Government in the United States, National, State and Local

The National Debt.– Whenever the revenues of the government are insufficient to pay its expenses recourse must be had to increased taxes or loans. In time of peace the ordinary revenues ought to be sufficient to meet expenses, but when extraordinary expenses must be incurred as is the case when war breaks out, or foreign territory is purchased, or some great public work is to be constructed such as the digging of the Panama Canal, the government must have recourse to the borrowing power. The Constitution of the United States expressly confers upon Congress the power to borrow money on the credit of the United States, and no limitations whatever are placed on the exercise of the power, such as are generally imposed on state legislatures by the state constitutions.

United States Bonds.– The usual mode by which the government borrows money is by the issue of its bonds, obligations similar in most respects to promissory notes made by individuals. A government bond is simply a promise to pay a certain sum at a particular time and with interest at a certain rate. The bonds issued by the United States government are of two kinds: "registered" and "coupon" bonds. A registered bond is made out to the person who purchases it; a record is kept of it at the treasury department, and when it is transferred to another person the record must be changed so as to show the new owner.

The advantage of such a bond is that if it is accidentally destroyed or lost the owner suffers no loss. The chief disadvantage is the difficulty in transferring it. A coupon bond is one which has interest coupons attached to it, which may be clipped off and presented to the treasury for payment as the interest becomes due. The government keeps no record of the owner and it may be transferred as any other personal property. If a coupon bond is lost or destroyed, however, the owner cannot collect the amount of the bond. United States bonds are issued in various denominations and for periods of time which vary widely. Usually bonds are sold to the highest bidder, but occasionally they are disposed of by negotiation with capitalists on the best terms that can be secured. During President Cleveland's administration $262,000,000 of bonds were sold to New York capitalists in this way.

Rate of Interest.– The rate of interest which United States bonds pay has varied from time to time. The Revolutionary War debt bore six per cent, and so did most of the civil war bonds. After the Civil War, however, the rate at which the government was able to borrow steadily declined, largely because of the desire of national banks to secure United States bonds (page 232). The rate of interest on bonds now outstanding ranges from two to five per cent.

Growth of the National Debt.– When the Constitution went into effect, the national debt, including the war debts of the states which were assumed by the national government, amounted to about $127,000,000; but by 1836 the debt was extinguished and there was a surplus in the treasury which was distributed among the states. The enormous expenses of the Civil War, however, had to be met largely by loans, and at the close of the conflict (1866) the interest-bearing debt was more than $2,000,000,000. During the next twenty years the debt was reduced to about $600,000,000, but this amount was increased between 1895 and 1899 to about $945,000,000 on account of bond issues to replenish the gold reserve and to meet a portion of the expenses of the war with Spain. On June 30, 1915, the interest-bearing debt stood at $969,759,090. In 1917-19 five bond issues aggregating more than $21,000,000,000 were made on account of the war with Germany.

In addition there is also a non-interest-bearing debt of $389,407,800, of which $346,681,016 consists of treasury notes issued during the Civil War, and popularly known as "greenbacks" from their color. The national interest-bearing debt of the United States on June 30, 1921, amounted to about $24,000,000,000. The total debt of England is now about $40,000,000,000, that of France about $46,000,000,000, and that of Germany over $30,000,000,000.

The Monetary System.– The coining of money is now regarded everywhere as a proper if not a necessary function of government. Under the Articles of Confederation, this power was possessed by the states as well as by Congress, though in fact it was exercised by neither. The framers of the Constitution decided that the most effective way of securing a uniform system of money would be to place the whole matter under the control of the national government, and so Congress alone was given the power of coinage. At the same time, remembering how the states had before 1789 flooded the country with paper money which in some instances had become worthless, the framers of the Constitution wisely decided to prohibit them from issuing bills of credit, that is, paper designed to circulate as money. Likewise they were forbidden to make anything but gold and silver coin a legal tender in the payment of debts.

The Acts of 1792 and 1834.– As soon as the new government under the Constitution had gone into operation, steps were taken to provide a system of metallic currency. In 1792, an act was passed providing for the establishment of a mint at Philadelphia and for the striking of both gold and silver coins.38 The gold coins were to be the double eagle, the eagle, the half eagle, and the quarter eagle; the silver coins were to be the dollar, the half dollar, the quarter, the dime, and the half dime.39 As the market value of a given quantity of gold bullion was then about fifteen times that of silver, the weight of the silver coins was made fifteen times that of the corresponding gold coins. But as the value of gold bullion presently began to increase in comparison with silver, it was necessary to readjust the ratio so as to keep both in circulation, and so in 1834 the weight of gold coins was reduced and the ratio made sixteen to one.

