Funding the National Debt.

Mr. Henderson.  I move to postpone all prior orders and proceed to the consideration of Senate bill No. 285.

The PRESIDENT pro tempore.  The morning hour having expired it becomes the duty of the Chair to call up the special order for today, being Senate bill No. 300.  That bill is before the Senate, and the Senator from Missouri moves to postpone it and all prior orders for the purpose of taking up the bill named by him.

Mr. HENDERSON.  As the Senator from Ohio is entitled to the floor on the special order, if my bill is called up I will let it be passed over informally to hear his remarks, as I understand his bill is to be passed over anyhow after his remarks.

Mr. Sherman.  But the funding bill is now the special order.

Mr. Henderson.  I do not desire to interfere with the Senator from Ohio.

The PRESIDENT pro tempore.  The motion is withdrawn.  The special order is before the Senate.

The Senate proceeded, as in Committee of the Whole, to consider the bill (S. No. 300) to reduce the rate of interest on the national debt, and for funding the same.  It proposes to authorize the Secretary of the Treasury, if he shall deem it expedient for the purpose of funding the national debt and reducing the rate of interest thereon, to issue registered or coupon bonds of the United States, in such form and of such denominations as he may prescribe, payable, principal and interest, in coin, and bearing interest at the rate of not exceeding five per cent. per annum, payable semi-annually, such bonds to be made payable in not over thirty years from date, to be issued to an amount sufficient to cover all outstanding or existing obligations of the United States, and to be disposed of in such manner and on such terms, not less than par, as the Secretary of the Treasury may deem most conducive to the interests of the Government.  The expense of preparing, issuing, and disposing of the bonds is not to exceed two per cent. of the amount disposed of, and the bonds, and the proceeds thereof, are to be exclusively used in taking up or retiring the obligations or indebtedness of the United States other than United States notes.  The bonds thus issued are to be known as "the consolidated debt of the United States," and to be exempt from taxation in any form by or under State, municipal, or local authority; and in consideration of the reduction of the rate of interest effected by the negotiation of these bonds, they and the interest thereon and the income therefrom are to be exempt from the payment of all taxes or duties to the United States.

The amount of interest saved by a substitution of five per cent. bonds for other Government securities is to be applied to the payment of the principal of the national debt, and for the purpose of insuring the payment thereof, and in lieu of the sinking fund contemplated by the act of February 25, 1862, the sum of at least $30,000,000, including the saving of interest, is to be annually applied to the reduction or extinguishment of the debt in such manner as may be determined by the Secretary of the Treasury, or as Congress may hereafter direct.

For the purpose of enabling the Secretary of the Treasury to prepare for the funding or payment of the outstanding Treasury notes bearing interest at the rate of seven and three tenths per cent. per annum, the holders of such notes are required to advise the Secretary of the Treasury, in such manner as he may prescribe, at least six months before their maturity, whether they elect that the notes shall be paid at maturity or shall be converted into bonds of the United States commonly designated as five-twenty bonds; and the right on the part of the holders of converting the Treasury notes into bonds shall be deemed and taken to be waived as to each and every note in relation to which notice shall not be given as thus prescribed, and the same shall be paid at maturity in lawful money of the United States.

Mr. Sherman.  There are two or three amendments reported by the committee which may as well be acted upon now.

The PRESIDENT pro tempore.  The amendments reported by the committee will be read.

The first amendment was in section one, line sixteen, to strike out the words "preparing, issuing, and," and in line seventeen to strike out the word "two" and insert "one;" so that the proviso will read:

Provided, That the expense of disposing of such bonds shall not exceed one per cent. of the amount disposed of.

The amendment was agreed to.

The next amendment was in section one, line eighteen, at the end of the proviso to add, "which said one per cent., or so much thereof as may be required, is hereby appropriated."

Mr. EDMUNDS.  With the consent of the Senator from Ohio, I will move to amend that amendment by adding after the word "appropriated" the words "for that purpose," which will make the meaning a little more explicit.  It is a mere verbal amendment.

Mr. Sherman.  I have no objection to that.

The amendment to the amendment was agreed to.

The amendment, as amended, was adopted.

The next amendment was in section two, line four, after the word "taxation" to strike out the words "in any form."

Mr. Fessenden.  How will the section read then ?

The Secretary read as follows:

That the bonds issued under this act shall be known as "the consolidated debt of the United States," and the same shall be exempt from taxation by or under State, municipal, or local authority, &c.

Mr. Sherman.  The amendment is simply to comform to the language of the existing law.

The amendment was agreed to.

Mr. SHERMAN addressed the Senate in explanation and support of the bill. [His speech will be published in the Appendix.]

Funding of the National Debt.
SPEECH OF HON. JOHN SHERMAN,
of Ohio,
IN THE UNITED STATES SENATE,
May 22, 1866.

The Senate having under consideration the bill (S. No. 300) to reduce the rate of interest on the national debt, and for funding the same—–

Mr. PRESIDENT:  This bill came to us in the usual mode from the Secretary of the Treasury, and its purpose is to facilitate the negotiation of a five per cent. loan.  It has been with me, during the present session of Congress, an earnest desire to see the interest on the debt of the United States reduced to not exceeding the rate of five per cent.;  but the Secretary of the Treasury, as will be gathered from his public documents, hesitated somewhat as to whether he could negotiate a loan bearing that rate of interest.  After full consideration, however, he presented this bill as containing the terms upon which, in his judgment, this loan could be negotiated.  It came to us, and by general consent was reported to the Senate, printed for the purpose of attracting attention and criticism, and was subsequently considered by the committee, and reported.  Its history is now known to the Senate.

Before considering the specific terms of the bill, it will be necessary for me to state the condition of the public debt.  By the statement laid on our tables on the 1st of May, it appears that the ascertained debt of the United States at that time was $2,827,676,871;  and from that may be properly deducted the amount of money, coin, and currency on hand of $137,987,028.82.  To this aggregate must be necessarily added quite a number of items;  some of which have been acted upon at the present session of Congress, and some of which will be acted upon before our adjournment, the mere statement of which will show the Senate the probable condition of the public debt within the next year or two.  The largest sum, probably, that will be required, or that is now pending before us, is the bill introduced from the Committee on Military Affairs for the equalization of bounties, which will take, if passed, near $200,000,000.  What will be the fate of that measure I have no means of knowing.  The Pacific railroad, now being constructed, will probably cost in the course of the next five years something like $50,000,000, and over $100,000,000 in the aggregate.  If the various branches that are entitled to bounty should comply with the terms of the law by building, each of them, one hundred miles during the year, it will take $6,400,000;  but the presumption is that some of those branches will fail to comply with the law.

In the settlements with the States for expenses incurred for the military service in an irregular way, we have already appropriated I think about ten million dollars to the States of Missouri, Kansas, Pennsylvania, and West Virginia, and there are other claims of the same character which will be presented by other States.  I am told that Indiana, Kentucky perhaps, and Ohio will have such claims.  Ohio has a claim of that kind growing out of the Morgan raid.  The probability is that this class of claims now unadjusted but not disputed, the principle having been settled, will take $20,000,000.  The largest yet allowed was to the State of Missouri, which I think amounted to some seven or eight millions.

Mr. Henderson.  Seven millions.

Mr. Sherman.  Then there is the measure presented by a prominent member of the House of Representatives, which, I hope, will not pass, and upon which I have a very clear judgment — the proposition to assume a portion of the expenses of the States in raising men during the rebellion;  the proposition generally known as Mr. Blaine’s bill, and which, should it receive the sanction of Congress, would take, by its terms, $116,000,000.  As I have seen but very little effort to pass that bill, I lay that aside as not a probable burden upon the Treasury.

Then there are classes of large private claims growing out of the war, many of which are being constantly pressed upon us, and which will take probably millions of dollars, but the precise amount of which no man can estimate.  The bill passed the other day for the relief of the contractors for the iron-clads, and the claims made by the States of Kentucky and Tennessee and the various border States for damages caused by the war, and claims for property used by the Army, are specimens of this class of claims, amounting, I might say, to fifties and hundreds of millions.  I take it the great body of these claims will be rejected upon the general principles of public law;  and therefore, in estimating the probable burden on the Treasury, I do not put this item very large, especially as I see a disposition in Congress to criticise very accurately this class of claims.

It therefore is very certain that in the most favorable aspect of affairs the public debt of the United States might fairly now be estimated at $3.000,000,000.  That is the amount stated by the Secretary of the Treasury in his annual report, and I think it is not overstated.  With the strong probability of passing the bill for the equalization of bounties, it may be understated;  but I take it as a correct estimate.

