruptcies, and cause a run on the savings-banks; you create a panic, and you have to reissue more than you have taken in. You cannot get money in circulation without lowering the rate of interest, and you cannot take it out of circulation without raising the rate of interest, and when you raise the rate of interest you stop the sale of bonds. The CHAIRMAN. Is there not a fluctuation in the amount of paper in circulation! Mr. POTTER. Of course there is a fluctuation. There is a flux and reflux at the money center, according to natural law, and this phenomenon is very marked in a country of such territorial extent and vast agricultural product as ours. And if you take paper out of circulation during the flux, you interfere with natural law, prevent the reflux, and produce a social convulsion which can only be relieved by a reissue of more paper than you took in. The CHAIRMAN. Can't we make steady progress down towards a lower volume of paper circulation? Mr. POTTER. You cannot. The CHAIRMAN. Didn't Mr. McCulloch do it? Mr. POTTER. No, sir; he did it until the people put their heel on him, and very properly, and not a moment too soon. The CHAIRMAN. But he went down at the rate of four millions a month, and he got to a point where specie payment might have been resumed, I suppose. Mr. POTTER. No, sir; the people stopped him because he was throwing them into bankruptcy and destroying the public revenue. The CHAIRMAN. Yes; but he did it until the people stopped him. Mr. POTTER. Then how are you going to do it if the people prevent you? The people, said Mr. Webster, "are so well schooled in the great doctrine of free government that they are competent to teach first principles even to their rulers, if unhappily such teaching should become necessary.' The CHAIRMAN. Is it not possible for a government which owes a demand debt, which you admit a greenback is Mr. POTTER. No, sir; I do not admit that. The CHAIRMAN. Look at it. It says on its face that the United States will pay one dollar. Mr. POTTER, Yes; but when? The greenback is what is known to the Constitution as a bill of credit, issued in lieu of a tax, and the difference between what it was issued at and what it was finally redeemed at falls as a tax on the people who otherwise would have paid taxes in the first instance. The CHAIRMAN. But we have fixed the time. Mr. POTTER. You cannot pay it at its face denomination in coin. "Man proposes, but God disposes." The CHAIRMAN. Can't you take the $150,000,000 now lying in the Treasury and exchange them for $150,000,000 of these greenback notes and put the notes in the fire! Mr. POTTER. Yes, without affirming it, I suppose you can; and then your gold will sooner or later go out of the country or into hoards or into the banks, and you will have to issue paper again. The CHAIRMAN. But is it not possible to do that, and so to reduce the amount of our paper circulation? Mr. POTTER. No, sir. The CHAIRMAN. Then you state this proposition: that when a nation reaches our present condition there is no help for it; it must stay there forever and ever. Mr. POTTER. I say that we have got to do as all nations have done, as our fathers did, as they did in Austria, as they have had to do in all countries wherever they have had to deal with inconvertible paper issued to meet the unproductive consumption of war. There are only two ways. One way is to pay it at what it is worth by the natural law of trade. If it is worth 30 cents on the dollar, let gold go up and resume specie payment on that basis. In every instance where paper has been issued for war expenses and paid, it has been paid in that way. There has never been a contrary instance in the history of the world. The CHAIRMAN. But there may be an instance. The resources and the honesty of this nation may be such that we shall be able to set the world an example of that. kind. Mr. POTTER. It is not a question of honesty. It is a question of natural law, and must not be judged by moral law or civil law or political law. You cannot do it any more than you can lift yourself by pulling on the straps of your boots. When you undertake to sell bonds what do you do? You offer a thing that is going to be cheap in exchange for a thing that is going to be dear. People are not going to trade with you on those terms. This government paper money is altogether different from a bank circulation. In the first place, even if this were a bank circulation and this money had been all issued and diffused and settled, and our economies adjusted to that system, this volume would be just as necessary to us now as 200,000,000 or less were before the war. The CHAIRMAN. As a matter of fact, have we not reduced the volume of paper money? Mr. POTTER. I think not. The CHAIRMAN. Then you deny the Treasury returns. Mr. POTTER. I take silver into account. The CHAIRMAN. But I am speaking of the paper. Mr. POTTER. Yes, the paper has been reduced; but by the act of June 20, 1874, the national banks were released from the obligation of maintaining a legal-tender reserve against their circulation, and this amount has been added to the circulation. The CHAIRMAN. And if we have done it once, can't we do it again? Mr. POTTER. But you are putting out silver. The CHAIRMAN. But we have got rid of so much paper. Mr. POTTER. Yes, but you have thrown thousands of people out of employment and brought bankruptcy and ruin upon thousands of others, and you have not advanced one inch toward the restoration of the specie standard; we have sunk to our chin in bankruptcy, and taking paper and silver together have not reduced the circulation a dollar. The CHAIRMAN. That may be; but don't you admit that we have got rid of the paper in that way? Mr. POTTER. No, sir; I deny it. I say that you