Demonetization of the Silver Dollar.– But soon the increase in the supply of gold again disturbed the ratio, making the silver coins worth more as metal than as money; and as the difficulty of keeping up the adjustment seemed insuperable, Congress decided to abandon the attempt and so in 1873 the silver dollar was practically "demonetized," that is, was dropped from the list of coins, and other silver coins were made subsidiary, that is, their weight was decreased so that the metal in them was worth less than their face value, and they were made legal tender for small sums only.40

Later Acts.– The opposition to the demonetization of the silver dollar, however, became so great that it was restored by the act of 1878 and made full legal tender. But the free coinage of silver was not restored; the act required the government to purchase and coin not less than $2,000,000 nor more than $4,000,000 worth of silver bullion per month. In the mean time the market value of silver had declined until the amount of silver in a silver dollar was worth less than eighty cents in gold, and it was believed that the act of 1878 by increasing the demand for silver would restore its market value. This, however, did not happen, and the market value of silver went on decreasing until at one time the amount of silver in a dollar was worth only about forty-six cents in gold. In 189 °Congress increased the use of silver by requiring the secretary of the treasury to purchase monthly four and one half million ounces of silver and pay for it with treasury notes which were redeemable in coin at the option of the secretary and which were to be canceled or destroyed when so redeemed. This act was repealed in 1893, since which date the government has purchased very little silver bullion for coinage purposes.

Free Coinage.– In determining its coinage policy, the government might follow either of two methods: (1) It might coin any and all bullion presented by its owners at the mints, or (2) it might purchase its own bullion and coin only so much as the necessities of trade or other considerations might require. The former policy is that of free coinage; it is also unlimited coinage since it involves the coinage of all bullion offered, without limit. From the very first, the practice of the government in regard to gold has been that of free and unlimited coinage; that is, any owner of gold bullion may take it to a mint and have it coined without charge except for the cost of the alloy. Prior to 1873, the same policy was followed in regard to silver, thus maintaining in theory at least a bimetallic or double standard. In 1873, however, Congress abandoned the policy of free coinage of silver and adopted the single gold standard. From then until now the government has coined no silver bullion for private owners.

Paper Currency.– In addition to the metallic money described above there is a vast amount of paper currency in the United States. This currency may be classified under five different heads.

Greenbacks.– First, there are the $346,681,016 of old United States notes or "greenbacks," already described. They were issued during the Civil War, they bear no interest, and are redeemable in coin upon the demand of the holder. Since 1878 the practice of the government has been not to retire them as they are redeemed but to reissue them and keep them in circulation.

Gold and Silver Certificates.– Second, there is a large amount of currency in the form of gold and silver certificates. The law under which such currency is issued provides that any owner of gold or silver coin may deposit it in the treasury and receive in exchange an equivalent amount of certificates. They are more convenient to handle than coin, and are equally valuable for paying debts and purchasing commodities. On the 1st of July, 1921, the amount of gold certificates in circulation was $452,174,709; the amount of silver certificates, $201,534,213. These two forms of currency constitute one eighth of our entire stock of money in circulation.

Sherman Treasury Notes.– A third form of paper money is the so-called Sherman treasury notes issued in pursuance of the act of 1890 already described. On July 1, 1921, there were $1,576,184 of them in circulation. The law declares that they shall be redeemed in coin, that is, either gold or silver, at the option of the government. To prevent the threatened depletion of the gold reserve41 and provide the necessary gold with which to redeem the increasing issues of Sherman treasury notes, bond issues aggregating $262,000,000 were issued during the years 1894 and 1895. By the act of 1900 the policy of maintaining a single gold standard was definitely adopted by Congress, and it was provided that greenback notes, Sherman treasury notes, and other securities of the government should be redeemable in gold.

National Bank Notes.– The fourth class of paper money is national bank currency. A national bank, unlike other banks, not only receives deposits and makes loans and performs the other functions of banks, but also issues notes which circulate as money. There are about 8,200 national banks in the United States, with an aggregate capital of more than $1,000,000,000 and with a total circulation of $729,550,513 of notes outstanding (July 1, 1921).

Federal Reserve Notes.– The federal reserve banks, established under the act of 1913, not only receive deposits and make loans to other banks, but also have power to issue federal reserve notes which circulate as money. The amount in circulation July 1, 1921, was $2,680,494,274. This constitutes by far the largest amount of paper money in existence.

The total amount of money of all kinds in circulation on July 1, 1921, amounted to $5,776,437,473, or a per capita circulation of about $53.40.

The National Bank System.– Any number of persons, not less than five, may organize a national bank, the amount of capital required depending upon the population of the town or city where the bank is located. Prior to 1914 the organizers were obliged to purchase and deposit with the government, bonds of the United States equal to one fourth of the capital of the bank; now they may do so if they wish. The comptroller of the currency then delivers to the bank notes equal in amount to the par value of the bonds deposited. These notes when properly signed by the president and cashier of the bank may then be loaned by the bank or otherwise issued as currency, for though not a legal tender they are commonly used as money. It must also be remembered that the United States bonds deposited with the government remain the property of the bank and it receives the interest on them just as any other owner would.

