exported in a British vessel, the proceeds of the flour realized in New York, and which can be applied to the payment of goods bought in England, will be only six thousand dollars, and there will remain an actual balance against the country of a thousand dollars. This familiar example shows the importance of re-establishing our commercial supremacy upon the ocean. And I deem it, therefore, essential to our pros perity that the shipping interest of the country be fostered, not only as a nursery for seamen, but also as an essential agency in enabling the government to institute and maintain specie payments. It is an interest also, which, in its development, is as important to the States and people remote from the seacoast as it is to the maritime sections. Every addition to our facilities for the export of the products of the interior is as advantageous to the producers as to the merchants and ship-builders of the coast.

While I do not anticipate that it will be necessary to delay resumption until our proper commercial position is regained, I am satisfied that the development of the navigation and ship-building interests will improve the credit and rapidly augment the wealth of the country. The sugges tions that I have made indicate my opinion that it will not be wise to resume specie payments while so large a part of the interest-bearing debt of the country is represented by five-twenty bonds and held by European merchants, bankers, and manufacturers. Questions that have been raised in regard to the nature of the obligation assumed by the government in the issue of these bonds have undoubtedly deterred many persons from purchasing them as a permanent investment, and, consequently, they are largely held in this country and in Europe for speculative purposes, by persons who design to put them upon the market whenever the advance shall furnish a sufficient inducement, or when political or financial disturbances may create a demand for money for other purposes. It is probable that from seven to nine hundred millions of these bonds are now held in Europe, and, to a considerable extent, by persons who will dispose of them under the influences to which I have referred. Such a panic as existed in Europe in 1866, at the opening of the Austrian and Prussian war, would be likely to induce the return of a sufficient amount to this country for sale to embarrass business, and, in case of resumption, to cause the suspension of the banks. It is, therefore, in my judgment, essential that the larger part of the five-twenty bonds. be withdrawn, and that other bonds be substituted in their place, issued upon terms and conditions which admit of no doubt. In fine, the prac tical question is not merely the resumption of specie payments-as a measure by itself it is not difficult-but the problem is, to resume under such circumstances that the position can be maintained, not only in times of tranquillity, but also in periods of excitement and peril. Our course, it seems to me, is plain. Every measure of the government bearing upon the subject should tend to appreciate the value of our paper currency. It is probable that some decrease in the volume of paper will

ultimately be necessary, and I, therefore, respectfully suggest that the Secretary of the Treasury be clothed with authority to reduce the circulation of United States notes in an amount not exceeding two millions of dollars in any one month. Thus will the country be brought, gradually it may be, and yet without disaster, into a condition when the resumption of specie payments will be easy if not unavoidable.

On the 1st of December, 1869, the principal of the public debt of the United States, not deducting bonds and cash on hand, amounted to $2,605,286,789 82. Of this amount the sum of $356,113,258 50 is represented by United States notes not bearing interest. The larger part of this is needed for circulation, but the amount can be reduced from the ordinary revenue of the country if Congress shall consider it expedient to make provision for such reduction. The fractional currency in circulation was $38,885,564 68, and there is no occasion for any legislation in reference to this item of the public debt. There were outstanding, also, certificates for gold deposited in the treasury to the amount of $36,862,940. These certificates are redeemable on presentation. These three items amount in the aggregate to $431,861,763 18, and in making provision for the public debt they are not necessarily to be considered.

Of the loan of January 1, 1861, the sum of $7,022,000 is outstanding, and payable on the 1st of January, 1871. The loan of 1858, of $20,000,000, is payable in 1873. The bonds known as ten-forty bonds, amounting to $194,567,300, are not payable until 1874. The six per cent. bonds, payable in 1881, amount to $283,677,600. As the bonds known as eighty-ones and ten-forties, amounting in the aggregate to $478,244,900, are not payable and cannot be paid previous to 1874 and 1881, it is unnecessary to consider them in making provision for a new loan. The five-twenty bonds, amounting in the aggregate to $1,602,671,100, are either redeemable or will soon become redeemable, and it is to this class of the public debt, and to this class alone, that attention should be directed.

