A History of Money and Banking in the United States: The Colonial Era to World War II (19 page)

Used to a currency of gold coin only, with no intrusion of bank notes, California businessmen took steps to maintain gold circulation and avoid coerced payment in greenbacks. At first, the merchants of San Francisco, in November 1862 jointly agreed to refrain from accepting or paying out greenbacks at any but the (depreciated) market value, and to keep gold as the monetary standard. Any firms that refused to abide by the agreement would be blacklisted and required to pay gold in cash for any goods which they might purchase in the future.

Voluntary efforts did not suffice to overthrow the federal power standing behind legal tender, however, and so California merchants obtained the passage in the California legislature of 107See Mitchell,
History of Greenbacks
, pp. 156–63.

108Banks of deposit existed in California, but of course they could not supply the public’s demand for cash. See Knox,
History of Banking
, pp. 843–45.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

a “specific contracts act” at the end of April 1863. The specific contracts act provided that contracts for the payment of specific kinds of money would be enforceable in the courts. After passage of that law, California businessmen were able to protect themselves against tenders of greenbacks by inserting gold coin payment clauses in all their contracts. Would that the other states, and even the federal government, had done the same!109

Furthermore, the private banks of deposit in California refused to accept greenbacks on deposit, newspapers used their influence to warn citizens about the dangers of greenbacks, and the state government refused to accept greenbacks in payment of taxes. In that way, all the major institutions in California joined in refusing to accept or give their imprimatur to federal inconvertible paper.

Judicial institutions also helped maintain the gold standard and repel the depreciated U.S. paper. Not only did the California courts uphold the constitutionality of the specific contracts act, but the California Supreme Court ruled in 1862 that greenbacks could not be accepted in state or county taxes, since the state constitution prohibited any acceptance of paper money for taxes.

The state of Oregon was quick to follow California’s lead.

Oregon’s constitution had also outlawed banks of issue, and gold had for years been the exclusive currency. Two weeks after the agreement of the San Francisco merchants, the merchants of Salem, Oregon, unanimously backed gold as the monetary standard and refused to accept greenbacks at par.

Two months later, the leading merchants of Portland agreed to accept greenbacks only at rates current in San Francisco; the 109This experience illustrates a continuing problem in contract law: It is not sufficient for government to allow contracts to be made in gold or gold coin. It is necessary for government to enforce
specific performance
of the contracts so that debtors must pay in the weight or value of the gold (or anything else) required in the contract, and not in some paper-dollar equivalent decided by law or the courts.

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merchants in the rest of the state were quick to follow suit. The Portland merchants issued a circular warning of a blacklist of all customers who insisted on settling their debts in greenbacks, and they would be quickly boycotted, and dealings with them would only be in cash.

Oregon deposit banks also refused to accept greenbacks, and the Oregon legislature followed California a year and a half later in passing a specific performance law. Oregon, too, refused to accept greenbacks in taxes and strengthened the law in 1864

by requiring that “all taxes levied by state, counties, or municipal corporations therein, shall be collected and paid in gold and silver coin of the United States and not otherwise.”110

In the same year, the Oregon Supreme Court followed California in ruling that greenbacks could not constitutionally be received in payment of taxes.

The banking story during the Civil War is greatly complicated by the advent of the national banking system in the latter part of the war. But it is clear that the state banks, being able to suspend specie and to pyramid money and credit on top of the federal greenbacks, profited greatly by being able to expand during this period. Thus, total state bank notes and deposits were $510 million in 1860, and by 1863 rose to $743 million, an increase in state bank demand liabilities in those three years of 15.2 percent per year.111

It is no wonder, then, that contrary to older historical opinion, many state banks were enthusiastic about the greenbacks, 110Cited in Richard A. Lester,
Monetary Experiments
(London: David and Charles Reprints, [1939] 1970), p. 166. On the California and Oregon maintenance of the gold standard in this period, see ibid., pp. 161–71. On California, see Bernard Moses, “Legal Tender Notes in California,” in
Quarterly Journal of Economics
(October 1892): 1–25; and Mitchell,
History
of Greenbacks
, pp. 142–44. On Oregon, see James H. Gilbert,
Trade and
Currency in Early Oregon
(New York: Columbia University Press, 1907), pp. 101–22.

