thority. There were three of these in existence at the time of the establishment of the government, and in 1837, when the Bank of the United States was crushed, there were nearly eight hundred. The State banks issued bank notes, but these could not be legal tender, the Constitution providing that no State can make anything but gold and silver a legal tender (73). The notes of the State banks were like the promissory notes of an individual, one could accept them or not as one pleased. After the downfall of the Bank of the United States in 1837 a very large part of the currency of the country consisted of the notes of the State banks. In some States the banks were kept under strict control and were compelled to keep on hand sufficient specie with which to redeem their notes, but in a number of States there were no such safeguards and "wild-cat" banks issued notes regardless of their ability to redeem them. The outstanding notes of State banks in 1860 amounted to over $200,000,000. In 1865 Congress passed a law imposing a tax of ten per cent. on the circulation of State banks. The purpose of this tax was to strengthen the new national bank system (see below) by driving the notes of the State banks out of circulation. The law succeeded in its purpose. "The power to tax is the power to destroy." State banks redeemed and cancelled their outstanding notes and ceased to issue new ones. We still have State banks,1 but they do not issue bank notes, because they cannot afford to pay the tax. National Banks. The Civil War was not far advanced before it was plain that the State banks could not meet the financial demands of the hour. In 1861 the New York banks suspended ceased to redeem their notes in specie-and the national government could no longer borrow gold from them. Accordingly, in 1863 Congress created a system of 1It is estimated that there are about 7000 private and State national banks, which became the basis of our banking system as it exists at present. The national banking law of 1863 has been modified from time to time, but its essential features have remained unchanged. Our national banking system as it is to-day may be described as follows: (1) National banks with a capital of $25,000 may be organized in towns of less than 3000 inhabitants; in towns of more than 3000 and less than 6000 inhabitants the capital must be $50,000; in places of more than 6000 and less than 50,000 inhabitants it must be $100,000; in places of more than 50,000 it must be $200,000. (2) The organizers of a bank (not less than five in number) must purchase United States bonds equal in amount to at least one fourth of the capital of the bank and deposit these bonds with the comptroller of the currency at Washington. The bank remains the owner of these bonds and receives interest from them. (3) The bank receives from the comptroller national bank notes equal in amount to the par value of the bonds deposited. These bank notes are not legal tender; they are promises to pay-like the old notes of the State banks; like any bank note, in fact. (4) The bank notes are secured by the bonds in the possession of the Treasurer of the United States. If a bank should fail in business and be unable to redeem its notes in legal tender money, the comptroller will sell the bonds and get the money with which to redeem the notes. A bank note is thus as good as a government bond, as good as the government itself. Banks frequently fail, but the holders of their notes have never lost a dollar by reason of the failure.1 United States Notes. We come now to the paper currency issued by the government. It has been seen that during 2 1 Under the national banking laws nearly 7000 banks have organized with a total issue of about $700,000,000 in bank notes. 2 During the War of 1812 the federal government issued $36,000,000 in interest-bearing treasury notes, but these were not legal tender. They were all redeemed after the war closed. the Civil War the federal government issued large quan'tities of inconvertible paper money, making the same a legal tender (p. 308). The notes thus issued are officially known as United States notes, but they are popularly called greenbacks, a name given to them on account of the green color of their backs. These greenbacks have played an important part in our financial and political history during the past forty years. In all $449,000,000 in greenbacks was issued. When the war was over the government began to destroy them when they came into the treasury, just as one destroys a promissory note when it is paid. The policy of retirement (destruction) of the greenbacks continued until 1868, when the people demanded that the retirement should cease; they said the greenbacks were needed in business. Congress obeyed the demand and ceased to retire the greenbacks. Now that the greenbacks were to remain in circulation it was necessary to make them as good as gold. During the war and the years immediately following it they had been below par; a dollar in greenbacks could not be exchanged for a dollar (23.22 grains of gold). In 1875 Congress passed a measure, the purpose of which was to make the greenbacks as good as gold. This was the Redemption Act, which provided that after January 1, 1879, the Secretary of the Treasury should resume specie payments, or, in other words, should redeem greenbacks in gold, dollar for dollar, whenever they should be presented at the treasury for redemption. To enable him to do this he was permitted to sell bonds for gold and keep this gold in the treasury as a reserve set apart especially for redemption purposes. The result was that greenbacks began to circulate at par. When redemption day arrived the Secretary had on hand more than $100,000,000 of gold, but no greenbacks were presented. The knowledge that they were as good as gold satisfied everybody and no gold was demanded. What was to be done with the greenbacks after they were 66 redeemed? Congress in 1878 answered this question by providing that when a greenback was redeemed in specie it should not be retired, cancelled or destroyed, but should be re-issued and paid out again and kept in circulation." The greenbacks in circulation at this time amounted to $346,000,000, and this amount has never been materially decreased. 1 As Under the Sherman Act of 1890 (p. 314) the treasury notes as well as the greenbacks could be presented for redemption. In 1893 there were $150,000,000 of these notes, and the sum was increasing. Here was $500,000,000 of paper money, greenbacks and treasury notes together, and only $100,000,000 of gold with which to redeem it. we have seen (p. 314), this condition of affairs alarmed the financial world and there was a rush to the treasury with greenbacks and treasury notes. The reserve fell rapidly, and the Secretary (in 1894-1895) was compelled to sell bonds (borrow money) to the amount of $262,000,000, in order to keep the gold reserve at the $100,000,000 mark. Under the currency law of 1900 the gold reserve must be $150,000,000, and United States notes are redeemable at the treasury in gold. Why have not the greenbacks been retired as they have been redeemed? The friends of the greenbacks answer that to retire them would contract the currency, would make money scarce, and thus lower prices; that we need more money, not less money. The enemies of the greenbacks say that they ought to have been retired long ago, and that under a sound system of financiering they would have been retired; that they have already cost more than their face value, and that they will be a source of danger as long as they exist. Another question: Did Congress have the right under the Constitution to issue paper money as legal tender? The Supreme Court of the United States in 1884 answered this when it declared that "Congress has the 120 Statutes at Large, p. 87. constitutional power to make the treasury notes of the United States a legal tender in payment of public and private debts in time of peace as well as in times of war." This power, the court averred, was incident to the power of Congress to borrow money, and was a power which any sovereign government could lawfully exercise. Emergency Currency. The Aldrich Law passed in 1908 provides for an emergency currency to be issued in time of panic or extraordinary financial depression. This law authorizes the organization of banking associations throughout the country and permits these associations to deposit with the Treasurer of the United States, State, municipal, and county bonds, and receive therefor bank notes amounting to ninety per cent. of the value of the bonds deposited. The emergency money issued in this way must not exceed $500,000,000 at any particular time. In order that it may be driven out of circulation as soon as the panic has passed, the emergency currency is taxed at the rate of five per cent. per annum for the first month, six per cent. per annum for the second month, and so on, the tax increasing month by month until it amounts to ten per cent. per annum. The Aldrich Law expires in June, 1914. The Essential Facts of our Monetary System. We are now prepared to understand the following summary of our monetary system: (1) The federal government has complete control of all currency issues and may issue legal tender paper money as well as gold and silver currency. (2) The gold dollar of 23.22 grains is the unit of monetary value, and the coinage of gold is free. The amount of gold coined from year to year is wholly a matter of private initiative. Government does not regulate it. The amount is regulated by supply and demand-the supply of gold bullion and the demand for gold coin. (3) Silver dollars and silver certificates, the treasury |