The national government lacked even the most rudimentary financial tools in the secession winter of 1860-61. It lacked both a stable currency and supply of credit along with revenue and banking systems. By the time the sixteenth president, Abraham Lincoln, took the oath of office on March 4, 1861, the country was not only on the verge of Civil War but also a financial disaster. The nation’s coffers were almost empty, left in disarray from three decades of Jacksonian fiscal policies, and the government faced a continuing liquidity crisis in light of the demands generated by Civil War expenditures.
Early in his administration, Lincoln recognized that the war’s outcome would be largely determined by resources. Thus, he understood the imperative of raising funds to carry out the war effort. It was against this backdrop that Lincoln appointed Salmon P. Chase to the Treasury, authorizing Chase alone to act on all matters pertaining to the country’s finances. Chase, like most everyone else at the time, underestimated the severity of the War—both its duration and its cost. Just as dangerous, perhaps, Chase overestimated the usefulness of Jackson era financial policies to deal with the crisis.
Upon taking office, Chase “found on hand less than $2,000,000, all of which was appropriated ten times over. He calculated that he needed $320,000,000, as he reported to the Congress that met in July ,” wrote financial historian Bray Hammond. Chase needed credit, revenue, and an increase in the supply of money.
After the fall of Fort Sumter, Lincoln unilaterally began to finance the war effort. Over the months that followed, Chase—with Lincoln’s occasional assistance—would court Congress, encouraging bond sales, higher tariffs, a single national currency, and bank reforms.
Chase biographer Albert Bushnell Hart wrote: “The most important financial measures during the first year were arrangements for new loans, and the actual borrowing of money—both matters in which the brief legislation of Congress was very significant, for there was laid the foundation for large issues of bonds, of interest-bearing notes, and of circulating notes.”
Chase had asked Congress, meeting in special session during in July 1861, to authorize $240 million in loans. Chase was convinced that the government should not sell its securities below par, but there was no market for government securities at par. American financier Jay Cooke became a close advisor to Chase in 1861, suggesting that the Treasury sell bonds directly to the American public, appealing to their patriotism and emotion. Chase, therefore, asked Congress for low-denomination Treasury notes which people could pay for in installments. As described by historian Phillip S. Paludan, the Treasury secretary sought “[t]o encourage their enthusiasm Chase wanted to have these notes earn interest at a penny a day on a $50 note—a higher rate than usually paid by the government. Average Northern citizens would thus link their fortunes to the success of Union arms.”
The Creation of “Greenbacks”
In the final months of 1861, Chase’s plans were undermined by a revolt by New York bankers, gold hoarding, declining bank reserves, military losses, a threatened conflict with Britain, and a lack of confidence in the Union's finances. Economic historian Margaret G. Myers noted that “the Treasury had begun to meet its obligations by issuing its own demand notes, which still further reduced the credit of the government. The bankers who had agreed to loan 150 millions had understood that Chase would not make such issues; Chase claimed that the bankers had discussed and approved his action. James Gallatin, son of the former Secretary of the Treasury [Albert Gallatin] and president of one of the leading banks of New York, protested in vain. He pointed out that, with the continuing drain in specie, it was only a matter of time before specie payments would have to be suspended. When his protests went unheeded, he urged the New York banks to take the step at once, before all their gold was gone. They hesitated for several weeks, but by the end of December their specie reserves had been cut in half and were declining so rapidly that they could no longer maintain the 25 percent reserve ratio against liabilities. They suspended on December 30. Banks in other cities soon followed the lead of New York. The Treasury was therefore deprived of any more income receipts in specie, and it too was obliged to suspend.”
(Resumption was not to occur until 1879 and even then doubts lingered into 1890s about whether the United States would maintain the gold standard.)
Bonds were only one tool that the Lincoln Administration used to finance the war. By December 1861, according to Cooke biographer Ellis Paxson Oberholtzer, Secretary Chase proposed new measures: the issuance of interest-bearing paper money and notes to be discharged through banking associations. The latter measure would become the basis for national banking laws.
