CHAPTER XI

LEGAL TENDER NOTES

1861-1865

THERE was never any reasonable doubt as to the power of Congress under the Constitution to charter a bank, and the Supreme Court settled the question early in the period of the Second United States Bank. The contention that Congress had no such power was fostered as a political issue, as in the case of Jackson, affording, as it did, an opportunity to decry monopoly and assail the money power; but the chief strength of this contention came from the champions of state sovereignty and a strict construction of the Constitution, who feared that liberalizing that instrument might give encouragement to the opponents of slavery and endanger its extension into the territories, and indeed might disturb its maintenance where it already existed.

It seems equally clear that the framers of the Constitution intended to prohibit Congress from issuing paper currency and making the same legal tender. At the time the Constitution was adopted, the country was at the climax of its suffering from legal tender notes issued by the colonies and Congress, as set forth in Chapter I. Although the purpose to prohibit seems clear, the language failed to carry out the intent, as appears from the decision of the courts that Congress has that power in a practically unlimited degree. No history of our currency struggles would be complete that did not fully cover this phase of our experience.

The financial and monetary conditions which confronted the administration of Lincoln in 1861 were such as would have se

verely taxed a finance minister with the genius of Hamilton and the wide experience of Gallatin. The nation was at the brink of civil war, the outcome of which could not be foreseen. Its debt of about $76,000,000 was greater than at any time since the period following the War of 1812, and most of this debt had been created during years of peace. The nation's credit was poor, its securities having been sold at more than 10 per cent. below par by the outgoing Secretary of the Treasury.

The currency consisted of about $250,000,000 of specie and $200,000,000 of state bank notes, and whilst the 1600 banks, as a whole, possessed a fair quantity of specie (probably 45 per cent. of their note-issues), most of it was held by the banks in the money centres. The condition of the paper circulation was very far from satisfactory. Great dissimilarity in the laws governing banks in the several states precluded uniformity, security, or safety. There was no central place of redemption, hence most notes were at a discount, varying with the distance from the bank of issue. It was estimated that there were 7000 kinds and denominations of notes, and fully 4000 spurious or altered varieties were reported.

The government's funds were held in the subtreasuries and mints, in specie, but the amount was small, the revenues having been for some time insufficient to meet the expenses. The tariff law passed on March 2, 1861, had not yet become effective. The Treasury possessed power, granted by the Congress which had just expired, to issue bonds and Treasury notes. As the bonds would not bring par (some selling at 94, others as low as 86), Treasury notes were issued, since, being receivable for duties, they were approximately worth par.

Government needs became more pressing as the impending war developed, and Congress was called in extra session July 4, 1861. Secretary Chase, in his report to Congress,' estimated the sum required at $318,000,000 and recommended both taxation

1 Finance Report, July, 1861.

and loans. His plan embraced taxation sufficient to cover the ordinary expenses of the government, interest on the debt, and provision for the sinking fund, the extraordinary expenses to be covered by loans. His scheme for borrowing included noninterest-bearing notes payable on demand, interest-bearing notes for short terms, and bonds for long terms; the first to be convertible into the second, and the second into the third, form of obligation. Thus he expected to avert the evil which many of his predecessors experienced, of being compelled to receive for payments to the Treasury the notes of state banks, most of which were fluctuating in value, and might even become valueless on his hands. He hoped that $100,000,000 of the loan might be placed abroad, but this hope was not realized. While thus suggesting notes to circulate as money, he urged great care "to prevent the degradation of such issues into an irredeemable paper currency, than which no more certainly fatal expedient for impoverishing the masses and discrediting the government of any country can well be devised."

Congress adopted Chase's plan in the act of July 17, 1861,, which authorized the borrowing of $250,000,000, either in 6 per cent. twenty-year bonds, or 7.30 per cent. three-year Treasury notes in denominations not less than $50, or in one-year 3.65 per cent. notes, or non-interest-bearing notes of less than $50, redeemable on demand. Notes under $10 were prohibited, and the demand notes were not to exceed $50,000,000. These might also be issued to pay public creditors and be redeemed in 7.30's, and when redeemed they might be reissued at any time prior to December 31, 1862, provided the total limit of the loan was not exceeded. The amending act of August 5, 1861, provided for the exchange of the 7.30 notes into bonds, the limit of the loan ($250,000,000) not to be exceeded; for the issue of "demand" notes of $5; directed that the latter class be receivable for all public dues; furthermore, suspended the subtreasury act of 1846, so far as to permit the moneys received from loans to be

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deposited in "solvent, specie-paying banks" and drawn upon for payments. It will be observed that the demand notes were not made specifically payable in coin, but were universally regarded as coin notes, since no other legal tender money existed at the time.

In his report in December, 1861, Chase, still hopeful of an early cessation of the war, discussed two plans for the currency. He pointed out that the banks in the states in rebellion had about one-fourth of the estimated circulation for the whole country, and that of the remaining $150,000,000 a very considerable part was of doubtful value in an emergency. He ventured the opinion that the issue of state bank notes was not constitutional, and proposed that the large amount thus practically borrowed, without interest, from the people by state banks, should, by legislation, be made to inure to the advantage of the general government. An issue of government notes would, in his opinion, serve the purpose of furnishing a uniform circulating medium, and at the same time aid the government in its emergency; but the dangers of overissue, inadequate provision for redemption, and consequent depreciation were, he thought, so great as to outweigh the advantages. He therefore recommended a national bank currency secured by bonds, which would yield all that a government issue could, and not be open to the same criticism.

The Treasury had met its immediate needs up to this time with demand and 7.30 notes, a sale of two lots of $50,000,000 each of the latter having been "underwritten" and "placed" by the banks of New York, Philadelphia, and Boston. Chase had arranged with the banks for a further placing of $50,000,000 in 6 per cent. bonds on a 7 per cent. basis, and there was an understanding that still another $50,000,000 would be taken in January, 1862. He also issued the Treasury notes authorized by the laws of the previous Congress.

At the special session of Congress in July, Chase had estimated the government's expenditures for the fiscal year at $318,000,000.