Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
(?-1899)
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First Pub. Date
1881
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New York: Maynard, Merrill, and Co.
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1899
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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REFUNDING OF THE PUBLIC DEBT OF THE UNITED STATES

III.128.1

REFUNDING OF THE PUBLIC DEBT OF THE UNITED STATES. On July 1, 1860, the national debt was $64,769,703. It consisted of a loan of $20,000,000 authorized June 14, 1858. and payable in 1874; a nearly equal sum of treasury notes, issued to meet the conditions resulting from the monetary crisis of 1857, and redeemable at pleasure; and a number of old loans issued between 1842 and 1848, all of which fell due within the next eight years. During the year 1860 a loan for $21,000,000 had been authorized, for the purpose of redeeming the outstanding treasury notes, and, bearing 5 per cent. interest, was sold at about par. The economic condition of the country was excellent. The crops were good, and the exports of domestic produce large. The federal system of taxation was extremely simple, duties on imports and sales of public lands being the two important sources of revenue, while any deficits that might occur were covered by loans. Excise, stamp, income and direct property taxes under the federal government were absolutely unknown. The outbreak of the rebellion changed all this, and the simple system then in vogue was ill-fitted to bear the strain thrown upon it. Economic questions had received but little attention, and the existing tax methods were capable of only a moderate extension, and principally in one line. The policy of the government was timid and tentative, and instead of a clear conception of the crisis the secretary of the treasury had a vague idea, which was shared by many, that the contest would be brief, and that it would not be necessary to resort to extreme measures to bridge over the severe present needs of the administration. The fall of Sumner, the suspension of the banks, and the open secession of the southern states, did not extent the influence that they should upon Mr. Chase, and it was by loans and issues of notes, instead of by a resort to taxation, that he sought to meet the enormous and continually increasing demands made upon the treasury. The debt of the nation increased from $90,867,828 on July 1, 1861, to $267,540,035 in December of that year, without any effort being made to furnish a revenue sufficient to meet at once a part of the expenditures. In order to alleviate the burden of the debt already contracted, and to pay certain of the future expenses of the war, a forced loan was taken from the people through treasury notes on which had been conferred a legal tender quality. Having made this beginning, further steps were taken in the same direction. Loans and issues of legal tenders followed one another. Some futile efforts to frame tax systems were made, but resulted only in disappointment, and what they were intended to accomplish were met with new loans. The internal revenue law of 1862 was badly framed and badly administered; the people were unaccustomed to excise duties, the machinery was complicated, and the officers inexperienced. It was modified many times before the annual revenue derived under it reached the $300,000,000 that was justly believed could be drawn from internal sources. From time to time tariff measures were passed, the duties being continually raised, until a vast and intricate customs service was formed in which all sound theory and practice had been sacrificed ostensibly to revenue, but in reality to private interests. The tariff and internal revenue laws grew up separately, and their provisions clashed with one another. Some industries were taxed out of existence, while others were benefited beyond all precedent. With every new issue of legal tenders prices rose, and the vast expenditures of government, uniting with the inflation of values and the uncertain condition of general business, created a spirit of gambling and speculation which spread to every branch of production and exchange, and wrought incalculable mischief and loss. No scheme for raising money was too wild, but the treasury department and congress were blind to the one step that would restore a certain degree of confidence and maintain in a measure the public credit. The fiscal errors enormously increased the expenditures of the government. While loans were being nominally taken at par and over, in reality they were selling at 50 and even at 34, as that marked the depreciation of the paper money. Prices of war material had increased three and four hundred per cent. Mr. Chase refused to believe that his issues were responsible for this, and could only recommend further loans and further issues. His policy was, in a measure, adopted by Mr. Fessenden, but with Mr. McCulloch a new and more just policy was inaugurated.

III.128.2

—The growth of the debt during the war need not be detailed here, as it is but a constant succession of loans. In June, 1862, the outstanding principal of the debt was $524,176,412; in 1863, $1,119,772,138; in 1864 $1,815,784,370; and in 1865, $2,680,647,869. On Aug. 31, 1865, the debt had attained its highest point, $2,845,907,626. Of the ordinary sources of income, customs and internal revenue were the most important, and the course of the receipts in these two branches in the years 1861-6 clearly showed how weak and futile were the first endeavors to frame adequate tax systems, and how little taxation contributed toward meeting the current expenditures of government.

Table.  Click to enlarge in new window.