On January 29, 1862, Secretary Chase wrote to New York Congressman Elbridge G. Spaulding, chairman of the House Ways and Means subcommittee, summarizing his views on the Legal Tender legislation: “The condition of the treasury certainly needs immediate action on the subject of affording provision for the expenditures of the government, both expedient and necessary. The general provisions of the bill submitted to me seem to me well adapted to the end proposed. There are, however, some points which may, perhaps, be usefully amended.”
On February 4, Chase wrote William Cullen Bryant, editor of the New York Post, and said, "Your feelings of repugnance to the legal tender clause can hardly be greater than my own; but I am convinced that, as a temporary measure, it is indispensably necessary.”
The Union needed money, but it also needed a uniform convertible currency—one which unlike the existing state bank notes was not easily counterfeited and whose value was reliable. Civil War Congressman James G. Blaine observed that this was “the most momentous financial step ever taken by Congress.” Blaine continued: “It was admitted to be a doubtful if not dangerous exercise of power; but the law of necessity overrides all other laws, and asserts its right to govern. All doubts were decided in favor of the nation, in the belief that dangers which were remote and contingent could be more easily dealt with than those which were certain and imminent.”
Union army officer Donn Piatt, later a journalist and writer, claimed:"Of course the idea of issuing money directly by the Government to meet an emergency was as old as the governments themselves. But Amasa Walker, a distinguished financier of New England [and a soon-to-be Massachusetts congressman], had a thought that was new. He suggested that the notes thus issued directly from the Government to the people as currency should bear interest. This for the purpose not only of making the notes popular, but for the purpose of preventing inflation by inducing people to hoard the notes as an investment when the demands of trade failed to call them into circulation as a currency. This idea struck Mr. David Taylor, of Ohio, with such force that he sought Mr. Lincoln and urged him to put the project into immediate execution. The President listened patiently, and at the end said, 'That is a good idea, Taylor, but you must go to Chase. He is running that end of the machine, and has time to consider your proposition."
“Armed with this, the real father of the greenbacks again sought the Secretary. He was received more politely than before, but was cut short in his advocacy of the measure by a proposition for both of them to see the President. They did so, and Mr. Chase made a long and elaborate constitutional argument against the propose measure.”
Chase had a strong antipathy to paper currencies; he favored hard currency backed by precious metals, but yielded to the necessity to issue paper money. Historian Allan Nevins described the necessity: "A dependable currency was desperately needed to pay the soldiers, buy supplies, and keep business active. It seemed to many that the only feasible course was to have the government take bold control, issue its own circulating medium, and give it credit by pronouncing it legal tender for debts. This step would be so unprecedented, so momentous, and so full of risks that many recoiled from it. Secretary Chase, who felt great aversion to making anything but coin a legal tender, was himself reluctant."
(Much later, after Chase became the chief justice of the Supreme Court, he would relent, striking down the very policies—including the Legal Tender legislation—that he advocated as Treasury Secretary.)
Pennsylvania's Thaddeus Stevens was a powerful support in the House, arguing at the end of debate that the bill was one of necessity. Like the Founders, Stevens vehemently articulated the evils of paper money before relenting to support the legislation out of necessity. He said, “No one would willingly issue paper currency not redeemable on demand and make it a legal tender. It is never desirable to depart from that circulating medium which, by the common consent of civilized nations, forms the standard of value. But it is not a fearful measure; and when rendered necessary by exigencies, it ought to produce no alarm.”
On February 6, 1862, the legislation was passed by the House with a vote of 93 in favor and 59 opposed. The bill moved to the Senate where Ohio's John Sherman was its leading champion. President Lincoln signed the legislation on February 25.
