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.

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 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 7½ 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 The Secretary of the Treasury issued 5,000,000 of the 44,000,000 withdrawn by Mr.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 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, 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 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. 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 compute it at so much per head, or so much 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 on 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 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 appreciation. 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 was backbone enough in the nation to endure this without having recourse to expansion, the growth might go on for ten or twenty years, by 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 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 is.∼ 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 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 higher 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 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, out 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.