Fateful Lightning: A New History of the Civil War & Reconstruction (41 page)

The discretion cabinet secretaries had in making patronage appointments (in these days before a professional civil service) was “enormous, so enormous that when not discreetly dispensed, it tears a party to pieces.” That was a development Lincoln stopped cold in its tracks. Salmon Chase was indignant to discover that, in his role as secretary of the Treasury, Lincoln regarded him as no more than an extension of the presidential will. “We… are called members of the Cabinet,” Chase raged in disappointment, “but are in reality only separate heads of departments, meeting now and then for talk on whatever happens to come uppermost, not for grave consultation on matters concerning the salvation of the country.” But it gave no end of amusement to John Hay, who wrote in 1863 that Lincoln “sits here and wields like a backwoods
Jupiter the bolts of war and the machinery of government with a hand equally steady & equally firm.”
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Lincoln might not have been able to deal so independently had he not enjoyed substantial Republican majorities in both the 37th Congress (elected with him in 1860) and the 38th Congress (elected in 1862). As it was, Republicans on Capitol Hill turned the Civil War Congresses into an engine of legislative activity: House resolutions and congressional joint resolutions alone more than doubled during the war. Most of them emerged from a plethora of new House and Senate committees organized by the Republicans in 1861 to investigate disloyalty, war contracts, the New York City Customs House, and so on; still more were produced by the powerful Republican Party caucus, where the most radical measures on emancipation, confiscation of Southern property, and postwar reconstruction were hatched.
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Lincoln would need those majorities particularly for handling the needs of war finance and the impact the war would have on the Northern economy. From the first call for volunteers, it was clear that some way had to be found to harness the North’s unquestioned industrial and financial superiority to the task of winning the war. Lincoln professed to have no expertise in finance. “Money,” remarked Lincoln, when Treasury Secretary Chase brought a group of New York bankers to the White House to discuss war finance, “I don’t know anything about ‘
money
.’ I never had enough of my own to fret me, and I have no opinion about it any way.” In truth, Lincoln had been interested in fiscal issues as far back as his days in the Illinois legislature, when he had been the point man for the Illinois state bank, and he had been bitterly critical of the Democrats’ national financial policies all through the 1840s. “Finance will rule the country for the next fifty years,” Lincoln predicted to William Pitt Kellogg, and with that in mind, he wanted “the Capital of the country to become interested in the sustaining of the national credit.” He “had taken an especial interest” in Chase’s financial strategy, and “Mr. C. had frequently consulted him in regard to it.”
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It was actually not Lincoln but Chase who lacked experience in “money.” Chase was a onetime Democrat who had thrown his allegiance to the Republicans over slavery and Kansas-Nebraska, and he had never fit comfortably with the Whigs or the Whiggish economic views that abounded in the new party. Chase was skeptical on tariffs, hesitant about the virtues of federally financed “internal improvements,”
and so resolutely set against banks that in 1853 he had supported a restructuring of the Treasury to prevent the Treasury from borrowing money (Congress should exercise the sole right to authorize borrowing), setting interest rates on Treasury securities, or using commercial bank accounts for government payables or receivables. He opposed “a mere paper money system of currency,” had railed “against the frauds and undue expansions of banks and their suspensions of payment on their issues and deposits,” and had criticized tariffs “in favor of free trade.”
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Now he was in charge of them all.