111
Historical Statistics
, pp. 625, 648–49.

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A History of Money and Banking in the United States:
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which provided them with legal tender that could function as a reserve base upon which they could expand. As Hammond puts it, “Instead of being curbed (as some people supposed later), the powers of the banks were augmented by the legal tender issues. As the issues increased, the deposits of the banks would increase.”112 Indeed, Senator Sherman (R-Ohio) noted that the state banks favored greenbacks. And the principal author of the greenback legislation, Representative Elbridge G. Spaulding (R-N.Y.), the chairman of the House Ways and Means subcommittee that introduced the bill, was himself a Buffalo banker.

The total money supply of the country (including gold coin, state bank notes, subsidiary silver, and U.S. currency including fractional and greenbacks) amounted to $745.4 million in 1860. By 1863, the money supply had skyrocketed to $1.435

billion, an increase of 92.5 percent in three years, or 30.8 percent per annum. By the end of the war, the money supply, which now included national bank notes and deposits, totaled $1.773 billion, an increase in two years of 23.6 percent or 11.8

percent per year. Over the entire war, the money supply rose from $45.4 million to $1.773 billion, an increase of 137.9 percent, or 27.69 percent per annum.113

The response to this severe monetary inflation was a massive inflation of prices. It is no wonder that the greenbacks, depreciating rapidly in terms of gold, depreciated in terms of goods as well. Wholesale prices rose from 100 in 1860 to 210.9

112Bray Hammond,
Sovereignty and an Empty Purse: Banks and Politics in
the Civil War
(Princeton, N.J.: Princeton University Press, 1970), pp. 246, 249–50. See also North, “Greenback Dollars,” pp. 143–48.

113
Historical Statistics
, pp. 625, 648–49. In a careful analysis, North estimates the total money supply at approximately $2 billion and also points out that conterfeit notes in the Civil War have been estimated to amount to no less than one-third of the total currency in circulation. North,

“Greenback Dollars,” p. 134. The counterfeiting estimates are in William P. Donlon,
United States Large Size Paper Money, 1861 to 1923,
2nd ed. (Iola, Wis.: Krause, 1970), p. 15.

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Before the Twentieth Century

at the end of the war, a rise of 110.9 percent, or 22.2 percent per year.114

The Republican administration argued that its issue of greenbacks was required by stern wartime “necessity.” The spuriousness of this argument is seen by the fact that greenbacks were virtually not issued after the middle of 1863. There were three alternatives to the issuance of legal tender fiat money. (1) The government could have issued paper money but not made it legal tender; it would have depreciated even more rapidly. At any rate, they would have had quasi–legal tender status by being receivable in federal dues and taxes. (2) It could have increased taxes to pay for the war expenditures.

(3) It could have issued bonds and other securities and sold the debt to banks and non-bank institutions. In fact, the government employed both the latter alternatives, and after 1863

stopped issuing greenbacks and relied on them exclusively, especially a rise in the public debt. The accumulated deficit piled up during the war was $2.614 billion, of which the printing of greenbacks only financed $431.7 million. Of the federal deficits during the war, greenbacks financed 22.8 percent in fiscal 1862, 48.5 percent in 1863, 6.3 percent in 1864, and none in 1865.115 This is particularly striking if we consider that the peak 114Ralph Andreano, ed.,
The Economic Impact of the American Civil War
(Cambridge, Mass.: Schenckman, 1961), p. 178.

