Financial History 145 Spring 2023 - Page 31

Abraham Lincoln Thomas Riggs Henry Whipple
An interesting financial issue at the very heart of those events in Minnesota in 1862 is seldom discussed , and it looks to have been a precipitating factor : namely , the gold standard of money and the precarious state of US government finances .
Financial historians regard the Civil War as an important event in US financial history for reasons that escape most other historians . Lincoln ’ s government was the first to issue paper currency and US Treasury notes and bonds that were not exchangeable for gold . Such historians like to trace the effects of these changes wrought by the Civil War into many other financial matters , but their gaze seldom wanders too far from the corner of Broad and Wall Streets in Lower Manhattan .
The history of attempts to issue paper currency is littered with failures : from the 18th century South Sea bubble to the hyperinflations of the present century in Zimbabwe and Venezuela . The temptation is always strong to print more of the stuff than is prudent : to pay soldiers , to build palaces , etc . The result is often rampant “ inflation ”— or , more pointedly , devaluation — of the paper currency .
Currencies that have held their value for centuries , such as the old British pound sterling and the Swiss franc , have had a common feature : they were exchangeable for gold . There is nothing special about gold as such , but its beauty , rarity and extreme density make it easy to store
and difficult to counterfeit , features that appealed to bankers centuries ago . Such gold-backed currencies , therefore , have an intrinsic value , while the gold backing prevents the government issuing such currency from printing more of it than it has gold to exchange for it .
The US dollar in 1860 was considered such a currency . A person in possession of $ 20.67 of US currency could , at his / her option , go down to a certain government office or a certain bank and exchange the $ 20.67 in currency for precisely one troy ounce of gold . As a result , the price of a pair of good quality boots in 1860 was basically the same as it had been in 1790 , when the US Treasury began operations . The US dollar was said to be a “ sound ” currency .
The Civil War changed all of this . In early July 1861 , when President Lincoln asked the US Congress for $ 400 million to combat what he then called an “ insurrection ” in the states of the Confederacy , the US government did not have the gold to back it . The Union was in danger of dissolution , of course , and the fact that there wasn ’ t the gold to continue to issue gold-backed money to pay for the war was a somewhat minor point to the politicians in Washington , DC .
It took a few months for the government to fully realize the implications of this fact . Shortly after President Lincoln got his authorization of money from Congress on
July 5 , 1861 , the US government issued $ 50 million in debt notes , payable — as usual — on demand and , at the holder ’ s option , in either paper currency or in gold .
The folks working at the Treasury Department were the first to perceive the government ’ s looming financial problem . On the outflow side of things , Treasury Secretary Salmon Chase observed in October 1861 that “ the expenditures everywhere are frightful .” On the other side of the ledger , one veteran Treasury official recalled that although tariffs — the main source of federal revenue in those days — could be paid either with Treasury notes or with gold , tariff payers in late 1861 began paying almost exclusively with notes . “ There were demand notes out to the amount of 60 millions of dollars ,” he recalled , “ and as these were receivable at the Custom-House the same as gold , and did not command so high a premium , duties on imports were almost exclusively paid in them , and little or no specie [ i . e ., gold ] was received .”
Gold was fleeing the government coffers .
The investing public took a little longer to adjust to the government ’ s fiscal problems . Confidence in the federal government ’ s finances was pinned on the hope of a quick Union victory , but the Union defeats at the first Battle of Bull Run and at Wilson ’ s Creek in late summer 1861 began to shake that confidence . The state-chartered banks , initially willing to buy federal
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