War and Money: Some Lessons of 1862

THE soundness of an institution is put to a test by the strain of a critical moment. Even in times of peace our monetary system has created grave alarm ; what then must be in store for us in the emergencies of war ?

In all the energetic and hopeful movement of recent years for the reform of our monetary evils, we have been holding up to view the necessity for legislative action in anticipation of a possible day of reckoning; and that day of reckoning has unexpectedly come upon us in the war with Spain. It now makes little difference whether the war be long or short, so far as concerns the existing fact of an actual currency crisis ; the crisis is upon us, and our system will soon be put on trial. The preliminary appropriation of $50,000,000 out of the Treasury balance for war expenditures was itself a step toward monetary complications, and as a hint of congressional methods is big with possibilities.

It is a matter of common knowledge that we have long been living in feverish uncertainty under a monetary system in which the standard for prices and for all complicated business transactions has been subject to doubt. No sooner had we made the paper promises of the government (which had been our standard from 1862 to 1879) as good as gold (January 1,1879) than we began to suffer from an agitation causing fear as to whether the standard might not be changed from gold to silver. That agitation was not laid by the campaign of 1896, because no legislation (in spite of the solemn pledges of the Republican party) has since enacted the edict of the people against silver into a statute. Although a great victory for the maintenance of the existing gold standard was won, yet we are so placed to-day that its fruits may be wrested from us in the upheaval of a war with Spain or in the disturbances produced by fiscal needs. Among the greatest disasters of war should be counted the shaking of the weak foundations on which our standard rests, and the toppling over of the edifice of our national credit.

That the continuance of the gold standard depends upon the ability of the Treasury to provide gold for all its payments is a truism which it is unnecessary to emphasize. The business world has been again and again alarmed by the ebb and flow of a fluctuating gold reserve behind our government legal tender paper ; when it grew slender the loss of the gold standard seemed imminent, whereupon every effort was made to fill the Treasury and save the standard. These shocks to the nerve centres of commerce in the past few years are only too fresh in every mind. Indeed, in assigning responsibility for a declining gold reserve, the leaders of the Republican party insisted that to the deficits in the budget during the preceding administration was to be ascribed the inability to protect the standard. Now observe the attitude of Congress to-day. While, up to this time, the revenue for the present fiscal year has not risen to an equality with the expenditures, the same party (of course assisted by their opponents), without a question or an expressed doubt, supplied an appropriation in anticipation of war by taking it bodily out of the Treasury balance, without making any new provisions for obtaining means by taxation or by loans, and the straightforward measure of borrowing by bonds is even shelved in the Senate.

Here we touch the great danger of the hour, — one upon which too much stress cannot be laid : the old easy-going and fatal confusion of mind in Congress between the fiscal and the monetary functions of the Treasury, which in 1861 wrecked the credit of the United States, and led to the financial débâcle of 1864 when Mr. Chase resigned his portfolio in despair. Out of this confusion of mind may easily result a policy which may entail upon us evil consequences for decades to come. It will be the purpose to hide dubious schemes under the guise of patriotism. By representing as unpatriotic everything which does not tally with selfish and partisan designs, an attempt is made to deny a hearing to the teachings of experience, of reason, of sound monetary judgment, and hence of all that most concerns the honor of our country, — of all that is, in the true sense, most patriotic. If this spirit is to control our new fiscal legislation, there is grave trouble ahead of us.

