Reminiscences of Sixty Years in Public Affairs, Vol. 2

G >> George S. Boutwell >> Reminiscences of Sixty Years in Public Affairs, Vol. 2

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XXXVI
AN HISTORIC SALE OF UNITED STATES BONDS IN ENGLAND

If there should be any considerable interest in the history of the
funding system of the United States, the interest would be due to a
sale of bonds some thirty years ago and certain incidents which could
not have been anticipated, which arose from the execution of the trust.

In the month of July, 1868, a bill for funding the national debt which
had passed the Senate of the United States was reported, without
amendments, to the House of Representatives by the Committee on Ways
and Means.

When the bill was under consideration in the House, I proposed a
substitute. In the debate of July 21 I made a statement of the nature
of my substitute, and I reproduce an extract which sets forth the
first step in a policy which culminated in the Act for Funding the
Public Debt, and which was approved by President Grant July 14, 1870:

"The amendment to which I wish to call the attention of the House
provides for the funding of $1,200,000,000 of the public debt
$400,000,000 payable in fifteen years @ 5 per cent interest,
$400,000,000 payable in twenty years @ 4 1/2 per cent interest, and
$400,000,000 payable in twenty-five years @ 3.65 per cent interest,
the latter sum of $400,000,000 payable, principal and interest, at the
option of the takers, either in the United States, or in London, Paris,
or Frankfort."

At that time I had not entertained the thought that I might come to be
the head of the Treasury Department. Indeed, I had no other purpose in
public life than to remain in the House of Representatives.

I had had experience on the executive side of the Government and also
on the legislative side, and I had a fixed opinion in favor of the
latter form of service.

As Secretary of the Treasury, I proposed a bill in 1869 in the line of
the substitute for the bill of the Committee on Ways and Means which I
had challenged in July, 1868. The bill proposed an issue of three
classes of bonds, each of four hundred million dollars, which were to
mature at different dates, and to bear interest at the rates of 5, 4 1/2,
and 4 per cent. It was further provided that the principal and
interest of the bonds bearing the lowest rate should be made payable
either in the United States, or at Frankfort, Paris, or London, as the
takers might prefer. The provision was rejected through the influence
of General Schenck, who had then returned recently from Europe, and
with the opinion that the concession involved an impairment of national
honor. As a substitute for the feature so rejected, I originated a
plan for the issue of registered bonds, upon the condition that the
interest could be paid in checks to be forwarded by the mails to the
holders of bonds at the places designated by them in any part of the
world. This plan is far superior to the first suggestion, as it is
susceptible of a much wider application.

I have received from Mr. Roberts, the Treasurer of the United States,
the following letter and statement:

STATEMENT SHOWING THE PROPORTION OF UNITED STATES BONDS OUTSTANDING
JANUARY 25, 1900, ON WHICH INTEREST IS PAID BY CHECK.

TITLE OF LOAN. Total issue. Registered Percentage
bonds on of bonds on
which interest which interest
is paid by is paid by
check. check.

Funded loan of 1891 continued at 2 per cent
. . . . . . . . .$ 25,364,500 $ 25,364,500 100.00
Four per cent funded loan of 1907
. . . . . . . . . 545,342,950 478,195,600 87.69
Five per cent loan of 1904
. . . . . . . . . 95,009,700 64,615,650 68.01
Four per cent loan of 1925
. . . . . . . . . 162,315,400 117,997,200 72.70
Three per cent ten-twenties of 1898
. . . . . . . . . 168,679,000 109,450,060 55.09

Totals . . . . . . . . $996,711,550 $795,623,030 77.49

TREASURY DEPARTMENT.
OFFICE OF THE TREASURER,
WASHINGTON, D. C.
_January_ 25, 1900.

HONORABLE GEORGE S. BOUTWELL,
Boston, Massachusetts.

_My Dear Mr. Secretary:_ It gives me pleasure to enclose to you a
table showing by classes of bonds the percentage of interest paid by
checks. The interest on all registered bonds is now so paid. Only
the coupon bonds, by their nature, are differently treated.

Your plan has worked admirably, and the drift is slowly from the coupon
to the registered form, and so to an increase of the payment of
interest by checks.

With kind regards, Yours very truly,
(Signed) ELLIS H. ROBERTS,
_Treasurer of the United States._

The plan has been adopted by corporations that are borrowers of large
sums of money upon an issue of bonds, and the use of the system is
very general in the United States.