have reduced paper to a certain amount, but, including trade-dollars and old silver coinage, a dollar of silver has come into circulation for every paper dollar you have taken out. The CHAIRMAN. Where is the silver? It is not in circulation. We have taken in a certain amount of fractional currency, and we have taken in many millions of greenbacks, forty or fifty millions, and there is no silver put out in place of them. Mr. POTTER. Yes, sir. The CHAIRMAN. Where is it? Mr. POTTER. A friend of mine had paid to him the other day $200 in fractional silver coin, all old coinage that has come into the circulation from hoards, and the man who paid it to him said that he had been paid $1,000 of the same sort in the same way. The CHAIRMAN. But there have been coined less that ten millions of silver, and of that 70 or 80 per cent. is lying in the Treasury, and the Secretary has issued a circular asking the public to take it and they won't do it. Mr. POTTER. I do not say that you cannot reduce your paper ten or fifteen millions, but I do say that if you succeed in doing that you will probably have to reissue twenty millions to repair the damage resulting therefrom. The CHAIRMAN. That is your assertion. Mr. POTTER. It is a law of political economy. I say you cannot reduce the circulation to that extent, or to any other considerable extent. There has been complaint about contraction, but there has been no contraction; there has been an increase in the sluggishness of the circulation which has the same effect as contraction, and if you undertake now to aggravate that by reducing the volume of circulation you precipitate a crisis upon us at once, and imperil the existence of social order. The CHAIRMAN. If we reduced the volume one-half and made it circulate twice as fast, would not it perform the same function? What difference would it make to the community? Mr. POTTER It would not make any difference; but how are you going to circulate it as fast! The CHAIRMAN. The business of the country being on the basis of this sluggish cir culation, if you let the business alone and at the same time reduce the amount of the currency, it will of itself circulate more rapidly, will it not? Mr. POTTER. All I can say is, try it. The CHAIRMAN. We are trying it. Mr. POTTER. When banks withdrew their circulating notes what did they do? Did they sell the securities? No; they curtailed their loans and discounts, they applied force to their debtors, and they precipitated wholesale prices, and coin came from abroad and the circulation flowed back by natural law. The banks forced their debtors; but in this case the government attempts to apply force to its own creditors; can anything be more absurd The distinction is radical and complete. There is no analogy between a bank issue and government paper issued for commodities that are destroyed and gone forever. When the currency depends upon the movements of banks of issue and discount, the increase of deposits precedes the increase of circulation, and the stock market and wholesale prices of commodities first feel the influence of an inflation; but when the currency depends upon the political action of a government is issuing bills of credit, the increase of circulation precedes the increase of deposits, and retail prices of commodities first feel the influence of an inflation. The CHAIRMAN. I find that in 1865 the total paper circulation was $983,318,686; in 1878 it was $688,597,275. The difference between the two is very nearly $300,000,000, and to that extent we have succeeded in reducing our paper money. Mr. POTTER. A good part of that nine hundred and eighty-three millions was compound interest notes. The CHAIRMAN. But I find this remarkable thing, that, reducing this circulation to a gold value, it is almost entirely uniform from 1865; in other words, I find that the purchasing power of the currency at that time, when measured in gold, was $692,000,000, and now our paper circulation measured in gold would buy $694,000,000 worth, showing a difference of only $8,000,000 between the two periods. Mr. POTTER. I do not believe all the statistics I see in the newspapers. The CHAIRMAN. This is taken from the official report of the Secretary of the Treasury. Mr. POTTER. Well, I do not believe that. I know that when Mr. McCulloch undertook to contract and the people stopped him, there were three hundred and fifty-six millions of legal tenders out, and they remained out until the panic of 1873, and there were about three hundred millions of bank-notes in circulation. The CHAIRMAN. That was in 1868, was it not? Mr. POTTER. Yes. The CHAIRMAN. The amount was three hundred and fifty-six millions and it remained without any change whatever until 1871, and the national bank-note circulation that time was also pretty nearly unaltered. There was almost a uniform amount during of paper out for that whole period. Mr. POTTER. Yes. The CHAIRMAN. And the purchasing power of it also was almost the same. Mr. POTTER. I am almost afraid that I misunderstood you, Mr. Chairman. Did you include bank-note circulation? The CHAIRMAN. Certainly; bank-note and legal-tenders. Mr. POTTER. What do you say it was? The CHAIRMAN. In 1865 it was nine hundred and eighty-three millions, and now, at the time of the Secretary's report, it was six hundred and eighty-eight millions, in round numbers. The conclusion from these figures is that, measured by gold, no matter what amount of paper you have out, the result is practically the same in a country like ours, doing a large commercial business. Mr. POTTER. Yes, if the gold is in a state of freedom, and the government does not tamper with it. The CHAIRMAN. I find some fluctuations due to government interference with gold, but the Treasury