It will be observed that this debt is of the most diverse character.  It consists, not only of the unliquidated claims that I have specified, but the public debt which is ascertained is provided for by twenty-seven different laws and as many as forty different forms of securities.  The report on the finances, which was laid on your table at the commencement of the present session, contains a list of these various loans, covering six or seven pages.  Under some of these laws there are a great diversity of issues.  For instance, under the seven-thirty law there are three different series of notes, and under the five-twenty law there are five different series, containing somewhat different provisions.  The seven-thirties vary somewhat, although it is very difficult precisely to state the difference.

Mr. FESSENDEN.  The difference arises from the dates of issue, principally.

Mr. Sherman.  Partly, but in the seven-thirties the difference is also in the terms of the bond.  The principal difference is that in one class of those bonds the interest may be at the pleasure of the Government paid in gold at six per cent.  I merely allude to this diversity of loans to show that the natural idea of every one connected with the finances of the Government would be, as early as possible, to consolidate and put in some uniform form the public debt of the United States.  This is an obvious idea.  It is now difficult for the people of the United States to understand any but two or three of these loans, and none but a skillful financier, engaged himself in the purchase and sale of stocks, can tell the various differences of value between the different forms of securities and the reasons of those differences.  It is obvious, therefore, that for public convenience it is necessary to consolidate these loans as soon as possible into one distinct form, so that we shall have nothing to provide for but the interest of the debt and such portion of the principal as the policy of the United States may require us to pay off.

There is another reason for funding our public debt.  It is not a question of policy, but it is a question of necessity.  A large portion of this debt matures very soon, and it must be either renewed or paid off.  It can only be paid off by selling other bonds, and consequently there is necessity of prescribing the terms of these new securities.  I have here a table showing when this public debt matures:

It will thus be seen that while the pressure of the principal of the public debt is not very great now, yet $178,000,000 is within the reach of the Secretary, and that next year and the year following both the seven-thirties and five-twenties come within his reach for payment or conversion.

Mr. CLARK.  I suppose it is not a necessity that they must be redeemed.  It is at the option of the Secretary.

Mr. Sherman.  I say it is within the power of the Secretary.

Mr. CLARK.  The Government may have a longer time if it chooses.

Mr. SHERMAN.  Yes, by paying six per cent. interest in gold.  I wish simply now to show that it is within the power of the Government, if it can reduce the rate of interest, to do so consistently with the stipulations of the bonds.

But there is another argument derived also from another table that I have before me.  All modern nations who are now dealing very largely in public debt have as a matter of policy reduced their public debt to some simple, tangible form, so that in every country there is a specific debt known to the people of that country, with a fixed rate of interest prescribed by law;  and the whole of the public debt is generally put in that form as soon as possible.  England had formerly the same diversity of securities that we now have;  but it has been the policy of English statesmen, from William Pitt down to this time, to reduce that debt into one simple form, so that nothing but the interest should be provided for, and the result has been that the whole of the public debt of England is reduced to a three per cent. debt except about one million pounds.  The total amount of the public debt of Great Britain is £799,802,139, and the whole of this may now be said to be a three per cent. annuity, the principal, however, redeemable at the pleasure of the Government.  In France I find the same thing has occurred.  The term "rentes" generally describes the great mass of the public debt.  I think all the debt, except a few technical annuities, given probably for specific purposes, one called "obligations trentenaires," and some floating debt, is now funded in the form of rentes.  The debt of Russia, also, is now funded into three, four and a half, and five per cent. stocks — the great body of it in the form of five per cent. foreign loans.  The same statement holds good in regard to all European countries.  Every nation in Europe, where a public debt has existed in some cases for centuries, has adopted it as a principle to reduce that debt to as simple a form as possible, so that the interest alone would be a charge upon the treasury, and that a sinking fund should pay off gradually such portion of the principal of the public debt as the policy of the Government would allow.

It is manifest that if the debt of the United States was now reduced to one simple form of a five per cent. stock or bond, so that the United States need not look except to the payment of the interest of that debt, and to the payment or purchase of such portion of the principal as its policy might dictate, much of our financial difficulty would be removed.  What is now the trouble with us ?  Why cannot this project be adopted ?  The answer is that a very large portion of the principal of the public debt becomes due in a short time, and the Secretary must provide for the payment of that principal;  and this very necessity of going constantly into the market to renew these loans imposes upon him nearly all the burdens of his office.  And yet I do not arraign the policy that was adopted during the war of making short loans.  It was proper to do it, it was necessary to do it.  It was not proper for this Government to stipulate to pay these high rates of interest for a long period of time, and therefore during the war it was necessary to make short loans at a high rate of interest;  but it was always done in view of reducing the rate of interest after the war should be over, and with a view of consolidating this whole debt.  The policy, so far as I know, of those connected with the finances of the country, has been to keep ever in view the principle of redeemability in every form of security issued during the war.  Therefore the five-twenty note was payable or might be paid after five years.  The seven-thirties and the various forms of securities that have been issued are within the reach of the Government in a short time.  Why was this idea so carefully kept in view ?  Simply to enable the United States to retain the advantage of paying the principal after the war when loans could be negotiated on more favorable terms.  And now we may properly reap the benefit of this wise policy.  We may now enter the money market with the laurels of victory and peace.  We need no longer compete with the industrial interests of our citizens in borrowing money, but may prescribe our own terms and renew our debts on conditions consistent with our vast power and resources.

Now, Mr. President, the only additional question I need present in this connection is, is this the time to fund the public debt ?  I say emphatically it is.  I believe we have wasted four or five precious mouths in doing it.  I believe that the process would have been easier at the beginning of this session than it will be now;  and why ?  In order to fund the public debt of the United States a large amount of currency is necessary;  but it is necessary for us to reduce our currency as soon as possible.  We cannot get back to specie payments without some reduction of the currency.  Every one desires to resume specie payments.  Before we return to specie payments this debt ought to be funded.  It cannot be funded on as favorable terms after we return to specie payments.  The very abundance of the currency obviously enables us to fund the debt at a low rate of interest;  and it is just and right, as this debt was contracted upon an inflated currency, that upon that same currency the debt ought to be funded in its permanent form.  The effect of the superabundance of paper money is to reduce the rate of interest;  that is obvious.  At the time of the celebrated John Law excitement, the rate of interest in France was reduced to one and a half per cent. by the overwhelming amount of paper money.  I say that now, above all others, is the time to fund this debt in some form of security.  If we postpone it six months or a year it will only add to our difficulties.  The longer we postpone it, and the longer we leave this amount of floating indebtedness upon the market of the United States, the less will we be able to fund it at a low rate of interest and on favorable terms.  And, sir, we have no choice about it.  We have got to do it, because this debt is maturing, and we have got to put it in some other form unless we intend — to use a very expressive phrase — to shin it, and go into the market to renew short loans.  This debt matures, and it has got to be paid.  It can be paid, not by taxes but by selling new bonds and new loans;  and therefore we must determine upon some form of funding this debt as soon as practicable.  And this brings me to the main question involved in this bill, and that is what rate of interest the United States ought to pay on our public debt.  Upon $830,000,000 we are now paying interest at the rate of seven and three tenths per cent., higher than we allow our citizens to exact from each other.  Upon the great part of our debt we pay six per cent. in gold, equivalent at present rates to seven and eight tenths per cent. in the currency for which the bonds were sold.  We exempt our public creditors from the burdens of taxation.  The question is now whether we are willing to continue to pay such interest, and whether we are unable to meet our obligations on more favorable terms.

And, sir, in considering this question, I wish it distinctly understood that I would not arbitrarily change any contract with a public creditor.  Public faith is the most precious jewel of a nation, and I would not tarnish ours by any violation of promise or contract.  So far as we have stipulated we must pay;  our credit demands it.  An old writer says:

"This is the great thing called credit.  Credit is a consequence, not a cause;  the effect of a substance not a substance;  it is the sunshine, not the sun —, the quickening something — call it what you will, that gives life to trade, gives being to the branches and moisture to the roots.  It is the oil to the wheel, the marrow in the bone, the blood in the veins, and the spirits in the heart of all the négoce, trade, cash, and commerce of the world."