In my report to Congress in December, 1869, I made recommendation of
the Funding Bill, and I placed copies of the bill that I had prepared
in the hands of the Finance Committee of the Senate, and in the hands
of the Committee of Ways and Means of the House of Representatives.

When the bill became a law, the authorized issue of five per cent
bonds was limited to two hundred million dollars, and the issue of four
per cent was raised to twelve hundred million. Simultaneously with the
passage of the Funding Bill of July, 1870, the war between France and
Prussia opened, and the opportunity for negotiations was postponed
until the early months of the year 1871. In these later years, when
bonds of the United States have been sold upon the basis of their par
value at two per cent income, it is difficult to realize that in 1869
the six per cent bonds of the United States were worth in gold only
83-5/10 cents to the dollar. The first attempt to dispose of the five
per cent bonds was made by the Treasury Department through an
invitation to the public to subscribe for the bonds, payment to be
made in the currency of the country, or by an exchange of outstanding
five-twenty bonds which bore interest at the rate of six per cent.
The subscriptions reached the sum of sixty-six million dollars, of
which the national banks were subscribers to the amount of sixty-four
million, leaving two million only as the loan to the general public.
A portion of the amount taken by the banks was for the account of
patrons and clients. This experience justified the opinion that future
efforts with the general public would be unsuccessful, while the credit
of the country was not established and placed beyond the influence of
cavilers and doubters.

It was under such circumstances that the aid of banks and bankers
became important for the furtherance of subscriptions, in view of the
fact that they could give personal service of a nature not possible in
the case of salaried officers of the Government, nor compatible with
their daily duties.

It is not easy, in this age of comparative freedom and power in
financial affairs, to comprehend that in the year 1871 the long
established bankers of New York, Amsterdam, and London, either declined
or neglected the opportunity to negotiate the five per cent coin bonds
of the United States upon the basis of their par value. It may not be
out of place for me to mention Mr. Morton, of the house of Morton,
Bliss & Co., as an exception, to the bankers of Europe and the United
States.

It was in the same months of 1871 that I recommended the issue of a
four per cent fifty-year bond as the basis of the currency to be issued
by the national banks. This proposition, which would have been
advantageous to the banks, in an increasing ratio as the value of money
diminished, was defeated by the organized opposition of the banks
through an effective lobby that was assembled in the city of
Washington. Such was the public sentiment in the year 1871, even in
the presence of these important facts, that in the month of December
I was able to say in my annual report that the debt had been diminished
during the next preceding year in the sum of ninety-four million
dollars, and that the total decrease from March 1, 1869 to December 1,
1871, was over two hundred and seventy-seven million dollars.

It was in this situation of affairs that Messrs. Jay Cooke & Co.
proposed to undertake the sale in London, by subscription, of one
hundred and thirty-four million five per cent bonds then unsold.
Authority was given to Cooke & Co. to proceed with the undertaking,
and when the books were closed, September 1, I was informed that the
loan had been taken in full. By the terms prescribed by Cooke & Co.,
the subscribers deposited five per cent as security for the validity
of their subscriptions. The bonds were to be delivered the first day
of December.

Upon the receipt of the information that the undertaking had been a
success, the bonds were prepared, and the Hon. William A. Richardson,
then an assistant secretary of the Treasury, was designated as the
agent of the department for the delivery of the bonds. The bonds were
placed in safes, on each of which there were three locks. The clerks
were sent over in different vessels, and the keys were so distributed
among them, that there were not keys in any one vessel by which any
one of the safes could be opened.

The success of the subscription gave rise to an unexpected difficulty.

At that time there were outstanding one hundred and ninety-four million
ten-forty United States bonds that carried interest at the rate of
five per cent.

It was a singular coincidence, and a coincidence probably not due to
natural causes, that some five per cent bonds, having fifteen years to
run, should be at par, and that other five per cent bonds that might
run thirty years should fall below par in the same market. In the
three months from August to December, these ten-forties were quoted
as low as ninety-seven, or even for a time at ninety-six. Cooke became
anxious, if not alarmed, lest the rate should fall below ninety-five,
and consequently lest the subscribers should refuse to meet their
obligations. Early on the morning of the first Monday in December, I
received the information that the bonds were taken as soon as the
offices were open. I may mention in passing that Cooke & Co. paid for
the bonds as they were delivered, either in coin or in five-twenty
bonds.