It is perfectly clear, however, that the present war can be conducted without serious commercial distress other than that entailed by a diversion of industry and by increased taxation. The incidents of the day, if availed of, must be regarded as extremely favorable. The generally prosperous condition of all our industries, the quickening results of the last great harvest, which was accompanied by a strong European demand and high prices for our cereals, the unparalleled balance of $470,000,000 of exports over imports in nine months, the consequent credits due us from abroad, and the exceptional flow of gold rising beyond $60,000,000 to our side as soon as our credits are drawn upon, — these are fortunate conditions, for which, in this juncture, we ought to be profoundly grateful; all the more grateful because they furnish a basis upon which our fiscal affairs may be conducted with signal success, if we but avoid the fatal confusion between fiscal and monetary operations from which we have suffered so grievously in the past; if we but hold to the elementary principle that the Treasury requires in time of war a control of wealth and capital, — of goods, and not merely of the medium of exchange which performs the subsidiary work of transferring these goods. It is not difficult to understand that, in times either of peace or of war, the one important matter is the production and possession of the articles needed by the country. Money serves only a subsidiary purpose as a medium by which these articles (expressed in terms of money) are exchanged ; and a small amount of money goes on doing the vast work of exchange in an unceasing round. In days of peace, when production is normal, every one knows how desirable it is to have no disturbances in trade arising from defects in the monetary machinery. In days of war, production is even more essential than in a period of peace ; the main economic difference (apart from the withdrawal of laborers) at the time being the partial readjustment of productive effort to articles for the army and navy. Hence how much more necessary it is, in the abnormal conditions of war, to be free from additional disturbances caused to industry by tampering with the standard, and thus breaking up the efficiency of the system by which exchanges are carried on ! Changes in the standard would do more than merely affect the convenience of industry; by modifying the measure in which prices are expressed, they would bring in endless confusion, increase the national debt, lower the purchasing power of wages, and weaken the vital resources of the land.

In view of all our residuary legacies from the issue of inconvertible paper during the civil war, it should be superfluous to suggest that a war emergency does not necessarily require a resort to paper money or a departure from the existing standard. Unfortunately, in the minds of men, high and low, there exists an insistent belief that somehow or other paper money is an essential concomitant of war. Perhaps it arises from the remembrance that such has been the fact in most cases of war known to their experience ; which may be only another way of admitting that inefficient financial management has been the rule. At any rate, the idea which should hold possession of the national consciousness, in this affair with Spain, is that abundant means for war expenses can be provided without giving up our standard, but above all that these funds can be most easily and cheaply obtained by merely avoiding any action which can in the slightest degree be construed as disturbing the existing standard. The suggestion of increased paper issues, a menace to the existing gold reserves by appropriating Treasury balances, any proposition to use more silver, in fact any increase of our demand obligations, would create doubt as to the standard, and for that reason should be regarded as unpatriotic in the truest sense.

Instead of carrying us through the civil war, the government paper money was the one conspicuous enemy of public credit, of the soldier, and of the laborer at home. If we came through the crisis, it was solely because we withstood not only the heavy blows of war itself, but also the injuries arising from an iniquitous monetary system. In the summer of 1861, after the bankers of New York, Boston, and Philadelphia, with many doubts, had patriotically assumed the task of selling bonds for the United States to the amount of $150,000,000, they found the community unwilling to buy them in the existing condition of government credit at the rate of interest exacted. Being under agreement to pay the Treasury for these obligations in gold, when they found their means locked up in unsalable securities they were finally obliged to suspend specie payments (on December 30, 1861). With the best of intentions, but in dense ignorance of investment, requirements, Congress, by a strange fatuity, forbade the sale of bonds below par. Given a fixed rate of interest, the selling price of a bond is high or low according to the high or low credit of the issuer. Our credit in 1861 being far from good, Congress made it impossible to sell bonds at a price which investors would pay for the fixed return, thus voluntarily cutting itself off from usual and legitimate methods of borrowing, and making little or no resort to emergency taxation. The Treasury found itself in an impasse ; whereupon it was claimed that the issue of inconvertible paper money was a necessity. Curiously blind to the fact that the price of bonds is a market judgment as to the credit of the issuer, we refused to accept the consequences of a low credit, and a measure was proposed preëminently adapted to destroy any little credit that remained. Without trying to borrow in the way which the strongest modern nations find legitimate, desperately in need of funds, the Treasury came to the last resort of a bankrupt government, and issued inconvertible paper money. To put out paper promises to pay on demand, when all the world knew there was not a dollar of coin in reserve to redeem the paper, was a pitifully open way of advertising the hopeless condition of the Treasury. No lover of our country can look back on that spectacle without chagrin and wounded national pride. If the enemies of the United States had cunningly planned to “corner” the Treasury, they could not have gained their purpose more effectually than was accomplished by the blunders of ardent friends. A great and prosperous country, and yet unable to borrow ! For the words of Charles Sumner were admittedly true then, as they are to-day : —