The government issued greenbacks in July 1862 and March 1863, both times for $150 million. Historian Walter A. McDougall wrote: "The Union war effort as a whole seemed an improvised potlatch. But the Treasury's issue of unbacked greenbacks to the ultimate sum of $431 million was a gamble that paid off because 'funny money' covered just 16.5 percent of the Union budget compared with 61.7 percent of the Confederate budget." John Steele Gordon wrote that the greenbacks issued constituted "a vast sum by the standards of the time, but it amounted to only about 11 percent of federal spending in those years. And while there was inevitably, a surge of inflation, it was a manageable 75 percent or so."
In the spring of 1862, Cooke's sales force mobilized after Congress authorized the sale of so-called "five-twenties" bonds in the Legal Tender bill. The provision for greenbacks meant there was a relatively reliable national currency to use to buy the new bonds. The government's need for money was insatiable and outran Wall Street's ability to meet the government's needs. Cooke, as he had described to Chase a year earlier, bypassed the bankers, selling directly to the American people. According to Carl Sandburg, “[Cooke’s] drive got under way in the spring of 1863 to sell $500,000,000 of five-twenties, bonds paying six percent interest for twenty years or redeemable in government gold within five years.”
Although the price of gold throughout the Civil War reflected the Union's military success or lack of it, passage of the Legal Tender Act encouraged further speculation in gold. Paul Studenski and Herman Edward Krooss explained that "bad news caused gold to be hoarded and its price in terms of paper to rise, while good news caused gold to be thrown on the market and its price to drop." John Steele Gordon described the gold speculation of the period this way:
"The creation of a second form of money...set off a wild speculative bubble in Wall Street as the value of the greenback in terms of gold gyrated in response to Union victories and defeats. In July, 1863, just before Gettysburg it took fully 287 greenback dollars to buy 100 gold ones. The speculators were called 'General Lee's left wing in Wall Street' in the newspapers, and Lincoln publicly wished that 'every one of them had his devilish head shot off.' But the opprobrium affected their speculations not a bit."
The price of gold remained unstable through 1864 when Secretary Chase intervened in the gold market to curb speculation and stabilize greenback currency.
The Revenue Act and National Banking Act
The war raged on, continuing to demand monies to pay for its exigencies. Tax legislation was signed by President Lincoln on July 1, 1862. Under the Revenue Act, federal employees who received salaries over $600 per year had taxes withheld from their paychecks. Not only did the Revenue Act provide for income tax collection but it also imposed excise taxes on many activities. Historian Walter A. McDougall described the irony between the Revenue Act of 1862 and Shay’s Rebellion which sparked the Revolutionary War. McDougall wrote
"In 1775, Americans had taken up arms to resist a few shillings in taxes imposed from abroad. Now they were asked to swallow theoretically limitless taxes for the purpose of taking up arms against one another. The bill, whose 20,000 words made it the longest to date, itemized imposts on everyone from locomotive manufacturers to circus barkers. It sparked a month of lively debate until Thaddeus Stevens struck the perfect false note. The taxes would so augment Union forces that the South would quit within ninety days, whereupon it would be right and proper 'in accordance with the practice of nation, the dictates of wisdom and of justice, to make the property of the rebels pay the expense of the war which they have so wantonly caused.' Well, that made it an easy vote after all."
Having dealt with the nation's bonds, currency, and taxes, the Administration and Congress finally confronted the need to reform the banking system in 1863. The chief advocate for the banking bill was Senator John Sherman, a strong fiscal conservative who long had believed in limiting government expenditure.
In his Annual Message to Congress of December 1863, President Lincoln stated: "The enactment by Congress of a national banking law has proved a valuable support of the public credit, and the general legislation in relation to loans has fully answered the expectations of its favorers. Some amendments may be required to perfect existing laws, but no change in their principles or general scope is believed to be needed." A year later in December 1864, Lincoln reported: "Changes from State systems to the national system are rapidly taking place, and it is hoped that very soon there will be in the United States no banks of issue not authorized by Congress, and no bank-note circulation not secured by the Government."
