the decision to issue greenbacks -- 1/22/24

Today's encore selection -- from Ways and Means by Roger Lowenstein. In one of the most momentous developments of the Civil War, the U.S. -- which had not had a national currency of any type to that point -- elected to begin printing currency. It was a highly contested decision, and yet that currency, which came to be called “greenbacks,” was a key early part of the successful financing of that war:
"In the desperate winter of 1861-1862, the financial crisis threatened to halt the Union armies. The Treasury was empty; the banks had suspended; the government had no currency. Chase had few ideas, other than a labored program for bank reform. Almost by default, the Republican Congress seized the initiative. The most likely vehicle for financial resuscitation was the House Ways and Means Committee. Ways and Means had two subcommittees. One dealt with revenue, but revenue legislation was unlikely to provide help in the near term. The other subcommittee, on currency, was chaired by Elbridge Spaulding of New York State. Spaulding had been working on Chase's proposal to reform the banks, but when the banks went off gold, Spauld­ing realized there would not be time. He himself was an investor and director in Bank of Attica and the Farmers and Mechanics' Bank, both in Buffalo. In the 1860s, it was not uncommon for representatives to tailor legislation affecting personal investments. Spaulding, who had been a popular Whig mayor before running for Congress, was untrou­bled by any idea of conflict of interest. He simply reckoned that the banking channel was stuck and it was in the public interest -- also in his private interest -- to unstick it. On December 30, 1861, with the Union nearly overwhelmed by fiscal problems, Spaulding reported another bill -- for a government currency.

"In theory, Spaulding could have proposed more of the Treasury demand notes, but as we have seen, the demand notes were refused in some quarters. Spaulding wanted a universally acceptable currency that the Treasury could use to pay for the war. His bill was revolutionary. As if by a conjurer's trick, it authorized the Treasury to print United States Notes to distribute to soldiers, suppliers, and others. The catch was that, unlike virtually every other bill in circulation, Spaulding's notes would not be redeemable for silver or gold. This meant the gov­ernment would not be constrained by the supply of metal; it could print as much as it liked, or at any rate as much as Congress authorized.

"And Spaulding's notes would not pay interest. Today, we scarcely pause to consider that the money in our wallets does not yield a return. After all, it is 'money.' In 1861, virtually all government paper did pay interest. That was the inducement for holding it. Finally, Spaulding's paper would not have a maturity date. This, too, was unusual. A matu­rity date was a pledge that the paper could be exchanged for something of value at a specified time. But these notes would not be redeemable. They were issued for perpetuity.

"To the Civil War mind, these features were both shocking and blasphemous. Several years before the war, a Boston merchant named Sam­uel Hooper had published Currency or Money, a tract that had considered -- and denounced -- such a currency. Hooper did not mince words. 'They [paper bills] are not money,' he wrote disdainfully. 'They are, in fact, only promises to pay money.' The son of a shipper in Mar­blehead, Massachusetts, Hooper had learned finance at a counting­house on State Street in Boston, and then become a prosperous businessman, trading in the Pacific Northwest and China. A savvy appraiser of financial risk, he had written that paper money was no more like the real thing than a contract to deliver flour was flour itself 'Paper money possesses no intrinsic value,' Hooper had patiently explained. 'It has only a derivative or secondary value, founded upon the good credit of those who issue it.'

"What, then, was Spaulding proposing to offer-if not an interest payment and not redemption at a maturity date -- to induce people to take his currency? Spaulding's U.S. Notes would be 'legal tender' ­they would be money by proclamation, that is, by government fiat. They would suffice for all debts and commercial exchanges; acceptance would be compulsory and universal.

"Secretary of the Treasury Chase had also considered legal tender but had rejected it as subversive as well as inflationary. This had also been Hooper's view. When bills cannot be converted to coin, he had written, 'depreciation [inflation] is one of the consequences.' Yet on January 15, 1862, as Chase noted in his diary, he was visited by Hooper, who was now a member of Congress -- and also by Spaulding. Hooper, despite his adamant earlier warning that paper was no more money than it could be flour or bread, 'expressed his decided opinion that the U.S. notes must necessarily be made legal tender.' Evidently, the emergency had changed his mind. Chase promised to consult with Thaddeus Stevens, the Ways and Means Committee chair, but did not commit himself.

"Chase was also conferring with a cabal of big-city bankers, some of whom were as horrified as he was. The bankers feared that the new U.S. Notes would replace the multitudinous private bank notes that were the country's primary currency. They were shocked at the notion of a paper money unhinged from gold. Gold and silver had a market price around the world. As long as the dollar was tied to gold, Ameri­cans could seamlessly trade with other nations. Spaulding's bill would sever the link -- not only to gold but to foreign currencies.

"Over the first few weeks of 1862, the bankers attempted to cobble together a substitute bill -- revolving around their own notes. But the banks' position was weak. Their notes were trading at a discount (in­evitably, since they were no longer backed by coin). On January 20, a Boston banker telegraphed Chase that the effort to confect an alternate solution had collapsed.

