The curtailment of bank currency under the national system which had started, in consequence of the natural causes already set forth, which grew out of the greater prosperity of the country and the more stable condition of its finances, was now to be still further aided as a result of the growth of a great government surplus. The Treasury had been buying bonds, and thereby reducing indebtedness, during the later 'seventies as occasion offered. But the process went forward even more rapidly after 1880. Revenues were abundant and largely in excess of the amount needed for government expenses. Consequently, under the independent Treasury law whose features have already been noted, only two uses could be made of these excess funds. They might be kept on hand in money in the vaults or they might be deposited with the banks. The latter operation, however, necessitated the depositing of government bonds with the Treasury as security.

It was found that if the Treasury used the surplus funds to buy up issues of bonds in the market before they were due, it raised the price of the bonds so high that it became expedient for the national banks to sell as many of their bonds as they could and reduce their circulation to as low a point as possible, while if the funds were deposited in the banks the latter were obliged to buy the bonds in order to use them as security with the Treasury for the holding of the deposits. They thus raised the price of the bonds in the market through their own action, and made it unprofitable for themselves to use such bonds for the maintenance of outstanding circulation. During the years 1881-91 the bonded debt of the United States was cut by more than $1,000,000,000. The price of the bonds rose tremendously, and in 1891 the lowest average price was more than 124. The effect of these changes was very soon perceived in the national-bank circulation, which dropped from $323,000,000 in 1879 to $173,000,000 in 1892. It almost seemed as if the issue of notes would be cut to the absolute minimum corresponding to the volume of bonds required by the law to be deposited as a prerequisite to the existence of the banks.

New conditions set in after 1890. The Tariff Act of that year had been so drafted as to cause a large decrease in the annual net revenue, and it was shortly apparent that, instead of having funds with which to buy more bonds, the government would have to borrow money on new bonds. Conditions were complicated by the silver-purchase policy which had been followed by the government since 1878 and which was carried farther by the silver-purchase law of 1890. This policy contributed to the panic of 1893, although the silver-purchase law was repealed in that year. Issues of new bonds were made by the government during the second Cleveland administration (1893-97), to the amount of some $252,000,000. This and the cessation of the silver-purchase policy and of the issues of notes based on silver by the govermnent somewhat helped the bank circulation to increase, and in 1896 the total notes outstanding had grown to about $214,000,000 their circulation. With the growth of the great surpluses of revenue during the decade 1880-90, a new type of problem appeared; for the purchases made by the Treasury Department, in order thus to use up the surplus, had brought the bonds to a premium and made it questionable whether the maintenance of the circulation on a satisfactory basis providing for the issue of enough of the notes would be feasible. Discussion of the question was, however, only sporadic. The national system was proving itself in so many ways better adapted to the needs of the country than the system of banking which had preceded it, that comparatively few persons were disposed to attack it seriously. The difficulty in getting an adequate supply of notes had been making itself more and more felt prior to that time, and when the panic of 1893 came on this phase of the problem became suddenly very acute. During the panic of 1893 there was a tremendous shortage of currency and many expedients had to be resorted to for the purpose of supplying even the bare necessities of the country for a circulating medium. Not only clearing-house certificates, but a great variety of forms of local obligations which serve as currency substitutes, were injected into the circulation from time to time, and served as a means of relieving the strain upon national-bank notes. As for the national-bank notes themselves, it was almost out of the question to obtain sufficient amounts of them. Even when a national bank had deposited its bonds with the Treasury and had made application for notes, fully three weeks were necessary in order to get delivery of the finally completed currency. This delay was necessary in order that the notes might be printed, dried, and shipped to their destination. The process of signing them and putting them out required more time. Altogether, the delay involved in making the currency available was so great that the experience of the panic convinced practically all observers of the unsatisfactory nature of the prevailing system for issuing notes as a practical matter, entirely independent of the question whether the method of note issue provided in the National Act was or was not theoretically satisfactory or desirable.