III.128.3

—There had been no settled policy on which this vast load of debt had been created, other than the recognized necessity of meeting all requisitions made upon the treasury. In his report for 1863, Mr. Chase said that in the creation of debt he had kept four objects in view: 1, moderate interest; 2, general distribution; 3, future controllability; and 4, incidental utility. The close of the war, however, found the debt in a very unsatisfactory condition. On Aug. 31, 1865, it was made up of the following items:

Funded debt... $1,109,568,191.80
Matured debt... 1,503,020.09
Temporary loans... 107,148,713.16
Certificates of indebtedness... 85,093,000.00
5 per cent. legal tender notes... 33,954,230.00
Compound interest legal tender notes... 217,024,160.00
Seven-thirty notes... 830,000,000.00
United States notes (legal tenders)... 433,160,569.00
Fractional currency... 26,344,742.51
Suspended requisitions... 2,111,060.00
Total... $2,845,907,626.56

III.128.4

Of the above items, the United States notes, the 5 per cent. notes and the compound interest notes, in all, $648,138,959, were a legal tender, and were for the most part in circulation as currency. The temporary loans were payable in thirty days from the time of deposit, after a notice of ten days. The 5 per cent. notes were payable in lawful money, in one and two years from Dec. 1, 1863. The compound interest notes were payable in three years from their respective dates, all becoming due between June, 1867, and October, 1868. The 7-30 notes were payable before July, 1808, in lawful money, or were convertible at maturity into 5-20 bonds. The certificates of indebtedness would mature between 1865 and 1867. So that, besides the United States notes, there were nearly $1,300,000,000 of debts in various forms, all of which (with the exception of the temporary loans) must be converted into bonds or paid in money before October, 1868.

III.128.5

—Secretary McCulloch at once entered upon the difficult task of restoring the disordered finances of the nation to a more normal condition, and of introducing some semblance of system in the management of the debt. The revenues of the government were now sufficient to meet the current expenditure, including the debt charges, so that an opportunity was afforded for dealing with the debt. The secretary announced as his policy, the contraction of the paper issued by the government, which had been in a great measure responsible for the financial disorder and almost ruin. In order to secure this contraction the secretary recommended: 1, that congress declare that the compound interest notes should not be legal tender after their maturity: and 2, that the secretary be authorized to sell 6 per cent. bonds for the purpose of retiring not only compound interest notes, but also the United States notes. As to the rest of the debt, it was shown that more than one million was already overdue; that $187,549,646 must be provided for before 1867, and that $1,021,335,732 fell due in 1867-8, no account being taken of the notes and fractional currency. The main point was to place the whole debt in such a form that only the interest could be demanded until the government was in a condition to meet the principal. It must therefore be funded. He asked authority to sell 6 per cent. bonds to pay the certificates of indebtedness as they matured, to meet any deficiencies that might occur in the current fiscal year (1866), and to take up any portion of the debt maturing prior to 1869 that could be advantageously retired. Of the debt falling due in 1867-8, $830,000,000 consisted of 7-30 notes, which were convertible into bonds at the pleasure of the holders, and the secretary believed that a part of this amount would be at once funded were an opportunity offered. The portions of the debt accruing before 1869 it was the intention of the secretary to fund into 5 per cent. stocks, and a like method could be used in 1871 when other portions fell due. Two results would be accomplished by such a policy: the treasury could be put and kept in such condition as not only to be prepared to pay all claims upon presentation, and also to take up in advance of their maturity, by payment or conversion, such portions of the temporary debt as would obviate the necessity of accumulating large currency balances in the treasury, and at the same time relieve it from the danger of being forced to a further issue of legal tender notes, or to a sale of bonds, at whatever price they might command.

