=Collection of Internal Revenue Taxes.=--For convenience in collecting internal revenue taxes, the country is divided into some sixty districts, not by act of Congress as is the case with customs districts, but by the order of the President. Sometimes several states are grouped into one district; sometimes a state is divided into several districts.

Thus there are four districts in Illinois, six in New York, and five in Kentucky. In each district there is a collector who acts under the supervision of the United States Internal Revenue Commissioner. The collection of internal revenue taxes is a much more simple task than the collection of customs duties, and is done for the most part by the sale of stamps to the manufacturer, who is required to affix them on the articles taxed. In a.s.sessing the tax on most articles their value is not taken into consideration, and hence there is less opportunity for arbitrary action on the part of the government officials and of course less likelihood of controversy, than is the case with the administration of the customs laws.

=Other Sources of Federal Revenue.=--Besides the receipts obtained from tariff duties and internal revenue taxes, there are a number of other sources of revenue such as those from the sale of public land, the tax on national banks, fines and penalties for violations of the laws of the United States, profits on coinage, naturalization, immigration, patent office and other fees, etc.

_Income Taxes._--In very recent years (since 1918), the income tax, in its various forms, has become the greatest of all the sources of revenue for the federal government.

It was in 1862 that Congress levied for the first time a tax on incomes, the rate varying from five to ten per cent according to the amount of the income, all incomes below $600 being exempt from the tax. In 1872, the law was repealed; but a demand for reviving this method of taxation gradually increased, and it came to be a standing part of the national platform of the Democratic party. Accordingly when the Democrats got control of Congress in 1894, they enacted a law providing that all incomes in excess of $4,000 a year should be taxed at the rate of two per cent on the amount in excess of that figure. Shortly after the law went into effect, however, the Supreme Court, overruling its former decisions, decided, by a vote of five to four, that the law was unconst.i.tutional, mainly on the ground that a tax on income from property was a direct tax in the sense of the Const.i.tution, and not having been apportioned among the states according to their population was null and void. Sentiment in favor of such a tax, however, steadily grew, and in 1913 the const.i.tutional impediment was removed by the sixteenth amendment.

Later in the year Congress levied an income tax, in connection with an act to reduce tariff duties. The income tax is one per cent on each individual's annual net income in excess of $3000 (or $4000 for husband and wife living together), plus an additional tax of one per cent on net income over $20,000 and not exceeding $50,000, two per cent on net income over $50,000 and not exceeding $75,000, and so on up to six per cent on net income over $500,000.

_The Corporation Tax._--Congress in 1909 pa.s.sed a law imposing a tax on corporations, joint-stock companies, and a.s.sociations, to the extent of one per cent on the net income of each in excess of $5,000 a year. In the year 1912 the tax yielded $28,583,259. The next year the exemption of $5,000 was removed, thus making the entire net income of corporations liable to the tax.

_Inheritance Taxes._--During the Civil War and the war with Spain, Congress levied a tax on inheritances, and the permanent adoption of this form of taxation was strongly recommended by President Roosevelt in his annual messages, but owing largely to the fact that many of the states have pa.s.sed laws of this kind, the idea has never commended itself to Congress.

[Ill.u.s.tration: CUSTOMHOUSE, NEW YORK]

[Ill.u.s.tration: IN THE MINT AT PHILADELPHIA]

=Deposit of United States Funds.=--The taxes collected by the national government, together with its other funds, are kept partly in the treasury and partly in the nine subtreasuries located at Baltimore, Boston, Chicago, Cincinnati, New Orleans, New York, Philadelphia, St.

Louis, and San Francisco. In addition the secretary of the treasury is authorized to designate national banks as depositories and to deposit certain of the funds therein. In times of financial stringency or threatened crises, this authority may be used by the secretary to relieve the money market, by distributing the public funds among the depositories.

=Federal Appropriations and Expenditures.=--Having studied the sources of federal revenues, we come now to the subject of expenditures. Revenue bills are prepared, as we have seen, by the ways and means committee of the house of representatives. At first the appropriations of Congress were embodied in a single bill prepared by the committee on appropriations, but as the operations of the government expanded, the appropriations came to be embodied in a number of bills, sixteen in 1920, prepared by nine different committees. The committee on appropriations was responsible only for the half dozen more general appropriation bills, while other committees prepared the the bills appropriating large amounts for the army, navy, diplomatic service, post office, Department of Agriculture, District of Columbia, Indian service, and improvement of rivers and harbors. In 1921, however, the committee on appropriations was enlarged and again entrusted with the preparation of all the various appropriation bills, the house thus returning to the earlier system of a single committee responsible for all expenditures.