The new banking structure was designed to further expand the monetary supply. Financial historian William F. Hixson wrote: "A provision in the National Banking Act that particularly appealed to Secretary Chase and other government officials required the newly chartered national banks to use government bonds as security for the creation of the national currency banknotes. This provision was made a part of the act in order to make it easier to sell government securities by requiring banks to buy them. The act would thus provide assistance to the government in the continued financing and refinancing of its debt.
“[It] emphasized...that the legal tender greenbacks created by the government became an important source of increased reserves for private banks which enabled them to increase the amount of money they created. In other words, the government not only permitted private banks to create money, the government in effect facilitated the process."
Treasury Secretary Chase Resigns
As the war progressed, Chase increasingly disapproved of President Lincoln. Chase believed that he was superior to the president, vying to replace Lincoln as commander in chief. In February 1864, Chase's campaign fell apart precipitously when a letter prepared by his supporters boomeranged. Chase biographer Donnal V. Smith described the circumstances. He said,
"Believing that his political prospects were constantly improving, Chase made his increased criticisms of the Administration and the conduct of the war more pointed than ever before. His constant refrain was that there was no real administration in the true sense of the word; it was recklessly, negligently extravagant; the jealousy of certain members in it prompted them to do all they could to defeat the plans of the Treasury Department, and even to make personal attacks. All this was charged to the ineptitude of the President.”
In embarrassment, the secretary offered his resignation to the president. Lincoln rejected it as he had before. (After his first resignation in December 1862, Chase had written: "I have neither love nor taste for the position I occupy, and have only two great regrets connected with it—one that I ever took it; the other that having resigned it I yielded to the counsels of those who said I must resume it.")
In the months that followed, Chase came into repeated conflict with President Lincoln over patronage. An exchange of notes on June 28 and June 29 ended with Lincoln accepting Chase's resignation on June 30. When he resigned, Secretary Chase maintained that his performance heading the Treasury had been sublime. Writing in his diary on July 1, 1864, he said, "So my official closes. I have laid broad foundations. Nothing but wise legislation—and especially bold yet judicious provision of taxes—with fair economy in [administration] and energetic yet prudent military action (the last of which seems to be evidenced by the position of Grant at the head [of] our armies—oh may he have troops and supplies enough!) seems necessary to ensure complete success."
When Treasury official Lucius Chittenden protested to Lincoln that the impact of Chase's departure might prove "worse than another Bull Run defeat," Lincoln responded that Chase had two bad habits—a feeling of indispensability and a mania for the presidency.
Lincoln then quickly decided that Maine Senator William Pitt Fessenden would be the ideal replacement. Meanwhile, Fessenden went to the White House to recommend the appointment of Hugh McCulloch of Indiana to the post. The Fessenden appointment was a test of wills—which President Lincoln won. Fessenden sought to decline the nomination but was immediately confirmed by the Senate and, inevitably, accepted the position. Lincoln gave Fessenden a free hand on appointments but said "he hoped Mr. Fessenden would not, without a real necessity, remove any friends of Governor Chase."
Fessenden took office in the midst of a Union political campaign when the Union military campaign seemed stalled. Fessenden's daughter and biographer wrote:
"It is difficult to understand the embarrassments and perplexities which surrounded the Treasury when Mr. Fessenden became secretary in July, 1864. The war was still going on. The public debt was over $1,740,000,000. The country was suffering from an inflated currency. In addition to $600,000,000 of irredeemable paper money, the Treasury had issued $161,000,000 of certificates of indebtedness, which were at a discount, thus lowering the value of all government bonds. There were $91,000,000 of suspended requisitions and $17,000,000 in the Treasury to meet them. A loan of $32,000,000 offered by Secretary Chase in June had been withdrawn, as the bids were too low to be accepted. The daily requirements were $3,000,000. The army and navy had not been paid for months. Gold was at 225. The armies of Grant and Sherman were stopped before Richmond and Atlanta for want of money. Mr. George Harrington, the assistant secretary of the department, declared that the condition of the Treasury in July, 1864, was a thousand times worse than under Hamilton or Chase."
