of public money; but Secretary Chase did not use this permission. He required the loans to tho government to be paid over into the government depositories. At the same time the preparation of the government securities was so delayed that they could not be delivered to the banks. "It was under these circumstances that the banks in New York resolved, on the 28th of December, 1861, to suspend specie payment. * * * The suspension of specie payments, therefore, is to be traced primarily to the patriotic efforts of the banks in the great cities to sustain the government."[1] A conservative bank movement followed the suspension, but after April, 1862, there was a rapid expansion of loans, deposits and circulation, accompanying the premium on gold and silver.
The banks of Kentucky had not suspended in January, 1862. These, with the banks of Ohio and Indiana, were the only ones in the country, with some scattered exceptions, which still held out. There was a great struggle in Ohio as to whether the Board of Control should allow the Bank of the State to suspend.[2]
To the authorities at Washington it seemed that the resource of loans from the banks was not adequate to the financial necessities of the time. The expenditures were already $1 million a day and very rapidly increasing. The banks having nearly all suspended, there was great fear that a continuation of borrowing from them might lead to a repetition of the trouble of 1814, and that suspended banks would manufacture currency for the purpose of loaning it to the government. These misgivings and apprehensions furnished the motive of the legal tender act of February 23, 1862, by which the government undertook to help itself by the issue of an irredeemable treasury-note currency.
We have already seen that he who issues notes borrows; that he lays hands upon the value money in circulation, putting his promise currency in the place of it. If, therefore, a country has a metallic circulation, there is an immediate financial resource at the disposal of the government, in case of war or other calamity,—a resource which is strictly limited, however, in its amount to the amount of this metallic circulation. It is not necessary that the specie should be drawn into the public treasury. It suffices to suspend specie payment and issue treasury notes which will displace the specie without depreciation, until the limit of the specie circulation is reached. Beyond that point the exchanges turn adverse, the paper depreciates, and the specie is exported. At the outbreak of the civil war, it was a critical fact in the financial situation that the federal government did not have this resource at its disposition, because this resource had all been used up to its utmost limit in peace time by the banks, to whom it had been given away. There were a few men in Congress, in 1862, who were prepared to say to the banks that they must at once retire their circulation; that they had been allowed to have this privilege up to that time, but that then the public needed to use it for its own purposes and could no longer afford to give it
