NOTES AND MEMORANDA

THE UNITED STATES CURRENCY ACT OF 1900

THE Act passed in the United States on March 13 of this year marks an important change in the currency policy of the United States. It does not, indeed, greatly modify the situation as in [practice it stood before-the gold standard, with a great mass of paper money and silver money superimposed on the gold basis. But it makes the situation more clear, and fixes the gold standard under the strict letter of the law. For many years, the silver party had demanded the free coinage of silver, which must mean the virtual establishment of the silver standard; while at the opposite extreme, the conservative currency reformers advocated the complete abolition of government paper currency, and the establishment of the gold standard with no other paper than bank notes convertible into specie. The Act of 1900 conforms to the wishes of the currency reformers by establishing, or rather confirming, the gold standard. But so far from doing away with the government paper money, it regulates and remodels that form of currency in a manner to indicate that it will remain, at least until further legislation is undertaken, a permanent part of the monetary system.

It need not be recalled that the Presidential election of 1896 turned mainly on the silver question, and that the Republican party came into power under a pledge to maintain the gold standard. In the first Congress which sat after that election, from 1897 to 1899, the Republicans were unable to carry out legislation on the currency. They had an effective majority in the House of Representatives, but in the upper branch some of the Senators from the Western States, though Republicans, were yet committed to the silver side. Hence it was impossible for the party to bring about legislation on the currency. The elections of 1898 in the various States, however, so changed the complexion of the Senate, that in the present Congress, whose first Session began in December, 1899, the Republicans had an effective majority for all purposes. Accordingly, the very first measure introduced in the House of Representatives was the Currency Bill, which was passed almost at once, transmitted to the Senate, there subjected

to some considerable amendments, and, finally, after the usual compromises and adjustments in a conference committee, put into definitive shape. It became law on March 13. While in its details by no means such as to satisfy the advocates of thoroughgoing reform, it was passed at all events with commendable promptitude at the earliest opportunity.

It will be recalled that the currency system of the United States, as it stood before the Act, and as maintained in essentials since its passage, contains four forms of fiduciary money, -two sets of legal tender notes issued by the Government; the notes issued by the national banks; and the over-valued silver currency, circulating partly in the form of coined dollars and partly in the form of certificates representing such dollars. In the government paper the most important constituent is the "United States Notes," commonly spoken of as "greenbacks," dating from the issues of the Civil War, and fixed, since 1878, at a rigid quantity ($346,681,016). The other constituent of the government paper is the "Treasury Notes," issued in 1890 in purchase of silver bullion under the well-known Act of that year, and subject, under a peculiar set of involved legislative provisions, to gradual conversion into silver dollars or certificates. It may be noted at once that the Act now passed confirms and hastens this process of conversion, and provides for the systematic retirement of this form of government paper and for its complete conversion within a few years into silver currency. And it may be convenient also to note that, so far as the silver currency itself is concerned, there is no change of importance under the new Act, except for the swelling of its volume through the conversion of the Treasury Notes. The silver dollars. remain legal tender, and the silver certificates, though not nominally legal tender, circulate quite as effectively as if they were. The silver currency presents an imposing example of the limping standard,—an over-valued currency maintained at a point far above its bullion value by mere limitation of quantity. The quantity is indeed enormous, about $470,000,000 already, and likely to be near $600,000,000 when the Treasury Notes are finally converted. But the quantity, great as it is, is not excessive in view of the enormous population. Left untouched, even with its present swollen dimensions, it is not likely to lead to embarrassment.

By far the most important and interesting parts in the new measure are those relating to the United States notes. First of all, it is specifically provided that these shall be payable in gold. Further, in the opening section of the Act, it is declared in terms that the gold dollar shall be "the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard." This is no more than a declaration of

It is indeed provided in the last section of the Act that its provisions "are not intended to preclude the accomplishment of international bimetallism whenever conditions shall make it expedient and practicable to secure the same by concurrent

policy; the effective mechanism for carrying it out is contained in the provisions for the redemption of the legal tender money. Yet the declaration itself is important, since it commits the United States. overtly and unconditionally to the gold standard. In previous statutes the word "coin" had been commonly used, and under the strict letter of the law the administrative officers of the Government had discretion to pay legal tender notes, as well as bonds and other obligations of the Government, either in gold or in silver. Thus, if Mr. Bryan had been elected in 1896, he, or his Secretary of the Treasury, would have had authority to refuse payment in gold and to make payment in silver only. As the law now stands, no President or Secretary of the Treasury will have discretion, and, even if a presidential election should turn out in favour of a silver candidate, a new statute by a new Congress would have to be enacted. The United States notes are payable in gold and in gold only.

A "Division of Issue and Redemption" is established in the United States Treasury for the purpose of maintaining the unfailing redemption in gold of United States notes. Hitherto, while the Treasury has had incumbent upon it, at least since the resumption of specie payments in 1879, the duty of redeeming the paper in specie, no separate funds have been put at its disposal for this purpose. The so-called "gold reserve" has consisted simply of surplus cash in the form of gold, for which an important nucleus was accumulated in the operations of 1877-79, immediately preceding resumption, but which has been diminished or swelled since that date according to the relations of revenue and expenditure. In years of prosperity and of redundant revenue, as in 1887-90, and again in 1898-1900, this supply of gold has been very large. In years of depression, as in 1893–96, it has been subject to drain and even to dissipation under the double influence of declining revenue and of presentation of notes for redemption. This extraordinary confusion of the fiscal and the monetary duties of the United States Treasury has been due to no deliberate policy, but simply to compromise between conflicting parties, and especially to the long and indecisive struggle between the gold faction and the silver faction. And it was the end of that struggle, for the time being at least, and the decisive victory of the gold party in 1896, which made possible the more definite and careful legislation of the present year. A specific reserve fund of $150,000,000 in gold coin is set aside in the Treasury, which may be used for redemption purposes only. This is styled in the Act the "reserve fund." Contrasted with it is the "general fund," consisting of the cash in the Treasury available for ordinary disbursements. As it happened, the Treasury has been amply supplied with funds for the last year or two, and was able, action of the leading countries. . . . at a ratio which shall ensure permanence of relative value." This amply qualified declaration was inserted in the Senate as a consolation clause for those public men who had in previous years committed themselves to a general advocacy of international bimetallism.