“ Our country is rich and powerful, with a numerous population, busy, honest, and determined, and with unparalleled resources of all kinds, agricultural, mineral, industrial, commercial; it is yet undrained by the war in which we are engaged ; nor has the enemy succeeded in depriving us of any of the means of livelihood. It is hard — very hard — to think that such a country, so powerful, so rich, and so beloved, should be compelled to adopt a policy of even questionable propriety.”

The disasters of the civil war will not have been in vain if they bite into our consciousness the lines of distinction between measures fit for fiscal needs — the provision of funds by taxation and borrowing — and those which have a wholly separate function in maintaining unshaken a standard for prices and contracts. The former should be kept entirely apart from the latter. Instead of trying to supply emergency needs in a way to complicate the monetary system, or to introduce a fluctuating paper for a gold standard, common prudence should have dictated a scrupulous avoidance of all measures of borrowing which in any way touched the standard. The action of our leaders in 1862 seems still stranger, when we find that these alternatives had been clearly laid before them by a deputation from New York, Boston, and Philadelphia, headed by Mr. George S. Coe and Mr. James Gallatin. In a conference with Secretary Chase explicit directions were given how the government might borrow unlimited sums without a resort to inconvertible paper, as follows : —

(1.) A tax bill to raise, in the different modes of taxation, $125,000,000 over and above duties on imports.

(2.) No issue of demand Treasury notes except those authorized at the extra session in July last.

(3.) An issue of $100,000,000 Treasury notes at two years, in sums of five dollars and upwards, to be receivable for public dues to the government, except duties on imports.

(4.) A suspension of the Sub-Treasury Act, so as to allow the banks to become depositories of the government of all loans, and so that the Treasury will check on the banks from time to time as the government may want money.

(5.) An issue of six per cent twentyyear bonds, to be negotiated by the Secretary of the Treasury, and without any limitation as to the price he may obtain for them in the market.

(6.) The Secretary of the Treasury should be empowered to make temporary loans to the extent of any portion of the funded stock authorized by Congress, with power to hypothecate such stock ; and, if such loans are not paid at maturity, to sell the stock hypothecated for the best price that can be obtained.

Not all these details, of course, are applicable to our existing situation, but the pith of this advice lies in the application of ordinary business methods to the operations of the Treasury, and in the avoidance of dangerous demand obligations for whose redemption no reserves have been provided. In spite of these suggestions, Congress in 1862 issued irredeemable paper money which subsequently depreciated to thirty-five cents on the dollar ; and as this money was received at par for bonds, the obligations of the nation were in reality sold at less than par in gold. That is, Congress did not in fact escape the necessity of selling our bonds for what they would bring, but, by attempting to evade fundamental principles, it accomplished nothing for its purpose, while bringing wreck and ruin to the credit of the Treasury. Everything which the advocates of paper money said would not happen did happen, and in a way most dispiriting to all courageous supporters of the Union.

The danger of the hour arises from a defective because uncertain monetary system, due to the presence of the paper money which once did such damage, and to the evident force which the silver party still displays at Washington. The fear is that, in the bustle of war, attention will be directed to other things than monetary reform ; and when fiscal legislation comes into the hands of enemies to our existing standard, the need of borrowing will be made an excuse for changes in fiscal measures which may prevent a proper regulation of the currency. The cunning schemer will provide the policy, while crass minds will be drawn in as tools; both must unite to work the damage. But the point is not hard to make clear, so that intriguers should find it difficult to deceive.

