"It is needless to say to you that the statement is entirely erroneous from beginning to end.

"In the department's circular of the first instant, a copy of which is hereby inclosed for your information, _all_ national banks are invited to become financial agents, and depositaries of public moneys received on account of the sale of these bonds, and the commissions allowed on subscriptions are plainly stated therein.

Over one hundred (100) national banks have been thus designated as depositaries for the purpose mentioned, and all are treated precisely alike, both as to commissions allowed and balances held.

"The First National Bank of New York enjoys, as a United States depositary, no special privileges whatever from the department.

It has, however, thus far, subscribed for a larger amount of four per cent. bonds than any other bank, and has, consequently, received a larger amount for commissions. But any other bank subscribing for the same amount of bonds would, of course, receive the same amount for commissions.

"Very respectfully, "John Sherman, Secretary."

"Treasury Department, } "Washington, D. C., January 14, 1879.} "H. C. Fahnestock, Esq., New York.

"Dear Sir:--Your note of the 13th instant is received.

"In buying the fours thrown upon the market, you are rendering as much service to the government as if you bought directly. Indeed, I am glad you are buying from the market rather than from the department. I do not wish to force this refunding operation too much, lest it may embarra.s.s resumption. I only fear that some eager parties may subscribe for more than they can sell and pay for by called bonds or coin within the running of the call. This is the only contingency that disturbs me.

"Very respectfully, "John Sherman."

My published correspondence shows that with all the efforts and strength of the department it was impossible to keep up with the subscriptions for bonds pouring in from all parts of the United States and from Europe. Over sixty millions were subscribed for in the first two weeks of January. Offers made by me in December, though not accepted at the time, were made the grounds of demands in January, when conditions had greatly changed. As the money received for four per cent. bonds could not be applied to the payment of six per cent. called bonds until interest on such bonds ceased, ninety days after the call, I feared that the enormous deposits would create a serious stringency in the money market, and perhaps cause a panic after the first of April. The banks and bankers in New York, as well as in other large cities of the United States, were actively competing to swell these subscriptions, so as to get the larger commission offered for the greater amount of bonds sold. Such a contest occurred between the First National Bank of New York, and Seligman & Co., and their a.s.sociates. In ended in a contract made on the 21st of January, between the Secretary of the Treasury and the former syndicate, by which the latter subscribed for $10,000,000 of four per cent. bonds, on the terms stated in my circular of January 1, and $5,000,000 a month thereafter, the secretary reserving the power to terminate the contract.

On the same day a call was made for $20,000,000 of six per cent.

bonds. Another call for a like amount was made on the 28th. The aggregate call for six per cent. bonds in January was $120,000,000.

Charles F. Conant was again appointed as the funding agent of the treasury department, and directed to a.s.sume the general management and supervision of all business in London arising from the funding of bonds. He was instructed to advise me frequently as to the condition of the business intrusted to him.

The object of this sale of bonds in London was stated in the public prints, and also in the following letter:

"Treasury Department, January 22, 1879.

"Charles M. Fry, Esq., "President Bank of New York, National Banking a.s.sociation, New York.

"Sir:--Your telegram was received yesterday.

"The syndicate arrangement was confined to the sale of bonds in Europe, where it is deemed important to sell bonds partly to cover called bonds held abroad; and a contract has been made with bankers having houses in London, on precisely the same terms as were extended to all in this country. It was thought that this would be best for the domestic loan. No contract of arrangement will be made to interfere in any way with the free, open, popular subscriptions in the United States.

"I am glad to notice your success and will give you every facility that is extended to anyone else.

"Very respectfully, "John Sherman, Secretary."

The sale in London was fully justified when the called bonds matured, and those held abroad were paid for without the exportation of coin. It was my desire to secure the exchange of four per cent.

bonds directly with the holders of the six per cents. For this purpose I invited, by a department order widely circulated, such an exchange, allowing to the holder of any six per cent. bond, whether called or uncalled, the same commission and allowance for interest granted to banks and bankers. By these expedients I hoped for, and succeeded in conducting, the change of bonds without disturbing the ordinary current of business.

The process of refunding the 5-20 six per cent. bonds, by the sale of four per cent. bonds, went on with some fluctuations until the 4th of April, 1879, when all the six per cent. bonds then redeemable were called for payment. This period in the magnitude of business done was far the most active and important while I was Secretary of the Treasury. The struggle between banks and bankers, not only in the United States but in London also, gave rise to many questions which had to be promptly acted upon, chiefly by cable or telegram.

The amount involved were so large as to induce caution and care.

