Paper Money with a Fixed Limit

214 HISTORY OF AMERICAN CURRENCY. PAPER MONEY WITH A FIXED LIMIT. The era of paper money on which we then entered has one peculiar feature, unprecedented, so far as I have been able to learn, in the history of paper money. Our paper money is redundant, but fixed in amount. The greenbacks stood, when Mr. McCulloch's contraction was arrested, at 356,000,000. The banknotes were fixed at 300,000,000, but subsequently, July, 1870, 54,000,000 more were authorized. The fractional currency was fixed at 50,000,000. The banknotes have never quite reached 350,000,000, and the fractional has never reached its limit. The withdrawal of the threeper-cent. compound interest notes, which had been held as bank reserves, operated as a contraction, but the allowance to the country banks to keep J of their reserves in the redemption cities operated as expansion. Allowing for these variations, the limit of legal currency was fixed, until the Fall of 1873, at 750,000,000. Nearly every nation which has ever used paper money has fixed its amount, and set limits which it has solemnly promised again HISTORY OF AMERICAN CURRENCY. 215 and again not to pass, but such promises are vain. The intention, when they are made, is honest, but it is impossible to keep them. A man might as well jump off a precipice intending to stop half way down. It remains to be seen whether we too, when the redundancy is absorbed by high prices and excessive credit, will break over the limit, as every other nation has done, under the inevitable constraint which it then imposes,—but the phenomena thus far, ar^ those of a redundant paper with a fixed limit.

COURSE OF THE MARKET. To trace out its operation would require a history of the money market for the last six years. The inflation of credit which went on all over the country so soon as it was understood that specie payments were indefinitely postponed, is only imperfectly presented in the following table showing the state of the National Banks at different dates.

2i6 HISTORY OF AMERICAN CURRENCY. 1868 j 1869 j 1870] 1871 1872, 1873 ] Jan. July Jan. Tuly Jan. July Jan. Ck/l Apr. Sept. Per ct. Resrv. Millions 294-3 294.9 294.4 292.7 292.8 291 I I 3O2.2 307 7 333-4 336.2 339-° aQ Millions. 531-8 575-8 563.5 574-3 546.2 542.1 561.9 602.1 625.7 663.9 622.6 Millions. 616 6 655.7644.9 606.3 688.8 I 7i9 3, I 768.3 I i 7?9 4 I 872.5 I 90°) 8 ' 940.2 u 33-3 32.5 32.7 29-5 34-8 32.7 29.7 3i-3 25-325.8 24-5 23-9 24.0 22 9 21.6 23-4 22.7 22.6 22 9 19-3 20.5 20.7 * Ag. Clearings at N. Y. per annum. 28.4 thous. millions. 37-4 27.8 29-3 32.6 33-9 In 1868 the market was easy, save in March and April, when the rate varied from 8 to 12, and in October, November, and December, there being a lock-up in November, and the Western demand making itself felt. In 1869, the market was stringent throughout the year. It was declared in October, to be " worse than for eight years." Stock speculation was active, and it was remarked that it was continually absorbing more and more currency. The redundant paper in * The annual aggregate clearings from 1853 to 1C62 averaged 5,000,000,000. In. 1863 they were 14,000,000,000 and rose steadily. This is introduced only as a general indication of the increase of transactions.

HISTORY OF AMERICAN CURRENCY. 2lf New York was absorbed, and the state of things was realized which was to come three years later for the country at large. The high rates of 1869 drew funds to New York for loan on stock security. The year 1870 was marked by great ease. Money flowed into New York in abundance. Rates on call were from 4 to 6, and on best paper 6 to jk throughout the year. The only excitement was in July and August, at the breaking out of the war in Europe. In 1871, the demand of funds for railroad building became very marked. The market was easy until September, when it was quoted stringent, though rates were not high. This lasted during the autumn, and was ascribed to the "movement of the crops." In 1872, there was nothing remarkable until the crop movement began again, when the rates advanced sharply, and commercial paper could not be quoted. The Secretary of the Treasury issued 5,000,000 of the 44,000,000 withdrawn by Mr. McCulloch. His efforts to withdraw these 10 218 HISTORY OF AMERICAN CURRENCY.

