From The Atlantic magazine, July 1898 Issue:
THE soundness of an institution is put to a test by the strain of a critical moment. Even in times of peace our monetary system has created grave alarm ; what then must be in store for us in the emergencies of war ?
In all the energetic and hopeful movement of recent years for the reform of our monetary evils, we have been holding up to view the necessity for legislative action in anticipation of a possible day of reckoning; and that day of reckoning has unexpectedly come upon us in the war with Spain. It now makes little difference whether the war be long or short, so far as concerns the existing fact of an actual currency crisis ; the crisis is upon us, and our system will soon be put on trial. The preliminary appropriation of $50,000,000 out of the Treasury balance for war expenditures was itself a step toward monetary complications, and as a hint of congressional methods is big with possibilities.
It is a matter of common knowledge that we have long been living in feverish uncertainty under a monetary system in which the standard for prices and for all complicated business transactions has been subject to doubt. No sooner had we made the paper promises of the government (which had been our standard from 1862 to 1879) as good as gold (January 1,1879) than we began to suffer from an agitation causing fear as to whether the standard might not be changed from gold to silver. That agitation was not laid by the campaign of 1896, because no legislation (in spite of the solemn pledges of the Republican party) has since enacted the edict of the people against silver into a statute. Although a great victory for the maintenance of the existing gold standard was won, yet we are so placed to-day that its fruits may be wrested from us in the upheaval of a war with Spain or in the disturbances produced by fiscal needs. Among the greatest disasters of war should be counted the shaking of the weak foundations on which our standard rests, and the toppling over of the edifice of our national credit.
That the continuance of the gold standard depends upon the ability of the Treasury to provide gold for all its payments is a truism which it is unnecessary to emphasize. The business world has been again and again alarmed by the ebb and flow of a fluctuating gold reserve behind our government legal tender paper ; when it grew slender the loss of the gold standard seemed imminent, whereupon every effort was made to fill the Treasury and save the standard. These shocks to the nerve centres of commerce in the past few years are only too fresh in every mind. Indeed, in assigning responsibility for a declining gold reserve, the leaders of the Republican party insisted that to the deficits in the budget during the preceding administration was to be ascribed the inability to protect the standard. Now observe the attitude of Congress to-day. While, up to this time, the revenue for the present fiscal year has not risen to an equality with the expenditures, the same party (of course assisted by their opponents), without a question or an expressed doubt, supplied an appropriation in anticipation of war by taking it bodily out of the Treasury balance, without making any new provisions for obtaining means by taxation or by loans, and the straightforward measure of borrowing by bonds is even shelved in the Senate.
Here we touch the great danger of the hour, — one upon which too much stress cannot be laid : the old easy-going and fatal confusion of mind in Congress between the fiscal and the monetary functions of the Treasury, which in 1861 wrecked the credit of the United States, and led to the financial débâcle of 1864 when Mr. Chase resigned his portfolio in despair. Out of this confusion of mind may easily result a policy which may entail upon us evil consequences for decades to come. It will be the purpose to hide dubious schemes under the guise of patriotism. By representing as unpatriotic everything which does not tally with selfish and partisan designs, an attempt is made to deny a hearing to the teachings of experience, of reason, of sound monetary judgment, and hence of all that most concerns the honor of our country, — of all that is, in the true sense, most patriotic. If this spirit is to control our new fiscal legislation, there is grave trouble ahead of us.
It is perfectly clear, however, that the present war can be conducted without serious commercial distress other than that entailed by a diversion of industry and by increased taxation. The incidents of the day, if availed of, must be regarded as extremely favorable. The generally prosperous condition of all our industries, the quickening results of the last great harvest, which was accompanied by a strong European demand and high prices for our cereals, the unparalleled balance of $470,000,000 of exports over imports in nine months, the consequent credits due us from abroad, and the exceptional flow of gold rising beyond $60,000,000 to our side as soon as our credits are drawn upon, — these are fortunate conditions, for which, in this juncture, we ought to be profoundly grateful; all the more grateful because they furnish a basis upon which our fiscal affairs may be conducted with signal success, if we but avoid the fatal confusion between fiscal and monetary operations from which we have suffered so grievously in the past; if we but hold to the elementary principle that the Treasury requires in time of war a control of wealth and capital, — of goods, and not merely of the medium of exchange which performs the subsidiary work of transferring these goods. It is not difficult to understand that, in times either of peace or of war, the one important matter is the production and possession of the articles needed by the country.
Money serves only a subsidiary purpose as a medium by which these articles (expressed in terms of money) are exchanged ; and a small amount of money goes on doing the vast work of exchange in an unceasing round. In days of peace, when production is normal, every one knows how desirable it is to have no disturbances in trade arising from defects in the monetary machinery. In days of war, production is even more essential than in a period of peace ; the main economic difference (apart from the withdrawal of laborers) at the time being the partial readjustment of productive effort to articles for the army and navy. Hence how much more necessary it is, in the abnormal conditions of war, to be free from additional disturbances caused to industry by tampering with the standard, and thus breaking up the efficiency of the system by which exchanges are carried on ! Changes in the standard would do more than merely affect the convenience of industry; by modifying the measure in which prices are expressed, they would bring in endless confusion, increase the national debt, lower the purchasing power of wages, and weaken the vital resources of the land....
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