Credit is based, not only upon a strict compliance with contracts and ability to perform them, but also upon great care in making them.  We must have prudence in making a contract, honor in observing it, and ability to perform it.  These are the elements of public as well as private credit.  Our history as a nation has shown that we have the means and will to fill our contracts.  It is for us to show our prudence in making these for the future.  In private dealing we will not trust a man who has great means and ample property if he is reckles less in making engagements, but we do trust a prudent man who has no resources but his pru dence and probity.  As a nation we ought not to impair our credit by making engagements more onerous than other nations do, unless we are compelled to do so by stern necessity.  Now, sir, I cannot but think that it is discreditable to us as a nation that we are now issuing our bonds at a higher rate of interest than any Christian nation of the world;  that we now continue to issue six per cent. bonds, principal and interest payable in gold, at a coin value of seventy-five cents on the dollar.  I do think the fact that all European nations, with all their complicated relations and expensive forms of government, can sell their securities at a more favorable rate than we, is an unpleasant fact no longer justified by the relative condition of the several countries.  While we were in war, our Government in discredit, and our own people fearing the result of the struggle, we were justified by necessity in paying high rates;  but to do so now is a confession of weakness that I see no foundation for.

Let us test this question by a more detailed comparison of the rates of interest paid by this and other countries, and of the resources of each.  I have a table showing the debt, population, and annual interest paid by leading nations:

But this table, while it presents us in an unpleasant aspect, does not show the entire facts.  Of our debt only $2,200,000,000 is on interest.  The residue is not funded or is in the form of currency, but on the sum of a little more than $2,000,000,000 we pay $139,000,000 of interest, while Great Britain pays a less sum of interest by some millions of dollars on nearly double the debt.  The rate of interest on her consols, at their present market value, is three and a third per cent.  One hundred dollars of her bonds, bearing interest at three per cent., will sell in any money market of the world for eighty-six dollars in gold, equal to ninety-four dollars in our coin, while $100 of United States bonds, bearing six per cent. interest, will sell in Europe at from sixty-five to seventy dollars in sterling gold, and in the market at New York for about seventy-six dollars in our coin.  Is there such a difference between the condition of affairs in this country and in Great Britain;  is there anything in our public credit, the nature of our institutions, or the character of our laws, or in the uncertainty of payment that compels this exorbitant difference ?  I do not think so.  In France the rate of interest is about four per cent. and a fraction;  sometimes a little less than four.  In Russia it is five per cent.  In Austria it is five per cent.  Five per cent. is the highest rate paid, except during an emergency by any of those countries;  and their resources are not to be compared with ours.  This table shows that, tested by the public debt of any nation of modern times, the amount paid by the United States is entirely exorbitant, and therefore the first duty is to reduce this rate of interest, not by arbitrary means, but by every device of legislation.  In my judgment, it will be a public discredit if the Secretary of the Treasury is compelled to issue any more six per cent. gold-bearing bonds.  When you examine our resources and compare them with the amount of our public debt, the latter seems insignificant.  It is shown, not only by our official tables, but by the actual exhibition of our industry and strength in the last throe or four years, that we have more elements of strength and more resources in money than any nation of Europe.  England has but thirty million people upon whom her public debt rests;  we have thirty-five million people, and our population increases at a ratio without example, maintaining that ratio for sixty years.  We have the broadest agricultural field of any nation in the world, without even excepting Russia, because the great body of Russia is either too cold or too dry for agricultural productions.  We have a territory of compact form but varied climate, and productions greater in extent than all Europe.  We have 2,044,077 separate farms, each occupied by the owner, and in the main tilled by his own labor.  Our coal-fields are estimated to be thirty-six times the size of those of Great Britain and Ireland, and are distributed throughout all portions of the country.  As coal is the basis of the wealth of Great Britain, and actually yields seventy-two million tons, while we now consume but fifteen millions, we have in coal a bank that can never break, a mine of jewels more valuable than all the gold of the world.  And our mineral resources are greater than those of any two countries of the world.  California has furnished to the mints of the United States for gold coin over $360,000,000, and probably a greater amount in bullion exchanged for foreign productions.  Iron in mountains of rich ore is scattered in most of the States.  We have more actual wealth per capita, now, than any nation in Europe.  The price of labor here is twice what it is in Europe.  All the elements which enter into the computation are in our favor.  For us to pay this rate of interest, it seems to me, is an acknowledgment that there is some defect in our form of government, some insecurity, or some unreasonable demand for the use of money, that I cannot explain.

The vast disproportion between the rates of interest we pay and our resources has excited the intelligent observation of an Englishman recently among us and who has recently written a book upon the resources and prospects of America, a copy of which I have before me.  I refer to Sir Morton Peto, and I am sure every Senator who hears me will deeply regret that one so friendly to our country seems, by the advices we have this morning, to have been involved in financial embarrassments at home.  This intelligent writer, who is familiar with the whole system of finance and taxation in England, has presented in this volume the results of his study and observation of our resources in a manner that must attract the attention of every reader.  The book is a careful collection of facts admirably arranged, but without attempt at concealment or exaggeration, and he closes it by saying that after the completion of our Pacific railroad—

" We shall be called upon to regard America as the greatest nation of the world.  She will be entitled to take that rank by reason of her extent, her diversity of soil and climate, the character of her communications, the variety of her resources, her vast mineral riches and the abundant field which she presents for labor and for the employment of capital and enterprise.  Many among us are accustomed to smile when we hear the Americans speak of the United States, in their accustomed manner, as a 'great nation.'  But there is no mere boast in that description.  Emphatically, America is a 'great nation.'  Where can we find her equal in geographical and natural advantages, in material progress, or in general prosperity ?  As a united people, the Americans present to the world a spectacle that must excite general admiration.  Regarding them as of the same race and ancestry with ourselves, as a people using our language, governed by our laws, united by the same religion, influenced by kindred sentiments, their progress is a spectacle which should kindle our admiration and enthusiasm."

And, sir, in this connection we must remember that while our resources are so great, they are not locked up in the bosom of mother earth, but may be touched by the power of taxation.  The actual experiment has been tried, and the result has been far greater than any of us estimated.  We are now collecting a revenue greater than any modern nation.  A recent official statement made to us by the revenue commissioners shows that during the current year the result of our taxes is over five hundred million dollars, a sum greater than France or Great Britain ever collected in any one year.  We are now engaged in the happy duty of repealing many of these taxes, but will still retain $30,000,000 to apply annually on the principal of our debt;  a fact that has forcibly impressed the mind of Mr. Gladstone, who, after years of peace, is fortunate in being able in Great Britain to propose a plan of slightly reducing the debt of that country by changing a portion of it into terminable annuities.

Another element of credit is that under our system of government our national expenses are far less than other nations.  Sir Morton Peto says:

"In proportion to population, the United States, in 1860, had, I apprehend, the smallest expenditure and the smallest national debt of any country in the world."

And, sir, even under the increase of our expenditure since the war our actual expenditure, other than on account of the public debt, will be in the future far less than the same population in Europe.  Here war expenses cease with the war.  No standing army swells exorbitantly our estimates.  Our heroes who saved the country by war are now enriching it by their labor.  Our current expenses next year will be considerably less than two hundred millions.  So that whatever view we take of our financial position, whether we consider our resources, our receipts, or expenditure, or the varied industry of our people, we must conclude that we are not justified in paying rates of interest so far in excess of other nations.

Again, sir, the present rate of interest is a war rate, and the distinction between a war rate and a peace rate is recognized by all the writers.  England was compelled to sell many of her three per cent. annuities at some sixty cents on the dollar;  but even England when she was involved in the great war with Napoleon never paid anything like such a rate of interest as we do this day.  It seems from the report of one of the revenue commissioners, which is very full of facts and details on this subject, that the average rate of interest paid by Great Britain during her war with the French republic, of eight years, was £4.17s. per £100;  a little less than five per cent.;  that during the year 1802 it was reduced to £4.4s.;  that during the war with the French empire it was £4.5s;  that from the end of the war until 1821 it was £4.5s., or four and one fourth per cent., and that the average rate during the whole period of the war was four and three fifths per cent., reduced to a specie standard;  and yet we have paid, uniformly, six per cent. in gold, receiving paper for our bonds, paying the interest in gold, and converting one into the other.  At one time during the war we paid at the rate of thirteen or fourteen per cent. on money, counting the difference between gold and paper.  Such a thing as that would exhaust any country except ours.  We were able to borrow this money and get it from the people;  but it is obvious that at the very earliest moment we must go back to something like a reasonable rate of interest on our public debt.  We must not tear from our people the results of their labor and pay it for purposes of this kind when there is no necessity.  I take it, therefore, as an axiom with which to set out, that we ought to reduce the rate of interest.  I expect to live to see the time when the rate of interest in this country will not be over three or four per cent., and now we propose to reduce it on new loans to five per cent.