The princ.i.p.al difficulty in refunding arose out of the provision in the act of Congress that ninety days' notice should be given, to the holder of bonds, by the government, when it exercised its option to pay, after five years, any portion of the bonds known as the 5-20 bonds, payable in twenty years but redeemable after five years. Prudence required the actual sale of four per cent. bonds before a call could be made or notice given to the holders of the 5-20 bonds, designated by description and numbers, of the intention of the government to pay them. When sales were made the money received was deposited in the treasury of the United States, or with national banks acting as public depositaries, which were required to give security for such deposits.

The necessary effort of the deposit of large amount involved in refunding operations was to create a stringency in the money market.

I early called the attention of Congress to this difficulty, but had doubts whether the government would be justified in repealing the law requiring ninety days' notice. This provision was a part of the contract between the government and the bondholder, and could only be changed by the consent of both parties. Congress failed to act upon my suggestion. The interest accruing for ninety days at six per cent., or one and a half per cent. on the great sums involved, was a loss to the government but a gain to the banks or bankers that sold the bonds. The syndicate of bankers engaged in the sale of bonds chose the First National Bank of New York as their depositary. The department was indifferent where the deposits were made so that they were amply secured. Other banks and bankers engaged in the sale of bonds chose their own depositaries, and thus an active compet.i.tion was created in which the department took no part or interest.

This struggle led to charges of favoritism on the part of the department, but they were without the slightest foundation. Every order, ruling and letter was fully discussed and considered by the Secretary and other chief officers of the treasury, and also by General Hillhouse, a.s.sistant treasurer at New York, and is in the printed report of the letters, contracts, circulars and accounts relating to resumption and refunding made to Congress on the 2nd of December, 1879.

The charge was especially made that favor was shown the First National Bank of New York, of which George F. Baker was president and H. C. Fahnestock was vice president. It was said that I was a stockholder in that bank, and that I was interested in the syndicate. It is scarcely necessary for me to say, as I do, that these charges and imputations were absolutely false. This bank and the a.s.sociated bankers sold larger amounts of four per cent.

bonds than any others and received a corresponding commission, but, instead of being favored, they were constantly complaining of the severity of the treasury restrictions. Rothschild, the head of the great banking house in London and the chief of the syndicate, especially complained of what he called the "stinginess" of the treasury department. I can say for all the officers of the treasury that not one of them was interested in transactions growing out of resumption or refunding, or did or could derive any benefit therefrom.

The rapid payment of the 5-20 bonds had a more serious effect upon the English market than upon our own. Here the four per cent.

bonds were received in place of the six per cent. bonds, no doubt with regret by the holders of the latter for the loss of one-third of their interest, but accompanied by a sense of national pride that our credit was so good. In London the process of refunding was regarded with disfavor and in some cases by denunciation. On the 4th of March Secretary Evarts wrote me the following letter:

"Department of State, } "Washington, March 4, 1870.} "Hon. John Sherman, Secretary of the Treasury.

"Sir:--I have the honor to transmit herewith, for your information, a copy of a dispatch No. 928, dated February 12, from the consul general at London, in which the department is advised that there exists dissatisfaction, among certain holders of the 5-20 bonds of the issue of 1867, with the rapidity with which the government is refunding its debt at a lower rate of interest, and that it is the purpose of such holders to demand payment of their called bonds in coin. I have to honor to be, sir, your obedient servant.

"Wm. M. Evarts."

This demand was easily met by the sale of four per cent. bonds in London, and the balance of trade in our favor was increasing. The antic.i.p.ated movement of gold did not occur.

Congress, by the act approved January 25, 1879, extended the process of refunding to the 10-40 bonds bearing interest at the rate of five per cent., amounting to $195,000,000 as follows:

"AN ACT TO FACILITATE THE REFUNDING THE NATIONAL DEBT.

"_Be it enacted by the Senate and House of Representatives of the United States of America in Congress a.s.sembled_, That the Secretary of the Treasury is hereby authorized, in the process of refunding the national debt under existing laws, to exchange directly at par the bonds of the United States bearing interest at four per centum per annum, authorized by law, for the bonds of the United States commonly known as 5-20's, outstanding and uncalled, and, whenever all such 5-20 bonds shall have been redeemed, the provisions of this section, and all existing provisions of law authorizing the refunding of the national debt, shall apply to any bonds of the United States bearing interest at five per centum per annum or a higher rate, which may be redeemable. In any exchange made under the provisions of this section interest may be allowed, on the bonds redeemed, for a period of three months."

On the 26th of February the following act was pa.s.sed:

"AN ACT TO AUTHORIZE THE ISSUE OF CERTIFICATES OF DEPOSIT IN AID OF THE REFUNDING OF THE PUBLIC DEBT.