Of this amount the sum of $75,477,800 has been purchased since March last, and the bonds are now held by the government. Before any measure for funding the five-twenty bonds can be consummated the government will be able to purchase at least $75,000,000 more. There will then remain, on the 1st of July next, about $1,450,000,000 of the five-twenty bonds in the hands of the public creditors. Of the entire indebtedness of the United States, only the unimportant sum of $27,000,000 will be due and payable previous to 1874.

Under these circumstances it does not seem to me to be wise to authorize the funding of the whole amount of the five-twenty bonds, which, as is now anticipated, will be outstanding on the 1st of July next, but that $250,000,000, at least, should be suffered to remain either for purchase or redemption previous to 1874. Should the sum of $250,000,000 be left for that purpose, the entire public debt would be in a condition to be

easily redeemed. Between 1874 and 1881 the ten-forty bonds could be paid, and provision also made for the redemption of the bonds which will be payable in the year 1881. It may be wise to reduce the proposed loan to $1,000,000,000, which would then leave for payment previous to 1881 the sum of about $670,000,000, or hardly more than $60,000,000 a year. Assuming that the proposed loan will be for an amount not exceeding $1,200,000,000, I recommend that it be offered in three classes, of $400,000,000 each: the first class of $400,000,000 to be payable in fifteen years, and to be paid in twenty years; the second class of $400,000,000 to be payable in twenty years, and to be paid in twenty-five years; the third class of $400,000,000 to be payable in twenty-five years, and to be paid in thirty years.

The essential conditions of the new loan appear to me to be these: 1st. That the principal and interest shall be made payable in coin. 2d. That the bonds known as the five-twenty bonds shall be received in exchange for the new bonds.

3d. That the principal be payable in this country, and the interest payable either in the United States or in Europe, as the subscribers to the loan may desire.

4th. That the rate of interest shall not exceed 4 per cent. per annum. 5th. That the subscribers in Europe shall receive their interest at London, Paris, Berlin, or Frankfort, as they may elect.

6th. That the bonds, both principal and interest, shall be free from all taxes, deductions, or abatements of any sort, unless it shall be thought wise to subject citizens of the United States to such tax upon income from the bonds as is imposed by the laws of the United States upon income derived from other money investments.

There are two reasons, and each seems to me to be a controlling reason, why the bonds of the United States should be exempt from State and local taxes. If not so exempt, the amount of the taxes imposed by the local authorities will be added to the interest the government will be required to pay, and thus the nation will be compelled to provide for taxes imposed by the local authorities.

Secondly. Inasmuch as the ability to borrow money may, under some circumstances, be essential to the preservation of the government, the power should not, even in times of peace and prosperity, be qualified by any concession to the States of the right to tax the means by which the national government is maintained. The right to use its lawful powers free of any condition, restriction, or claim of another, is an essential condition of sovereignty, and the national government should never surrender or qualify its power in this particular.

In offering the new loan, citizens and subjects of other governments should receive the strongest assurance that the interest and principal are to be paid in coin, according to the terms of the bonds issued, without any deduction or abatement whatsoever.

In order to avoid the necessity of employing agents for the negotia tion of the loan, I respectfully recommend that a liberal commission be

allowed to subscribers, and that those who first subscribe be permitted to select the class of bonds in which their subscriptions respectively shall be made. I further recommend, in connection with the proposed loan, that the banks established under "the act to provide a national currency" be required to substitute the bonds that may be issued under the proposed loan act for those now deposited as security for the redemption of their bills. Should any bank be unwilling to accept the new condition, provision should be made for the surrender of its charter, and authority given for the organization of new banks to supply the deficiency thus created.

