Chapter Seven THE CIVIL WAR The public debt in 1860 totaled $64.8 million and was close to the Federal government's annual budget of $63.1 million. This quantity of money would appear insignificant compared to the amount the national government would owe at the end of the War Between the States. At the outset, it was believed by many in the government that the war would be of very short duration. The greater resources of the northern states were expected to overpower the southern states in rebellion. As the war continued, however, the Federal government was forced to completely overhaul its financial organization. Treasury Secretary Salmon P. Chase The nation began to march towards war with the election of Abraham Lincoln as President in 1861. Moreover, the new administration was starting office with the treasury virtually empty. Among Lincoln's first appointments was that of Salmon P. Chase as Secretary of the Treasury. Chase was a "hard money" advocate and an adherent of the principle of the Independent Treasury. Congress met in July 1861 to consider ways of financing the war, which Chase estimated would amount to $318,519,581.87 during the coming year. He proposed that $80 million be raised by taxes, mainly through an increase in tariffs, and the rest be borrowed. In formulating this plan, Chase was reverting to Gallatin's old view that the government should use current revenue to pay for its normal operations and interest, and borrow whatever was needed to pay for the war. 1 Division of Loans in Treasury On July 16, 1861, Congress authorized $250 million in loans in a variety of forms, which carried interest in the 7 percent range. It 1 Studenski and Kroos, Financial History, U.S., 137-156. also allowed the issuance of non-interest bearing Treasury notes to be used to pay government salaries and to be deemed acceptable in payment of money owed the government. A Division of Loans was created in the Office of the Secretary to perform certain administrative debt management functions. Chase then negotiated loans of $150 million with a group of major banks in the latter half of 1861. However, at the time, the banks had only $63 million in hard currency available, and were afraid that a transfer of a large portion of that supply would shake public confidence in their ability to redeem their own notes. They wanted the government to keep its proceeds from the loan in the banks until the banks could resell their holdings of government bonds to the public for additional amounts of hard money. Chase disconcerted them though, by insisting upon full payment in hard currency to be kept by the Treasury. As the banks could not accommodate this demand, a compromise was reached. Chase permitted the banks to have the extra time needed until sales of government securities could replenish their gold supplies. However, the military losses suffered by the Federal government early in the war made it difficult for the government to sell its securities as quickly as the funds were needed. Meanwhile, Chase had to revise his estimate of expenditures for the first year of the war upward to $532 million. At the same time, his assessment of anticipated revenues, was amended downward to $55 million. Finally, payment in specie had to be suspended indefinitely, as the banking system no longer had sufficient gold reserves to honor its notes. Legal Tender Act Congress, with Chase's support, passed the Legal Tender Act on February 25, 1862. This act authorized the Treasury to issue $150 million in United States notes and authorized the sale of up to $500 million in 6 percent bonds. The Treasury notes, which eventually were referred to as greenbacks, were declared legal tender for the payment of all public and private debts, even though they were not backed by gold. This was the first paper money issued by the Federal government. The next year, Congress authorized the issuance of an additional $300 million in greenbacks, a necessary measure since the government was spending $1 million a day. As might be expected, the value of the greenbacks declined over the course of the war. Gold prices nearly doubled in terms of paper money by the end of the war, and the cost of living rose by 50 percent. Although the issuance of paper money added to the inflation, the rapid increase of government demand for goods and services was also a contributing factor. As the government's finances were stretched, Congress turned to increased taxes to help pay for the war. Congress passed a comprehensive tax act on July 1, 1862, designed to raise $150 million. The act included internal taxes such as an excise tax on spirits and tobacco, specific taxes on manufactured goods, stamp taxes, and income and inheritance taxes. By 1865 these taxes were contributing over $200 million to the northern cause. The Office of Tax Commissioner, which had been established in 1861, was superseded by a Commissioner of Internal Revenue. 2 Since even these taxes were inadequate to raise the necessary funds to fight the war, a continued reliance on borrowing was inescapable. Chase's view on public finance, which was a portent of the Savings Bond program, called for "the general distribution of the debt into the hands of the greatest possible number of holders. . . ." 3 Chase justified this view on the grounds of loyalty and fairness. As he summed up the case, "every holder of a note or bond, from a five cent fractional note to a five thousand dollar bond, has a direct interest in the security of national institutions and in the stability of national administration." 4 Chase further held that it was another advantage of a wide distribution of the debt that its burdens on the economy would be diminished if the receivers of interest were also those who paid the taxes that supported interest payments. Chase began executing this approach to borrowing by employing "a large number of agents in many places, and directing their action from the Department." 5 The plan was initially very effective, but soon became inadequate to raise the amount of money the government needed. 6 As a result Treasury's inability to market its securities to the general public, Chase negotiated a deal in October 1862 with the 2 Studenski and Kroos, Financial History, U.S., 137–156. 3 Secretary, Annual Report, 1863, 13-16. 4 IBID. 5 IBID. 6 IBID. banking house of Jay Cooke. Cooke was to be paid 0.5 percent on the first $10 million and 0.375 percent on the balance for his efforts in selling the bonds. Calling himself "General Subscription Agent of the Government Loan," Cooke began a sales campaign that employed 2,500 salesmen who sold bonds in denominations of $50 and up. By January 1864 this approach had produced sales of $362 million. Despite Cooke's claim that after expenses, he had only made $220,000 on the deal, public opinion had it that he had profited too greatly, so Chase was forced to end the arrangement. Later on, William P. Fessenden, Chase's successor as Secretary of the Treasury, was forced to use Cooke's services again to arrange the sale of $700 million in notes, this time at an even higher rate of commission of 0.75 percent on the first $50 million and 0.625 percent on the remainder. National Bank Act The war eventually forced the government into making some reforms in its financial operations. It was finally realized that a national banking system was needed to handle the many transactions of the Treasury. Therefore, in February 1863, Congress passed the National Bank Act, which permitted the charter of national banks. Many state banks refused to become nationally chartered, however, until Congress passed a series of amendments, including several increasingly harsh impositions of a tax on notes issued by state-chartered banks. By October 1866, 1,644 banks had received a national charter. 7 Register's Problems With Security As might be expected, the increased activity in Treasury operations caused a need for more employees. Consequently, all Secretaries of the Treasury during the war continually lobbied Congress for appropriations to hire more clerks and to raise the pay of all employees. One incident reported by Fessenden highlights the problems that were caused by this burden of work and also indicates the environment within which the work of handling securities took place. On June 5, 1864, C.P. Bailey, chief clerk and superintendent 7 Studenski and Kroos, Financial History, U.S., 137-156. |