when the new Act was passed, to set aside the "reserve fund" and still maintain an ample "general fund." The high import duties under the Tariff Act of 1897 have swelled the revenue; the two fiscal measures adopted at the outbreak of the Spanish War-the loan of $200,000,000 and the heavy internal taxes under the War Revenue Act of 1898-have served to fill the Treasury to overflowing. Hence it was possible, immediately on the passage of the Currency Act, to set aside $150,000,000 in gold for the reserve fund, and still retain a large general fund. The transition to the new régime took place with

out even a tremor.

The provisions in regard to the administration of the reserve fund are peculiar. The fund obviously bears some analogy to the specie in the Issue Department of the Bank of England; but the analogy cannot be pressed far. If it were complete, notes when redeemed at the reserve fund of the Treasury would be held in that fund until gold were re-deposited in exchange for them; the reserve fund thus serving for the automatic exchange of notes for gold, or gold for notes. This simple mechanism, however, is not adopted. It is provided that if at any time notes are exchanged for gold, these notes shall not be held by the Division of Issue, but shall be transferred by the Secretary of the Treasury to the "general fund," whence an equivalent amount of gold is turned back into the reserve fund. It is also provided that if the Secretary of the Treasury happens to have no gold in his general fund, he shall exchange the notes, so far as possible, for gold in the hands of the public at large, thus securing gold for replenishing the reserve fund. The expectation is that the habits of the community in using paper money for almost all everyday transactions will often facilitate this process of getting gold from the general public in exchange for redeemed notes. But it is also provided that, in the end, if these means of replenishing the fund do not suffice, and if the amount of gold in that fund falls below $100,000,000, the Secretary of the Treasury shall sell bonds for gold, and thereby make sure of restoring the reserve fund. The essence of the arrangement thus is that when notes have been redeemed from the reserve fund, they are not to remain there until the general public takes the initiative in redepositing gold in exchange for them; but that the Treasury itself endeavours to put the notes again into circulation and actively tries to secure their re-exchange for gold,

The explanation of this peculiar arrangement is to be found in the political history of the country, and in the supposed exigencies of the dominant political party. The long established habit of using Government paper money; the advocacy, in many sections of the community, of paper money as a blessing per se; the disposition to compromise and to make concessions; some supposed association of the greenbacks with the patriotic outburst of the Civil War,-has caused many Republicans to attach to them a sacro-sanct quality. They are supposed to be inviolable, and any effort to diminish their volume, still

more any effort to get rid of them, meets with a pseudo-sentimental opposition. Not a few leaders of the reigning party have repeatedly declared them to be "the best money any country ever had," and have committed themselves in favour of the policy of retaining them indefinitely. Hence, in the Act of 1900, careful steps have been taken, in the manner outlined above, to make sure that they shall not be locked up or permanently withdrawn from circulation in consequence of the provisions for their steady redemption in gold. In fact, the Act provides in so many words that "United States notes exchanged in accordance with the provisions of this section shall, when covered into the Treasury, be re-issued as now provided for by law."

The great danger which the new arrangement will meet, in the opinion of the present writer, lies in precisely this complicated arrangement. It maintains the tradition that the legal tender notes are money as such. It will compel constant transfers from the reserve fund into the general fund, and vice versa. It obscures the principle of an automatic interchange of notes for gold. The absence of a strong tradition of inviolability, the temptations which government paper money always engenders, the maintenance of a great stock of gold having the semblance of a needless hoard, may not improbably lead a future Congress, in a time of fiscal need, to levy on the newly established gold reserve. These are questions for the future, and probably not for the immediate future. Unless by chance there shall be, what does not now seem probable, a complete reversal of public opinion and a victory of the silver party at the election of November in the present year, it is to be expected that the legislation now enacted will stand for a considerable period in the future. Whether it will prove to settle definitely the monetary policy of the United States in the direc tion of a rigid permanent mass of government-issued convertible paper money; whether the new reserve fund will eventually be dissipated; whether it will tempt to still further issues of paper money, and so prove fatal to convertibility; or whether the Act will prove to be only a stage of transition toward the eventual complete retirement of the paper money-these are possible developments as to which it would be rash to venture prediction.

The other changes made in the Act are of less significance. As has already been noted, the Treasury notes of 1890 are to be disposed of. The silver bullion which was bought in 1890, and of which the larger part still remains in the Treasury vaults in the form of bullion, is to be coined into dollars at the rate of $1,500,000 a month, and Treasury Notes are to be converted into silver dollars or certificates as fast as this coinage takes place. So long as the Treasury notes exist in their present form, they are to be exchanged for gold from the reserve fund, precisely as the United States notes are. In a few years they will have disappeared, or rather will have been made over into silver currency, and thereafter the United States notes will alone have claims against the gold reserve fund.