There are one or two collateral views that Senators might reflect upon with great propriety.  First, there is the influence of these high rates of interest on the industry of our country.  I have a letter here, which probably presents this point as clearly as I can, from a very intelligent citizen of the city of New York.  I will read a short extract.  He speaks of the effect of the high rates paid by the Government in the city of New York.  He says:

"A powerful cause which exposes the poor and persons of limited means to such high rents is found in the rates of interest established by national and State laws and the increased value given to money by such legislation.  During the rebellion the Government offered a higher rate of interest than the laws of New York and the sea-board States generally had established as legal.  Hence investments in United States securities now realize more than two per cent. over bonds and mortgages in New York.  Capitalists have therefore been withdrawing money from real estate loans to invest them at higher rates in Governments.  This policy affects scores of millions of capital.  It has a direct tendency to limit and retard building and discourage all State developments.  It has entirely unsettled the whole system of the demand and supply of money for private enterprises.  Every day an unprecedented number of houses and lots are thrown on the market, either from the inability of the borrower to pay off his mortgages or debts in any other way, or from the imperative necessity of raising money to prosecute old business or start new.  These enforced real estate sales benefit the capitalists alone, who in return demand at least fifteen per cent. on their new property, and those who are obliged to rent are thus held at their mercy.

" Before the war capitalists and corporations were ready to loan from fifty to seventy per cent. on real estate securities.  With from two to five thousand dollars on hand a man could buy and build with a certain reliance on a loan, while his future earnings, with the gradual advance of property, would ultimately give him a clear title to a home for himself.  In this way many thousands of good dwellings were constructed in New York;  but the arrest of this system has put our population into the hands of the landlords, and they will hold the power till the system is changed.  If the poor became rich, they would do the same."

That is obvious.  The effect of these high rates paid by the Government is not only to absorb the floating capital of the country, but to deter men from engaging in enterprise;  and therefore all over the cities of the United States it is a common remark "It is impossible to get houses."  In the West the cry is distressing.  In all the cities it is impossible to get a house at a fair rent.  The rent absorbs all a man’s little earnings.  The result is the people are crowded into tenements, half a dozen families in a house;  in New York, in some cases two or three families in a room;  and all these distressing incidents grow out of the advance in rents, the greater expense of living, the high prices of produce, of food, clothing, and all the necessaries of life.  I think there is no fact that contributes so much to this state of affairs as the high rate of interest paid by the Government of the United States.  We go in and compete with every man who is talking about building a house, to borrow money.  We compete with every class of industry.  We compete with the railroad companies in the sale of their bonds, with the manufacturers in the building of new warehouses.  We compete with all classes by offering a higher rate of interest than we allow the courts to enforce for them.  During the war that was necessary;  we could not avoid it;  but is it necessary now ?  I think it is not.

The great leading objects of this bill are to fund the public debt and to reduce the interest;  but there is another object proposed by it which I think is peculiarly an American one, and upon which I ought to say something before I proceed to examine the details of the bill, and that is the necessity of providing when we contract a debt for the payment of it.  The original funding act framed by Alexander Hamilton was based upon the idea that a public debt should be temporary, and this idea is ingrafted upon American finance.  In view of this, in the first loan law of 1862, if I remember aright, we provided that one per cent. of the amount of the loan should be set aside as a sinking fund with a view to pay off the principal of the debt.  That pledge has never been redeemed, nor during war was it possible or proper to redeem it.  A sinking fund can properly be accumulated only during peace.  It would be bad economy to take a portion of the money borrowed at high rates of interest during war and invest it in securities purchased in the market and then lay them aside and accumulate the interest for the purpose of paying off a debt during peace.  Great Britain tried that for nearly one hundred years and finally abandoned it.  The old form of a sinking fund, which was the favorite theory of Robert Walpole and William Pitt, was abandoned, then resumed, and was finally abandoned in 1819.  I have an interesting book here, the preface of which was written by the celebrated Mr. McCulloch, in which he speaks of the abandonment by Great Britain and by all other nations of the old form of a sinking fund.  I will read an extract from it:

"Neither must it be supposed that the notion of the wonder-working effects of sinking funds has been a mere harmless error.  On the contrary, few delusions have been practically so mischievous.

"Dr. Hamilton, of Aberdeen, has the merit of having dissipated the delusion in regard to the sinking fund." * * * * * * * *

"He showed that instead of reducing, the sinking fund had increased, the debt.  And he proved to demonstration that the excess of revenue over expenditure is the only fund by which any portion of the public debt can ever be discharged.

"But since Dr. Hamilton’s work appeared, more correct accounts have been obtained of the expenditure, loans, &c., during the great struggle terminated in 1815.  And from these it may be easily shown that the sinking fund was not a clumsy only, but a costly imposture.  In proof of this we beg to state that the loans contracted in each year from 1794 to 1816, both inclusive, amounted in all to £584,874,557, at an annual charge to the public of £30,174,364.  Of these loans the commissioners of the sinking fund received £188,522,350, the proportional annual charge on such portion being, of course, £9,726,090.  But it further appears from the accounts referred to, that the stock which the commissioners purchased with this sum of £188,522,250, transferred to them out of the loans, only yielded an annual dividend of £9,168,232.  On the one hand, therefore, an annual charge of £9,726,090 was incurred to enable the sinking fund commissioners to go to market;  and, on the other, they bought stock which yielded £9,168,232 a year;  so that, on the whole, their operations during the war occasioned a direct dead loss to the country of no less than £557,857 a year, equivalent to a three per cent. capital of £18,595,233, exclusive of the expenses of the office, which amounted to above £60,000.  Such was the practical result of Mr. Pitt’s famous sinking fund, so long regarded as the palladium of public credit, and the sheet-anchor of the nation !

"Notwithstanding Dr. Hamilton’s book was published, as already stated, in 1813, the statute for the suppression of the sinking fund, the 10 George IV, c. 27, was not passed till 1829.  It enacted that in time to come the sum to be applied to the reduction of the national debt should be the actual annual surplus of revenue over expenditure."

The old form of sinking fund adopted in England, and also in this country, was to invest by certain persons named in the law specific funds and authorize them with those funds to buy any portion of the public debt.  That plan of accumulating a sinking fund has been abandoned, and now, as this author says, the only proper way is to apply a fixed sum raised by taxes and from surplus revenue to the payment of the public debt.  Instead of endeavoring to keep the debt alive by sinking fund commissioners, the application of a specific sum to the payment of the principal and interest of the debt every year would have the same effect in extinguishing the public debt as if invested in sinking fund commissioners and without the loss and expense of management.

Mr. Van Winkle.  With the permission of the Senator from Ohio, I should like to ask him whether he has so far investigated this subject as to tell me whether the principal objection made to the sinking fund of Pitt and the others he has alluded to was not that the nation continued to be a borrower.

Mr. Sherman.  That was it.

Mr. Van Winkle.  And that it was really borrowed money which was applied to the sinking fund.  Let me ask, further, whether there would be any difference in the result, provided the nation had a surplus and that surplus was applied to the sinking fund or was paid directly on the debt.  I ask for information.

Mr. Sherman.  The Senator is undoubtedly correct.  England borrowed money to pay into the sinking fund.  The plan proposed in this bill is from the proceeds of taxes to raise a specific sum, appropriating it for the payment of the public debt.  The difference is between borrowing money to pay a debt and using your own money to pay the debt, money collected from the people.

Mr. Van Winkle.  Then the form in which it was applied, whether a surplus of taxes was taken and applied by means of a sinking fund or directly applied to the debt, would be immaterial.

Mr. Sherman.  Certainly.

Mr. Van Winkle.  The difference between them would arise out of other circumstances.

Mr. Sherman.  So that the money to raise the sinking fund was not raised by borrowing.  If it was raised by taxation and directly applied, the effect is the same as if invested in commissioners.  The only reason why I make any remark about the sinking fund is that this bill contains a provision applying a specific sum every year to the cancellation of bonds under laws to be hereafter framed.

I have thus stated, I fear with too much detail, that any plan should embrace these ideas:  the funding the debt, the reduction of interest, and the ultimate payment of principal.  And here a difference of opinion arose whether this plan should be prescribed by Congress or whether it should be left mainly to the Secretary of the Treasury.  I objected to the law passed here a month or two ago, and the Senator from Maine did not think my objections well founded.  But I still think I was right.  My objection did not arise from any want of confidence in the Secretary, for I know the present Secretary will not abuse this trust.  But it grew out of what I considered the right of the people to know precisely the terms of the loan.  That bill authorized the Secretary to sell a bond, principal and interest payable in gold, running not to exceed forty years, and bearing an interest not to exceed six per cent., to be free from State and local tax, and which he might sell under par.  Now, I did not wish to admit for a moment, in the form of a law, the possibility of any Secretary selling such a bond even at par, and certainly not under par.  It was a cheapening of the public credit to provide for such a loan.  And without renewing the controversy, I ask, is it not better in legislating on this important question, involving $3,000,000,000, to put in the form of law and on the face of the statute the terms and conditions upon which your public agents shall sell your bonds ?  It seems so to me, and therefore, if this bill contained no new provisions, I should think it important, and highly important, that the terms finally agreed upon and fixed by the Secretary of the Treasury, after full consideration, should be embraced in the form of law so as to be binding upon him and his successors, so that no change should be made without the consent of Congress.  I do not propose, however, nor do I ask the repeal of that law, but I think that when the plan is agreed upon, it should assume the form of law, leaving, however, the general provisions which passed a short time ago to stand to meet emergencies and exigencies now unforeseen.