If our government borrows by creating a demand debt in a form to be used as currency, it mixes the borrowing, or fiscal, measure with the regulation of our monetary system, exactly when the latter should most be kept inviolate. The inherent danger of this is not far to seek. By building up a vast superstructure of demand paper and a silver currency of a value far less than its face, all depending upon a slender gold reserve for the redemption which gives it parity, an instant connection is established between every event which may affect the income or credit of the Treasury and the machinery of prices and contracts with which trade is carried on. The one important aim of Treasury management should be to keep these two matters entirely distinct. There is no reason whatever why fiscal measures for borrowing should in the slightest way be complicated with the machinery which the community has evolved as a standard and for the exchange of goods. It is the duty of the state to keep its hands off this machinery, to recognize the facts of civilized commercial experience, and to go on its way borrowing and taxing, without thought of interfering with that which is at the very base of business life. If, as now, it is not easy to maintain our standard in gold, it would be a wanton attack on industrial enterprise to make more complicated a situation already difficult.

By making a demand debt of the government serve as money, an intolerable situation is created whenever an emergency like the present conflict with Spain arises. This money, the value of which is dependent on the fiscal condition of the Treasury, is the agent by which the world of business is exchanging goods, and upon whose value all prices and contracts depend. Consequently, every passing event of war or politics, every victory or defeat of our army or navy, every party success or failure, through its effect on the credit of the Treasury, passes directly — like electricity on a live wire — to the value of the paper and all fiduciary currency, and then moves swiftly on, after producing fluctuations in the standard, to all the transactions of trade and industry. It should never be that ups and downs of Treasury finance should have any connection whatever with the standard and the conduct of business. The moment our government does anything to create uncertainty in the existing standard, that moment this uncertainty changes normal business into a matter of guesswork and speculation. This is but a résumé of our experience in the civil war.

The present situation is in some respects more favorable, and in some less favorable, than that of 1861. We are fortunate in having at the head of the Treasury an experienced financier, while in 1861 we blundered because there was no leader with an intelligent knowledge of what should be done. The abundant harvest of last year and our unparalleled exports, as has been said, are causes for congratulation. But, on the other hand, the precedents of wrongdoing are present with us in the form of the United States notes and the mass of silver currency, and the monetary system is in unstable equilibrium. As every one knows, our national banknotes are redeemable in lawful money; hence their value depends upon the kind of money in which they are redeemed. Our legal tender notes (United States notes and Treasury notes of 1890) depend for their value on the sufficiency of the gold reserve in the Treasury. Moreover, the receipt of silver currency on equal terms with gold in payments to the Treasury, and the outgoing payment by the Treasury of all demand upon it in gold, maintain the parity of $455,000,000 of silver with gold. If the reserves behind the paper are in any way exhausted, then the Treasury cannot pay gold on demand, and the silver will no longer be kept at a value greater than its own. Clearly, our existing standard pivots on the gold reserve of the Treasury.

It may not be amiss to quote here the deliberate judgment of the monetary commission at a time when there was little thought of war with Spain : —

“ The existence of a large outstanding debt payable on demand is also a source of weakness to the government in its international relations. Modern warfare is so expensive that it is almost as much a matter of money as of men. A nation suddenly confronted by the alternative of war or dishonor would be greatly handicapped by a large demand debt which it must provide for at once. Great additional force is given to this consideration by the fact that it would be scarcely possible for this nation to engage in war in its present situation — counting as part of the situation the imperfect development of clear conceptions on the subject of money in the minds of the people — without a suspension of specie payments and a resort to further issues of government notes. There is no occasion to criticise those patriotic men who believed that the issue of greenbacks was necessary to save the Union. But the world has advanced in financial knowledge and skill since then. There is no doubt that if our government were relieved of its existing demand obligations, and our currency system put in working order upon a gold basis, it would be entirely possible for us to go through a war without suspension of specie payment or any derangement of our monetary system. If war should come, the value to the country of the ability to thus avoid the indirect losses following from depreciated currency, inflated prices, and financial demoralization would be so great that the burden of paying off now our demand obligations would be as nothing in comparison.”