has not sold any gold for about a year. Mr. POTTER. No; the Treasury Department sold gold and bought bonds, which it should not have done, and now it is buying gold and selling bonds, which it should not do. It must always be doing something outside of its legitimate business of collecting and disbursing. There was an inflation in 1865, and there is now. In 1864 gold went up to 255, but when the Germans began to take our bonds gold began to drop. When you issue paper money to supplant gold, the first effect is a natural drop in the price of gold itself, and this is what constitutes depreciation. It does not keep up. Why? Because it is demonetized. It falls of its own weight, naturally. So it was here. But when the Germans began to take our bonds, it went down still more on that account. Then the government began to sell, and finally hammered gold down nearly to par on six hundred and odd million dollars of paper, thus greatly aggravating the difficulty. That is the explanation of the depressed condition of the country. The CHAIRMAN. It is true that we are depressed, and that may be the canse. But there is depression in England, France, and Germany. Is that the cause of their depression also! Mr. POTTER. It is, in England, to a great extent; but the German depression was caused, as I have stated, by metallic inflation, which is just about as bad as paper inflation, except that metallic inflation remedies itself in time. The CHAIRMAN. But you say that France kept her currency at the normal amount all the time? Mr. POTTER. Yes. The CHAIRMAN. Yet they have depression in France. Mr. POTTER. Sympathetically they have. The whole commercial world suffers from a violation of political economy in any one nation. The other day you had a winess here, Mr. Horace White, of Chicago, and when you asked him about the cause of the depression he said it was owing to a reaction from an era of speculation; one of a series of crises which have taken place in all countries except France. You asked him why, and he said it was because the people of France were not of a sanguine temperament! They were sufficiently sanguine in John Law's day, I thought. I will tell you why France has not had crises. It is because she has the double metallic standard, and substantially a metallic circulation; she has the best currency in the world. That is the grand secret. The CHAIRMAN. But you say that we cannot get back to a metallic circulation. Mr. POTTER. I say we can only get back to it by advancing the price of gold on whatever paper we have; the moment you advance the price of gold you increase the rapidity of circulation. A rapid circulation means much more than the rapid exchange of money; it means rapid consumption, production, and exchange; an increase in the division of labor, greater cohesion of the parts of the social body, and many other results, which may be summed up in one word, prosperity. The CHAIRMAN. But how would you put up gold? Mr. POTTER. Buy it. Let the government undo what they have done and buy gold, if necessary, in order to raise the price. The CHAIRMAN. Would you put out more paper now? Mr. POTTER. Yes, sir. The CHAIRMAN. Well, let this government offer 150 in greenbacks for gold to morrow Mr. POTTER [interrupting]. That is what they ought to do. You must advance the price of gold or reduce the volume of paper. If you can reduce the paper, all right; but can you? The CHAIRMAN. I agree with you that reducing the paper will produce the effect. but you insist that we must go back and pass through all this trouble over again. Mr. POTTER. No, not through trouble, through happiness. The trouble is in attempting to resume upon our present volume of paper. You cannot do it, and Mr. Sherman does not wish to do it unless he is a fool, which I have not supposed was the fact. Of course, when gold began to go down on an undiminished volume of paper, that increased the metallic equivalent of the circulation, and before the motion of the circulation became sluggish, metallic prices rose here very rapidly as the price of gold went down. Is that clear? The CHAIRMAN. No; I understand you to say that currency prices rose as gold went down. Mr. POTTER. No, sir; to illustrate, suppose a barrel of flour is worth $20 in currency; with gold at 200, it would be worth $10 in gold. Now, if gold goes down to 150, that increases the gold price of that flour to more than $13, does it not? The CHAIRMAN. I think not; I think it is worth just $10 in gold as before. Mr. POTTER. No; the currency price remained nearly the same. It did not go down as fast as the gold. The CHAIRMAN. That is a question of fact. Mr. POTTER. It is a fact. And that is the explanation of our excessive imports. I wish to explain that when the paper price of gold goes down, the paper prices of commodities do not follow until increased sluggishness of the circulation drags them down; and until paper prices are dragged down the result of the decline of the paper price of gold is an advance in the metallic price of commodities. When you sell down the price of gold on an undiminished volume of paper you produce a metallic expansion, and this is precisely what Mr. McCulloch did when he was at the same time urging contraction. The CHAIRMAN. But as gold has fallen in value our imports have diminished and our exports have increased. Mr. POTTER. That is because the circulation has finally become sluggish under the excessive imports of past years. The CHAIRMAN. But gold has fallen in value, and you say that the imports would increase in that state of things, but in fact they have diminished. You say also that the exports would diminish, but they have increased. Mr. POTTER. I said that the imports increased up to a certain time, when the slug |