The growth of national expenditures has been rapid. The appropriations for 1916 reached the unprecedented amount of $1,637,583,682; those for the period of the war (1917-1918), $32,427,000,000, including $9,000,000,000 loaned to European allies. In 1921, the appropriations were reduced to about $5,500,000,000.

=The National Debt.=--Whenever the revenues of the government are insufficient to pay its expenses recourse must be had to increased taxes or loans. In time of peace the ordinary revenues ought to be sufficient to meet expenses, but when extraordinary expenses must be incurred as is the case when war breaks out, or foreign territory is purchased, or some great public work is to be constructed such as the digging of the Panama Ca.n.a.l, the government must have recourse to the borrowing power. The Const.i.tution of the United States expressly confers upon Congress the power to borrow money on the credit of the United States, and no limitations whatever are placed on the exercise of the power, such as are generally imposed on state legislatures by the state const.i.tutions.

_United States Bonds._--The usual mode by which the government borrows money is by the issue of its bonds, obligations similar in most respects to promissory notes made by individuals. A government bond is simply a promise to pay a certain sum at a particular time and with interest at a certain rate. The bonds issued by the United States government are of two kinds: "registered" and "coupon" bonds. A registered bond is made out to the person who purchases it; a record is kept of it at the treasury department, and when it is transferred to another person the record must be changed so as to show the new owner.

The advantage of such a bond is that if it is accidentally destroyed or lost the owner suffers no loss. The chief disadvantage is the difficulty in transferring it. A coupon bond is one which has interest coupons attached to it, which may be clipped off and presented to the treasury for payment as the interest becomes due. The government keeps no record of the owner and it may be transferred as any other personal property.

If a coupon bond is lost or destroyed, however, the owner cannot collect the amount of the bond. United States bonds are issued in various denominations and for periods of time which vary widely. Usually bonds are sold to the highest bidder, but occasionally they are disposed of by negotiation with capitalists on the best terms that can be secured.

During President Cleveland's administration $262,000,000 of bonds were sold to New York capitalists in this way.

_Rate of Interest._--The rate of interest which United States bonds pay has varied from time to time. The Revolutionary War debt bore six per cent, and so did most of the civil war bonds. After the Civil War, however, the rate at which the government was able to borrow steadily declined, largely because of the desire of national banks to secure United States bonds (page 232). The rate of interest on bonds now outstanding ranges from two to five per cent.

_Growth of the National Debt._--When the Const.i.tution went into effect, the national debt, including the war debts of the states which were a.s.sumed by the national government, amounted to about $127,000,000; but by 1836 the debt was extinguished and there was a surplus in the treasury which was distributed among the states. The enormous expenses of the Civil War, however, had to be met largely by loans, and at the close of the conflict (1866) the interest-bearing debt was more than $2,000,000,000. During the next twenty years the debt was reduced to about $600,000,000, but this amount was increased between 1895 and 1899 to about $945,000,000 on account of bond issues to replenish the gold reserve and to meet a portion of the expenses of the war with Spain. On June 30, 1915, the interest-bearing debt stood at $969,759,090. In 1917-19 five bond issues aggregating more than $21,000,000,000 were made on account of the war with Germany.

In addition there is also a non-interest-bearing debt of $389,407,800, of which $346,681,016 consists of treasury notes issued during the Civil War, and popularly known as "greenbacks" from their color. The national interest-bearing debt of the United States on June 30, 1921, amounted to about $24,000,000,000. The total debt of England is now about $40,000,000,000, that of France about $46,000,000,000, and that of Germany over $30,000,000,000.

=The Monetary System.=--The coining of money is now regarded everywhere as a proper if not a necessary function of government. Under the Articles of Confederation, this power was possessed by the states as well as by Congress, though in fact it was exercised by neither. The framers of the Const.i.tution decided that the most effective way of securing a uniform system of money would be to place the whole matter under the control of the national government, and so Congress alone was given the power of coinage. At the same time, remembering how the states had before 1789 flooded the country with paper money which in some instances had become worthless, the framers of the Const.i.tution wisely decided to prohibit them from issuing bills of credit, that is, paper designed to circulate as money. Likewise they were forbidden to make anything but gold and silver coin a legal tender in the payment of debts.