The peculiarity, however, of our present situation resides in the fact that a departure from our standard may not necessarily result from additional issues of paper money as in 1862, but from an interference with the gold reserve in the Treasury which would quickly bring us to the silver standard. Whether the deflection from the existing order is produced by resort to paper or to silver, the primary effects would be much the same. To be sure, the President may still in emergencies sell bonds, under the Resumption Act, to provide gold for this reserve. There is thus no possible reason why this gold reserve, under efficient management, should be allowed to ooze away and bring us to a change of standard. There is potential difficulty, however, in the mental attitude of Congress. It has plunged us into war ; it has made the expenditure of vast sums a necessary consequence. Then, what will be the disposition of Congress as to means for providing these funds ?

From this point of view, the appropriation of $50,000,000 and the attitude of the Senate are big with suggestions. The Treasury balance which had been accumulated by the sale of bonds during the last administration, to secure gold for the protection of the standard, was at once, and without debate, voted away to a very considerable extent. It is no answer if it be said that a dramatic effect was intended by giving instant purchasing power to the President, since that result could have been equally well accomplished by giving the Secretary authority to sell bonds at a proper rate of interest, and by insuring the payment of the principal in gold instead of in dubious “ coin.” Therefore, this first action has in it a world of suggestiveness as to the likelihood that Congress will obtain the funds for war by means which will leave our standard intact.

How dangerous this appropriation was does not seem to be generally realized. As a matter of fact there were not funds enough in the Treasury to warrant an appropriation of $50,000,000. The general Treasury balance at the time was about $225,000,000. From this must be deducted the following items: —

Fractional and minor coins largely uncurrent. $13,000,000

Receipts from sale of Union Pacific railway, held to pay bonds January 1, 1899. 14,000,000

Funds held for redemption of national bank - notes to be withdrawn .... 33,000,000

Reserved in Treasury for ordinary working balance. 40,000,000


These items, together with the $100,000,000 held as gold reserve for United States notes, leave a balance of only $25,000,000 subject to appropriation. That is, if $50,000,000 were taken out of the Treasury very soon, it would either trench upon a small working balance for daily needs, or at once cut into the gold reserve now supporting our whole monetary fabric. Before all of this appropriation is called for, the Treasury must necessarily be given means of obtaining new supplies. New war appropriations for the army and navy have been made, but no new supplies have been obtained for the Treasury. Can any one be so blind as not to see why the silver group in the Senate willingly voted for such measures, which must deplete the Treasury and imperil the gold reserve, but yet refuse to vote for bonds by which alone the Treasury can obtain funds enough to prevent the dissipation of the gold reserve ?

It should be borne in mind that the silver men are intrenched in the Senate, and are watching vigilantly for a chance to bring in the silver standard. Unable to accomplish this task against the present House and the veto of the President, it would be their strategy, of course, to gain by negative what it is impossible to effect by positive measures. An upheaval brought on by war would be their opportunity ; and by their control of the Senate almost any fiscal legislation is at their mercy. Having once put ourselves in the position where our Treasury requires fiscal enactments, we must accept what the Senate will allow us. It does not require much imagination to see that in this passion for war the silver group hope to find the opportunity they lost in 1896. The presence of Mr. Bryan in Washington, and the introduction by Mr. Teller of the resolution of recognition of Cuba against the wishes of the administration, showed clearly their purpose to outbid the Republican party by radical action.