As bonds were taken, and as payments were made, a difficulty appeared
which had been anticipated, but not in its fullness. The proceeds from
the sales of the five per cent bonds were pledged to the redemption of
the six per cent five-twenty bonds, reckoned at their par value.

It was provided by the statute that whenever five-twenty bonds were
called, a notice of ninety days should be given, when interest would
cease. Thus it happened that whenever a bond was called it was worth
par and interest to the end of the ninety days. Of the called bonds
some were in America, and the owners did not choose to present them in
London in exchange for five per cent bonds, nor for coin. Hence it
happened that the total proceeds of the five per cent bonds, about
twenty million dollars were paid in gold coin by Cooke & Co. This
coin was deposited in the Bank of England, but upon such terms as
were imposed by the governors:

(1) The deposits must be made in the name of William A. Richardson.
This was done, but a statement was made by Judge Richardson that the
deposit was the property of the United States.

(2) The gold was not to be taken out of the country. This stipulation
was in the line of our policy, which was to invest the entire sum in
five-twenty bonds, whenever they could be bought at par. The
opportunity came in a manner that was not anticipated. The documents
referred to are of historical value, and they are therefore inserted
as follows:

_(a)_ A declaration of trust by William A. Richardson, Assistant
Secretary of the Treasury, dated at London, December 28, 1871.

_(b)_ Letter of William A. Richardson, Assistant Secretary of the
Treasury, to John P. Bigelow, Chief of the Loan Division of the
Treasury, dated also at London, December 28, 1871.

_(c)_ Letter of George Forbes, Chief Cashier of the Bank of England,
to Judge Richardson, dated January 4, 1872.

_(d)_ Letter of Judge Richardson to George Lyall, Governor of the
Bank of England, dated January 15, 1872.

_(e)_ Reply to the same by George Forbes, Chief Cashier, dated
January 17, 1872.

_(f)_ William A. Richardson's report of January 25, 1872.

_(a)_ DECLARATION BY WILLIAM A. RICHARDSON

Whereas, I have this day deposited in my name, as Assistant Secretary
of the Treasury, U. S. A., in the Bank of England, two million five
hundred and fifty thousand pounds sterling, and shall probably
hereafter make further deposits on the same account:

Now I hereby declare that said amount and deposits, present and future,
are official and belong to the Government of the United States, and not
to me personally that the moneys so deposited are the proceeds of the
sale of five per cent bonds of the "Funded Loan"; that whatever money
I may at any time have in said Bank under said account, will be the
property of the United States Government, held by me officially as
Assistant Secretary of the Treasury, acting under orders from the
Secretary; that the same is, and will continue to be subject to the
draft, order, and control of the Secretary of the Treasury,
independently of, and superior to my authority, whenever he so elects,
and that upon his assuming control thereof, my power over the same
will wholly cease. In case of my decease before said account is
closed, the money on deposit will not belong to my estate, but to the
Government of the United States.

Witness my hand and seal,
(Signed) WILLIAM A. RICHARDSON,
_Assistant Secretary of the Treasury, U. S. A._
LONDON, ENGLAND, _December_ 28, 1871.

_Witnesses:_
JNO. P. BIGELOW, E. W. BOWEN, GEO. L. WARREN.

_(b)_ JUDGE RICHARDSON TO JOHN P. BIGELOW

41 LOMBARD ST., LONDON, ENGLAND,
_December_ 28, 1871.

_To_ JOHN P. BIGELOW, _Chief of the Loan Division, Secretary's Office,
Treasury Department, U. S. A._

I have this day deposited in the Bank of England, in my name as
Assistant Secretary of the Treasury, two million five hundred and fifty
thousand pounds sterling money, belonging to the United States,
received in payment of five per cent bonds of the Funded Loan delivered
here in London.

All money hereafter received for future delivery of bonds will be
deposited to the same account.

Herewith I hand you a declaration of trust signed by me declaring that
said account and moneys belong to the United States, and not to me
personally, also the Deposit Book and a book of blank checks numbered
from 35,101 to 35,150, both inclusive, received from said Bank, all of
which you will take into your custody and carefully keep in one of the
iron safes sent here from the department in the same manner as the
books are kept.

This money, and all the money deposited in said bank on the account
aforesaid, will be drawn and used only in accordance with the orders of
the Secretary of the Treasury to redeem or purchase five-twenty bonds
and matured coupons, or such other and further orders as he may make
in relation thereto.

