General, in his annual report, recommends several alterations in the law not affecting its character materially. A bill will be prepared providing for such alterations as, upon further consideration, shall seem expedient.

On the 16th day of May, 1872, I transmitted to Congress a bill entitled "A bill to amend and consolidate the navigation and customs collection laws of the United States," together with a communication explaining the character and purpose of the measure. (Ex. Doc. 290, 42d Cong., 2d Sess.) I respectfully ask the attention of Congress to the bill and the reasons for its passage.

The time has come when the attention of the public is turned naturally to the future financial policy of the country. That policy must rest upon the past and the present.

The war caused three great changes in business and financial affairs that have received the careful consideration of the American people.

I. The country was compelled to impose heavy customs duties upon merchandise, and thus, without general observation and without argu ment upon the principles involved, the nation entered upon a broad system of protection.

II. The Government issued Treasury notes for general circulation as currency, and prohibited banks of issue by State authority.

III. A system of national banks was established, and their cirenla. tion protected by the national credit.

The wisdom of these measures, speaking generally, has been established; and, subject to such changes as the changing condition and opinions of the country and people may demand, they will remain a part of our public policy until the financial consequences of the war disappear. The weight of the national debt has been so great that for more than ten years there has been no opportunity for the practical discussion of the doctrines of protection and free trade, and in that long period of an unchanged protective policy incident to the burdens of the war the nation has advanced rapidly and safely in the develop. ment of its natural resources.

Anticipating a condition of peace, we may also anticipate a general reduction in the percentage of customs duties. This reduction, however, should not be measured solely by the wants of the Treasury; but regard should be had also to the condition of the various branches of industry in which the people are engaged. In presence of the fact that the leading pursuits of the country are stronger than ever before in the possession of adequate capital and a supply of intelligent laborers, there may be a moderate reduction from time to time in the rate of duties, as the diminishing expenses of the Government shall permit, without either alarming capital or injuring labor.

For the purposes of government, the principles of political economy are national, and not cosmopolitan. A nation that can produce a given article at less cost than it can be produced elsewhere may wisely accept free trade in it; but a nation having natural advantages for its production, yet destitute of skill in the incident art or trade, must wait for the opportunity that sometimes comes from the calamity of war, or secure a more economical and a more constant support in the policy of its Government. If average natural facilities exist, the period of necessary protection is a short one compared with the lifetime of a nation; while the advantages gained can never be wholly lost. But if reasonable natural facilities do not exist, then a system of duties for protection is a present and future burden without adequate compensation. So varied and rich, however, are the natural resources of the United States, that we either are or may soon be in successful competition with the older and more experienced countries of the world in the production of the chief articles of personal necessity, comfort, and luxury, and of the machinery by which these articles are produced or obtained.

Herein is a sufficient justification for the existing protective system, and for its continuance during the transition period.

Nor is the prospect of ultimate successful competition with other countries disturbed by the circumstance that the wages of labor are higher in this country than in those. If, ten years since, it was the thought of any that the only way to a successful contest with Europe was in the reduction of the wages of labor to the European standard, that thought has disappeared, probably, in presence of the fact that high wages on this side of the Atlantic have stimulated emigration, until there is a near approach to equality in the cost of labor, and of the coëxisting fact that the addition thus made to the number of laborers has only aided in the development of our resources, without yielding in any quarter an excess of products, or retarding in any degree the prosperity of the laboring population.

This prosperity on their part is associated with a higher and constantly improving intellectual and social culture and condition. It being given that an intelligent person has all the special knowledge of an art or trade possessed by the most experienced and best-trained operative, who, outside of this special training and experience, is an ignorant person, and equal advantages of capital and machinery being given also, the intelligent person proceeds to improve and simplify methods of production to such an extent that an addition to his wages of even a hundred per cent. represents but a small part of the advan tage gained.

Yet the special training and knowledge of the ignorant man is the basis of the improvements made. This truth, considered first with

reference to a single American laborer and then multiplied many hundred thousand times, represents the advantage of America over Europe and Asia in the contest for final peaceful supremacy in the affairs of the world. Thus is America solving the industrial problem of the ages by extorting cheap production from expensive labor.

The reason for these remarks may be found in the opinion I entertain, that the tariff system of the country has contributed largely to the general prosperity; and that such general and continued prosperity is the only basis on which even a wise financial policy can rest.

In disenssing the other changes caused by the war, the issues of United States notes and of notes by the national banks should be consid ered together; indeed they are necessary parts of our financial system, and neither can be substituted for the other without general disturbance and permanent injury. The national banking system is so far superior to the State bank system, and to any system of private banks, as to render argument in its behalf, in these respects, unnecessary; while the substitution of an equal amount of United States notes as cur rency would be productive of serious evils and losses.

