Effects of Legal Tender Issues.

The notes were first issued in April, 1862. Gold began to rise and to be exported. The following table from the “ Merchants’ Magazine,” for July, 1862, shows how immediate and direct was the effect.

High gold and exchange stimulated exports, for high nominal prices were realized, but, as home prices advanced, and the foreign prices of export were governed by foreign circumstances, these. large returns proved fallacious, and the heavy pressure on the Western agricultural interest began, which led to an outburst, in 1873, of loud and ill-directed complaints. Heavy imports followed upon heavy exports of merchandise and gold, and the paper inflation and fictitious prosperity enabled people to pay heavy duties, large gold premium, and high exchange for the imported articles. The mills, forges, and factories were active in working for the government, while the men who ate the grain and wore the clothing were active in destroying, and not in creating capital. This, to be sure, was war. It is what war means, but it cannot bring prosperity.

One immediate effect of the Legal Tender Act was to destroy our credit abroad. Stocks were sent home for sale, and, as Bagehot shows, Lombard Street was closed to a nation which had adopted legal tender paper money. No sales of bonds could be made in England until the war closed, and the amount of legal tender to be issued was finally fixed by facts. The loans at home were scarcely more successful. Much was said in Congress about the disgrace of “shinning “ through Wall Street to borrow money for national use, and a foolish pride of seeing the bonds quoted at par, led to such restrictions on the Secretary that he was obliged to resort to the most disadvantageous transactions with lenders, and to continue paper issues until a six per cent. bond sold at par indeed, but for a currency worth from 60 to 70 cents on the dollar. The notes he paid out to government creditors were accumulated in banks, and then deposited again in the United States Treasury at five per cent.

By August all specie had disappeared from circulation, and postage-stamps and private note-issues took its place. In July a bill was passed for issuing stamps as fractional currency, but in March, 1863, another act was passed providing for an issue of 50,000,000 in notes for fractional parts of a dollar—not legal tender. For many years the actual issue was only 30,000,000, the amount of silver fractional coins in circulation in the North, east of the Rocky Mountains, when the war broke out. In 1872 this issue was forced up to between 40 and 50,000,000, producing a redundancy and enhancing retail prices.

The Legal Tender Act provided for funding the notes in six per cent. 5–20 bonds. Very few were so funded even with money at four per cent., an instructive fact for those who now hope to fund the outstanding notes by simply allowing it to be done. However, this fixed the price of a six-per-cent. bond at par in paper, and, as the Secretary might not sell below the market price, he could not negotiate with bankers on terms which allowed them a profit. This clause was, therefore, repealed.

The interest on the bonds was payable in gold, duties being payable in gold, but the 50,000,000 of notes issued in August, 1861, and 10,000,000 in February, 1862, were receivable for all dues. They were at a premium just less than gold, for the payment of duties, and very little gold came in until these notes had all been paid in. During 1862, the government bought gold to pay interest. It was not until 1863 that the popular sales of bonds afforded a steady resource of means of payment, and the duties produced a gold income for paying interest. The advance of prices, however, had vastly increased the expenditure of the government, and the sum total of the debt is increased to an amount, which it would be idle to try to estimate, by the paper inflation.

On the 25th of February, 1863, the National Bank Act was passed, but it did not go into operation, and did not affect the situation, until two or three years afterwards.

On the 23d of March, 1863, Congress passed the 900,000,000 Loan Act, allowing the Secretary to borrow that sum in ten-forty bonds at not more than six per cent., or 400,000,000 of it in Treasury notes at not over six per cent., legal tender, redeemable in paper in three years, or 150,000,000 of it by issuing legal tender notes. All the old notes which were fundable in six per cent. bonds were called in, and exchanged for new notes not so fundable, and the Secretary was allowed to sell bonds below the market price.

Gold being at 140–150, that is, the paper dollar worth 65 or 70 cts., 75,000,000 ten-forties were taken at about par at six per cent. The Secretary was now led to try the ten-forties at 5 per cent., but the currency was not sufficiently depreciated to float them at or near par, and they were not taken. He then used his alternatives, issuing 175 millions one and two year Treasury notes. Gold rose to 200–220 or above, making the paper worth 45 or 50 cts., at which point the 5 per cent, ten-forties floated. The amount sold up to October 31st, 1865, was $172,770,100. Mr. Spaulding reckons up the paper issues which acted more or less as currency, on January 30th, 1864, at $1,125,877,034. 812,000,000 bore no interest. He disapproves of the 900,000,000 Loan Act on account of the discretion it allowed to the Secretary, and the inflation to which it led; but a policy like that of the Legal Tender Act collects errors as it advances, and those who inaugurate it should know that they can never control it, nor throw off responsibility for its ultimate consequences.

June 17th, 1864, Congress forbade time rates for gold. The effect was to enhance the premium, and, on July 2d, the law was repealed. The Legislature of New York had previously attempted to stop speculation in gold by forbidding banks to loan on bills of foreign exchange, one of the most legitimate operations in banking.

By an act of June 30, 1864, the greenbacks are not to exceed 400,000,000, and “ such additional sum, not exceeding 50,000,000, as may be temporarily required for the redemption of temporary loans.”