"_Be it enacted by the Senate and House of Representatives of the United States of America in Congress a.s.sembled_, That the Secretary of the Treasury is hereby authorized and directed to issue, in exchange for lawful money of the United States that may be presented for such exchange, certificates of deposit, of the denominations of ten dollars, bearing interest at the rate of four per centum per annum, and convertible at any time, with accrued interest, into the four per centum bonds described in the refunding act; and the money so received shall be applied only to the payment of the bonds bearing interest at a rate of not less than five per centum in the mode prescribed by said act, and he is authorized to prescribe suitable rules and regulations in conformity with this act."

On the 4th of March, 1879, the amount of uncalled 5-20 six per cent. bonds outstanding was $88,079,800. Antic.i.p.ating that sales of four per cent. bonds would continue, I gave the following notice:

"Notice is given that when the 5-20 six per cent. bonds of the United States are covered by subscriptions to the four per cent.

consols, the latter will be withdrawn from sale upon the terms proposed by department circular of January 1, 1879, and upon the terms stated in the contract with the Messrs. Rothschild and others, of the date of January 21, 1879. The amount of 5-20 six per cent.

bonds outstanding and embraced in calls to this date is $88,079,800.

When this sum is covered by subscriptions under the existing circular and contract, all further sales of four per cent. consols, to provide for the refunding of the 10-40 five per cent. bonds, will be made upon terms which will probably be less favorable to the purchaser, and in accordance with new proposals and contracts.

This notice is given so that all parties wishing to subscribe for consols upon the terms stated in the circular and contract may have an opportunity to do so until the 5-20 bonds are called."

In giving this notice I had in view a change in the mode of refunding which would save to the government the whole or large part of the three months' interest pending the call. This notice gave an additional spur to the market for four per cent. bonds. Copies of it were sent to Mr. Conant and to all parties interested in pending operations, and due notice was given to all persons and corporations engaged in the sale of bonds that all existing contracts would terminate when the 5-20 bonds were covered by subscriptions.

At this time there was a good deal of anxiety as to the effect of the large sale of four per cent. bonds. If these could be exchanged, par for par for six per cent. bonds, the operation would be easy, but many holders of called bonds would not accept the lower rate of interest and invested the princ.i.p.al of their bonds in other securities. General Hillhouse, on the 8th of March, expressed the common feeling as follows:

"There is a good deal of speculation in the papers, as well as in business circles, as to the probable effect on the money market of the settlements to be made in April, during which month, if I am not mistaken, about $150,000,000 of calls will mature. It is now seen, however, that investment demand for the fours is much larger than was antic.i.p.ated by many; and the subscribing banks will be, therefore, likely to find themselves loaded with large amounts which they cannot dispose of. It would not be strange, in the closing of such vast transactions, if there should be some stringency, but with the favorable indications, that the public are taking the bonds freely, and with the power of the secretary in various ways to facilitate the settlements, it can hardly be more than temporary."

Mr. Conant wrote me, on March 8, from London:

"I have called on all the members of the syndicate several times within the past few days, and have urged them very strongly to push the sales of the bonds here. I have persistently tried to persuade them that they ought to conduct the business with far more energy, and I have said to them that, at the time the contract was entered into, representations were made to you that $50,000,000 of the four per cent. consols could be disposed of on this side of the Atlantic, and that as they had undertaken the business they should not disappoint you. I have represented to them the importance of preventing the shipments of gold from New York, and that you supposed that the sales of bonds which you expected they would make would prevent such shipments. . . .

"The feeling which I alluded to in my last letter, that when the time arrives for the settlement of the large subscriptions made in New York and elsewhere at home the market will be found overloaded, and that a fall in price will take place, still exists here, and has the effect of causing certain cla.s.ses of investors to delay making purchases, which they will ultimately make. I have not hesitated to say to the a.s.sociates here that when refunding operations shall have been completed the four per cent. consols will soon thereafter go to a premium, and good reasons can be given why such should be the case."

Soon after I commenced receiving prophecies of stringency and disaster. A long letter from Fisk & Hatch, of New York, said that general apprehension had been growing up in financial circles, and was rapidly gaining ground, that the settlements by the national banks with the treasury department, in April and May, for the large subscriptions of four per cent. bonds made in January and February, would occasion serious disturbance and embarra.s.sment in the money market. They advised me to pursue a course that, whether proper or not, was not in accordance with law. Mr. L. P. Morton., on the same date, took a milder view of it, but still suggested a remedy not within my power.

On the 13th, General Hillhouse, in referring to the apprehensions of my correspondents in regard to the settlements in connection with refunding, said that they might be caused in some instances by the suspicion, if not by the conviction, that their subscriptions had been carried beyond the point of absolute safety, "and now that settlement day is approaching they are naturally desirous of ascertaining how far they can count on the forbearance of the government."