III.128.6

—The second section of the loan act of March 3, 1865, authorized the secretary to "dispose of any of the bonds or other obligations issued under this act, either in the United States or elsewhere, in such manner, and at such races, and under such conditions, as he may think advisable, for coin, or for other lawful money of the United States, or for any treasury notes, certificates of indebtedness, or certificates of deposit, or other representatives of value, which have been or may be issued under any act of Congress." In February, 1866, a bill was reported from the committee of ways and means, which proposed to construe the law of 1865 as allowing the secretary to receive any of the issues of the government in exchange for the description of bonds contained in the first section of the act, provided there should result no increase in the amount of the public debt. This would amount to an authority to fund all outstanding obligations of the government into bonds. The debates that occurred on this bill practically covered the whole financial policy of the government, but turned particularly upon the question of retiring in this manner the United States notes, at that time below par, giving to the secretary, it was claimed, full control of the currency of the country, and, by direct inference, of the market values of every description of property. Those who believed in a depreciated paper issue, or who thought that there was a short and easy road to specie payments by which the greenback could be brought up to par, feared the results of conferring such a great power upon Mr. McCulloch, who was known to be no friend to a circulating medium that was shifting in value and constantly below par. While the necessities of the war lasted, it was well enough, they argued, to confer such unlimited powers, but not in a time of peace. It was further urged, that it would be folly to withdraw a non-interest bearing debt, such as the legal tender note was, and substitute for it an obligation that paid 5 or 6 per cent. annually. On the other hand, it was shown that the bill was no real innovation, as the secretary could then do indirectly, under existing loan acts, what it was proposed to authorize directly. He could exchange one kind of paper for another, but only with the consent of the holder. In fact, some $50,000,000 of outstanding obligations had been already funded before any doubt respecting the legality of such a proceeding had been raised. The bill was finally passed April 12, but, to limit the power of the secretary over the currency contained the provision that "of the United States notes not more than $10,000,000 may be retired and canceled within six months from the passage of this act, and thereafter not more than $4,000,000 in any one month." This measure enabled the secretary to deal with the debt as it matured by selling bonds bearing 6 per cent. interest, the principal of which was redeemable at any time after five and before the expiration of twenty years from the date of issue. Under this act the following issues were made: Consols, 1865, $332,998,950; consols, 1867, $379,618,000, consols, 1868, $42,539,350. In May, 1866 Mr. Sherman introduced a bill into the senate, providing for reducing the interest on the national debt, and for funding the same. It provided for the funding of all of the outstanding debt save the greenbacks into 5 per cent. thirty-year bonds; and in consideration of the lower rate of interest, the bonds were to be exempted from the income tax levied by the United States. The amount of interest saved by the conversion was to be applied to the payment of the principal of the national debt; and it was estimated that the debt would be extinguished by this process in about thirty-six years. The debt was composed of so many different classes of securities and obligations that no one save a skilled financier could comprehend the details; it would, therefore, be a gain to make the rate of interest and the kind of security uniform. The rate of interest paid, too, was higher than that paid by any other nation; and though, while the war lasted, there was some excuse for such rates, they ought not to be continued in peace, when the credit of the government was beyond question. Moreover, it was a very fitting time to make the change, as a large portion of the debt was then or about to be under the control of the treasury. The main business of the secretary was to provide new loans for such as were maturing. But great objection was made to the clause exempting the bonds from taxation, and following the lead of one Mr. Hayes, of the revenue commission, many believed that the federal securities should be taxed equally with other property by state authority—a foolish proposition, and one that would practically give to the states the right to nullify by taxation the power of the national government to borrow money. Besides reducing the rate of interest by funding the debt, the bill proposed to establish a sinking fund. In 1862 the loan act provided for such a fund, but so long as the expenditures of government exceeded the receipts, it would have been a clumsy and costly instrument to maintain. The bill passed the senate, but could not be considered by the house. The debate showed that while the general opinion was in favor of funding the debt at a lower rate of interest, yet objections were urged against such a measure, not only on economic but also on administrative grounds. A like measure was introduced in the next session of congress, but was not acted upon.

