36. FINANCES (1861-1919). In the win ter of 1860-61 the finances of the Federal gov ernment were most discouraging. Secession was under way; national credit depressed, and executive efficiency was slowly disintegrating. There was little confidence that the Republican party, which had carried the election in Novem ber 1860, would be able to weather the approach ing storm. Some strength was shown at the close of the session by the passage of a new tariff law known as the Morrill Tariff, in which rates were slightly advanced. Lincoln took office 4 March 1861 and appointed Salmon P. Chase Secretary of the Treasury. On 15 April the troops were called out to put down the Rebellion and the country entered upon a four years' war which tried the financial system to the ut most, necessitated radical methods of financier ing, burdened the country with an enormous debt and raised taxes to a permanently high level. In brief, during the fiscal years 1862-65, expenditures were $3,348,000,000; taxes $667, C00,000 and loans $2,622,000,000. Loans were nearly four times as large as taxes. In the spring of 1861 it was not supposed that the war would last long and consequently the legisla tion of July and August was not designed to increase taxes in any considerable degree. A loan of $250,000,000 was authorized, some in crease was made in the tariff schedules and an income tax was levied. Under the authority of the Loan Act the Treasury Department en deavored with the assistance of local banks to borrow $150,000,000 by the issue of three-year treasury notes, bearing 7.3 per cent interest, since known as the seven-thirties. The banks re sponded with energy, but owing to the restric tions of the independent Treasury Law requir ing all payments to the government to be made in specie, they could not carry the burden and in December suspended specie payments. The Treasury Department was forced to follow their example. By the Act of 25 Feb. 1862, a corn prchensive loan act was passed and authority given for the issue of $150,000,000 non-interest legal tender treasury notes. There was much Opposition to making the notes legal tender, but the issue was justified in the debates on the ground of necessity—"necessity to meet the immediate obligations of the government; necessity to give currency to treasury notes; necessity to provide money which would in turn purchase bonds?) Two further issues, each of $150,000,000, were made by the Acts of 11 July 1862 and 17 Jan. 1863. In addition to these non
interest notes, the legal tender quality was at tached to some of the other short-term treasury notes. Other forms of treasury indebtedness were demand notes, certificates of indebtedness, temporary loans and fractional currency. Of the total amount borrowed $1,045,000,000 was in the form of long-term loans; $890,000,000 in interest-bearing notes; $458,000,000 in non interest bearing notes and $208,000,000 in tem porary loans.
In selling long-term bonds Chase kept four objects in view : (1) moderate interest; (2) general distribution ; (3) future controllability, and (4) incidental utility. Chase objected to selling bonds at a discount, or to offering more than 6 per cent interest. After the suspension of specie payments the legal treasury tender notes,or greenbacks, depreciated greatly in value ; as they were, however, receivable in the pur chase of bonds and as the bonds bore interest in gold, the return to the purchasers, as meas ured in gold, was far greater than the nominal rate of interest would indicate. Under the con ditions, therefore, the market for bonds con stantly broadened. To secure a wider distribu tion in the investment of government securities, an agent, Jay Cooke (q.v.), was employed with an extensive system of sub-agents to place the bonds in every section of the country. Chase was also opposed to making long loans and consequently reserved the right to the govern ment of redeeming bonds after 5 or 10 years. This gave rise to securities known as 5-20's and 10-40's, running for 20 or 40 years, but redeemable at the option of the government at the shorter period. In order to make a wider market for bonds, as well as to reform the currency system on a national basis, the national banking system was organized in which circulation is based upon the deposit of bonds.