Advantages of National Bank Currency.– If a national bank fails, depositors may lose their money just as depositors of money in other banks may, but the holder of a national bank note does not, for whenever a bank is unable to redeem its notes, the comptroller of the currency may sell the bonds which it has on deposit with him, and with the proceeds redeem its notes. Hence a bank note is as safe as any other form of currency. Moreover, national banks are subject to frequent and careful examination by government examiners, and failures among them occur with less frequency than among other banks.

Federal Reserve Banks.– By an important act passed in 1913 Congress provided for the creation of a series of federal reserve banks to be located in different parts of the country. The committee intrusted with the matter divided the United States into twelve districts, each of which is to have one federal reserve bank, located respectively in the following cities: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. In each district the national banks are required to become members of the federal reserve association, and to subscribe for its stock. Other banks may do so, by conforming to certain requirements.

Federal reserve banks are under the supervision and control of a federal reserve board consisting of the secretary of the treasury, the comptroller of the currency, and five other members appointed by the President. The federal reserve notes which they issue are guaranteed by the United States government, and are secured by commercial paper – notes and drafts – deposited in the treasury. It is expected that these banks will provide a more adequate supply of money and credit when the need is greatest, as during the crop-moving season, and at the same time give greater stability to the business of banking.

Federal Land Banks.– In 1916 Congress passed the so-called rural credits law, which provides for the organization of a series of banks for lending money to farmers at low rates of interest and for long periods of time. Such banks are under the supervision of the federal farm loan board consisting of the secretary of the treasury and four other members.

References.– Andrews, Manual of the Constitution, pp. 81-89, 104-118. Beard, American Government and Politics, ch. xviii. Bryce, The American Commonwealth (abridged edition), ch. xvi. Harrison, This Country of Ours, pp. 58-65. Hart, Actual Government, chs. xxi-xxii. Hinsdale, American Government, secs. 341-373. Laughlin, Elements of Political Economy, chs. xxv-xxvii.

Illustrative Material.– 1. Copy of the present tariff law. 2. Specimens of various kinds of money in circulation. 3. Copy of the last annual report of the Secretary of the Treasury.

Research Questions

1. What were the sources of national revenue during the period of the Confederation?

2. Why has the imposition of direct taxes on the states not been resorted to with more frequency?

3. What is your opinion of the law levying taxes on incomes?

4. What is the amount paid by your state in internal revenue taxes? How many internal revenue districts are in your state?

5. Are there any ports of "entry" or "delivery" in your state? Any customhouses? If so, what is the amount collected by each? (See report of the secretary of the treasury.)

6. Can you give the names of some articles now on the "free list"? Mention some articles on which, in your judgment, the tariff rate is too high. Mention some articles on which the tariff is levied according to the ad valorem method; the specific method; both methods combined. (See copy of the tariff law.)

7. With what countries do we have reciprocity commercial treaties? In brief, what are the provisions of those treaties?

8. Why is an internal revenue tax imposed on such articles as oleomargarine, filled cheese, and mixed flour?

9. What is the present rate on tobacco, cigars, distilled spirits, and fermented spirits?

10. What was the total amount of the appropriations of Congress at the last session? What were the largest items of expenditure?

11. What is the present mint ratio between gold and silver? the market ratio? What is the actual weight of a silver dollar? What is Gresham's law of coinage?

12. Which countries have a bimetallic monetary system? Which a single silver standard? Which a single gold standard? What are the arguments for and against free coinage of silver?

13. What would be the result of opening the mints to the free and unlimited coinage of silver?

14. Name the different kinds of paper money.

15. What was the amount of the interest-bearing debt according to the last report of the secretary of the treasury?

16. What do you understand by the terms "legal tender"? "fiat money"? "seigniorage"? "suspension of specie payments"?

17. What is the penalty for counterfeiting the currency of the United States?

[Answers to many of these questions may be found in the report of the secretary of the treasury which may be obtained gratis from the secretary.]

CHAPTER XIII

THE REGULATION OF COMMERCE

The Power to Regulate Commerce.– Under the Articles of Confederation, as we have seen, Congress possessed no power to regulate commerce among the states or with foreign nations. That power remained entirely with the states. Each state accordingly made such regulations as it saw fit, without regard to the general welfare. It was this want of commercial power on the part of Congress that contributed as much as anything else perhaps to the downfall of the Confederation. The Constitution as finally adopted gave Congress the exclusive power to regulate commerce among the states, with foreign countries, and with the Indian tribes, which were then treated somewhat as foreign nations for certain purposes. The only limitations placed on the power of Congress in this respect were that no duty should be levied on goods exported from any state; that no preference should be given by any regulation of commerce or revenue to the ports of one state over those of another; and that no vessels bound to or from one state should be obliged to enter, clear, or pay duties in another.