III.128.7

—The secretary of the treasury touched upon the subject of refunding when treating of the foreign debt in his annual report of 1866. "The question now to be considered is not, how shall our bonds be prevented from going abroad? for a large amount has already gone, and others will follow as long as our credit is good and we continue to buy more than we can pay for in any other way, but, how shall they be prevented from being thrown upon the home market, to thwart our efforts in restoring the specie standard? The secretary sees no practicable method of doing this at an early day, but by substituting for them bonds which, being payable principal and interest in Europe, will be less likely to be returned when their return is the least to be desired." He therefore advised the issue of a bond payable in Europe, and bearing 5 or 4½ per cent. interest, which was to be substituted for the foreign bonds. In March, 1867, he was directed to issue 3 per cent. loan certificates with which to retire the outstanding compound interest notes, but he received no authority to deal generally with the debt. In his next report (1867) he again approaches the subject, and, in discussing the exemption of national securities from state taxation, recommends that all obligations of the government be funded into bonds bearing 6 per cent. interest, and having twenty years to run; "one-sixth part of the interest at each semi-annual payment to be reserved by the government and paid over to the states, according to their population." A bill embodying the recommendations of the secretary was introduced into congress, but not taken up. A long debate occurred upon the funding of the debt, which was now largely composed of 5-20 bonds. An aggregate of $1,613,442,650, of which about $200,000,000 were in the form of seven-thirties, might be regarded as of 5-20 bonds; and including the debts that would mature in the summer of 1867, upward of $1,700,000,000 were due within a period of five years. and the larger part was redeemable in 1867 and 1868. A law had been already passed to check any further contraction of the currency as proposed by the secretary, but a measure looking to "free banking" had been drawn up, one of the provisions it contained being that when the combined issues of the national banks and government should exceed $700,000,000 the government notes in excess of this sum should be retired and canceled, until the amount of the latter outstanding should be reduced to $250,000,000. As it was, the first law interfered greatly with Mr. McCulloch's plans, for these depended in a great measure upon his proposed contraction of the currency. The time was, however, favorable for the conversion of the debt into 5 per cent. bonds, as at the prices then obtained for 6 per cents, such bonds could be negotiated at par. The republicans were adopting resolutions which demanded a reduction in the rate of interest on the public debt. so that the burdens of taxation might be lessened; while the democrats, looking upon the debt as held chiefly by capitalists and bloated bondholders, wished to tax the bonds and thus diminish the revenue obtained from them, a measure that the loan acts expressly prohibited. The lengthy debate that followed covered a large number of irrelevant topics, and came to nought. Meantime, however, the secretary had been using the power already given him, and in December, 1867, was able to report that since September, 1865, the temporary loans, the 5 per cent. notes and the certificates of indebtedness had all been paid; the compound interest notes had been reduced from $217,024,160 to $71,875,040; the 7-30 notes from $830,000,000 to $337,978,800; the United States notes, including the fractional currency, from $459,505,311.51 to $387,871,477.39; while the funded debt had been increased $686,584,800. The act suspending the further reduction of the currency was passed Feb. 4, 1868.

III.128.8

—There would be little interest in tracing the recommendations of the secretary and the abortive action of congress with respect to this question of funding the debt, which were annually gone through with, it would almost appear, for form's sake alone. It was admitted that the rate of interest which the government paid on the debt was higher than it ought to be, and while one party viewing the bondholders with suspicion wished to reduce their income, and the other for the purpose of removing burdens from the tax payers desired to refund the debt at a lower interest, no agreement could be reached. Some half measures were adopted, like that of July 25. 1868, which provided for a further issue of temporary loan certificates, for the purpose of redeeming and retiring the outstanding compound interest notes; and of July, 1870, which provided for the redemption of these certificates. It was in May, 1869, that the sinking fund was established, and the payment of a part of the debt each year thus insured. In December, 1869, the funded debt stood as follows: "Of the loan of Jan. 1, 1861, the sum of $7,022,000 is outstanding, and payable on Jan.1, 1871. The loan of 1858, of $20,000,000, is payable in 1873. The bonds known as 10-40's, amounting to $194,567,300, are not payable until 1874. The 6 per cent. bonds, payable in 1881, amount to $283,677,600. The 5-20 bonds, amounting in the aggregate to $1,602,671,100, are either redeemable or will soon become redeemable," and must therefore be provided for. This led up to the refunding act of July 14, 1870. It authorized the secretary to issue not more than $200,000,000 5 per cent. bonds, redeemable after ten years; also not over $300,000,000 4½ per cent. bonds, redeemable after fifteen years; also not over $1,000,000,000 4 per cent. bonds, redeemable after thirty years—all to be exempt from United States or state taxes. As the bonded debt was not to be increased, these different classes of securities were to be floated at par. In January, 1871, an amending act was passed, which increased the amount of 5 per cent. bonds authorized to $500,000,000, but the total amount of bonds to be issued under the act of 1870 was not thus increased. As was customary, the whole financial policy of the government, past and present, was reviewed in the debates on this measure, which extended over six months. As this is the most important act relating to the funded debt that had been passed up to the year 1870, it will be interesting to examine in detail the condition of the bonded debt. The following is a statement of the amount of the coin-interest-bearing debt outstanding March 1, 1871, the nearest date prior to the opening of subscriptions under the refunding act:

Table.  Click to enlarge in new window.

III.128.9

The 10-40's of 1864, which bore 5 per cent. interest, were then selling in the market for about 112 currency (or 93 in gold), so that it was expected that the new 4 per cent. bonds could be sold at par; and this belief was strengthened by the fact that the government was collecting a revenue greatly in excess of its expenditures for ordinary purposes, thus giving a large sum (about $100,000,000 annually) to be applied to the debt. Moreover, there had already occurred a large reduction of the principal of the debt, being more than $303,000,000 in four years, or an average annual payment of $75,000,000, thus demonstrating the ability of the nation to control its indebtedness.

