In January, 1861, the paper currency of the United States was furnished, by sixteen hundred private corporations, organized under thirty-four different State laws. The circulation of the banks amounted to $202,000,000, of which only about $50,000,000 were issued in the States which in April, 1861, undertook to set up an independent government. About $150,000,000 were in circulation in the loyal States, including West Virginia.

When Congress met in extraordinary session on the 4th of July, the three-months volunteers, who had hastened to the defence of the capital, were confronting the rebel army on the line of the Potomac, and the first great battle at Bull Run was impending. President Lincoln called upon Congress to provide for the enlistment of 400,000 men, and Secretary Chase submitted estimates for probable expenditures amounting to $318,000,000. The treasury was empty, and the expenses of the government were rapidly approaching a million dollars a day.

The ordinary expenses of the government, during the year ending on the 30th of June, 1861, had been $62,000,000, and even this sum had not been supplied by the revenue, which amounted to only $41,000,000. The rest had been borrowed. It was now necessary to provide for an expenditure increased fivefold, and amounting to eight times the income of the country. Secretary Chase advised that $80,000,000 be provided by taxation, and $240,000,000 by loans; and that, in anticipation of revenue, provision be made for the issue of $50,000,000 of treasury notes, redeemable on demand in coin. "The greatest care will, however, be requisite." be said, "to prevent the degradation of such issues into an irredeemable paper currency, than which no more certainly fatal expedient for impoverishing the masses and discrediting the government of any country can well be devised."1

The desired authority was granted by Congress. The Secretary was authorized to borrow, on the credit of the United States,not exceeding $250,000,000, and "as a part of the above loan,'1 to issue in exchange for coin, or pay for salaries or other dues from the United States, not over $50,000,000 of treasury notes, bearing no interest, but payable on demand at Philadelphia, New York, or Boston. The act does not say, "payable in coin,1' for nobody had then imagined that any other form of payment was possible.

Congress adjourned on the 6th of August, after passing an act to provide an increased revenue from imports, and laying a direct tax of $20,000,000 upon the States, and a tax of 3 per cent. upon the excess of all private incomes above $800. The Secretary immediately invited the banks of Philadelphia, New York, and Boston to assist in the negotiation of the proposed loans, and they loyally responded. On the 19th of August they took $50,000,000 of three years 7.30 bonds at par; on the 1st of October, $50,000,000 more of the same securities at par; and on the 16th of November, $50,000,000 of twenty years 6 per cents., at a rate making the interest equivalent to 7 per cent.

1 Congressional Globe, 1861. Appendix:, p. 6.

These advances relieved the temporary necessities of the treasury, and, when Congress reassembled in December, Secretary Chase was prepared to recommend a permanent financial policy. The solid basis of this policy was to be taxation. All the ordinary expenses of the government, the Secretary urged, should be paid by the annual revenue, together with the interest on the public debt, and a sinking fund should be provided for the gradual extinction of the principal. For these purposes, it was estimated, a revenue of $90,000,000 would be needed; and to secure that sum, the Secretary advised that the duties on tea, coffee, and sugar be increased ; that a direct tax of $20,000,000 be assessed on the States that the income tax be modified so as to produce $10,000,000, and that duties be laid on liquors, tobacco,carriages, legacies, banknotes, bills payable, and conveyances. For the extraordinary expenses of the war it was necessary to depend upon loans, and the authority to be granted for this purpose the Secretary left " to the better judgment of Congress," only suggesting that the rate of interest should be regulated by law, and that the time had come when the government might properly claim a part, at least, of the advantage of the paper circulation, then constituting a loan without interest from the people to the banks.

There were two ways, Secretary Chase said, in which this advantage might be secured: 1. By increasing the issue of United States notes, and taxing the bank-notes out of existence. 2. By providing a national currency, to be issued by the banks but secured by the pledge of United States bonds. The former plan the Secretary did not recommend, regarding the hazard of a depreciating and finally worthless currency as far outweighing the probable benefits of the measure. The second plan, he said, would create a large demand for government securities, affording increased facilities for procuring means for the prosecution of the war, and keeping down the rate of interest on the public debt; and at the same time would give the people a safe and uniform paper currency, without disturbing the exiting organization of business. He ex-pressed a favorable opinion of this plan with the greater confidence because it was no untried theory, but had been subjected in New York, and in one or two other States, to the test of experiment, and had been found practicable and useful.

Congress had hardly begun to consider these recommendations, when the situation was completely changed by the suspension of specie payments, on the 28th of December, by the banks of New York, followed by the suspension of the other banks in the country, and compelling the treasury also to suspend. This suspension was the result of a panic occasioned by the shadow of war with England, then impending darkly over the sufficiently gloomy prospect of the civil war. The British government, on the 30th of November, had demanded the liberation of the Confederate ambassadors, Mason and Slidell, taken forcibly from a British steamer by Captain Wilkes, of the United States Navy, and had also demanded an apology for the act. This despatch arrived in December, after the publication of the annual report of the Secretary of the Navy expressly commending Captain Wilkes for his prompt and decisive action, and asserting that his generous forbearance, in not capturing the vessel conveying these public enemies, must not be considered a precedent for the treatment of neutrals subsequently offending in the same way. The press and the people of the United States had generally justified the seizure of the ambassadors, and it was believed that the British government was resolved to force a quarrel by making demands which could not be complied with. Mr. Seward skilfully evaded the difficulty. He surrendered the prisoners, who were not worth fighting about, and without any formal apology, made the truthful explanation that Captain Wilkes had acted for himself, without instructions and without wrongful motive. Mr. Seward's note was written on the 27th of December and acknowledged by Earl Russell on the 10th of January, but meanwhile a general suspension of specie payments had taken place, and the notes of the government had gone to protest.