again kept the market stringent, and rates excessive, throughout the winter. During these years large quantities of American securities were negotiated in Europe. These were very moderately estimated—for the first three-quarters of 1873—at 100,000,000. In 1873, the farmers' movement against the railroads impaired confidence in railroad bonds as an investment. When the crop movement began again the demand of the country banks led to a demand from the city banks upon the brokers, and precipitated a panic on the stock exchange. The failure of several large banking houses engaged in the sale of railroad bonds increased the excitement. The closing of the stock exchange, and suspension of the city banks, obliged the country banks to contract their loans, and brought the industry of the country to a standstill. There was little or no "panic" outside of New York, but it is evident that a crisis in the operation of the paper money had been reached, and that crisis involved a reduction of prices and business. As the stock exchange was the place at which the redundent currency was employed, HISTORY OF AMERICAN CURRENCY. 219 the crisis was first developed there, by the demand for the return of the surplus. The shock, however, was transferred to the regular industries of the country. The expansion by the issue of a part of the 44,000,000 gradually restored the prices of stocks, but production was restrained, and the effect which lasts yet, and promises to last longest, is the reduction of wages.

During the crisis greenbacks were hoarded, which was thought to prove " how good they were." If the currency consisted of clam-shells, and a crisis should come, in which it was to be feared that clam-shells might be scarce, clam-shells would be hoarded; much more if there was fear that the next currency might be pebbles. Studying these facts in the light of the previous history, we perceive that the annual pressure in the autumn, increasing in force from year to year, was a premonition of the effect which must be apprehended whenever the expansion of credit and prices should have absorbed the entire redundancy of the currency. We have seen in the history of the Massachusests colony that each new issue was followed in a few years by a new 220 HISTORY OF AMERICAN CURRENCY. crisis, and an outcry about hard times and scarce money. The law which governs this is apparent. The rise of prices and multiplication of credit operations will go on to absorb any amount of currency whatever. If then, the amount be fixed, the expansion must come up to and press against this fixed barrier. This pressure will become apparent first at that season of the year at which the normal requirement is greatest. At that time there will be great distress occasioned by the need of withdrawing currency from the use in which it is engaged. As it cannot be imported, and the law forbids its increase, there is no relief.

It must be withdrawn, and the consequences must be endured. Then it is said that the currency is not elastic, and schemes are invented for making it so ; but no device whatever can make it elastic. An elastic body is one which will both expand and contract, but a paper currency never contracts itself. Any device which has elasticity for its object will have expansion for its effect. In its more general effects, the paper currency with a fixed limit produces a steady advance in the rate of interest, and also a reduction of prices.

HISTORY OF AMERICAN CURRENCY. 22I These effects are both traceable in the history of the last five years. The whole story which precedes goes to show that the value of a paper currency depends on its amount. At the time of issue, or during a war in which the issuer is engaged, it depends in some degree on his credit; but when it settles down in peace as the normal medium of exchange, its value comes to depend almost purely on its amount. This amount, of course, is relative to the requirements of the country for the purpose of performing its exchanges. What the requirement is, however, no man can tell. There is no rule for finding it. It does not depend on population, or wealth, or the amount of the exchanges. It bears no fixed relation to any known or ascertainable quantity. An agricultural country wants more, for the same population and wealth, than a manufacturing country. A sparsely populated country wants more, other things being equal, than a densely populated one. A country in which the means of communication are poor wants more, other things being equal, than a country with good means of communication. It is idle to attempt to 222 HISTORY OF AMERICAN CURRENCY.

compute it at so much per head, or so mnch per thousand of wealth. Currency is economized also by banking* arrangements and clearinghouse processes ; the requirement is reduced by railroad extension, and all facilities of communication. How far these conflicting influences have affected the actual requirement of the United States for circulating medium on a specie basis no one can even guess. It is properly an empirical question. We can only try. If we had a currency of specie value, we should get just as much as we need, and then we should know how much that is, but then, too, we should no longer care. Statisticians would be interested in it, but the finance and business of the country would not hang upon it. If, then, we assume that, on the whole, this country does require more than it had in 1861, this increase of the normal requirement goes en inside of and under the paper expansion. It produces a pressure on the inflated speculative prices from within, at the same time that they are restrained without by the fixed limit of the HISTORY OF AMERICAN CURRENCY. 223 paper. The effect must be a reduction of prices ; and such a reduction having occurred within the last five years is the best proof that the currency requirement is greater than it was."* In view of all this, the notion of " growing up "

to the fixed volume of the currency receives its just depreciation. The London " Economist " unfortunately seemed to lend some countenance to this notion during the month of October, 1873, and it was taken up on this side of the water by some who enjoyed considerable influence as conservative authorities. If we suppose the requirement of currency to increase from the growth of wealth and population faster than it decreases from improved communication and banking facilities, then a certain growing may be admitted, but, as it goes on, it exerts a slow, gradual, and pitiless contraction on prices, broken only, in Spring and Fall, by a succession of commercial crises. If then, there wTas backbone enough in the nation to endure this without having recourse to expansion, the growth might go on for ten or twenty years, by * See the Diagram at the end of this Chapter.

