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Financial Crisis President Lincoln Faced in 1862
06-04-2023, 12:01 AM (This post was last modified: 06-04-2023 12:03 AM by David Lockmiller.)
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Financial Crisis President Lincoln Faced in 1862
Guest Essay: New York Times - May 23, 2023 (with historical editing)
By Roger Lowenstein, author of “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War.”

The Civil War Congress faced a choice. President Abraham Lincoln and Republicans in Congress recognized that preserving America’s credit was the key to financing the Civil War.

Importantly, in early 1862, it became clear that the war would be longer (and bloodier) than expected, its cost quickly surged to $1 million and then $2 million a day — a level that would exhaust the government’s annual revenue base in only a month.

The only seeming solution was to borrow, but America’s credit was not held in high regard. The United States had recently agreed to 12 percent interest (a high rate that was an expression of investor mistrust), and even at that rate, offers of loans were scarce.

In 1861, Lincoln’s Treasury secretary, Salmon P. Chase, dispatched an emissary to England and continental Europe to scope out interest in loans; the response was poor. The Economist smugly reported, “It is utterly out of the question, in our judgment, that the Americans can obtain, either at home or in Europe, any thing like the extravagant sums they are asking, for Europe won’t lend them; America cannot.”

[I]n December of that year, when America’s banks, (which had been supporting the war over its first months), ran out of gold to lend to the Treasury, . . . Congress proposed a revolutionary expedient: “legal tender”— paper money — supported only by the full faith and credit of the U.S. government, not by gold. It would be money by government fiat, standard today but novel in 1862.

The notion of a paper money standard was shocking, including to many Republicans in Congress. As one had put it, paper could not be money any more than a contract to deliver flour was flour itself; it was only a promise to deliver the real thing.

The Treasury was running out of cash. Congress nonetheless recognized that most of the war’s expenses would have to come from borrowing. Had the country simply printed money to cover the entire budget, it would have risked a ruinous inflation, as would indeed occur in the Confederacy. Therefore, Congress limited the issue of legal tender paper notes to $150 million. (Later it authorized two more issues.)

But it still faced a dilemma: How to print legal tender and preserve the nation’s fragile credit?

William Pitt Fessenden, a Maine Republican and the chairman of the Senate Finance Committee, was shocked by the idea of paper money (he claimed it “tormented” him night and day) and grievously worried about its effect on the country’s ability to borrow, especially overseas. He proposed a radical amendment. In the original bill, legal tender would be lawful “in payment of all debts”; as amended, government debts, and only they, would be payable in gold.

But the Treasury needed the money. The legal tender bill passed and was signed by Lincoln — with the amendment — and the government’s financial crisis, at least for the moment, subsided. Troops were happy to get the new greenbacks, as they were called, and so were merchants and others.

Fessenden’s amendment was critical to winning the war. Although inflation in greenbacks was serious, ultimately about 80 percent, the United States had surprisingly little trouble borrowing money, because bondholders (many of them overseas) knew that interest payments would be in specie.

The public debt climbed to $2.68 billion by the end of the war — 41 times its level at the onset of Southern secession. Yet the United States emerged with its credit improved at home and abroad, able to borrow more and at lower interest rates.

A Confederate leader ruefully concluded, “The Yankees did not whip us in the field. We were whipped in the Treasury Department.”

After the war, the 14th Amendment to the Constitution (stipulating that the validity of the public debt of the United States “shall not be questioned”) implicitly treated the debt as sacrosanct.

"So very difficult a matter is it to trace and find out the truth of anything by history." -- Plutarch
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