An essential condition to the success of the proposed new loan is the continuance of the present revenue system. A chief means by which the holders of the five-twenty bonds can be induced to surrender them and receive a bond upon longer time and at a lower rate of interest, is the certainty furnished by the magnitude of the national revenue that these bonds are soon to be redeemed. We must be prepared to offer them the alternative either of accepting the new bond at a lower rate of interest, or payment of the principal of the existing bonds. When the fivetwenty bonds shall have been funded to the amount of $1,000,000,000 or $1,200,000,000, the revenues can be reduced materially, and yet sufficient sums be raised to meet the ordinary expenses of the government, to pay the interest on the public debt, and also to pay $25,000,000 to $50,000,000 of the principal annually.

Should our success in negotiating a new loan be equal to my expectations, based upon the fact that the ability and disposition of the people of the United States to pay the public debt are sufficient to justify us in assuming that the bonds of the United States will command the highest rates in the markets of the world, we shall then be in a condition to enter upon the work of reducing taxation at the commencement of the next session of Congress.

On the 30th of June, 1868, the amount of outstanding three per cent. certificates and compound-interest notes convertible into three per cent. certificates was $71,604,890. On the 30th of June, 1869, the amount outstanding was $54,991,410, showing a reduction of $16,613,480 in that form of indebtedness.

On the 1st of December, 1869, the amount outstanding was still further reduced to $49,716,150, showing a total reduction, in seventeen months, of $21,888,740.

The three per cent. certificates are a substitute, to a considerable extent, for United States notes, being largely held by the banks as a portion of their reserve, and thus indirectly, though not to their full nominal value, they swell the volume of currency.

I recommend that provision be made for the redemption of the three per cent. certificates within a reasonable time; and, as a compensating measure for the reduction in the amount of currency which would thus be caused, that authority be given to grant circulation to banks in the States where the banking capital is less than the share to which they

would be entitled, to an amount not exceeding thirty-five millions of dollars in the aggregate. The redemption of the three per cent. certificates and the additions to the banking capital might be so arranged as not to produce a serious disturbance in the finances or business of the country, while additional banking capital would be supplied to the sections now in need of it, and this without any increase of the volume of circulation.

There are two evils in the present banking system which require remedy by prompt and efficient legislation. The first is the practice on the part of banks of allowing interest upon deposits. The effect of this practice is, that moneys in the hands of individuals which otherwise might be loaned for regular mercantile and other business purposes are diverted into the custody of banks, upon the idea that, if the security is not better, payment can be obtained at a moment's notice. Country banks, and others remote from the large centers of trade, having received money on deposit for which they pay interest, are anxious to transfer such funds to other banks from which they will receive an equal or large rate of interest in return. They are stimulated also by the desire to place their funds where they can be at all times commanded. Thus influenced, large sums are placed on deposit with banks in the cities, especially in the city of New York, which is the great center of trade and finance for the Atlantic coast. In the ordinary course of trade the currency of the country tends rapidly to the cities, and it is unwise to stimulate this tendency by artificial means.

But the evil does not end with the impoverishment of the country. As. the banks in the cities may be called upon at any moment to respond to the drafts of their depositors, they decline to make loans representing such funds, upon commercial paper payable on time, but insist upon making call loans, as they are termed, with government bonds or other obligations pledged as collateral security. Merchants generally will not borrow money in large sums payable upon demand. The consequence is that the moneys thus accumulated in the city banks are loaned to persons engaged in speculative pursuits. The extent of this evil is seen in the fact that, of the bank loans in the city of New York in October, 1868, $98,000,000 were upon commercial paper, and $68,000,000 upon demand, with a pledge of collaterals; and in October, 1869, $99,000,000 were upon commercial paper, and $59,000,000 upon demand. In the former year, 41 per cent., and in the latter year, 37 per cent., of the loans made by the New York banks were upon demand.

A further result is seen in the fact that parties borrowing money upon commercial paper for legitimate commercial purposes, pay from three to six per cent. additional interest per annnm, as compared with persons who borrow money for speculative purposes. I therefore respectfully recommend that a law be passed prohibiting absolutely the payment of interest by banks upon deposits, and limiting also their loans upon collaterals to an amount not exceeding ten per cent. of their capital.