The further question which I now desire to submit to the Senate is, whether this bill presents a plan by which these objects can be accomplished.  If it were left to my own hopeful view of things I would strike out two or three clauses of this bill.  I would not extend the exemption from taxation to the income tax.  I would preserve the form of our laws in regard to the convertibility clause, vesting the power in the United States to pay off this debt after a certain time, say ten years.  I would insert a proviso which was in the old law of 1795, authorizing the United States to pay off the principal.  But the Secretary of the Treasury, who is to execute this law, is of opinion that he cannot negotiate a five per cent. loan upon these terms;  and therefore he would not undertake it.  He has the power under the general law we have passed to negotiate a loan at six per cent., or one at a less rate, but he thought he could not negotiate a five per cent. loan without additional legislation.  I am not sure of that.  I believe that if you pass a bill of this kind fixing the rate of interest at five per cent., with the general stipulations contained in this bill, we shall be able, though perhaps with some difficulty and after some time, to save the one per cent. without giving any additional benefits.  He thought not, however.  The question now is, not whether we shall give him this law, but whether we shall compel him to issue a six per cent. rather than a five per cent. loan, unless we give him the terms and privileges contained in this bill.  If I was called upon to prescribe the form, being probably a more hopeful man than he or many of those around me, I would insist that the Government of the United States should not pay in any event over five per cent. interest, and that a clean loan should be negotiated for that amount, and that it should be something like the ten-forty loan, within easy conversion, so that if in ten years we could negotiate a loan at a less rate of interest we might have power to do it.  But he thought that in order to enable him to negotiate a five per cent. loan he must have two provisions, one giving him authority to issue a thirty-year loan, to postpone the payment of the principal not to exceed thirty years;  and the other to exempt these securities from the income tax of the United States.

Those were the two conditions upon which he thought he could negotiate a five per cent. loan.  When I came to examine them, I found that these two conditions could amount to but very little loss.  The income tax levied by the United States now upon national securities pays to us less than one tenth of one per cent. of the public debt.  By the terms of the tax law the holders of these bonds are compelled to pay income as upon other property, but all the bonds that are held by persons whose aggregate income is less than $600 go free of tax;  all the bonds that are held abroad are free of tax;  all the bonds that are held by banks, insurance companies, and corporations are held free from this income tax.  No corporation pays an income tax;  the income tax is levied only upon individuals.  The result is that the bonds of the United States, you may say the great mass of them, are held in such a way that they pay no income tax.  The Secretary says:

"If you will surrender the trifling amount you collect from incomes derived from Government securities, I may be enabled to save you one sixth of all the interest paid upon the public debt."

When that proposition was made, it seemed to me perfectly obvious that we ought to adopt it.  There is another reason.  The income tax is, in its nature, temporary.  There is scarcely a doubt but what that income tax will disappear like many of the other taxes in a short period of time.  The time, in my judgment, is not far distant when a tax on a few articles of luxury will pay the interest on the public debt and pay our expenses.  I have no doubt we shall go through the same process of legislation that our ancestors did after the war of the Revolution, and as those who went before us did after the war of 1812.  All these taxes will disappear in a short period of time, and perhaps a tax on whisky and tobacco and on imported goods, a few simple taxes, with perhaps the income tax added, may be able to pay the interest on the public debt and the expenses of the Government.  Therefore the only question was whether we should surrender this small matter in order to accomplish a great object.  It seems to me we ought to do it.  If the Secretary of the Treasury can go to work and negotiate this loan by surrendering this small income tax, and thus effect a saving of interest equivalent to twenty per cent. of all the interest paid by the United States, it is certainly a very good bargain, and it does not require a very shrewd man to see it.

The other provision was that there ought to be a fixed period before which the principal should not be paid.  That was a point upon which I myself long hesitated;  and I agreed to it for this reason, and it is a very obvious one if Senators will apply their minds to it;  but a very small portion of the public debt can be converted now into a five per cent. loan.  A small portion of it is due.  The holders of the seven-thirties will avail themselves of their privilege to convert them into five-twenties.  There is not very much pressing upon the Secretary of the Treasury, but whatever it is, he must pay it, and he must issue some form of loan, and the only question is whether it shall be a five per cent. or a six per cent.  If you do not pass this bill he is compelled to issue a six per cent. loan because he cannot negotiate any other.  He says he cannot, and that is the general judgment.  It is the general judgment of gentlemen who oppose this bill that he cannot negotiate a five per cent. loan of any kind even with this bill, and therefore that he will be compelled to issue a six per cent.

The very fact that he is not compelled to borrow a large sum of money enables him to go into the market now like a rich man who has a boundless inheritance, a large estate, on which he wants to borrow a very small sum of money;  he can get it on good terms, but he says he cannot get it unless the payment of the principal is postponed for twenty or thirty years.  Suppose he does issue two hundred million or five hundred million five per cent. bonds under this bill;  the objection is that we may want to pay off the principal sooner.  Surely we would pay off the six per cent. bonds first, and we cannot expect to pay off all this enormous debt within thirty years.  All the bonds that he could probably issue within a year or two would fall very far short of the amount that would still remain unpaid under the most favorable circumstances in thirty years from this time.  Next year, after he has established a five per cent. loan under this bill, it may be that he can go into the market and get a better loan still, a better bond, on more favorable terms, and thus reduce the rate of interest on the balance of the debt as it matures.  I have no doubt he can do it.

I now come to consider an objection to this bill made with a good deal of force, especially by my Democratic friends, that the loans of the United States are exempt from State taxation.  Although this is a very important question, it has never been discussed in the Senate, and I think that unless Senators have been required to examine the decisions of the courts of the United States, they probably have not seen how far the courts have gone in settling this question.  I lay it down as a premise that in the absence of all stipulations about taxation in a law, no State can tax a Government security;  it is entirely inconsistent with the supreme power of the national Government to borrow money.  This question is settled more clearly than almost any question of constitutional law which has ever been mooted in this Government.  The first case involving it that came before the Supreme Court of the United States was the celebrated case of McCulloch vs.  The State of Maryland, in which the principle was decided that no tax could be levied by a State upon any agent employed by the national Government in the execution of its vested powers.  That case, however, did not reach the particular point that I am now discussing, but subsequently the case of Weston vs.  The City Council of Charleston arose in 1829, and is reported in 2 Peters, page 449, and upon the very point now in discussion.  Chief Justice Marshall was still upon the bench, the same judge who had decided the case of McCulloch vs. The State of Maryland.  The city of Charleston, under the authority of a law of the State of South Carolina, levied a tax upon bonds of the United States held by a citizen of Charleston.  The question was submitted to the supreme court of the State of South Carolina, and it was decided there by a majority that the State had a right to tax a Government security or the income derived from it.  A dissenting opinion was given by one of the judges of that court which is highly creditable to him, and I think presents the case very clearly.  I will read a short extract from that opinion before I read anything from the decision of Chief Justice Marshall.  This case arose at the beginning of the nullification crusade, and the very principles subsequently involved in the contest through which we have recently passed were then under discussion in South Carolina.

Judge Huger, in giving his dissenting opinion, said:

"I am unwilling, on so important a question, merely to express my dissent from the judgment of the court.  It is now for the first time agitated, and ought to be fully discussed, that it might be better understood.  It affects the use of a power, as essential to the General Government in periods of difficulty and danger, as any other which the people have delegated to it.  If the city council of Charleston can tax the stock of the United States, co nomine, the States can;  and if the States can, it is impossible not to perceive that the fiscal operations of the General Government may be completely frustrated by the States.  It will be in vain for Congress to pass acts authorizing the Secretary of the Treasury to borrow money, if the holders of their stock can be taxed for having done so by the States.  Congress may offer ten per cent. for loans, but who will lend, if the States can appropriate the whole to their own use ?"

