NEW BOOK: WAYS AND MEANS

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V25 2022 INDEX E-SYLUM ARCHIVE

The E-Sylum: Volume 25, Number 10, March 6, 2022, Article 5

Last week I almost published a Wall Street Journal review of a new book by Roger Lowenstein on the financing of the U.S. Civil War. I decided not to because the review of Ways and Means had nothing to say about the numismatics of the war. But in a new article this week, an excerpt from the book, Lowenstein discusses the creation of Greenbacks - "How Paper Money Saved the Union." Here's an excerpt. -Editor

Early in the Civil War, a New York congressman named Elbridge Spaulding had a terrible thought. What if the government were to print pieces of paper and call them money? Paper bills existed, of course, issued by scores of private banks. But they were only IOUs; they had no legal standing. As such, merchants and others could refuse them or mark them down.

Spaulding meant for his paper to be legal tender—valid for all debts and obligations, like gold and silver. It would be paper that none could refuse. This would give the Lincoln government what it desperately needed even more than troops—a currency to pay for the war.

The idea was shocking to his contemporaries. The U.S. had issued Treasury notes, but unlike those, Spaulding's notes would not pay interest and would not have a maturity date. Today, we scarcely think of the fact that the bills in our wallet do not pay interest—after all, they are money. In 1861, referring to paper as money was a blasphemy.

The ensuing debate was profound. The Civil War money printers (unlike some central bankers today) agonized over the potential for inflation. They also feared that paper money would jeopardize America's moral standing. William Fessenden of Maine, the powerful chair of the Senate Finance Committee, said the proposal shocks all my notions of political, moral and national honor. Spaulding himself defended his bill as a measure of necessity, and not of choice.

The heated question before Congress was: Should the new paper circulate voluntarily, or should it be compulsory for all debts and obligations? Chase, who had an inflated sense of his moral authority, told Spaulding he was regretting exceedingly the legal tender designation. Without the Secretary's endorsement, the bill had no chance.

However, the cost of the war was approaching $2 million per day (nine times the prewar budget). Soldiers and suppliers were going unpaid. Faced with possible bankruptcy, Chase flipped and demanded immediate action on legal tender.

Even with Chase on board—and even as thousands of their sons were being slaughtered—legislators were greatly troubled. Objection came from both parties. Rep. George Pendleton, an Ohio Democrat, said legal tender was a shock to the mind. Most upsetting, people who had contracted a debt in gold would be able to repay it in paper.

Support was greater in the West, where money was scarcer and farmers reflexively favored easier credit. One Westerner who supported the bill was President Lincoln, who looked past constitutional qualms to the plain necessity. As he said to the quartermaster general, Montgomery Meigs, Chase has no money…The bottom is out of the tub.

Business interests supported the bill, reckoning that the new paper would stimulate commerce.

The new money was instantly popular among soldiers, civilians and merchants. To the dismay of Jefferson Davis, greenbacks, as they came to be called, penetrated deep into Dixie, an early warning sign that the Confederacy was in trouble. A bill for Confederate legal tender was introduced in Richmond, but the rebel Congress was disinclined to so expand the powers of the central State.

Northern traders initially valued greenbacks at 2% less than the equivalent in gold, a discount that widened (at times drastically) according to the ebb and flow of Union armies. As opponents forecast, Congress returned for a second issue of $150 million in 1862, and a third in 1863. By then, inflation was escalating and the Republicans stopped authorizing more.

Wartime inflation totaled 80%, a serious hardship, but never close to the runaway inflation of 9,000% in the Confederacy. The Union's relative success owed much to Congress's decision to enact comprehensive federal taxes rather than, as in the South, relying almost exclusively on the printing press. Legal tender gave the country a trusted currency and kept the government afloat at a dire moment. In his memoirs, Sen. John Sherman called the Legal Tender Act the turning point.

After the war, greenbacks were eventually retired, and the nation returned to gold. But the Civil War experience proved to be a foretaste of modern monetary policy. The gold standard was abridged during the Great Depression, and in 1971, President Nixon cut the gold link for good. Since then, the dollar has been fiat money, backed only by faith in the U.S.