seeking investments afforded a favorable opportunity for selling them at a low rate of interest. Congress spent much time over a bill for retiring the bonds, and issuing new ones bearing three-and-a-half per cent interest, and running for forty years before the government had the option of payment.' The bill, however, was vetoed, and Congress adjourned without further action. Mr. Windom, who succeeded Mr. Sherman as secretary of the treasury, conceived the plan of continuing the bonds at the pleasure of the government, though bearing the lower rate of three and a half per cent interest. Those who desired to do this sent their bonds to Washington, and new ones were issued therefor, with the fact of their continuance stamped across their face. This plan was highly successful, the bonds were promptly sent and exchanged, while the foreign holders who preferred payment were paid, for which ample resources existed in the treasury.3 Afterward, when the national banking associations were re-chartered, they were granted the privilege of exchanging the "Windoms" or three-and-a-half per-cents for other bonds bearing three-per cent interest, to which was given the advantage that they should not be called until all the three-anda-half per-cents were paid. The amount exchanged was so great, as well as the surplus that could be devoted to paying the 1 For the bill, see 10 Cong. Record, p. 989. Mr. Windom, who was appointed March 5, 1881, retired Nov. 13, 1881, and was succeeded by Mr. Folger the next day. On the 4th of September, 1884, Mr. Gresham was appointed, and held the office until the 27th of October following. On the 28th of the same month, Mr. McCulloch returned and served during the remainder of President Arthur's administration. * See Mr. Windom's letter to Am. Bankers Association, giving an account of his refunding of the bonds. Proceedings, 1881, p. 26. three-and-a-half per-cents, that in a short time only the threes remained within the pleasure of the government to discharge. It happened that at the time fixed for concluding the history of our finances, Mr. McCulloch, who was at the head of the treasury department at the close of the war, and when the debt reached its greatest height, was also secretary of the treasury. He remarked that it was in the highest degree gratifying to him to notice the great reduction that had been made in the interval. On August 31, 1865, the indebtedness less cash in the treasury was $2,756,431,571, the annual interest charge, $150,977,697.87, and the average rate paid was 6.34 per cent. On November 1, 1868, near the close of his first term of service as secretary, the debt less cash in the treasury was $2,484,935,552.82, the annual interest charge had been reduced to $126,408,343, and the average rate paid was 5.8 per cent. Sixteen years later, on November 1, 1884, the net debt was $1,408,482,948.69, the interest charge was only $47,323,831.70, and the average rate paid was 3.92 per cent. The four following lines are unparalleled in the history of financial prose. Reduction of debt in sixteen years Reduction of annual interest charge $1,076,452,604.13 79,084,511.50 1,347,948,622.74 103,653,866,37 "In the management of its debt" said Mr. McCulloch,1 "the United States has been an example to the world. Nothing has so much surprised European statesmen as the fact that immediately after the termination of one of the most expensive and, in some respects, exhaustive wars that has ever been carried on, the United States should have commenced the 1 Ann. Treas. Report, 1884. payment of its debt and continued its reduction through all reverses until nearly one-half of it has been paid; that reduction in the rate of interest has kept pace with the reduction of the principal; that within a period of nineteen years the debt, which it was feared would be a heavy and never-ending burden upon the people, has been so managed as to be no longer burdensome. It is true that all this has been effected by heavy taxes, but it is also true that these taxes have neither checked enterprise nor retarded growth." And now for the climax of this wonderful story of national debt-paying. A large surplus was in the treasury at the time of Mr. McCulloch's retirement, which has been steadily growing; yet neither he dared, nor has his successor, to use a dollar to reduce the debt lest the standard of payment should be changed from gold to silver. That a nation so opulent, and with such high rational expectations, so facile in borrowing and so joyously prompt in paying, should adopt a policy for debasing its standard of value and continue it in the clear knowledge of accomplishing this result, is one of those senseless paradoxes which too often have given the otherwise brilliant coloring of our financial history a darker hue. CHAPTER IV. THE NATIONAL BANKING SYSTEM. AFTER Congress gave a preference in the spring of 1865 to the State banks which should apply before the 1st of July following for conversion into national banking associations, "nearly all of the State banks voluntarily changed." This is the language of the comptroller in his annual report for that year. He was correct; but when we consider the inducements offered to them to change, and the heavy burdens they would have borne if they had not, the language is strained. Clearly seeing their disadvantage in the future race for business if they remained State institutions, they changed so rapidly that on the 1st of November nine hundred and twentytwo of the one thousand six hundred national banks were converted ones. Thus in two years and a half from the time of organizing the first national bank, the national system became firmly established. Born in national agony, and always encompassed with enemies, the system has proved its superiority to every other tried in our country, and, like a good man, has won more and more popularity "with the process of the suns." The first effect of converting the State banks was to diminish the aggregate bank circulation, for the reason that no national currency was delivered to a converted bank until its former circulation was reduced below the amount prescribed by the national law. As several of the States which authorized the conversion of their banks gave them authority to continue the issue of their State circulation for a limited period after effecting the change, the action of the comptroller caused much complaint. Yet he was unquestionably right; they were bound to discharge all their former obligations, including the redemption of their circulation, and State enactments granting privileges or imposing restrictions contrary to the national banking law were void. On the 1st of October, 1865, the amount of national banknotes in circulation was $171,321,903, beside $19,525,152 in their possession and not issued. The outstanding State banknotes at that date were $78,867,575, and the legal tender and fractional currency amounted to $704,584,658. As we have seen, when Congress first discussed the bill for establishing the system, one of the strongest objections was the imperfect method for redeeming the circulation. This imperfection was acknowledged by the comptroller, the head of the treasury, and other persons who were engaged in administering the law. When it was revised the next year a step in advance was taken. Mr. Clarke, who succeeded Mr. McCulloch as comptroller, recommended that the banks be required to redeem their notes in "the great financial and commercial centres of the country, New York, Boston, and Philadelphia." This recommendation was heartily indorsed by the secretary. There were very few banks outside New York, Boston, and Philadelphia, which did not keep their chief balances in one of them, as a regular demand existed at that time for exchange on those cities. It was contended that where the current of trade required the banks to keep accounts for their own accommodation and that of their customers and |