III.128.10

—On March 6, 1871, the books were opened for subscriptions to the new loan, both in this country and in Europe; and all the national banks here, and a large number of private bankers in the United States and abroad, were authorized to receive subscriptions. On the first of August the subscriptions amounted to $65,775,550, the larger share being taken by the banks. In July certain bankers in Europe offered to take the balance of the $200,000,000 offered, and it is very likely that the whole loan could with advantage have been negotiated abroad had not the war between France and Prussia broken out. A French loan bearing 5 per cent. interest was being disposed of at about 80, and this interfered with the sale at par of a United States bond bearing the same rate of interest. The paper currency of this country also introduced an uncertainty respecting the dividend that would be received when the interest was paid, as the rate of exchange was liable to fluctuate widely. In spite of these features the whole of the loan was taken up by the last of August. From 1871 to 1877 bonds were disposed of under the act of July 14, 1870, not only for refunding purposes, but also for other charges on the government, like the purchase of coin for a resumption fund, the payment of the cost of constructing the Mississippi river improvements, etc. The amount of 5 per cent. bonds issued each year was: 1871, $59,669,150; 1872, $140,330,850; 1874, $115,800, 750; 1875, $96,505,700; 1876, $104,553,050; 1877, $1,134,850. Total, $517,994,150. No 4½ per cent. bonds were taken before August, 1876, and after this no 5 per cent. bonds could be issued. The secretary was able to negotiate these bonds bearing a lower rate of interest at par, by reason of a favorable change in the money market, and in May, 1877, the condition of the market allowed of the floating at par in coin of a 4 per cent. bond. Within a period of thirty days the subscription for this class of bonds reached more than $75,000,000. The success indicated by this auspicious beginning was, however, checked later on, when it was proposed to repeal the resumption act and to remonetize silver, measures which threw doubt upon the credit of the government, and threatened to put an end to all future refunding operations by disabling the government from borrowing. The result of any such set-back would be to throw away an opportunity to reduce the rate of interest on the $1,452,000,000 of the debt which was redeemable by May, 1881, by one-third—or a saving of $22,006,205 in yearly interest. Fortunately this attack upon the public credit failed in its object, and while the resumption law remained in force, the remonetization of silver was so accomplished as to conceal its real effects, and postpone the disastrous financial crisis that might at once have been precipitated.

III.128.11

—In the early part of 1879 a measure passed the house, authorizing the issue of certificates of deposit in aid of the refunding of the national debt. It proposed to authorize the issue, in exchange for lawful money, of certificates of deposit of the denomination of $10, bearing interest at the rate of 3 per cent. per annum, and convertible at any time into 4 per cent. bonds. The main object to be attained by this bill was to place these bonds within easy reach of every citizen who desired to invest his savings in these securities. It had been recommended by the president in his annual message, and also by the secretary of the treasury. It met, however, with great opposition in the house, as its result was represented to be nothing less than to convert the treasury into a savings bank. The bill passed the house, and in the senate the rate of interest was changed to 4 per cent. In order to make this form of loan as popular as possible, and to facilitate and distribute the sale of these certificates, national banks and public officers were designated depositaries. The intention of the law was, however, defeated, as the premium on the 4 per cent. bonds offered a good investment, and the certificates, while purchased in small amounts, were obtained chiefly in large blocks by speculators; the attempt to offer an investment for small savings proved a farce. The main object of these measures, the refunding of the 6 per cent. bonds, was accomplished. By April 5 all of the outstanding 5-20's had been refunded, and as no other 6 per cent. bonds remained, attention was directed to the 10-40's. On April 16, $150,000,000 4 per cents were offered at a premium of ½ per cent. On the following day subscriptions to the amount of $149,389,650 were received and accepted, and upward of $35,000,000 received and declined. By October, 1879, $40,012,750 of the refunding certificates had been sold, and all but $2,809,400 had been exchanged for 4 per cent. bonds. Between November, 1878, and November, 1879, there had been refunded $370,848,750 6 per cent. and $193,890,230 5 per cent. bonds of the United States, into bonds bearing interest at 4 per cent., making an annual saving of interest of $9,355,877.