115The Confederacy, on the other hand, financed virtually all of its expenditures through mammoth printing of fiat paper, the Southern version of the greenback. Confederate notes, which were first issued in June 1861 at a sum of $1.1 million, skyrocketed until the total supply of Confederate notes in January 1864 was no less than $826.8 million, an increase of 750.6 percent for three and a half years, or 214.5 percent per year. Bank notes and deposits in the Confederacy rose from $119.3 million to $268.1 million in this period, so that the total money supply rose from $120.4 million to $1.095 billion, an increase of 1,060 percent—or 302.9 percent per year. Prices in the eastern Confederacy rose from 100 in early 1861 to over 4,000 in 1864, and to 9,211 at the end of the war in April 1865. Thus, in four years, prices rose by 9,100 percent or an average of
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A History of Money and Banking in the United States:
The Colonial Era to World War II

deficit came in 1865, totaling $963.8 million. All the rest was financed by increased debt. Taxes also increased greatly, revenues rising from $52 million in 1862 to $333.7 million in 1865.

Tax revenues as a percentage of the budget rose from a minis-cule 10.7 percent in fiscal 1862 to over 26 percent in 1864 and 1865.

It is clear, then, that the argument of “necessity” in the printing of greenbacks was specious, and indeed the greenback advocates conceded that it was perfectly possible to issue public debt, provided that the administration was willing to see the prices of its bonds rise and its interest payments rise considerably. At least for most of the war, they were not willing to take their chances in the competitive bond market.116

THE PUBLIC DEBT

AND THE NATIONAL BANKING SYSTEM

The public debt of the Civil War brought into American financial history the important advent of one Jay Cooke. The Ohio-born Cooke had joined the moderately successful Philadelphia investment banking firm of Clark and Dodge as a clerk at the age of 18. In a few years, Cooke worked himself up to the status of junior partner, and, in 1857, he left the firm to branch out on his own in canal and railroad promotion and other business ventures. There he doubtless would have remained, except for the lucky fact that he and his brother Henry, editor of the leading Republican newspaper in Ohio, 2,275 percent per annum. See Eugene M. Lerner, “Inflation in the Confederacy, 1861–65,” in
Studies in the Quantity Theory of Money
, Milton Friedman, ed. (Chicago: University of Chicago Press, 1956), pp. 163–75; and Eugene M. Lerner, “Money, Prices, and Wages in the Confederacy, 1861–65,” in Andreano,
Economic Impact
, pp. 11–40.

116Mitchell,
History of the Greenbacks
, pp. 61–74, 119 f., 128–31. See also Don C. Barrett,
The Greenbacks and Resumption of Specie Payments,
1862–1879
(Cambridge, Mass.: Harvard University Press, 1931), pp. 25–57.

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Before the Twentieth Century

the
Ohio State Journal
, were close friends of U.S. Senator Salmon P. Chase. Chase, a veteran leader of the antislavery movement, fought for and lost the Republican presidential nomination in 1860 to Abraham Lincoln. At that point, the Cookes determined to feather their nest by lobbying to make Salmon Chase secretary of the Treasury. After heavy lobbying by the Cookes, the Chase appointment was secured, so Jay Cooke quickly set up his own investment banking house of Jay Cooke and Company.

Everything was in place; it now remained to seize the opportunity. As the Cookes’ father wrote of Henry: I took up my pen principally to say that H.S.’s [Henry’s]

plan in getting Chase into the Cabinet and [John] Sherman into the Senate is accomplished, and that now is the time for making money, by honest contracts out of the government.117

Now indeed was their time for making money, and Cooke lost no time in doing so. It did not take much persuasion, including wining and dining, for Cooke to induce his friend Chase to take an unprecedented step in the fall of 1862: granting the House of Cooke a monopoly on the underwriting of the public debt. With enormous energy, Cooke hurled himself into the task of persuading the mass of public to buy U.S. government bonds. In doing so, Cooke perhaps invented the art of public relations and of mass propaganda; certainly, he did so in the realm of selling bonds. As Kirkland writes: With characteristic optimism, he [Cooke] flung himself into a bond crusade. He recruited a small army of 2,500 sub-agents among bankers, insurance men, and community leaders and kept them inspired and informed by mail and 117In Henrietta Larson,
Jay Cooke, Private Banker
(Cambridge, Mass: Harvard University Press, 1936), p. 103. See also Edward C. Kirkland,
Industry Comes of Age: Business, Labor and Public Policy, 1860–1897
(New York: Holt, Rinehart and Winston, 1961), p. 20.