First. The national banks hold nearly four hundred million United States bonds, which otherwise would be thrown upon the market, absorbing domestic capital, or, if purchased abroad, adding, by the amount of the interest, to the annual balances against us in our account current with other countries.

Secondly. One office of a bank is to aggregate the capital of small possessors, and thereby to furnish means in aid of important commercial and financial undertakings, not only at the centres, but in the remote and newly-settled parts of the country.

Thirdly. The national banks are used as aids to the Government, which otherwise would require a large increase in the number of designated depositaries, and a proportionate increase of the public expenses without the least appreciable advantage.

Fourthly. They facilitate exchanges between different sections of the country, thus diminishing the cost of commercial transactions. Fifthly. They are generally less disposed than private parties, controlling equal capital, to demand exorbitant rates of interest.

But it does not follow from these views, nor would it follow from those of a similar character which might be presented, that the system is perfect; nor does it follow that the issue of notes directly by the Government should be surrendered and the business of furnishing a currency yielded to the national banks.

The circulation of each bank is fixed arbitrarily by a rule of law. The aggregate circulation is therefore a fixed sum, and consequently

there is practically no reserve to meet the increased demand for money due occasionally to extraordinary events at home or abroad, and arising periodically with the incoming of the harvest. The old State bank system is sometimes commended for the quality termed elasticity; but that quality as found in that system was the principal source of financial disaster. Under that system, in the absence of a present demand for coin, there was practically no limit to the issue of paper currency.

The increase of the circulation was attended and followed by an advance in prices, excessive importations, a consequent demand for coin drawn from the banks to meet balances abroad, a simultaneous reduction of the paper currency, and the consequent distress of merchants and bankers.

As the circulation of a bank is a source of profit, and as the managers are usually disposed to oblige their patrons by loans and accommodations, it can never be wise to allow banks or parties who have pecuniary interests at stake to increase or diminish the volume of currency in the country at their pleasure. Nor do I find in the condition of things a law or rule on which we can safely rely. Upon these views I form the conclusion that the circulation of the banks should be fixed and limited, and that the power to change the volume of paper in circulation, within limits established by law, should remain in the Treasury Depart ment.

A degree of flexibility in the volume of currency is essential for two

reasons:

First. The business of the Department cannot be transacted properly if a limit is fixed, and the power to raise the circulation above or reduce it below that limit is denied.

A rule of this nature would compel the Secretary to accumulate a large currency balance and to hold it; as, otherwise, the credit of the Government, in meeting the ordinary daily claims upon it, would be at the mercy of every serious business and political revulsion in the United States or Europe.

Especially would this be true now that our ordinary currency expenditures are greatly in excess of our currency revenue.

Secondly. There is a necessity every autumn for moving the crops without delay from the South and West to the seaboard that they may be in hand for export and consumption as wanted. This work should be done in the main before the lakes, rivers, and canals are closed, and yet it cannot be done without the use of large amounts of currency.

In the summer months funds accumulate at the centres, but the renewal of business in August and September gives employment for large sums, and leaves little or nothing for forwarding the crops in October and November.

Nor would this difficulty be obviated by a permanent increase or a permanent reduction of the volume of currency. The difficulty is due to the natural order of things, and increases with the prosperity of the country as shown in the abundance of its harvests.

The crops cannot be moved generally by the aid of bank balances, checks, and letters of credit, but only by bank notes and United States notes paid at once to the producers. This money finds its way speedily into the channels of trade and to the commercial centres; but if it be allowed to remain for general use, after the reason for its issue has ceased, the volume of currency would be increased permanently and the year following the same process would be repeated with the same results, and thus would the country depart more and more widely from the policy of resumption.

The problem is to find a way of increasing the currency for moving the crops and diminishing it at once when that work is done. This is a necessary work, and, inasmuch as it cannot be confided to the banks, where, but in the Treasury Department, can the power be reposed?

While the currency revenue was in excess of the currency expenses it was practicable to accumulate large balances in the Treasury during the summer, to be used, if necessary, in the purchase of bonds in the autumn, thereby meeting the usual demand for currency at that season of the year.

Hereafter such accumulations must be made by the sale of gold, and the sale of gold in large quantities during the summer, when business is the least active, may not always be consistent with the best interests of the country. Reliance cannot, therefore, be placed upon the ability of the Treasury to accumulate a currency balance each year for the purpose indicated.

The argument in favor of a paper currency, composed in part of United States notes and in part of national bank notes, is strengthened by the aid which may thus be furnished in resuming and maintaining specie payments. In the view I am now to take, I exclude the idea that the Government will ever abandon the issue of national bank notes, and undertake the issue of United States notes in their place. The result of such a policy may be foreseen. The people, deprived of the facilities for business afforded by banks, would seek relief through State institutions, and without much delay Congress would concede to them the right to issue notes for circulation. This concession would be followed by a surrender by the General Government of all control over the paper circulation of the country.

The true policy will be found in continuing the national banking sys