224 HISTORY OF AMERICAN CURRENCY. which time perhaps 750,000,000 of currency might be the specie requirement. No historical precedents exist to guide us in judging whether this process would indeed go on under such circumstances. As a matter of speculation, I am inclined to believe that the actual course of things would be that after every crisis wages would fall, industry would be checked, and the country would be slowly and gradually arrested in its entire industrial life. The nearest analogies are in the history of Massachusetts,* and in the history of England from 1812 to 1819.! Evidently, before any such state of things came about we should break out of the restraints in some way, but then there would be an end of the growing up. According to present appearance, the first shock is to push us into inflation, and so the hypothesis falls to the ground. However, to pursue the supposition, granting everything, when we grow up to 750,000,000, we cannot resume. At that point there may be no premium on gold, and prices may be at specie level, but there would still be no specie in the * See p. 23. f See p. 280.

HISTORY OF AMERICAN CURRENCY. 225 country. To carry on specie payments would require at least 250,000,000 of gold. We must either buy this, and cancel an equal amount of paper to make room for it, or wait to grow up 250,000,000 more. No notion which has been propounded in regard to our situation is more plausible, or involves more practical impossibilities than this of resumption by " growing up." If, now, anyone is disposed to believe that there are any circumstances in this country, which are so different from those of other countries that inferences from the history of the latter are of no value for the former, here h the history of the currency of this country, briefly and cursorily presented, but sufficiently to show how, from the very outset, our industrial development has been crippled by bad arrangements in this respect. English writers have lately given up the discussion of currency questions, and have taken the tone of passing by people who bother their heads about this subject as " possessed." The same tone has 10* 226 HISTORY OF AMERICAN CURRENCY.

been borrowed here by a certain school which imports its tone even more than its ideas. No one knows what a sick and weary subject paper money is unless he has made it a specialty. I have stated, below,* in its more proper connection, the distinction which is here to be observed ; when the currency is sound it takes care of itself, and other considerations of far hio-her scientific character come in to require attention : when the currency is redundant, irredeemable paper, it floats everything, and becomes a prime consideration. The English are fortunate in having experience only of a sound currency, and being able to make light of evils they do not know, although they must yet again take up the subject, for, that the Bank Act of 1844 is not a scientific settlement of the currency question, is proved by the fact that it could not be imitated by any other nation. For us, the currency question is of the first importance, and we cannot solve it, nor escape it, by ignoring it. We have got to face it and work through it, and the best way to begin is, not by wrangling about speculative opinions as to untried * Page 253.

HISTORY OF AMERICAN CURRENCY. 22J schemes, but to go back to history, and try to get hold of some firmly established principles, from which we can proceed with some confidence and a certain unanimity. We often boast of the resources of our country, but we did not make the country. What ground is there for boasting here ? The question for us is: What have we made of it ? No one can justly appreciate the natural resources of this country until, by studying the deleterious effects of bad currency and bad taxation, he has formed some conception of how much, since the first settlers came here, has been wasted and lost.

EXPLANATION OF THE DIAGRAM. The heavy line being taken as zero point, or equality of exports and imports, the • i i > i t line shows the excess of exports or imports of merchandise, by its variations above or below that line, exports being reckoned downwards, and imports upwards. The line marks the excess of imports or exports of specie in the same manner. The dotted line denotes the amount of bank or other paper per capita. The light dotted line between the years 1848 and the end shows the production of gold in California. The line of prices at the top of the diagram is made by adding the lower annual averages given in the Finance Report of 1863 down to that year. From 1848-1873 the line is formed by adding the January quotations from the table given in the Finance Report for 1873. Over eighty articles are included in each, but they are not the same articles. Therefore the scale is rewritten to bring the starting point in 1864 even with the ending point in 1863, and the two parts should only be compared for relative fluctuations, la the last-mentioned table a hundred-weight of iron and of hemp was taken, instead of a ton of each, as given, and railroad bars were struck out because not given in 1S64. Evidently the relation between the prices of 1863 and 18(54 do not appear at all.

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