V. A mixed currency causes unnatural and extreme fluctuations in the rate of interest.

If a mixed currency is in its nature constantly fluctuating, at one time very redundant, at another very scarce, it would seem to follow, as a necessary consequence, that the rate of interest, which is merely the sum paid for the use of money, or currency, would be equally so. Practically, we find that such is the fact. While the currency is in the process of expansion, and is enlarged by new issues from day to day, money must be plenty, and the rate of interest low.

When the currency has become largely increased, and speculation has been engendered by the rise of prices, the demand for money will increase faster than the supply, and the rate of interest will begin to advance.

When the banks have arrived at that point at which they must of necessity contract, and they begin to take in their currency, and, of course, to create a scarcity of the means of paying debts, then the rate of interest will rise to a very high point, not unfrequently to four or six times its natural rate.

The indebtedness which the expansion has encouraged must now be met, at all events and at any sacrifice. Sales of property cannot be made for cash, because all cash resources are needed to meet existing indebtedness, rapidly maturing; and, consequently, a great pressure is made upon the money market. The severity of this is indicated by the rate of interest.

Such being the facts in the case, we need not be surprised to find that the highest rates of interest are paid at times when there is far more than the average amount of currency.

On the other hand, when indebtedness has been discharged, both by the banks and individuals, and the currency reduced to very moderate dimensions, we find the rate of interest very low.

Take the years 1837 and 1857. Interest was up to thirty-six per cent; yet there was a greater amount of currency, per capita, then in use, than ever before or since. Take the years 1842-43, for an opposite example, when there was less currency than ever before. Money was very plenty and very cheap.

This law has governed the rate of interest at all times under our currency, and is strikingly exhibited in our Diagram No. 9, inserted herewith.

N0.9

By this diagram, we see, —

First, The frequent and extreme fluctuations in the rate of interest.

Second, That the highest rates of interest occur when there is the greatest expansion of the currency, as witness 1836, 1839, 1854, and 1857.

Third, That the lowest rates of interest are found where there is the smallest amount of currency, as in 1843-45.

Fourth, We observe some remarkable exceptions to these general facts.

In 1834, we find the interest up to twenty-four per cent, while, in the following year, it was down to five. This is easily explained by those cognizant of the facts. The United-States Bank then in existence was extremely desirous of recharter; and, to secure this, it was thought necessary to produce a tremendous pressure in the money market, or, in the expressive language of the day, " put on the screws." This result was a high rate of interest.

The following year, 1835, the bank took the opposite course, and interest fell below the natural rate.

In 1836, there was a great expansion of the currency, as shown in the lower line of the diagram. Speculation was rife, the banks could not meet the demand for money, and interest went up to thirty per cent. In 1837, the banks suspended, then issued freely, and interest went down to a low point. In 1838, the work of contraction began; a multitude of banks in the West and South failed, and the pressure upon the solvent banks became great; interest went up to eighteen per cent. The year 1839 witnessed still greater distress for money. Resumption of specie payments by the banks began to take place, and consequently a great contraction of the currency. There was also a very large exportation of specie that year; and, by these combined causes, the rate of interest ran up to thirty-six per cent. In 1840, on the other hand, more specie was imported than exported. The indebtedness of the country had been, in great measure, discharged, and money was plenty. Interest was down to five or six per cent. In 1841, there was again an export of specie, and also in 1842; and the rate of interest went up to nine and twelve per cent. But, in 1843, the lowest point was reached, more than twenty millions of gold were imported, and money was a drug. Interest was, for a while, almost nominal. Large amounts were negotiated as low as three and a half per cent.

From this time forward, we have only the natural results of a mixed currency in its fluctuations. In 1847, the rate of interest was high, — eighteen per cent, — though the currency was not redundant. This was the year of the Irish famine; and we imported twenty-two millions of gold above the exports. From 1849 to 1857, the currency was constantly increasing. Severe fluctuations in the money market took place, but no grand revulsion until 1857, when so great was the inflation of the currency, and consequently the general credit of the country, that an explosion took place; interest going up to thirty-six per cent. All these facts are significant, and form an essential part of the history of mixed-currency banking.