After Chase had been replaced by Fessenden, Secretary of the Navy Gideon Welles compared the policies of the Treasury secretaries. On July 26, 1864, he wrote: "Fessenden has got out an advertisement for a new loan and an address to the people in its behalf. … Capitalists will not as a general thing loan or invest for patriotism, but for good returns. The advertisement gives high interest, but accompanied by the appeal will excite doubt, rather than inspire confidence among the money-lenders. I am inclined to think he will get funds, for his plan is sensible and much wiser than anything of his predecessor. The idea with Chase seemed to be to pay low interest in money but high prices in irredeemable paper, a scheme that might have temporary success in getting friends and popularity with speculators but is ruinous to the country. The errors of Chase in this respect Mr. Fessenden seems inclined to correct, but other measures are wanted and I trust we shall have them."
Shortly thereafter, Chief Justice Taney died. Lincoln nominated Chase to the bench, in part to ensure that his Administration's policies were upheld. "In the appointment of Mr. Chase, all holders of government securities in America and Europe felt assured that the financial policy of the government would be sustained by its highest judicial tribunal. In sustaining that policy Judge Chase would only be sustaining himself, for he was the author of it," reported the Baltimore American and Commercial Advertiser in December. Lincoln was wrong; Chase reversed course. In an ironic twist of fate, three of the four cases which collectively became known as The Legal Tender Cases were heard by the once Secretary of the Treasury, Salmon P. Chase, before his death in 1873.
The Final Years of the Civil War
In his last message to Congress in December 1864, President Lincoln stated that "The financial affairs of the government have been successfully administered during the last year. The legislation of the last session of Congress has not yet elapsed to experience the full effect of several of the provisions of the acts of Congress imposing increased taxation."
Several months later, in March 1865, when Hugh McCulloch was appointed Lincoln's third and last secretary of the Treasury, he responded: "Thank you, Mr. President, heartily for this mark of your confidence, and I should be glad to comply with your wishes if I did not distrust my ability to do what will be required of the Secretary of the Treasury in the existing financial condition of the Government." The president replied: "I will be responsible for that."
Treasury Secretary McCulloch observed: "The movements of the armies, the great battles that were fought with varying success on both sides, so absorbed the public attention that comparatively little interest was felt in the measures that were adopted to provide the means to meet the enormous and daily increasing demands upon the treasury. It was the successful general who was the recipient of public honors, not the man by whose agency the sinews of war were supplied; and yet but for the successful administration of the Treasury Department during the war, the Union would have been riven asunder. If I were asked to designate the man whose services, next to Mr. Lincoln's, were of the greatest value to the country, from March, 1861, to July, 1864, I should unhesitatingly name Salmon P. Chase. When Mr. Chase was appointed Secretary, the public credit was lower than that of any other great nation. The treasury was empty. The annual expenditures had for some years exceeded the revenues. To meet the deficiencies, shifts were resorted to which, while they gave present relief to the treasury, increased its embarrassment."
Most important to the outcome of the war, the Union financing of the Civil War was far better and far more diversified than that of the Confederacy. Historian Allan Nevins wrote that the actions taken in support of the economy—"the issuance of bonds, the National Banking Act, the Morrill tariff, the greenbacks issue, and such new revenue measures as the income tax"–acted as "weapons of war." Jay Cooke biographer E. P. Oberholtzer noted that Cooke's success in marketing an $830 million bond issue in 1865 led a Confederate official to say: "The Yankees did not whip us in the field. We were whipped in the Treasury Department."
In his Thanksgiving Day proclamation of 1863—issued six weeks before the Gettysburg Address—President Lincoln summarized the economic consequences of the war: "Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consciousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom. No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People."
President Lincoln maintained his concern over the nation's finances until his death. "We must look to you, Mr. Secretary, for the money to pay off the soldiers," the President told Treasury Secretary McCulloch on April 14, 1865, the day he was assassinated.
Monetary History Highlights