He then proceeds to show that the power to tax at all involves the power in the States to nullify by taxation the power of the national Government to borrow money, and says:

"No Government, not revolutionary, has ever attempted to tax its own stock, and, among others, for two very satisfactory reasons:

"1.  Because such a tax must necessarily operate injuriously upon all future loans;  and

"2.  Because there is in fact a violation of contract in so doing, and therefore immoral and impolitic.

"Under the influence of these reasons, the Legislature of this State has refused to tax the stock of the United States;  but it appears that the city council of Charleston have thought differently, and have taxed it." * * * * * *

"If they can do so at all, they may do so to any extent;  it is equally with in their power to tax twenty per cent. or one hundred per cent. as one half per cent.  What shall govern their discretion it is impossible to foresee.  A State or a few States may concur in a policy at variance with that of the Government, nay, in hostility to it.  This, unfortunately, has been already witnessed."

He prophesies the very case that occurred afew years afterward in that State :

"They may, indeed, be indisposed to dissolve the Union and declare war, when they might have no objection to counteract Congress, and control its measures by the exercise of a power strictly constitutional.  Seven tenths of the stocks of the United States are owned in the cities of Boston, New York, Philadelphia, Baltimore, and Charleston."

And then he proceeds to discuss the power of cities and States to tax the Government stock, and shows that if it were conceded, the single State of New York might have it in its power to destroy the Government of the United States by preventing it from borrowing money.  The case was brought up to the Supreme Court of the United States, where it was elaborately discussed by Mr. Hayne and Mr. Legare, then among the ablest counsel in the country.  I will read from the decision of Chief Justice Marshall:

"This brings us to the main question.  Is the stock issued for loans made to the Government of the United States liable to be taxed by States and corporations ?

"Congress has power 'to borrow money on the credit of the United States.'  The stock it issues is the evidence of a debt created by the exercise of this power.  The tax in question is a tax upon the contract subsisting between the Government and the individual.  It bears directly upon that contract while subsisting and in full force.  The power operates upon the contract the instant it is framed, and must imply a right to affect that contract.

"If the States and corporations throughout the Union possess the power to tax a contract for the loan of money what shall arrest this principle in its application to every other contract ?  What measure can Government adopt which will not be exposed to its influence ?  But it is unnecessary to pursue this principle through its diversified application to all the contracts and to the various operations of Government.  No one can be selected which is of more vital interest to the community than this of borrowing money on the credit of the United States.  No power has been conferred by the American people on their Government, the free and unburdened exercise of which more deeply effects every member of our Republic.  In war, when the honor, the safety, the independence of the nation are to be defended, when all its resources are to be strained to the utmost, credit must be brought in aid of taxation, and the abundant revenue of peace and prosperity must be anticipated to supply the exigencies, the urgent demands of the moment."

Then he goes on to discuss the question at great length, and comes to the conclusion, in which the court was unanimous, that in the absence of all stipulation on the subject no State could be allowed to tax a Government security, simply because to do so would enable the States to destroy the power of the national Government, prevent it from prosecuting war, and from maintaining the authority of the United States.  This principle has never been controverted and never been doubted by any judge on the bench of the Supreme Court of the United States.  It has been acquiesced in by every judge who has sat upon that bench.  It has never since been controverted by any State of the Union.  It has never been attempted by any party in the Union to set aside that decision.  This exemption is so clear a principle of constitutional law, in my judgment, that it cannot be assailed or gainsaid.  The same question was again brought before the Supreme Court of the United States in a case from the State of Pennsylvania, when Chief Justice Taney sat upon the bench — the case of Dobbins vs. The Commissioners of Erie county.  The court again reaffirmed the same principle, referring to this case, repeating it, and applying this doctrine to a tax levied by the State of Pennsylvania on a Government officer.  Again the question was brought before the Supreme Court of the United States during the recent war, in a case reported in 2 Black — the case of the Bank of Commerce vs. The Tax Commissioners of New York city, where the opinion was given by Mr. Justice Nelson.  The question arose there as to the power of the State of New York to tax Government securities in the possession of the Bank of Commerce, a corporation of that State and the Supreme Court unanimously decided that a tax could not be levied in any form, from the very nature of the case, on a Government security.  It should be remembered, too, that up to the time of this last decision no provision had been contained in any loan law expressly declaring that the Government securities should be exempt from State and local taxation.  It was decided upon the general principle involved, and without regard to any stipulation made by Congress.  This last decision was in 1862, and it was that winter, for the first time, that we put in the stipulation in one of our loan laws.  The question was asked, why put in this stipulation if the law was so clear ?  The answer was just as conclusive, that as we were compelled to borrow money it was important to inform in the most authentic manner all who chose to loan it, of their rights and privileges under the Constitution.  No doubt many a man, upon the faith of the direct pledge of Congress, superadded to the decisions of the Supreme Court, loaned us his money in time of war, when he would not have done it if it was to be subject to local taxation.

I might add, if it was necessary to add to these authorities, that the same question was up again during the last term, and again decided in the same way, in the case I now hold in my hand.  This case was the taxation by the State of New York of the shares of a national bank;  and a majority of the court drew a distinction between a tax upon a share in the bank and a tax upon a Government security, and they also based their decision upon the express declaration of Congress that these shares should be taxed.  The Chief Justice, however, and Judge Wayne and Judge Swayne differed, and held that from the nature of the security itself, in any form or shape the Government security could not be taxed.  The majority of the court drew the distinction between the shares in the bank and the bonds held by the bank, and allowed the shares to be taxed.  In my judgment, such was the intent of Congress.  It was a subject that was very much discussed and mooted here at the time, and although I was opposed to the tax, yet it was finally carried.  The distinction made by the court was taken by Senators that the taking of shares in a bank was a reinvestment of the funds and a change of the form of security.

I say, then, that no Senator should vote against this bill, or any bill of a similar character, on the idea that it is not now wise to exempt Government securities from State taxation.  That is the settled principle of constitutional law, whether it is put in your laws or not;  and the only question is whether by omitting to put it in you will give the lenders the power to make a better bargain with you.

Mr. Fessenden.  Has the Senator any doubt of our power to provide specifically that it shall be subject ?

Mr. Sherman.  I have no doubt that Congress may, as a part of the contract, and before the loan is issued, say that the States may tax the security.  But, Mr. President, what effect would that have ?  Could you sell such bonds ?  Would you allow the southern States now to tax Government securities ?  Would you allow them to have the power over your public credit which would be involved in their power to destroy the income from Government securities, because, as Judge Huger says in the first decision made, if you give them the power to tax one mill you cannot restrain it ?  No, sir, the contract between the United States and all the citizens of the world is a contract higher than any imposition levied by a State, and we ought no more to tolerate the idea of levying tax upon the securities of the United States except by the United States itself, than Great Britain would allow any foreign Power to levy in Great Britain a tax on British securities.

It must be remembered that by express provision inserted in all the acts passed during the recent war United States bonds are exempt from State taxation.  All the debt now outstanding is thus exempt.  Even the bonds issued under the recent acts will be so exempt.  Suppose you follow the suggestion of the Senator from Maine and refuse in this bill to so exempt a bond bearing but five per cent. interest, or, as he suggests, actually provide that they shall be taxable.  Who would buy them ?  Who would surrender their present securities ?  How could you fund your debt ?  No device could be more perfect to continue the present high rates of interest.  And what good would result to State or nation ?  None whatever.  The State could not tax the present bonds, and the holders would not take your new ones.  The only way is to stand by the inviolability of our bonds as declared by the Supreme Court and upheld by every party or President to this time.

I now wish to meet the argument so often and forcibly made that it is unjust to exempt United States securities from local taxes.  And, sir, I admit that if this is regarded as a privilege to the holder it is indefensible;  but it is the privilege of the Government, not of the fund-holder.  It is the supreme power of the whole people to borrow money on the most favorable terms that is taxed and limited by a tax in the contract.  Such an exemption is only justifiable on the ground that it enables the Government to borrow money on better terms.  In the contract of borrowing the lender considers the rate of interest, the security of the principal, and the burdens of taxation.  If no taxes are to be deducted from his interest and the principal is absolutely sure and easily convertible into money, he is willing to part with his money at a low rate of interest.  This is the reason of the exemption, and the Government is presumed to receive the taxes in the more favorable terms of the loan.

But, sir, when the tax-payer sees that the Government is paying a higher rate of interest than the law allows to a citizen, the exemption will be felt to be wrong.  With the present rate of interest there will be a constantly growing jealousy between the bond-holder and tax payer.  The latter will complain that his property is burdened with all the expense of Government while his neighbor enjoys his full income free from all burdens.  This feeling is founded upon so clear a sense of what is right that no wise legislator will disregard it.  It is true that a contract once made cannot be violated whether it costs much or little.  Public faith demands an exact and specific performance, but an adjustment of this difficult problem ought to be made that will, while it preserves intact the rightful power of the Government to borrow money free from local taxes, require property in the funds to aid in the support of the Government.  I have shown that this cannot be done with safety to the United States by allowing States to tax our securities.  Two other modes have been suggested:  first, to tax directly by act of Congress the public securities at a rate equal to local taxation;  and secondly, to reduce the rate of interest.

