The first year of Mr. Trenholm's administration of the Currency Bureau was marked by an unprecedented reduction in national bank circulation. During that year the circulation was reduced $56,593,533, the largest reduction during one year in the history of the Bureau.

This large retirement of circulation was due to the high premium which prevailed on the four and four and one-half per cent. Government bonds, and the rapid retirement of the three per cent. bonds, redeemable at the option of the Government. Of the $224,612,150 of these bonds outstanding June 30, 1884, the banks held $172,412,550, and by June 30, 1886, the total of these bonds had been reduced to $144,046,600, of which amount the banks held $107,782,100. The high premium on the four and four and one-half per cent. bonds induced many banks to reduce their bond deposits to the minimum required by law, in order to dispose of the excess and take advantage of the prevailing high premium. One hundred and seventy-two new banks were organized during that year, and as the three per cent. bonds were subject to call at any time, there was no disposition to invest in these securities. This had the effect of increasing the demand for the four and four and one-half per cent. bonds and stimulated their market value.

The Act of July 12, 1882, authorized an issue of three per cent. bonds for the purpose of taking up the three and one-half per cents., and during the years 1886 and 1887 the three per cent. bonds were called by the Treasury Department for redemption, which resulted in a further reduction of circulation. From 1882 to 1887, there were 991 new banks organized, with an authorized capital stock of one hundred and eleven millions of dollars. While these banks were entitled to receive $99,999,000 in circulation, they deposited only $23,892,100 in bonds, and received only $21,495,100 in circulation.

The interest on the three and one-half per cents. ceased when they were called for redemption. Consequently, they were no longer available as security for circulation, as the law required a deposit of interest-bearing bonds. It was claimed by some of the banks that when a deposit of interest-bearing bonds had once been made the banks could not be compelled to replace them with other bonds, or to retire the circulation issued upon them. This question was finally settled, however, by an opinion of the Attorney General of the United States, to whom the matter was referred, who held that bonds on which interest had ceased could not lawfully be received or held as security for circulation.