Currency as Debt: A New Theory of Money
Understanding Money—Debt-Money Systems
Part 6 of 9
 

National currencies are public utilities. Because they command community resources, the authority for their creation, particularly when they are produced at almost no cost, is an important exercise of power. Accordingly, monetary authority properly belongs to civil governments.

Whatever mistakes the Founding Fathers of the new American Republic made, their wisdom was never more evident than in their distribution of the nation’s monetary power, placing most of it in the hands of its citizens. Under their plan the government would coin precious metals to meet standards established by statute. Citizens would have as much or as little currency as they needed, within the limits set by nature’s law, simply by taking their gold and silver to public mints to be coined.

The self-regulation inherent in a hard money system guaranteed long-term stability. True, prices naturally fluctuated as the ratio of currency to wealth changed—rising with the discovery of new deposits of gold and silver or improvements in refining processes, falling with the national accumulation of wealth from the increased productivity of the industrial age—but only slowly.

More than any other factor, the system’s stability caused its downfall. Powerful forces within the nation, speculators of one kind or another, dined at the table of easy credit. Sound money limited their schemes so they continuously solicited Congress for an elastic currency. Legislators supporting this request added their own complaints of inability to respond to national emergencies. For example, they could declare war but found it impractical to immediately raise sufficient taxes to pay for it. Taxes at that level could destroy the nation’s productivity, its very ability to conduct war. Ultimately, expediency won.
 

On two occasions Congress made significant changes in the nation’s monetary system, compelled to act both times by a national crisis. One was the financial panic of 1907 with its widespread bank failures and the depression that followed. This supplied at least some public stimulus and most of the political justification for the establishment of the Federal Reserve System. The other was over half a century earlier at the beginning of the Civil War.

On April 12, 1861 the Confederates fired on Fort Sumter. Paying for the men and supplies needed for the North’s war effort quickly exhausted a poor Treasury. Its balance of only $3,629,206 on July 1, 1860, the beginning of that fiscal year, bordered on insolvency, all due to mismanagement by Howell Cobb of Georgia, a Southern Democratic leader sympathetic to secession and a very inept Secretary of the Treasury. “Of an understanding of finance he was not suspected, even by his most devoted friends…”[17]

In prior years Secretary Cobb spent most of the Treasury’s funds buying back government bonds at premium prices “to distribute the store of public money.” His actions led to charges of disloyalty (unjustified, for he was an honorable man) as well as inefficiency. He seethed under stinging criticism even from his Southern colleagues who teased him unmercifully, saying “he had done more for secession than any other man.” Shortly after Lincoln’s election a time came when the Treasury refused to pay the salaries of Congressional members for want of funds.[18]

War expenses in the summer of 1861 amounted to one million dollars a day, climbing to one and a half millions in the last quarter of the year. A coalition of Philadelphia, Boston and New York banks, known as the Associated Banks, hastily organized to advance $50 million to the Treasury against the sale of government bonds to the public for that amount. The bonds sold in 32 days giving the banks a profit of $320,000 from their interest charges. (7.3 percent annually or 2 cents per hundred dollars per day) A second round for a like amount sold in 53 days at a profit to the banks of $530,000 but only because they absorbed an unsold $5 million themselves. Refusing a third issue, the bankers bluntly informed Lincoln’s Secretary of the Treasury, Salmon P. Chase, that he could expect no further aid from them.[19]

In early August of 1861 Congress authorized the Treasury to print and issue $50 million in irredeemable ‘demand’ notes. These demand notes were issued as a legal currency, acceptable at customs houses for payment of import duties on the same basis as gold. By late December 1861 all the banks followed suit, suspending redemption of their private bank notes in gold. Bankers saw this action as a natural preparation for war. From that point on, gold was traded at a premium or hoarded. The specie that the government had borrowed from the banks and immediately spent did not return to the banks through the normal channels of commerce, now filled with irredeemable bank notes.[20]

As the situation became critical, President Lincoln, attempting to borrow more money from New York bankers, learned that interest rates for war loans of their irredeemable bank notes would be 24 to 36 percent, payable in gold. Greatly disappointed he searched for another way to finance the war. There was no time to lay and collect taxes nor any reasonable expectation that such action would raise enough revenue to meet the government’s expenses for the duration. Nor could the Treasury sell its bonds. Existing law required it to accept payment for them only in gold and silver coin, now driven out of circulation.[21] The only remaining choice was to issue United States notes. 

Congressman Elbridge G. Spaulding of New York claimed authorship of the bill for a direct issue of irredeemable, legal tender, non-interest-bearing United States notes. The same bill authorized the Treasury to print and sell to the public $500 million in government war bonds. It further directed that the new war bonds could be purchased with the new notes. These war bonds paid 6 percent interest (3 percent every six months) with the original investment returned after five and not more than twenty years, hence their popular name—the five-twenties.[22]

Congress passionately debated the subject. There was strong prejudice against legal tender paper and serious doubts about the constitutionality of the legislation authorizing it. The sentiments of Congressman Kellogg of Illinois, aware of the real and grave danger, exemplified the patriotic appeals in support of the bill:[23]

Mr. Chairman, I am pained when I sit in my place in the House and hear members talk about the sacredness of capital; that the interests of money must not be touched. Yes sir, they will vote six hundred thousand of the flower of the American youth for the army to be sacrificed without a blush; but the great interests of capital, of currency, must not be touched. We have summoned the youth; they have come. I would summon the capital; and if it does not come voluntarily before this republic shall go down or one star be lost, I would take every cent from the treasury of the states, from the treasury of capitalists, from the treasury of individuals and press it into the use of the government.[24]

17 E. P. Oberholtzer, Ph.D., Jay Cooke Financier of the Civil War (1907, George W. Jacobs and Company, Philadelphia), I, p. 121 
18 Ibid., I, p. 124 
19 Ibid., I, pp. 150–165 
20 William G. Sumner, A History of American Currency (1873, Reprinted 1968 by Augustus M. Kelley, Publishers, New York, NY 10010), pp. 170, 189, 215 
21 Edwin Vieira, Jr., Pieces of Eight (1983, Sound Dollar Committee, P.O. Box 226, Fort Lee, NJ 07024), p. 171 
22 Oberholtzer, op. cit., I, p. 171, 214; Sumner, op. cit., p. 197; Both reference History of the Legal Tender Paper Money Issued During the Great Rebellion being a Loan without Interest and a National Currency by E. G. Spaulding 
23 Oberholtzer, op. cit., I, pp. 172, 214; Sumner, op. cit., p. 197 
24 Oberholtzer, op. cit., I, p. 173, referencing Spaulding p. 76