_The Acts of 1792 and 1834._--As soon as the new government under the Const.i.tution had gone into operation, steps were taken to provide a system of metallic currency. In 1792, an act was pa.s.sed providing for the establishment of a mint at Philadelphia and for the striking of both gold and silver coins.[38] The gold coins were to be the double eagle, the eagle, the half eagle, and the quarter eagle; the silver coins were to be the dollar, the half dollar, the quarter, the dime, and the half dime.[39] As the market value of a given quant.i.ty of gold bullion was then about fifteen times that of silver, the weight of the silver coins was made fifteen times that of the corresponding gold coins. But as the value of gold bullion presently began to increase in comparison with silver, it was necessary to readjust the ratio so as to keep both in circulation, and so in 1834 the weight of gold coins was reduced and the ratio made sixteen to one.

[38] Later mints were established at Denver, San Francisco, and New Orleans. a.s.say offices for refining and determining the purity of bullion have been established at New York, St. Louis, Deadwood, Helena, Boise, Carson City, Salt Lake, Seattle, and Charlotte, North Carolina.

To give strength and hardness to gold and silver coins an alloy of copper equal to one tenth of their weight is added.

[39] In addition to the gold and silver coins mentioned above are the five cent piece (nickel) and the one cent piece (copper).

_Demonetization of the Silver Dollar._--But soon the increase in the supply of gold again disturbed the ratio, making the silver coins worth more as metal than as money; and as the difficulty of keeping up the adjustment seemed insuperable, Congress decided to abandon the attempt and so in 1873 the silver dollar was practically "demonetized," that is, was dropped from the list of coins, and other silver coins were made subsidiary, that is, their weight was decreased so that the metal in them was worth less than their face value, and they were made legal tender for small sums only.[40]

[40] At the present time all gold coins and the silver dollar are legal tender for all sums. The smaller coins, however, are legal tender for small sums only, the amount ranging from twenty-five cents in the case of the nickel and copper pieces to $10 in the case of the silver coins.

_Later Acts._--The opposition to the demonetization of the silver dollar, however, became so great that it was restored by the act of 1878 and made full legal tender. But the free coinage of silver was not restored; the act required the government to purchase and coin not less than $2,000,000 nor more than $4,000,000 worth of silver bullion per month. In the mean time the market value of silver had declined until the amount of silver in a silver dollar was worth less than eighty cents in gold, and it was believed that the act of 1878 by increasing the demand for silver would restore its market value. This, however, did not happen, and the market value of silver went on decreasing until at one time the amount of silver in a dollar was worth only about forty-six cents in gold. In 1890 Congress increased the use of silver by requiring the secretary of the treasury to purchase monthly four and one half million ounces of silver and pay for it with treasury notes which were redeemable in coin at the option of the secretary and which were to be canceled or destroyed when so redeemed. This act was repealed in 1893, since which date the government has purchased very little silver bullion for coinage purposes.

=Free Coinage.=--In determining its coinage policy, the government might follow either of two methods: (1) It might coin any and all bullion presented by its owners at the mints, or (2) it might purchase its own bullion and coin only so much as the necessities of trade or other considerations might require. The former policy is that of free coinage; it is also unlimited coinage since it involves the coinage of all bullion offered, without limit. From the very first, the practice of the government in regard to gold has been that of free and unlimited coinage; that is, any owner of gold bullion may take it to a mint and have it coined without charge except for the cost of the alloy. Prior to 1873, the same policy was followed in regard to silver, thus maintaining in theory at least a bimetallic or double standard. In 1873, however, Congress abandoned the policy of free coinage of silver and adopted the single gold standard. From then until now the government has coined no silver bullion for private owners.

=Paper Currency.=--In addition to the metallic money described above there is a vast amount of paper currency in the United States. This currency may be cla.s.sified under five different heads.

_Greenbacks._--First, there are the $346,681,016 of old United States notes or "greenbacks," already described. They were issued during the Civil War, they bear no interest, and are redeemable in coin upon the demand of the holder. Since 1878 the practice of the government has been not to retire them as they are redeemed but to reissue them and keep them in circulation.

_Gold and Silver Certificates._--Second, there is a large amount of currency in the form of gold and silver certificates. The law under which such currency is issued provides that any owner of gold or silver coin may deposit it in the treasury and receive in exchange an equivalent amount of certificates. They are more convenient to handle than coin, and are equally valuable for paying debts and purchasing commodities. On the 1st of July, 1921, the amount of gold certificates in circulation was $452,174,709; the amount of silver certificates, $201,534,213. These two forms of currency const.i.tute one eighth of our entire stock of money in circulation.