The proposed scheme1 for providing funds to carry on the war, given to the public, has in the main a rational foundation. There is, nevertheless, a lurking danger in the proposition to adapt the loan to popular subscription. For that purpose a fixed price is necessary. Fixing the interest at three per cent and the price at par by no means makes it sure that any large part of the loan will be taken, unless the national credit happens to be exactly met by this adjustment. If the market judgment varies from this rate, then we shall repeat the experience of the civil war. There is the more reason for doubt on this point, because it seems to be assumed that the act will provide for the payment of principal and interest on the bonds in “ coin,” on the ground that an express requirement of gold would not be adopted by Congress. But if it is well understood that the word “ gold ” cannot be introduced, that indicates a doubt as to the future means of payment for principal and interest. This doubt will affect the price of the bonds, and a fixed price may be again the cause of disaster.

The tax on bank checks is, of course, a tax not upon the banks, but upon those who use checks instead of ordinary forms of money. Its effect being to tax one form of currency to the exclusion of other forms, it will to that extent lower the efficiency and convenience of our monetary system. So far as it limits this means of exchanging goods, it will be a commercial disadvantage, but it will yield considerable revenue.

The possibility of enormous expenditures before we have put our monetary system in order is unpleasant to contemplate. If the need of a careful revision of our legislation had become imperative when we were at peace with the world, how much more necessary — indeed, how much more essential to our safety — is it in the presence of war ! All the reasons which could be urged for monetary reform six months ago have tenfold more weight to-day. The very vitality of our credit, of our capacity to borrow, depends upon the certainty as to our standard. But Congress has not yet defined whether its bonds are payable in gold or in silver (should we by any emergency be forced to part with our small gold reserve). The unmistakable plan of the silver group in the Senate to antagonize the administration in order to gain political advantage shows what we must face.2

When the House bill for war revenue was sent to the Senate, the finance committee changed its whole character by a bold proposition to issue $150,000,000 more United States notes, and to coin the “ seigniorage.” At this writing it cannot be known what action the Senate will take on these proposals. That a new issue of greenbacks should even be mentioned is itself the strongest argument for the early retirement of those now outstanding ; because it proves, what has long been prophesied, the danger that their mere existence in our currency will suggest an improper issue in a time of emergency. As to coining the seigniorage, that is a proposal to coin what does not exist. The profits on coining silver have been covered into the general funds of the Treasury, and they have been used to meet past demands. There is little or nothing to-day in the Treasury with which to meet the difference — if called for—between the face and the market value of our silver coins for whose circulation at par we are responsible. The silver bullion now held behind the Treasury notes of 1890 is not seigniorage. To “ coin the seigniorage ” would increase the number of over-valued silver dollars which must be kept at par in gold, without adding one cent to the reserves held to maintain these dollars and other currency at par. In short, the two amendments of the finance committee above mentioned aim directly at weakening the power of the Treasury to keep its demand obligations redeemable in gold. What must one think of the patriotism of those who would try to take advantage of the perils of war to bring about that which they failed to obtain by the ballot in days of peace ? The suggestions of the Senate committee, like the appropriation of the $50,000,000, are ominous reminders of our errors in 1862. May we yet be saved from them!

J. Laurence Laughlin.

  1. (1.) An additional tax on beer of one dollar per barrel.
  2. (2.) Stamp taxes, as in the act of 1866.
  3. (3.) An additional tax on tobacco.
  4. (4.) The issue of short-time Treasury certificates, bearing interest to provide for emergency needs.
  5. (5.) A popular bond issue of $300,000,000 in denominations of fifty dollars, bearing three per cent interest and sold at par.
  6. The resolutions of the Senate, to which the Republican House did not agree, contained two plain conflicts with the Constitution, and a startling inconsistency. First, Congress has no power to recognize the independence of Cuba ; and second, it has no power to call on the militia for service in Cuba. Moreover, a recognition of the Cuban republic was accompanied by a noisy announcement to that unlocated authority of the intention of the United States to regulate its affairs for it.