receive the public money shall promptly and fully perform the duties for which the law appropriates their particular salaries." 6 The President was also concerned that the distribution of labor among the Clerks shall bear a fair proportion to their compensation, and it is unjust that the meritorious and faithful should have to perform the duties of such as may be found to be negligent, idle or incompetent. To prevent this injustice, it is essential that each Clerk shall attend regularly in his office, and discharge his own appropriate duties. 7 8 Polk suggested that Bureau heads keep records of absenteeism among clerks and ensure that the clerks paid all their debts to avoid embarrassment in the performance of their public duties. It is intriguing to think of a government on so small a scale that the President would be concerned with the daily activities of lower-level employees. It would be nearly half a century before civil service procedures were set up to provide a more effective system of managing government employees and eliminate some of the problems referred to by Polk. Federal Surplus For the eight years starting in 1850, the Federal budget was again in surplus with revenues exceeding expenditures. Tariff rates remained high and with the end of the Mexican War were well above the financial needs of the government. These surplus funds could have been used to pay off debt accumulated during the budget deficits of the previous decade. But none of the debt was due for payment. Instead, under the Independent Treasury system, the surplus accumulated in the Treasury, thus reducing the amount of hard money available for circulation in the country. To put some of these funds back into circulation, Secretary of the Treasury James Guthrie asked Congress for permission to buy government bonds on the open market, even if he had to pay a price above par. He was granted this permission, and during the 1850s he bought a substantial amount of bonds. By 1857 the debt had been reduced to $28.7 6 James K. Polk, Handwritten Letter to Robert J. Walker, (Washington: D.C. located in files at the Bureau of Public Debt, April 11, 1845). 7 Polk, Letter to Walker. 8 Polk, Letter to Walker. million. Still there was a negative impact on the economy. Guthrie had argued that the Treasury had the potential to “exercise a fatal control over the currency whenever the revenue shall greatly exceed the expenditure." By pulling in money the Treasury could cause economic problems as the policy caused a tightening of credit markers. Despite the purchase of government bonds by the Treasury, which today is called "open market operations," customs collections remained high in 1854 and 1855. Large amounts of specie continued to pile up in the Treasury. Late in 1856, several New York banks had to suspend specie payments. Treasury Secretary Howell Cobb continued buying bonds to help these banks out, believing that the government should use all of its surplus, if need be, to retain liquidity in the banking system. 10 By 1857 the country was hit by a financial panic and recession. In the beginning months of that year, the balance of hard money held by the Treasury reached a high of $15.7 million. This policy of holding on to reserves reduced the nation's money supply, which may have been a contributing factor in the panic. As Cobb continued to purchase bonds and as government revenue fell, the surplus soon turned to a deficit. The Treasury began borrowing again, with the result that by the end of 1860, on the eve of its greatest challenge, the Federal government was in debt by $64.8 million. 9 Esther R. Taus, Central Banking Functions of the United States Treasury, 1789–1941, (New York: Columbia University Press, 1943), 52-55. 10 Taus, Central Banking Functions, 52-55. Chapter Seven THE CIVIL WAR The public debt in 1860 totaled $64.8 million and was close to the Federal government's annual budget of $63.1 million. This quantity of money would appear insignificant compared to the amount the national government would owe at the end of the War Between the States. At the outset, it was believed by many in the government that the war would be of very short duration. The greater resources of the northern states were expected to overpower the southern states in rebellion. As the war continued, however, the Federal government was forced to completely overhaul its financial organization. Treasury Secretary Salmon P. Chase The nation began to march towards war with the election of Abraham Lincoln as President in 1861. Moreover, the new administration was starting office with the treasury virtually empty. Among Lincoln's first appointments was that of Salmon P. Chase as Secretary of the Treasury. Chase was a "hard money" advocate and an adherent of the principle of the Independent Treasury. Congress met in July 1861 to consider ways of financing the war, which Chase estimated would amount to $318,519,581.87 during the coming year. He proposed that $80 million be raised by taxes, mainly through an increase in tariffs, and the rest be borrowed. In formulating this plan, Chase was reverting to Gallatin's old view that the government should use current revenue to pay for its normal operations and interest, and borrow whatever was needed to pay for the war. 1 Division of Loans in Treasury On July 16, 1861, Congress authorized $250 million in loans in a variety of forms, which carried interest in the 7 percent range. It 1 Studenski and Kroos, Financial History, U.S., 137-156. also allowed the issuance of non-interest bearing Treasury notes to be used to pay government salaries and to be deemed acceptable in payment of money owed the government. A Division of Loans was created in the Office of the Secretary to perform certain administrative debt management functions. Chase then negotiated loans of $150 million with a group of major banks in the latter half of 1861. However, at the time, the banks had only $63 million in hard currency available, and were afraid that a transfer of a large portion of that supply would shake public confidence in their ability to redeem their own notes. They wanted the government to keep its proceeds from the loan in the banks until the banks could resell their holdings of government bonds to the public for additional amounts of hard money. Chase disconcerted them though, by insisting upon full payment in hard currency to be kept by the Treasury. As the banks could not accommodate this demand, a compromise was reached. Chase permitted the banks to have the extra time needed until sales of government securities could replenish their gold supplies. However, the military losses suffered by the Federal government early in the war made it difficult for the government to sell its securities as quickly as the funds were needed. Meanwhile, Chase had to revise his estimate of expenditures for the first year of the war upward to $532 million. At the same time, his assessment of anticipated revenues, was amended downward to $55 million. Finally, payment in specie had to be suspended indefinitely, as the banking system no longer had sufficient gold reserves to honor its notes. Legal Tender Act Congress, with Chase's support, passed the Legal Tender Act on February 25, 1862. This act authorized the Treasury to issue $150 million in United States notes and authorized the sale of up to $500 million in 6 percent bonds. The Treasury notes, which eventually were referred to as greenbacks, were declared legal tender for the payment of all public and private debts, even though they were not backed by gold. This was the first paper money issued by the Federal government. The next year, Congress authorized the issuance of an additional $300 million in greenbacks, a necessary |