Of course, part of the rationale for appointing Chase as secretary of the Treasury was precisely that he was a former Democrat and so could assuage the fears of other Democrats for the nation’s fiscal policy. Still, that did nothing to ease the pains of Chase’s distaste for such responsibilities, or the flimsy structures of government finance that he inherited from his erstwhile Democratic friends. The nation’s financial and banking system was in 1861 still very largely what Andrew Jackson and the Democrats had made it in the 1830s. Suspicious of the market revolution and of finance capitalism, Jackson demolished the federally sponsored Bank of the United States, and the Treasury became little more than a warehouse for government cash and customs receipts. This meant that banking became a matter for individual state governments to charter, which each state did mostly by its own lights. Jackson also took the added precaution of restricting all federal government monetary transactions to specie (which the Democrats regarded as the only real money), so the Treasury would neither accept paper money for itself nor print its own. No such restriction applied to the state-chartered banks, and so by 1861 the American economy was riding on a crazy quilt of banknotes and bonds issued by more than 5,000 state-chartered institutions (including canal companies). No merchant could do business without publications like
Day’s New-York Bank Note List, Counterfeit Detector and Price Current, Bicknell’s Reporter, Counterfeit Detector, and Philadelphia Prices Current
, or the
Cincinnati Price Current
to learn which banknotes were worth the value printed on their faces, which had to be discounted, and which were no longer anything more than paper.
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The great virtue of this system in Democratic eyes was that it kept economic power dispersed and ensured that the national government would remain small and fiscally weak. However, whatever that might have meant as an asset in peacetime politics, it became another matter entirely in war. Northern banks that had acted as the South’s financial brokers for decades often had nothing more than Southern
banknotes and bonds in their vaults as backing for their own accounts and banknotes, and with the secession of the Southern states, Northern bankers suddenly found that they no longer had any guarantee that Southerners would stand by those notes and bonds, or redeem them for specie. Southern bond prices in New York City plummeted like dead pigeons; of the 913 mercantile and banking firms in New York at the beginning of 1861, only 16 were still in business by year’s end. At the same time, as secession loomed larger and larger on the horizon, confidence in U.S. bonds and notes spiraled downward; by December 1860 the Treasury had to offer interest rates as high as 12 percent to sell its notes, and U.S. 6 percent bonds could only be sold at a steep 11 percent discount.