_Sherman Treasury Notes._--A third form of paper money is the so-called Sherman treasury notes issued in pursuance of the act of 1890 already described. On July 1, 1921, there were $1,576,184 of them in circulation. The law declares that they shall be redeemed in _coin_, that is, either gold or silver, at the option of the government. To prevent the threatened depletion of the gold reserve[41] and provide the necessary gold with which to redeem the increasing issues of Sherman treasury notes, bond issues aggregating $262,000,000 were issued during the years 1894 and 1895. By the act of 1900 the policy of maintaining a single gold standard was definitely adopted by Congress, and it was provided that greenback notes, Sherman treasury notes, and other securities of the government should be redeemable in gold.

[41] The gold reserve is a sum of money set aside for the purpose of redeeming the old "greenbacks" or United States notes. An effort has always been made to keep the amount above $100,000,000.

_National Bank Notes._--The fourth cla.s.s of paper money is national bank currency. A national bank, unlike other banks, not only receives deposits and makes loans and performs the other functions of banks, but also issues notes which circulate as money. There are about 8,200 national banks in the United States, with an aggregate capital of more than $1,000,000,000 and with a total circulation of $729,550,513 of notes outstanding (July 1, 1921).

_Federal Reserve Notes._--The federal reserve banks, established under the act of 1913, not only receive deposits and make loans to other banks, but also have power to issue federal reserve notes which circulate as money. The amount in circulation July 1, 1921, was $2,680,494,274. This const.i.tutes by far the largest amount of paper money in existence.

The total amount of money of all kinds in circulation on July 1, 1921, amounted to $5,776,437,473, or a per capita circulation of about $53.40.

=The National Bank System.=--Any number of persons, not less than five, may organize a national bank, the amount of capital required depending upon the population of the town or city where the bank is located.

Prior to 1914 the organizers were obliged to purchase and deposit with the government, bonds of the United States equal to one fourth of the capital of the bank; now they may do so if they wish. The comptroller of the currency then delivers to the bank notes equal in amount to the par value of the bonds deposited. These notes when properly signed by the president and cashier of the bank may then be loaned by the bank or otherwise issued as currency, for though not a legal tender they are commonly used as money. It must also be remembered that the United States bonds deposited with the government remain the property of the bank and it receives the interest on them just as any other owner would.

_Advantages of National Bank Currency._--If a national bank fails, depositors may lose their money just as depositors of money in other banks may, but the holder of a national bank note does not, for whenever a bank is unable to redeem its notes, the comptroller of the currency may sell the bonds which it has on deposit with him, and with the proceeds redeem its notes. Hence a bank note is as safe as any other form of currency. Moreover, national banks are subject to frequent and careful examination by government examiners, and failures among them occur with less frequency than among other banks.

=Federal Reserve Banks.=--By an important act pa.s.sed in 1913 Congress provided for the creation of a series of federal reserve banks to be located in different parts of the country. The committee intrusted with the matter divided the United States into twelve districts, each of which is to have one federal reserve bank, located respectively in the following cities: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. In each district the national banks are required to become members of the federal reserve a.s.sociation, and to subscribe for its stock. Other banks may do so, by conforming to certain requirements.

Federal reserve banks are under the supervision and control of a federal reserve board consisting of the secretary of the treasury, the comptroller of the currency, and five other members appointed by the President. The federal reserve notes which they issue are guaranteed by the United States government, and are secured by commercial paper--notes and drafts--deposited in the treasury. It is expected that these banks will provide a more adequate supply of money and credit when the need is greatest, as during the crop-moving season, and at the same time give greater stability to the business of banking.

=Federal Land Banks.=--In 1916 Congress pa.s.sed the so-called rural credits law, which provides for the organization of a series of banks for lending money to farmers at low rates of interest and for long periods of time. Such banks are under the supervision of the federal farm loan board consisting of the secretary of the treasury and four other members.

=References.=--ANDREWS, Manual of the Const.i.tution, pp. 81-89, 104-118. BEARD, American Government and Politics, ch. xviii. BRYCE, The American Commonwealth (abridged edition), ch. xvi. HARRISON, This Country of Ours, pp. 58-65. HART, Actual Government, chs.

xxi-xxii. HINSDALE, American Government, secs. 341-373. LAUGHLIN, Elements of Political Economy, chs. xxv-xxvii.

=Ill.u.s.trative Material.=--1. Copy of the present tariff law. 2.

Specimens of various kinds of money in circulation. 3. Copy of the last annual report of the Secretary of the Treasury.

RESEARCH QUESTIONS

1. What were the sources of national revenue during the period of the Confederation?

2. Why has the imposition of direct taxes on the states not been resorted to with more frequency?

3. What is your opinion of the law levying taxes on incomes?