A proposition has been made by Mr. Hayes, one of our tax commissioners, to levy a direct tax on all United States bonds held in this country of one per cent. on the principal of the bond, or to reserve one sixth of the interest payable on a six per cent. bond.  Such a tax applied to our present securities would be a breach of public faith.  Congress may have the power to do it — using the word power in its unrestricted sense — but it would be unjust, a fraud upon our creditors, and would forever impair our public credit.  It is an indirect violation of a contract made in good faith.  It is true the United States did not stipulate that it would not tax the bond, and the United States may properly levy an income tax upon public securities of any amount, as it may upon other incomes;  but when the United States selects this particular kind of property as the only kind of property upon which it will levy a specific tax, it is a violation of public faith.  To levy the same tax on this kind of property that you levy upon other property would not be unjust;  but to select it out and put upon it exclusively an income tax of sixteen and two thirds per cent. in order to defeat in this way the stipulated exemption from State taxation would be a violation of the public faith ; and yet that proposition has been made by an officer of the Government.  Mr. Hayes has furnished us a long and elaborate report on the subject.  I do not know that it is necessary for me to read his report, because any gentleman can find it.  He attached to it the form of a bill for that purpose.  It was disapproved by a majority of the revenue commission, but was submitted by Mr. Hayes as his own individual opinion.

Mr. FESSENDEN.  Have you found anybody but him in favor of it ?

Mr. SHERMAN.  Yes, he has the testimony of some of the leading men in the city of New York, and among the rest some men who have been employed as agents by the Government — C.T. Hillyer, Henry A. Perkins, John L. Bunce, James S. Tryon, Jonathan F. Morris, Olcott Allen, James Goodwin, Stephen D. Pardee, E.V. Haughwout, John W. Hunter, Royal Phelps, William B. Astor, William M. Vermilye, and a number of others, whose testimony is given, and who state that such a tax, in their opinion, would be just.  It is hardly fair to these gentlemen to regard their testimony as anything more than a general opinion that bond-holders should in some way contribute to the support of the Government;  and I know that some of them prefer a reduction of the rate of interest as proposed by me.

This question of taxing Government securities is far from being a novel one.  It has been resorted to in arbitrary Governments many times.  In France, in the time of Louis XIV and Louis XV, and especially during the regency that intervened, forced taxes on public funds were resorted to until the credit of that country was entirely destroyed.  It was proposed in England in 1717, but was firmly resisted.  I have here a paper attributed to the celebrated Henley, Earl of Oxford, written in that year on the inviolable nature of public securities, and the arguments have not lost their force by time.  He says:

"Your project of raising money for this year’s service, or of paying debts by taxing or lowering the interest of the funds, meets, I think, with too much approbation among some peoplo who look no further than themselves and consider only the present difficulty, regardless of the consequences of their proceedings.  The importance of the case seems to require that everybody should contribute what they can to set this matter in a true light and examine without prejudice how much the interest of our country, its reputation and honor, its future good or evil, may be affected by it." **** "I cannot but think that conscience is concerned, and natural honesty and public justice and the credit of the nation — everything that is sacred and inviolable in property is nearly affected;  all obligations will be in a way of being canceled, and, in a word, an indelible character of injustice cast upon us." ****

"To support and maintain a man’s private credit, it is absolutely necessary that the world have a fixed opinion of the honesty and integrity as well as ability of a person.  If there be good reason to object against the one or the other of these his credit sinks ; no one chooses to deal with him, nor does any one care to trust him." *****

"This true, this only foundation of credit takes in all cases and all persons, public as well as private, national as well as personal.  Just and honorable practices, fair and open dealings, a strict performance of contracts, a steady observance of engagements, will necessarily gain credit everywhere;  and common experience teaches us that a breach in these as necessarily destroys it." * * * * "And, indeed, a readiness and willingness to perform one’s engagements is such a fundamental of credit that all the affluence of money and the most immense riches are of no consequence if there be ground for the least suspicion of disingenuity.  The ability of a person without natural justice rather makes a man cautions than forward to deal with him.

"If, therefore, the legislature of any country should decline standing to its contracts or endeavor to impose other conditions than what at first were stipulated, I ask, would not such a conduct as necessarily impair the public credit as it would the credit of a private person ?  Has it not the same tendency to make the lenders jealous of their security ?  Who will venture to lend the public a second time if ever they find themselves not treated according to their contract ?  May there never be emergencies which may again oblige the public to borrow money ?  And if such case should happen, upon what foundation must they proceed if an instance can be produced, an act of the legislature which can never be forgot nor ever be repaired to show that legal security is not a security, and that engagements are not to be understood literally ?  What is the natural consequence of this but that no man will lend the Government for the future, but at such interest and such advancements as are full equivalents to the hazards people may run in lending ?"

The whole of this very able paper has a close application to the questions before us, and would well repay the reading;  and the remedy he proposes is the one I propose.  He says:

"If the lender be left at his liberty to receive his money or let it lay at lower interest (in case where funds are redeemable,) no cause can be given of complaint.  No injury is done, no hardship is offered.  The integrity and honesty of the borrower is evident, and credit is indisputable.  But if the borrower be his own judge and his own cause, and flies to an act of power because he can do it, it as necessarily sinks his credit as it takes away its foundation."

And, sir, this brings me to the plain and just remedy for all complaints of unequal taxation.  Let us, in strict accordance with our engagements, sell our improved credit.  Let us go into the market, and with our resources fully shown, our honor unimpaired, our securities free from all burdens, sell them on the most favorable terms;  and thus we receive in advance all the taxes we could levy upon our securities.  We will soon get more than the one per cent. which Mr. Hayes proposes to levy;  and when the tax-payer points to the fund-holder as shirking his share of the public burden, the latter can say, "I pay my tax in advance.  I get five per cent. interest for my money;  the law gives you six.  What is thus deducted from me relieves you from millions of taxes."  This policy, adopted in England, has reduced the rate of interest on public securities from six to three per cent., and has made the British consol the highest standard of credit in the civilized world.

Fortunately our loans are now just in a condition when we can commence this reduction of interest.  I showed a while ago that we had $177,000,000 of public debt within our reach now, and if it was known that no other but a five per cent. loan could be had, and that all maturing bonds should be paid off in money by the sale of five per cent. bonds, public creditors would quickly convert their securities into such a loan.  Large institutions, among the rest one of the largest in the State of New York, have made a proposition to convert their five-twenty bonds, maturing in May next, into this five per cent. loan.  If I had my own way I would not give them a thirty-year five per cent. bond;  I would give a ten-forty five per cent. bond, retaining the principle of redeemability, with a view to still lower interest;  but the Secretary thinks he cannot now negotiate such a loan as that, and therefore, for the present, I would give those the most ready to adopt the reduction policy the most favorable form of loan, but as soon as possible would reserve the power to reduce the rate of interest by the payment of the principal as soon as a bond without these exemptions or at a lower rate of interest would sell at par.  This process must be gradual.  It will not do for Senators to vote against this bill because they think five per cent. free of taxes is too high.  We must get it down first to five per cent., then to four, and then to three, all the while faithfully observing our contracts;  and we can do it.

It is not probable if this bill passes that during the present year more than one hundred millions of five per cents will be sold, because more than that would not be needed to meet the accruing indebtedness unless it should be necessary to sell more to pay bounties to soldiers or some extraordinary expenditure.  Next year the Secretary would have the power to pay off $600,000,000 of the five-twenties if he could sell these five per cent. bonds.  But it is important to pass the law this session in order to give him ample time to meet the obligations that are imposed upon him.

I say, therefore, that in every view which I can take of this bill it is a wise measure, intended to save interest upon the public debt, to adjust on correct principles, equality of taxation, and to lighten the enormous burdens upon our people.  And there is another feature which commends it to my favor.  If this bill pass in the form in which it now stands, the fund-holders will themselves pay off the principal of the public debt.  The one per cent. saved on the rate of interest will pay off every dollar of this debt in thirty-six years.  When the fund-holder and the tax-payer stand before the public hustings, and this matter is dragged into politics, as it will be, and the tax-payer says to the fund-holder "Your property is exempt and free from all tax," the fundholder may say "No, my friend, it is not;  your money you can loan to your neighbor at six per cent. interest, and the law enables you to collect the principal at pleasure;  I have already paid for this privilege by deducting one sixth of my income;  I have surrendered the principal sum loaned by me for an annuity for thirty-six years, and my share of the taxes will pay off every dollar of the debt within one generation."  He may refer to the report of Mr. Hayes showing that the average tax in the United States is one per cent., and that sum annually applied with the consent of the fundholder, and paid by him alone, would pay your debt.