III.128.12

—It will now be convenient to take a general survey of the refunding operations accomplished since 1870, as their magnitude will become more apparent. In 1870 there were outstanding of debt controllable within a short period by the government, an aggregate of $1,395,345,950, on which 5 and 6 per cent. were being paid, and more than five-sixths of the total was paying 6 per cent. The annual interest charge was $81,639,684. In place of these bonds bearing high rates of interest had been issued, up to 1880, $500,000,000 at 5 per cent., $185,000,000 at 4½ per cent., and $710,345,950 at 4 per cent., on which the annual interest charge was $61,738,838; being a saving in interest of $19,900,846. Within the same period nearly $300,000,000 of the principal of the debt had been discharged. The apparent ease with which these great financial changes were accomplished, is in a great measure to be explained by the general condition of trade and industry as shown in the money market. The bulk of the bonds were floated after 1878, and before 1873. The years 1871-3 were marked by speculative movements which gave an unnatural and in the end an evil stimulus to all forms of enterprise and investments, and the securities offered by the government were no exception to the general rule. Subscriptions were freely made both here and abroad, until the crisis of 1873, which was followed by a long period of retrenchment, the inevitable consequence of over-speculation and inflated values. The table we have last quoted makes no return of sales for 1873, and shows a decided falling off in those for 1874-5. Had the loan been offered two years later than it was, it could not have been negotiated as readily. From 1873 to 1878 commercial depression and stagnation weighed upon the trade and industry of the country, one of the most severe of such periods, if not the most severe, that the nation has ever experienced. For lack of other safe and profitable investments, capital was turned toward the government bonds, and the glut of capital seeking investment in the money centres gave an opportunity to place at par a bond bearing a low rate of interest. There was in these years an immense amount of legitimate trading being done, which, conducted on a sound basis, at least yielded average profit; and, as there was very little spent and wasted in speculation and in uncertain ventures, the country was adding to its available wealth at a very rapid rate. This prepared the way for the great operations of 1878, 1879 and 1880. Although trade had revived, and industry was fully employed, the immense amount of capital seeking for profit allowed the floating of a 4 per cent. bond when the security was so unquestioned. The government had collected from twenty to thirty millions each year in excess of its expenditure, the year 1879 forming an exception; and, as the better condition of trade was felt, the national revenues increased to such an extent that in 1880 the surplus revenue reached the sum of $65,883,653, and gave every sign of going far above that amount in the succeeding year, should the favorable conditions continue to exist. It followed, therefore, that the credit of the government was high, and the fact that the resumption of specie payments had been accomplished in 1879 with almost no friction, and without creating even a ripple in the money markets, only served to increase confidence in the ability of the government to handle its indebtedness. The only disquieting circumstance—the enforced coinage of a silver dollar that was worth much less than its face—was not sufficient to raise any question on the public faith, although notes of warning regarding the ultimate effects of this questionable policy were raised by those who had made a study of economic questions. The fact that the great refunding operations were accomplished, and that, too, without creating any financial disturbance, impressed the people with the enormous wealth-producing power of the nation, and gave promise of as great, if not greater, financial operations in the future, should the government again be compelled to draw upon the resources of the people. Every dollar of debt that the government paid, and every dollar of interest that was as much as paid by being saved through the refunding into low interest bonds, represented ten or a hundred dollars that could be borrowed in the future, when the necessities of the nation should require.

