The Sherman Act (1890)

BY PROFESSOR FRANK WILLIAM TAUSSIG

FIRST of all, it must be noted that the present act makes no important change from the provisions of the Bland act of 1878, except in the amount of silver currency to be issued. It is true there is a change in form; instead of silver dollars and silver certificates we are to have treasury notes, redeemable at the government’s option in gold or in silver coin, which notes are made legal tender for debts. But under the act of 1878 the silver dollars were a legal tender, and the silver certificates were practically so. Both, moreover, were practically redeemable either in gold or in silver; directly of course in silver, and indirectly, but none the less effectually, in gold. This indirect redemption arose because the government was always willing to accept the certificates and dollars freely in payment of all public dues; while, on the other hand, it was always willing and able to pay each one of its creditors gold, if he wanted it. The effect of the double willingness was to keep the silver currency always equal in value to gold, and the new legislation does no more than to simplify matters by making the treasury notes redeemable in gold or silver coin directly. It is safe to say—even without the express declaration, wedged into the act, that it is "the established policy of the United States to maintain the two metals on a parity on the present legal ratio"—that every administration, in the future as in the past, will wish to keep the notes equal to gold, and will redeem them in gold whenever that metal is demanded. The only important change, therefore, from the act of 1878, is as to amount. In both measures the annual increment of new silver currency is determined in a cumbrous way, depending on the price of silver bullion. The outcome under the old act was an annual issue of about thirty millions of dollars; under the new one it will be between fifty and sixty millions—for several years probably nearer sixty millions than fifty. . . .

. . . Twenty millions a year, perhaps thirty millions, will find use in the increase of retail transactions arising from the general growth of the community. There is an inevitable elasticity about this item. In any one year, more or less may be absorbed. Present indications point to the use, for the first year or two, of rather more than twenty millions. Then there is the gap left by retired bank notes, where again the count must be uncertain . . . but, on the whole, some temporary aid in finding a lodgment for the new notes in the retail currency will doubtless be found in this direction. Between general growth and retired bank notes, so large a part of the new notes will probably find their way into general circulation for retail transactions that the government will be able to hoard any unused excess without great financial embarrassment. Barring unexpected revulsions in foreign and domestic trade, we may therefore expect that the new silver currency will be issued at the start as smoothly and with as little immediate effect as that of the past. Those who expect any prompt effect on prices, on bank operations, or on government finances, are likely to be disappointed.

Next, as to the more ultimate effects, assuming that there will be no fresh legislation by Congress on the bank-note, silver, or greenback issues. We shall reach after a year or two the stage when more notes will be put out than can find a place in the old way. It is almost certain that sixty millions of new notes of the smaller denominations cannot be got into circulation every year. Of course it is possible that the government then will simply hoard the excess, as it did at an earlier period already referred to—the years 1885 and 1886. A continued surplus of income over expenditure might enable it, if it chose, to maintain such a policy for a long time—to buy the silver, and simply to hoard so many of the notes as did not readily find their way into circulation or came back into its hands. But this escape from the difficulties of the situation is not likely to be resorted to, except as a makeshift to tide over a temporary emergency, or one expected to be temporary. In the end, the treasury will doubtless have to pay out the notes, whether they find a ready circulation or not. Then, at last, it may be said, we shall have a forced issue of new currency, and surely a period of inflation, with all its intoxicating and demoralizing effects.

No doubt the inflation must come, but the how and when are not so clear. The reader’s attention must again be called to the importance of banking operations, and to the consequences which flow from the fact that all large payments are made by checks resting on bank deposits. No issue of government notes, large or small, can greatly affect prices, unless it affects the volume of bank deposits and that of the payments made through them. It would be wearisome, and indeed—since the precise turn which events may take is quite uncertain—hardly profitable, to speculate on the various possibilities of a future several years distant; but it may illustrate what I have said of the part which bank operations must play in any process of inflation, if I indicate the working of the silver notes under two simple and very possible sets of conditions. First, the notes may be issued at one of the ordinary periods of depression and business inactivity. At such times the banks have plenty of cash in their vaults; they find it difficult to induce business men to increase their credits and deposits; the industrial current is sluggish and is not easily moved by a fresh inflow. The notes which the government would pay out to bullion-sellers, or to other creditors, would accumulate in bank vaults, and thence more and more of them would flow back into the treasury. A larger and larger proportion of the government’s revenue would be received in these treasury notes. Meanwhile, gold would be paid out to such as called for it, and, the bank reserves being already over-full, the gold would tend to flow out in foreign payments; the more so because at such times securities, which form ordinarily a considerable part of our resources for foreign payments, would be difficult to sell abroad. By a process of this sort, the treasury might be drained of its gold, and even brought to a suspension of gold payments, while vet the note issues which had brought this about had had no effect on prices. Eventually, no doubt, the continuance of these issues would lead to a movement toward inflation; but only when, in the time of activity which usually follows in due course the time of depression, the banks, and still more the business community, were in a humor to respond.

F. W. Taussig, The Working of the New Silver Act, in , October, 1890 (New York), X, 165–171 passim.