When money is to be drawn to pay for bonds or coupons, it must be drawn
only by filling up a check from the book of checks above referred to,
and you will open an account in which you will enter the amount of all
deposits, the number and amount of each check drawn, specifying also to
whom the same is made payable and on what account it is drawn.

The checks will be filled up by Mr. Prentiss of the Register's Office,
who will place his check mark on the upper left corner, and will enter
the same in the book. You will then carefully examine the check, see
that it is correctly drawn for the amount actually payable for bonds or
coupons received and properly recorded, and you will, when found
correct, place your check mark on the right hand upper corner before
the same is signed by me. All checks will be signed by me with my
full name as Assistant Secretary of the Treasury, as this is signed.

(Signed) WILLIAM A. RICHARDSON,
_Assistant Secretary of the Treasury, U. S. A._

_(c)_ MR. FORBES TO JUDGE RICHARDSON

BANK OF ENGLAND, E. C.,
_January_ 4, 1872.

HON. W. A. RICHARDSON, _Assistant Secretary of the Treasury of the
United States_, 41, _Lombard Street_.

_Sir:_ To preclude any possible misunderstanding hereafter as to the
character of the drawing account opened in your name, I am instructed
by the Governors to communicate to you in writing that, in conformity
with the rule of the Bank, the account is considered a personal one;
that the Governors have admitted the words appended to your name merely
as an honorary designation; and the bank take no cognizance of, or
responsibility with reference to the real ownership, or intended
application of the sums deposited to the credit of the account.

I am, sir,
Your obedient servant,
(Signed) GEORGE FORBES,
_Chief Cashier_.

_(d)_ JUDGE RICHARDSON TO MR. LYALL

41 LOMBARD STREET, LONDON, ENGLAND,
_January_ 15, 1872.

GEORGE LYALL, ESQ.,
_Governor of the Bank of England._

_Dear Sir:_ Referring to the several conversations which I have had
with you, and with your principal cashier, Mr. Forbes, relative to the
manner and form of keeping the account which I desire to have in the
bank, I beg leave to renew in writing my request heretofore made
orally, that the account of money deposited by me may stand in the
name of Hon. George S. Boutwell, Secretary of the Treasury, U. S. A.,
and myself, Assistant Secretary, jointly and severally, so as to be
subject to a several draft of either, and of the survivor, in the
case of death of either one.

I suppose I must regard the letter of Mr. Forbes to me, dated January
4, 1872, and written under instructions from the Governors of the Bank
as expressing your final conclusion that the account in whatever form
it may be kept, must be considered a personal one.

You know my anxiety to have by deposits received by the Bank, and
entered in such way that in case of my death the balance may be drawn
at once by the Secretary of the Treasury or some other officer of the
Government, and although you are unwilling to regard the account as an
official one, I hope that on further consideration you will allow it
to be opened in the name of Mr. Boutwell and myself jointly and
severally as above stated. I am, sir,
Your obedient servant,
(Signed) WILLIAM A. RICHARDSON,
_Assistant Secretary of the United States Treasury Department._

_(e)_ MR. FORBES TO JUDGE RICHARDSON

BANK OF ENGLAND, E. C.
_January_ 17, 1872.

HON. W. A. RICHARDSON,
_Assistant Secretary of the Treasury
of the United States_, 41, _Lombard St._
_Sir:_ I am directed by the Governor to acknowledge the receipt of
your letter of the 15th inst., requesting that the account of money
deposited by you in the Bank may stand in the name of the Hon. George
S. Boutwell, Secretary of the Treasury, U. S. A., and yourself, the
Assistant Secretary, jointly and severally, so as to be subject to
the several draft of either, and of the survivor in case of death of
either one.

I am to inform you that the Bank is prepared to open an account in this
form, as a personal account; but it is essential that Mr. Boutwell
should join in the request and concur in the conditions proposed before
each party can in that case draw upon the account. I am, sir,
Your obedient servant,
(Signed) GEORGE FORBES,
_Chief Cashier._

_(f)_ JUDGE RICHARDSON'S REPORT

41, LOMBARD STREET, LONDON,
_January_ 25, 1872.