III.128.13

—This operation, however, did not complete the work to be done, as $273,631,350 6 per cent. bonds, issued during the years 1861 and 1863, and $508,440,350 5 per cent. bonds, issued in 1870 and 1871, were about to become due. Of these, all but $18,415,000 would mature in May, June and July, 1881. These bonds must be provided for, and under existing laws there remained available for refunding operations, $104,654,050, or less than one-seventh of the total to be refunded. The secretary of the treasury recommended that authority be conferred upon him to issue 4 per cent. bonds and refunding certificates convertible into such bonds as before, and owing to the favorable situation he believed that such a bond could be sold at a premium. Although a refunding measure was introduced in the house, and debated, no vote was reached. In his report for 1880 the secretary again called attention to the necessity of passing some measure, and recommended that this portion of the debt be provided for by treasury notes, running from one to ten years, and issued so that they may be paid as they mature. This would obviate the necessity of paying a premium on the bonds purchased by the government for the sinking fund, as had often happened, and would leave a large portion of the debt so placed that it could be easily controlled by the government. He asked authority to issue $400,000,000 of such notes, which he thought need not carry a higher rate of interest than 3 per cent., and also to issue a like amount of bonds, to bear 3.65 per cent. interest. The government fours were then selling at 113. A bill was brought into the house, which provided for a long-time bond (at first a 50-year bond, afterward modified to 20-40's), to bear 3 per cent. interest. Objection was at once made, and with reason, that such a measure would practically place this refunded portion of the debt beyond the control of the government, and at a time when large reductions in the principal were possible. While the surplus revenue in 1879 was but about seven millions, in 1880 it was nearly sixty-six millions, and it was estimated that in 1881 a surplus of more than fifty millions could be counted upon with certainty, and this amount might be greatly exceeded. That such a proceeding could not be defended, was proved by plain figures. In January, 1881, there remained $671,207,050 redeemable at the pleasure of the government before July, and the surplus revenue to be collected before that date would, by the estimate of the secretary of the treasury, reduce this sum to $640,000,000. The requirements of the sinking fund for the next ten years, or until the $250,000,000 of the 4½ per cent. bonds became due, would amount to $520,000,000, and this took no account of the surplus revenue applied to the debt in that time. So that there could be no justice in converting this $630,000,000 into a long-term debt. Yet, it was on the rate of interest and the term of the bond that the debate was centred. There was such a scarcity of sound investments that the returns were small on such as were freely bought. "Only a few years ago the French rentes yielded over 5 per cent. on the market price, and not very long since United States government bonds could be bought, to return 7 and 8 per cent. Consols are now no longer at par, but they are so little under it that practically they may be said to yield only 3 per cent.; United States fours yield about 3½ per cent., French rentes, about 4 per cent.; Indian sterling bonds, not quite 4 per cent.; and colonial government securities, generally about the same rate. Even Russian and Hungarian bonds, great as is the risk attached to them, pay an investor only 5½ or 6½ per cent., respectively. And if we pass from the securities of states to those of private companies, we find that those in good credit give usually from 3 to 4 per cent., but seldom more." It was with reason urged that the credit of the government of the United States ought to be as high as that of any other nation, and that a 3 per cent, bond could be floated at par; the only question was, how long a time such a bond ought to run. The English consol, which bore 3 per cent, was practically perpetual, but a perpetual debt was opposed to all the traditions of American policy, and not to be thought of under any circumstances. As finally passed, the bill provided for the issue of $400,000,000 of bonds, bearing 3 per cent. interest, and payable in twenty years, or redeemable in five years after the date of issue, and also treasury notes to an amount not exceeding $300,000,000, bearing interest at 3 per cent., redeemable at the pleasure of government after one year, and payable in ten years from the date of issue.

III.128.14

—But while passing through congress, a provision was introduced into the measure, which was not only decidedly objectionable in itself, but was opposed to the spirit of a funding act, which should be a purely voluntary transaction: the government ought not, in such a case, to attempt to force a sale. either upon the people or upon any particular class of institutions. The securities of the government had been made a basis for the circulation of the national banks, and these useful institutions had experienced a great reduction in their profits, through the previous funding operations of the government. The comptroller of the currency, in his report for 1879, said: "The refunding of the national debt commenced in 1871, at which time the national banks held nearly $400,000,000 of the 5 and 6 per cent. bonds; and from that date to the present time they have held more than one-fifth of the interest-bearing debt of the United States. This class of bonds has since been greatly reduced, and is now less than one-sixth of all the bonds pledged for circulation, while more than one-third of the amount consists of bonds bearing interest at 4 per cent." At the time that this funding bill was pending (1881) the amounts of 6 and 5 per cents had been still more reduced. It was now proposed to make the new bonds the only government securities that could in future be used by the banks as a basis for their circulation, and, as an inducement to the banks to accept this proposition, the taxes on capital, deposits and circulation were to be repealed. But these measures of compensation were not included in the bill which passed the house, and the finance committee of the senate proposed to strike out this coercive section, thus removing the objectionable feature of the bill. It had been shown by the comptroller of the currency that such a section would strike a very serious blow at the national bank system, as the $211,000,000 of bonds then deposited by the banks would mature in that year (1881), and this amount of the new 3 per cents would have to be substituted, or the notes issued on it would have to be retired, and the banks probably be compelled to go into liquidation. But the section was restored, and the bill went to the president. The result of this provision was to create great distrust among the banks, and in the short period of thirteen days they contracted their issues by $18,722,340, and nearly precipitated a panic. In fact, a crisis was averted only by the action of the secretary of the treasury, who paid out an equal amount of legal tenders in the purchase of bonds. This movement was, however, caused in a measure by other provisions of the bill, which were, that "section four, of the act of June 20, 1874, entitled 'an act fixing the amount of United States notes,' be and the same is hereby repealed; and sections 5159 and 5160 of the Revised Statutes of the United States be, and the same are hereby, re-enacted." This would deprive the banks of the right to take up by a deposit of legal tenders their bonds held by the treasurer as a security for their circulation, and would compel them to keep bonds to the amount of one-third of their capital, and this, whether they issued circulating notes or not. This panic, however uncalled for, showed that the banks believed their existence to be endangered, and the president, taking the same position, vetoed the bill, giving as a reason the inexpediency, not to say the injustice, of the coercive section. "Under this section it is obvious that no additional banks will hereafter be organized, * * and no increase of the capital of existing banks can be obtained except by the purchase and deposit of 3 per cent. bonds. No other bonds of the United States can be used for the purpose. * * This is a radical change in the banking law. It takes from the banks the right they have heretofore had under the law to purchase and deposit, as security for their circulation, any of the bonds issued by the United States, and deprives the bill holder of the best security which the banks are able to give, by requiring them to deposit bonds having the least value of any bonds issued by the government. * * In short, I can not but regard the fifth section of the bill as a step in the direction of the destruction of the national banking system." The veto message was submitted on the day before congress adjourned, so that no action could be taken on it.