The unlooked-for blessing in this disaster was that the collapse of Southern bonds and notes wiped out any fiscal leverage the Confederates might have had on the Northern financial markets in 1861, something that was made worse by the Confederate decision to sequester loans owed by Southerners to Northern finance for the duration of the war. Northern businessmen who might otherwise have hesitated to support Lincoln in making what amounted to war on their investments now swung behind the war as the only hope of reclaiming what the Southerners owed them. At the same time, European financiers who had invested in American bonds and notes now hurriedly unloaded them for whatever they could get on the open market, thus telescoping American foreign indebtedness and leaving American businesses with more unobligated gold in their reserves than they had expected.
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All of this was a voyage of discovery for Chase, and notwithstanding Lincoln’s confidence that Chase could learn his way around fiscal matters, it took Chase time to figure out what was happening, how much money he would have to get to pay for the war, and where (and in what form) he was going to get it. At the very beginning, Chase greatly underestimated the amount of money needed to fund the war (he thought $320 million ought to do the job), and he was reluctant to ask Congress to raise more than a quarter of it by taxation, which in Democratic eyes was the unpardonable political sin. But Chase soon found that the war was costing the federal government $1 million a day, and by the end of 1861 he could foresee the price tag on the war hitting $350 million just to get to the end of the fiscal year in June 1862. As the war’s bills multiplied, the enthusiasm of bankers and investors for government securities cooled, and Chase did not help matters by irritably questioning their patriotism. As he did so, Chase found himself in the peculiarly un-Democratic posture of supporting Republican senator John Sherman’s Omnibus Revenue Act in August 1861, which allowed the levying of a direct income tax
and the issue of $150 million in short-term Treasury notes and another $100 million in long-term bonds.
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The old Democratic insistence that Treasury transactions be made only in gold hobbled the sale of these notes, and what was actually raised from the marketing of these securities turned out to be hopelessly inadequate. By February 1862 all the proceeds had been spent, and a further issue of bonds and notes would be taken by the financial markets as a confession of desperation. At this point Congress stepped in with its own measures for war finance, on February 25, 1862, passing the Legal Tender Act, which authorized Chase to print $150 million in paper money to pay government debts. The issue of paper money was a particularly difficult pill for Chase to swallow, since Jacksonian economics confidently predicted that the use of notes, bonds, and especially unsecured paper money rather than specie would destroy public confidence in the economy, feed financial speculation on the money markets, and send prices through the roof. In fact, successive issues of another $300 million of legal tender notes (or “greenbacks,” from the green ink used to print their reverse sides) helped to inflate prices in the North by almost 80 percent during the war. Chase had little choice, however: “It is true that I came with reluctance to the conclusion that the legal-tender clause is a necessity,” he admitted, “but I came to it decidedly and I support it earnestly. The Treasury is nearly empty. … You will see the necessity of urging the bill through without more delay.”
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In July, at the prompting of Thaddeus Stevens as chair of the House Ways and Means Committee, Congress carefully propped up the Treasury’s paper issues with the Internal Revenue Act of 1862, which used a graduated income tax to bring in $600 million in new revenue and take the inflationary steam out of the greenbacks. In fact, Congress eventually began to take its financial cues more from Stevens (a longtime Whig) than Chase, and at Stevens’s prodding Congress took another step away from the era of Jacksonian finance in 1863 when it passed the National Banking Act. The act resurrected the issuance of federal charters for banks, which had been killed when Jackson destroyed Nicholas Biddle’s Second Bank of the United States in the 1830s, and created a national banking system, which effectively turned private banks into depositories and receivers for federal funds. The new national banking system adopted greenbacks as their national banknotes, and Congress drove the old state banknote issues permanently out of existence by slapping a ruinous 10 percent tax on their use.
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For long-term borrowing, Chase wisely and conveniently washed his hands of the un-Jacksonian chore of hawking government securities through the Treasury by designating a fellow Ohioan, Jay Cooke, as the Treasury’s bond agent. Cooke, a natural-born financier, had made his fortune in banking before retiring at the tender age of thirty-seven, and in 1861 Chase had actually offered him the post of assistant secretary of the Treasury. Cooke preferred a free hand, and in July 1861 he countered Chase’s offer with an ambitious proposal for funding the war through the sale of a new and complicated series of government securities. With Chase’s hesitant approval, Cooke opened a Washington office at 452 15th Street, across from the Treasury building, and oversaw the issuing of a bewildering variety of government bonds and notes, carrying variable interest rates over varying terms. In October 1862 Chase made Cooke the Treasury’s general subscription agent for selling bonds across the country.

The most popular of these securities was the “5-20” bond (rather like modern federal savings bonds, these were discounted bonds that were redeemable after a minimum of five years but came to full maturity in twenty years), and through his network of 2,500 subagents Cooke was able to sell $362 million of them in their first year of offering. Not only were the redemption dates reasonable and the minimum purchase low (anyone with $50 could purchase 5-20s with interest rates as high as 7.5 percent), but the direct taxes enacted by Congress assured investors that the Treasury would have the money in hand to redeem the bonds at time of maturity. “Talk not of Taxes!” announced one bond sale circular, “they
secure
the Loans. Take the Loans! and the Taxes will fall more lightly—and they supply the ready,
present
and
required
means to strike the death blow at rebellion and the foul disturbers of the Nation’s peace!”

By skillfully juggling the dynamic of notes, bonds, paper money and taxation, Chase, Cooke, and Congress succeeded in raising the money needed for the war without sapping the Northern economy. They also hooked the nation’s private finance capital to the interests of the federal government, for as private investors bought the new securities, they were also buying an interest in the success of the North in the war (after all, if Lincoln and Chase failed, investors would probably never recover their investments). In return, as the federal government inched toward victory, Northern financiers such as Cooke, J. Pierpont Morgan, and A. J. Drexel found themselves mounting a rising tide of financial power and experience. Over the 1860s, the number of New York City banking houses would leap from 167 in 1864 to 1,800 in 1870, and the New York Stock Exchange would open its own building in 1863. The war would thus produce a temporary transfer of the nation’s private capital into government hands (the nightmare of the old Jacksonians) and the rise of a new class of American financiers who brokered this transfer.
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