I accept the justice of the principle.  I say that we cannot go before the people and preserve the exemption from local tax unless we show that the United States get some benefit from it;  and by surrendering this one per cent. the fund-holders will be stronger and more secure than they were before.  They will feel safer in the payment of the principal;  they will know that the one per cent. thus saved is laid aside under the operations of this law and applied to the payment of the principal of the public debt;  that it will pay off the principal of that debt in due time and without any danger of the misapplication of the fund, for it will be applied each year, thus adding to the value of the remaining funds.

The passage of this bill is now an imperative necessity.  It is not my bill;  it is not my idea.  I think it is too favorable to the fund-holders.  I think that a ten-forty five per cent. loan might be put upon the market at par;  but the Secretary of the Treasury says that without the two stipulations to which I have referred, he does not think that he can, to use the ordinary language of the day, float a five per cent. loan.  I am therefore willing to give these stipulations to him, hoping that next winter we can repeal the clause exempting the bonds from income tax, and then let him issue a clear five per cent. loan.  I do not think he will be able to issue over a hundred millions before that time.  Perhaps next winter we may shorten the period during which the principal may be redeemable, and perhaps in a few years, if our country goes on prospering as it is now prospering, we may reduce the rate of interest as England has done, first one half per cent., then another one half, keeping the body of the bonds always within our reach.  The position of our public debt is just in that condition now, under the established policy of those who have regulated our finances, that it is within our reach, so that we can soon fund the whole of the public debt and reduce the rate of interest on all or nearly all of it.

There is another collateral advantage which will be derived from this bill.  I refer to the provision in the fourth section.  It will be remembered that the holders of the seven-thirty notes have the right by the terms of the option printed on the back of those notes to convert them into five-twenty six per cent. bonds at maturity, or to demand the money.  Two hundred and forty millions of these notes come due in the month of August next year, and six hundred millions in the May following.  Under the condition of the present laws, the Secretary of the Treasury will be compelled to accumulate and hold in hand two hundred and forty millions in order to meet the possible option of the holders of the seven-thirties.

What would be the effect ?  The withdrawal of $240,000,000 of money from the circulation of the country, when it is now being reduced under the operations of the recent law, would be disastrous.  It would be withdrawing one half of the circulating medium in order to meet an obligation when every particle of that money is necessary for the use of the people.  Section four of this bill provides that the holders of the seven-thirty notes shall give a reasonable notice of their choice to take either the money or the bonds.  They have the right to make that choice, and nobody proposes to abridge that right.  They have the right to do it at the time stated, and nobody proposes to deprive them of it.  What is proposed is simply to require them to give a reasonable notice of their choice of the alternative which they have, and that is put at six months.  Some think that is too long and may complain of it.  I do not think it is for the large amount involved.  It works no injury, because the bill provides that in case they do not give their notice of the option, they get their money and the Secretary can provide for it.  The probability is that the great mass of those notes will be converted into five-twenty bonds without cost;  and one effect of having a five per cent. loan upon the market would be to float this large mass of indebtedness into the five-twenties as the holders have a right to do, while if you issue six per cent. bonds none of these holders will avail themselves of the option until the last moment, and then by demanding the money would greatly embarrass the Government.

It has been said in some of the public prints that this provision is a violation of the contract.  It is no more a violation of the contract than the notice which is required by law in the case of a tenancy from year to year.  If I am renting a house for a year or more I am bound to give notice of my intention to retain it.

Mr. FESSENDEN.  I suggest to the honorable Senator, if he will take a suggestion from me, that it is a power, substantially, that Governments have always exercised.  Take the original convertibility clause;  we did not repudiate that clause, but we provided that the right of conversion should be exercised before a given time.  There was no complaint made of it.

Mr. Sherman.  There was some complaint made in the New York papers that this was a violation of the public faith, that we were repudiating our obligations;  but it was not general.  There are several precedents for this provision;  but the most striking case was the one alluded to by the Senator from Maine, which was done after full debate and consideration.  The United States notes originally issued, and still outstanding, had printed on the face of them, "The holder of this note may convert it into a bond bearing six per cent. interest in coin, and payable after five years and within twenty years."  It was found that this privilege or option attached to the notes prevented the sale of the bonds, because no one would avail himself of that option, having the right to do it at any time;  and therefore we provided that he should exercise that option by the 1st of July following or he should cease to have it.  I have now one of these notes.  The privilege printed on the face of it is now denied me.  Yet no one complains, as I failed to exercise my right at the time stated.

Mr. CLARK.  I will inquire of the Senator from Ohio whether it does not go upon the ground that the bond-holder assents.  The Government having provided that unless he gives notice within six months it shall be so, it is upon the ground that having notice he assents that it shall be so.

Mr. Sherman.  That is true.  It is a general principle of law, that wherever a party has a right to do or not to do a particular thing, a reasonable notice of his choice may be required.  That is a principle of municipal law as well as of public law.  It is required by nations generally and inserted in many treaties.

And now, Mr. President, I have thus, without any preparation except the few figures and papers before me, presented the reason for my earnest support of this bill.  Like most financial questions, they attract but little attention though they deeply affect the nearest interest of every citizen, his food, his clothing, his home, and more important than all else, the honor of his country.  Our attention has been so occupied with political questions affecting more keenly the interests of parties and partisans that all the complicated problems of finance thrust upon us by the war have not occupied as much of the time of this Senate as some unimportant political measures.  I almost owe you an apology for occupying your time so long, but I trust in a short time the waves of the recent war will settle in peace and quiet, and that all of us will look to the material interests of a great country, all of which are in our hands.  I am so hopeful of the future, after escaping all the perils of the past, that I may not see the clouds that others see.  War is apt to be followed with financial distress;  and we may be affected by the impending war in Europe.  Our bonds now held abroad may, and no doubt will come back to us, and for a time will depress our securities.  But war in Europe will open to us new markets.  It will restore our commerce.  We can well afford to redeem our bonds with the superabundant produce of the West.  Our cotton crop will yield us exchange enough to absorb all the securities held abroad.  Who can say that after the first panic the timidity of money may cause it to flee from war in Europe and seek safety in our national securities ?

Sir, what we need now is confidence in ourselves, in our resources, and in our destiny.  Our country has been for years the refuge of the laboring man, where he has found employment, independence, and freedom.  It will soon be the refuge of capital.  It may become the place of deposit of the wealth of the world.  Why should it not be ?  We as a nation have always observed our obligations.  We have twice paid off a national debt.  We have unexampled resources in men, in land, in iron, gold, coal, and in all the elements of wealth.  Why, then, should we talk about taxing our national debt ?  Why place it in the power of every village corporation to affect our national credit ?  Why enter the money market offering usurious interest ?  Why pay now more than any good merchant in New York will pay ?  Why traffic our loans, a mortgage on all our industry, on worse terms than bankrupt nations of Europe offer ?  Go, backed by your resources, your unclouded and undisputed empire, the love and faith of your people, the respect of all nations;  go, I say, with all these, and with confidence in yourselves, to the people, who hold your bonds, and you will be able to borrow money at five per cent., yea, before long, at four per cent.  Go not to the money-changers.  If they are allowed to fix the rate of your interest they will continue it as it is with all its exemptions, until the people, fired at an injustice, will do wrong to correct it.

I conclude as I commenced, that to compel the Secretary of the Treasury, by denying him this legislation, to issue more six per cent. bonds is a political crime.

Mr. CLARK.  I suppose nobody expects action upon the bill at the present time.  I differ very materially from the Senator from Ohio in regard to some positions which he has taken on this bill, especially with regard to the matter of taxation, not, however, upon the constitutional power, but upon the expediency of it.  But I do not propose to address the Senate at the present time, nor am I certain that I shall do so at anytime.  If nobody else desires to address the Senate at this time, I will move that the further consideration of the bill be postponed until to-morrow, so that the Senate may proceed to other business.

Mr. Fessenden.  I suppose it is not intended that this bill shall stand in the way of the business set for to-morrow.

Mr. Sherman.  Not at all.  I will state to Senators, though, that I should like to have a vote on this bill within a reasonable time.

Mr. CLARK.  There will be no objection to that, I take it.

The motion to postpone was agreed to.