III.128.15

—In this way was a refunding measure defeated. But the debt was maturing, and some provision for meeting it must be made. Congress had adjourned and the responsibility was thrown upon the secretary of the treasury. On March 1, 1881, or three days before the adjournment of congress, the maturing debt was.

Table.  Click to enlarge in new window.

III.128.16

The only resources of the government to meet these obligations were the surplus revenue, and about $104,630,000 of 4 per cent. bonds that had been authorized by the acts of 1870 and 1871, but had not been disposed of. To pay off the maturing bonds with the revenue was clearly out of the question; and to have issued the 4 per cents would have placed so much of the debt beyond the control of the government, owing to the length of time they had to run before redemption, a step that it was not expedient to take. The secretary, Mr. Windom, therefore assumed the responsibility and adopted the following plan: "On April 11 there was called for absolute payment on July 1, 1881, the small loan of $688,200, bearing 6 per cent. interest, and known as the Oregon war debt, and at the same time, for payment on the same date, the 6 per cent. loans, acts of July 17 and Aug. 5, 1861, amounting to $140,544,650, and act of March 3, 1863, amounting to $55,145,750; but to the holders of the bonds of the two latter loans permission was given to have their bonds continued at the pleasure of the government, provided they should so request." This plan proved entirely successful, and a like privilege was extended to the holders of the funded loan of 1881. The bonds were presented freely, because the new continued bonds (known as "Windoms") bore a small premium, and the amounts that were not so presented were easily met by the surplus revenue. The annual saving in interest accomplished by this simple operation was $10,473,952, and on Nov. 1 there remained outstanding of bonds bearing 3½ per cent. interest, payable at the pleasure of the government, $563,380,950. The step taken by the secretary was severely criticised as being an assumption of legislative powers by an executive officer, but he really had no alternative, and, as events proved, his expedient was better than the one proposed by congress, which would have placed it beyond the power of the government to pay a larger portion of the debt by postponing payment of it for a term of years. Although this was not, properly speaking, a refunding measure, it accomplished what such a measure proposed to accomplish, and so satisfactory was the result that Secretary Folger made "no recommendation of legislation for the refunding of the bonds now outstanding bearing interest at 3½ per centum."

III.128.17

—A bill to refund $200,000,000 of the continued bonds into 3 per cent. stock was debated in the senate, but failed in the house, and the whole matter would have been allowed to rest had it not been for the necessity of allowing the national banks to renew their charters. The eleventh section of this act (July 12, 1882) authorized the secretary to receive continued bonds, and to issue instead 3 per cent. securities; and provided "that the bonds herein authorized shall not be called in and paid so long as any bonds of the United States heretofore issued bearing a higher rate of interest than 3 per centum, and which shall be redeemable at the pleasure of the United States, shall be outstanding and uncalled. The last of the said bonds originally issued under this act, and their substitutes, shall be first called in, and this order of payment shall be followed, until all shall have been paid." This measure completed the funding operations of the government, and while more than $300,000,000 of the 3½ per cents were exchanged for 3 per cents, the surplus revenues were so great that, by November, 1883, the 3 per cents were being called in for payment. It was, in fact, then a question as to what should be done with the revenues of the government when all the threes were redeemed, as no other bonds became due until 1891, and the attempts to reduce the revenue had proved abortive.

III.128.18

—For the purpose of showing more completely the changes that have occurred in the debt, the following table, from official records, is given:

Table.  Click to enlarge in new window.

III.128.19

—AUTHORITIES. The Finance Reports and Congressional Globe and Record are the chief authorities, but there is much material scattered among periodicals which might be consulted with advantage, but which can not be mentioned in this place.

WORTHINGTON C. FORD.

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