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port of the army, and this was unfair to the farmer, who had to pay the tax in goods of real value, whilst other people were allowed to pay it in depreciated paper. As in the Northern States, irredeemable notes, issued in excessive quantities by the Government, were used as currency, and, though they were never made legal tender, the disappearance of other forms of currency and the almost total absence of coin made their ル acceptance by the public almost as compulsory as if legal tender authority had been given to them. Moreover, the Confederate Government made no attempt even to pay the interest on their loans in coin, though it would have been quite possible to have bought specie at its market value for this purpose.

In September, 1862, an Act was passed authorizing note issues to any extent that would be necessary to defray public expenses, and by the end of the year the outstanding notes issued by the Confederate and State Governments amounted to $500,000,000. The following year an attempt was made to get rid of the depreciated Treasury notes by a system of compulsory funding, and an Act was passed saying that all notes not converted into bonds by August 1st were to be no longer either current or convertible and new note issues were ordered to take their place. It was impossible, however, to get all the old notes brought in, and they continued to circulate in defiance of the Government prohibition side by side with the new issues, the total volume amounting before the end of the war to $1,000,000,000. With this mass of worthless paper issued by the Confederate Government, the States, the banks, and private firms and individuals, the currency rapidly became quite unmanageable, and the total collapse of credit that resulted hastened the close of the war.

The excessive issues of paper currency both in the Northern and Southern States increased enormously the

expense of the war to the Government, and consequently to the country. Just at first the Government profited by the note issues, because it could pay off contracts made when gold was at par with notes which were already depreciating, but a little later, when forced to expend large sums in the purchase of war stores, it suffered severely from the rise of prices and the decline in the purchasing power of the greenbacks-almost the only form of currency in which payments were made to it. In 1865 Government was paying off, at a time when the value of money was rising and prices were falling, debts contracted at a time when the value of money was at its lowest and prices at their highest, and was losing at the rate of 25 per cent. or 30 per cent. The extra cost of the war due to the depreciated currency has been variously estimated, but the lowest computation gives it at $528,000,000, and about onefifth of the public debt, which reached its maximum height-$2,846,000,000-at the end of August, 1865, was due to the substitution of United States notes for money. Hulberd, Comptroller of the Treasury, writing after the war was over, gave as his opinion that "probably not less than 33 per cent. of the present indebtedness of the United States is owing to the high prices paid by the Government while its disbursements were heaviest." The people suffered not only through the increased demands that had eventually to be made on them by the Government to enable it to meet its obligations, but also from the curtailment of credit and the disturbance of all business relations, and the wage-earners suffered a direct loss to the extent that the rise in wages fell short of the rise in the expense of living.

McCulloch, Secretary of the Treasury in 1865, wrote: "There is no fact more manifest than that the plethora of paper money is not only undermining the morals of the people by encouraging waste and extravagance, but

is striking at the root of our material prosperity by diminishing labour." Just at first the issue of irredeemable paper money seemed to stimulate the production of wealth, but it was soon evident that its effect was to substitute speculative activity for steady industrial pursuits, and to give free play to all the most selfish and dangerous elements of industrial and commercial life.

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CHAPTER V

FINANCIAL HISTORY AFTER THE CIVIL WAR

Part I

THE policy of establishing a system of national banks was inaugurated by Chase during the war, with the object of making the bank-note circulation a means of enlarging the sale of Government securities, but the scheme was not actually brought into operation until the war was nearly over. The advantages that he anticipated were (1) the provision of a national and uniform paper currency secured by a pledge of United States stocks, which would be an inestimable benefit to the country, and (2) the assurance of financial help for the Government by gaining a steady market for Government securities and so maintaining their price.

By an Act passed in 1864 it was determined that banks, either newly established or already in existence, might become national banks by depositing with the Secretary of the Treasury registered bonds of the United States to the extent of one-third of their capital, provided the amount were not less than $30,000, receiving in return from the Comptroller of the Currency notes for circulation to the extent of 90 per cent. of the face value of the bonds deposited, but not exceeding the market value. The notes were not to be full legal tender, but were to be received at par for all dues payable to the United States, except duties on imports, and could be used

for all payments made by the Government within the country with the exception of the payment of interest on the National Debt and the redemption of the national paper currency. Moreover, a national bank was bound to receive the notes of any other national bank ąt par in payment of a debt due to itself. The notes were redeemable at the counter on demand, and the banks were forced to keep a reserve in lawful money equal to 25 per cent. or 15 per cent. of the notes in circulation, according to the place in which the bank was situated. The limit of the aggregate note circulation of the national banks was placed at first at $300,000,000, half of which was to be divided among the banks in the various States and Territories in proportion to their population, whilst the other half was to be distributed at the discretion of the Secretary of the Treasury. Banks wishing to be admitted to the system could apply to the Comptroller, who was granted full powers to accept them or not at his discretion and was not bound to give any reasons for his decision. Public money might be deposited in the national banks at the discretion of the Secretary upon giving adequate security "in Government bonds or otherwise."

There were several features in the system that were a novelty in American banking. Firstly, the Government and not the banks was directly responsible for the notes, and banks joining this system had to substitute the notes issued by Government for the private notes they had circulated hitherto; hence there was more uniformity in the paper note circulation than there had been before. Secondly, there was certainty of redemption, for all the notes were secured on Government bonds and an adequate reserve was insisted on. The power of redemption, however, was not of very great importance at first, for the clause stating that the reserve kept for that purpose was to be in "lawful money". allowed

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