HON. GEORGE S. BOUTWELL,
_Secretary of the Treasury._

_Dear Sir:_ It is my purpose in this letter to give you an account of
the way in which I have kept the money arising from the sale of the
Funded Loan, and the manner in which it has been drawn from time to
time to pay for bonds purchased and redeemed.

Immediately after the first of December, 1871, the money began to
accumulate very rapidly. Up to the first of December no money whatever
had been received, all bonds delivered having been paid for by the
called bonds and coupons or secured by deposit of other bonds; but on
the second day of that month nearly two and a half millions of dollars
cash were paid to me; then on the fourth, nearly five millions of
dollars more; and on the fifth, above three millions, and so on in
different sums till the present time.

Of course it was wholly impracticable to receive, handle, count and
keep on hand such large amounts of gold coin, weighing between a ton
and three quarters and two tons to each million of dollars. At one
time my account showed more than sixteen millions of dollars on hand,
and to have withdrawn from circulation that amount of coin would have
produced a panic in the London market; and the risk in having it
hoarded in any place within my reach would have been immense,
especially as it would have soon been known where it was.

I ascertained that there would be some difficulty in keeping an
official Government account in the Bank of England, and I did not feel
authorized, or justified in my own judgment, in entrusting so much
money to any other banking institution in this city. I found, also,
that the Bank of England never issues certificates of deposit, as do
our banks in the United States. But it issues "post notes," which are
very nearly like its ordinary demand notes, but _payable to order,_ and
on seven days' time, thus differing only in the matter of time from
certificates of deposit. Availing myself of this custom of the Bank
of England, I put all the money into post notes, and locked them up in
one of the safes from which the bonds had been taken. This I regarded
as a safe method of keeping the funds, and I anticipated no further
difficulty.

But when the Bank made its next monthly or weekly return of its
condition, and published it in all of the newspapers as usual, the
attention of all the financial agents, bankers, and financial writers
of the daily money articles in the journals was immediately attracted
to the sudden increase of the "post notes" outstanding, and the
unusually large amount of them, so many times greater than had ever
been known before. They were immensely alarmed lest the notes should
come in for redemption in a few days, and the coin therefor should be
withdrawn from London and taken to a foreign country; and lest there
should be a panic on account thereof. Some of the financial writers
said they belonged to Germany, and that they represented coin which
must soon the transmitted to Berlin. The Bank officers themselves,
although they knew very well that these notes belonged to the United
States, were not less alarmed because they feared that I would
withdraw the money to send it to New York, which they knew would make
trouble in the London Exchange. Money, which for a short time before
had been at the high rate of interest, for this place, of five per
cent, had become abundant, and the people were demanding of the Bank
a reduction in the rate; but so timid were they about these post
notes that they did not change the rate until I took measures to
allay their fears. This I did because I thought it would be injurious
and prejudicial to the Funded Loan to have a panic in London, in which
the market price of the new loan would drop considerably below par
just at a time when its price and popularity were gradually rising,
and just as it was coming into great favor with a new class of
investors in England, the immensely rich but timid conservatives.

I determined to open a deposit account with the Bank of England, and in
doing so experienced the difficulties which I anticipated. I assured
the officers that the money was Government (U. S.) money, which I did
not intend, and was not instructed to take home with me; but which I
should use in London in redeeming bonds and coupons, and should leave
in the bank on deposit unless by the peculiarity of their rules, I
should be obliged to withdraw it. They objected to taking the money
as a Government deposit, or as an official deposit in my name, having
some vague idea that if they took it and opened an official Government
account they should be liable for the appropriation of the money unless
documents from the United States were filed with them taking away
that liability, but they could not tell me exactly what documents
they wanted nor from whom they must come. They did, however, agree to
open an account with me, and that was the best I could do. In signing
my name to their book, I added my official title, and when, some time
after, I came to drawing checks, I signed in the same way. This
brought from the officers a letter which I annex hereto, saying that
my deposit would be regarded as a private and personal one.

What I was most anxious to provide for was the power in some United
States officer to draw the money in case of my death (knowing the
uncertainty of life), without the delay, expense, and trouble which
must necessarily arise, if it stood wholly to my personal credit. I
asked the officers to allow it to stand in your name as Secretary and
mine as Assistant Secretary, jointly and severally, so as to be drawn
upon the several check of either, and by the survivor in case of the
death of either one. I suggested other arrangements which would have
had the same result, but they said their rules prevented their
agreeing to my requests, that they were conservative and did not like
to introduce anything new into their customs.

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