"The government had now superseded the banks as the responsible party for issuing currency. Within the government, initiative had shifted from Treasury to the House committee. Spaulding, however, needed Chase's support. When Chase returned the bill to Spaulding, he noted he was 'regretting exceedingly' the legal tender aspect. That fell short of the endorsement Spaulding wanted, nonetheless he re­ported the revised bill to the House.

"Even Spaulding, whose paternal grandfather had served as a captain at Bunker Hill, seemed wary of his bill. He defended it as an accom­modation to war -- 'a measure of necessity, and not of choice.' Yet he challenged his colleagues to act on the emergency: 'Will Congress have the firmness and the courage?' The call to courage also referred to his demand that Congress support the new currency with higher taxes.

U.S. Fractional Currency note first issued during the Civil War

"The legal tender debate was among the most profound of the war. Opponents maintained, and firmly believed, that issuing paper would cause a ruinous inflation. Thus far, inflation in the North had been relatively modest. But legislators were well aware that war currencies had come a cropper in the past, including in America during the Revo­lutionary War and in Britain and France during the Napoleonic era. Congressmen frequently quoted the Founding Fathers; all had been skeptical -- if not dead set against -- paper money. None other than Alexander Hamilton himself had warned:

The emitting of paper money by the authority of Govern­ment is wisely prohibited to the individual States, by the na­tional Constitution. And the spirit of that prohibition ought not to be disregarded, by the Government of the United States.

"But paper was unavoidable. The only practical issue was whether to make the Union's paper legal tender, and thus compel its acceptance. Democrats, the party of Andrew Jackson, with their long suspicion of paper currency, were naturally opposed, but not a few Republicans were troubled as well. Stevens was the most forceful advocate. When a mem­ber objected that if the notes were legal tender they would depreciate, Stevens responded savagely: 'How do gentlemen expect that using the same amount of notes without the legal tender will inflate it less?'

"There was extensive debate over the law's constitutionality. (The Constitution did not explicitly permit, nor did it prohibit, such a cur­rency.) The most heartfelt objections were moral. Legal tender struck many as a fraud -- an attempt to pass off as 'money' what was merely paper. George Pendleton, a Democrat from Ohio, called it a 'shock' to the mind. Most upsetting, people who had contracted a debt under the gold standard would now be able to repay it with paper. Roscoe Conk­ling, an upstate New York Republican, warned that legal tender would proclaim 'a saturnalia of fraud; a carnival of rogues. Every agent, at­torney, treasurer, trustee, every debtor of a fiduciary character, who has received for others money -- hard money ... will forever release himself from liability by buying up, for that knavish purpose, at its depreciated value, the spurious currency we will put afloat.' Supporters promised that this one authorization would be the last, but they were disbelieved. Conkling invoked the French maxim on virtue: it was the first way­ward step that assured the rest. This was not all theatrics. Legislators genuinely feared that legal tender would be a stain on the nation's honor. They feared that if such ignoble paper circulated, gold, as per the fa­mous law of Gresham, would be forever hidden away. Morrill, one of the most powerful Republicans in the House, denounced his party's bill: 'It is of doubtful constitutionality; it is immoral; a breach of the public faith; it will banish all specie from circulation; it will degrade us in the estimation of other nations .... I protest against making anything a legal tender but gold and silver.' The Vermonter, who incidentally was a shareholder in a state bank, dolefully predicted that within sixty days, the government would seek to authorize more.

"Morrill's fear was not unreasonable. The bill authorized only $150 million of notes: At the present rate of federal spending, nearly $2 mil­lion a day, such a sum would be exhausted by spring. But the bill also authorized $500 million of twenty-year bonds. The Republican spon­sors maintained that people would use the legal tender notes to pur­chase the bonds. In such a way, the notes would be returned to the Treasury, which could then reissue them. In effect, the legal tender notes would serve as a conduit to funnel public capital into long-term bonds, which would finance the war.

"There was something defensive about this theory -- as if even the sponsors doubted that people would carry notes yielding 0 percent rather than bonds yielding 6 percent. Even Stevens allowed that, but for the war emergency, he would never willingly abandon 'that circulating medium which, by the common consent of civilized nations, forms the standard of value.'

"Grievously for the bill, Chase had deep reservations regarding the probity of legal tender. He also had constitutional worries, although Lincoln may have mollified those. According to one visitor, the Presi­dent said, 'Go back to Chase and tell him not to bother himself about the Constitution. Say that I have that sacred instrument here at the White House, and I am guarding it with great care.' The comment was probably apocryphal. Although Lincoln was willing to adapt the Con­stitution to his purposes, he was not cavalier about it. What we know is that since his apprenticeship as a legislator, the President had supported liberal banking and currency arrangements." 



Roger Lowenstein


Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War


Penguin Press


Copyright 2022 by Roger Lowenstein


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