Regulation of Foreign Commerce. In pursuance of the power to regulate commerce with foreign nations Congress has enacted a large amount of legislation relating to tonnage duties, duties on imports, quarantine, immigration, the importation of adulterated foods, wines, teas, and other food products, the conduct of navigation, the construction and inspection of ships carrying passengers, pilotage, clearances, the protection of shipping, the rights of seamen, the registration and insurance of vessels, life-saving appliances, the use of wireless telegraph apparatus, and the like. It was also in pursuance of this power that the Embargo Act was passed in 1807 and the Nonintercourse Act in 1809 – both of which were in effect prohibitions rather than regulations of commerce.

The Navigation Laws prescribe with great detail how vessels registered under the American flag shall be constructed and equipped for the comfort and safety of their crews and passengers; how they shall be inspected; rules that shall be observed to avoid collisions, how signals shall be displayed, etc.; the forms of papers vessels must carry; how the wages of seamen shall be paid, the nature of their contracts, etc.

The Tonnage Laws prescribe the rate of tonnage duties that shall be levied on vessels entering American ports. Tonnage duties, as the name indicates, are a form of taxation calculated on the basis of the tonnage admeasurement of the vessel; they are levied on American as well as foreign ships, though the rate is higher on the latter than on the former. Sometimes they have been higher on the vessels of some foreign countries than on those of others, in which case they are known as discriminating tonnage duties. Such discriminating duties are employed for the purpose of favoring the commerce of those nations which extend us commercial privileges and for shutting out or restricting that of nations which discriminate against our trade. In pursuance of the power to regulate foreign commerce, Congress prohibits foreign vessels from engaging in the coasting trade, and permits only citizens of the United States to serve as masters on vessels registered under the American flag. Formerly only American-built vessels could be registered, but in 1914, after the outbreak of the great war in Europe, Congress passed an act allowing ships built in foreign yards, when owned by American citizens, to be registered under the American flag; and more than 100 such vessels have been so registered.

Immigration.– By virtue of the commerce power Congress has enacted a series of immigration laws imposing restrictions on the coming of immigrants to our shores. For a long time immigration from Europe was encouraged rather than restricted, but within recent years so many undesirable persons have found their way to America that Congress has been led to pass various laws designed to shut out the worst of them and admit only the desirable ones.42

First of all, the immigration laws exclude convicts, insane persons, paupers and those likely to become paupers, persons suffering with dangerous, loathsome, and contagious diseases; epileptics, persons afflicted with tuberculosis, idiots, feeble-minded persons, polygamists, anarchists, immoral persons, and others of this character.

In the second place, what are known as alien contract laborers are prohibited from entering the United States, that is, persons who come under contract already entered into, to perform labor, whether skilled or unskilled. The law excluding this class was enacted in obedience to the demands of the union laborers of the United States, who did not wish to be subjected to competition with foreign laborers specially imported for the purpose. Actors, teachers, lecturers, and members of other professions are exempted from the law, and so are skilled laborers if domestic laborers of like kind are not available in the United States.

A third group of excluded classes are Chinese laborers, the immigration of whom was first prohibited in 1882.

A law of 1916 provides, with certain exceptions, that no alien shall be admitted unless he can read English or some other language or dialect. A law passed in 1921 limits the number of immigrants who may enter annually from each country, to 3 per cent of the number already in the United States, or a total of about 356,000.

There is now a head tax of eight dollars levied upon every immigrant who is admitted. Persons whose steamship passage has been paid by others or who have been otherwise assisted to come are not allowed to enter. When an immigrant has been denied admission by the commissioner of immigration at the port at which he has landed, he may take an appeal to a special board of inquiry. If the decision of this board is against him he may appeal to the United States commissioner-general of immigration, and finally to the secretary of the department of labor. If the final decision is against him, the steamship on which he sailed is required at its own expense to transport him to the port from which he sailed.

Quarantine.– In pursuance of the power to regulate foreign commerce, Congress has enacted a volume of legislation in regard to quarantine and medical inspection of ships and their passengers coming from foreign ports. In most instances inspections are made by the United States consul at the port from which the vessel sails, and a bill of health is furnished the master of the vessel, but in some Asiatic and South American ports regular medical inspectors are stationed. At various ports along the coast, national quarantine stations have been established at which inspections of incoming vessels are made and at which they may be detained if found to have on board persons suffering from dangerous contagious diseases.