Currency as Debt: A New Theory of Money
Understanding Money—Debt-Money Systems
Part 7 of 9
 

Honest intentions proved impossible to keep. Just five months after passing the first bill, on July 11, 1862, a further emission of United States notes raised the total to $300 million. Professor Sumner would later write that “a man might as well jump off a precipice intending to stop half way down.”[25]

Lincoln gave credit for the idea to a Colonel Dick Taylor and in a letter to him said, “…But we finally accomplished it and gave to the people of this Republic the greatest blessing they ever had—their own paper to pay their own debts.”[26]

The idea was simple. If the government’s credit was good enough to borrow the private irredeemable bank notes from New York bankers, why not print legal tender United States notes and borrow wealth directly from a patriotic citizenry? With Congress’s authorization the Treasury printed and spent into circulation United States notes denominated in dollars; it did not print dollars. People called them ‘greenbacks’ because they were printed with green ink on the back. The government would pay for the war by eventually accepting the greenbacks for taxes or buying them back with gold or silver coin.

Congressional opponents of the measure managed to have the legal tender greenbacks issued as ‘demand’ notes, implying that the Treasury would pay the note’s face amount in specie to its holder on demand. Furthermore, at the insistence of the bankers who hurried to Washington to lobby Congress, the legal tender character of the notes was restricted. They could not be used by the government to pay interest on the public debt, meaning the money borrowed from the banks, nor by the public for duties on imports. These payments were to be made in gold.

“The provision that the interest on government bonds could not be paid with the notes, but that the bond itself could be paid with them may seem a strange compromise—strange, that is, until it is remembered that the government was paying the interest annually while payment of the bonds was some years away. The financiers through their influence in the Senate could change this concession before payment on the bonds was due.” And they did.[27]

The limitations printed on the greenbacks proved to the public that they were not as good as gold and silver coin or even as good as the more familiar privately issued bank notes. Due to these limitations, the large volume of United States notes issued (a total of over $400 million) and the fact that they were redundant with over $250 million in gold previously in circulation, greenbacks were inflationary. Against the greenback dollar, gold traded at only a 3 percent premium in January of 1862. By the end of the following January it was at 60 percent and at the end of February at 72 percent, its high point for 1863.[28]

Gold’s highest premium during the war, 185 percent, occurred on July 11, 1864 after the sudden retirement of Secretary Chase in the midst of the country’s worst financial troubles. Still, the value of the greenback dollar never dropped below 35 cents, a far better performance than the paper currency of the Revolutionary War. Loyal Americans customarily supported it, denouncing gold speculators as traitors, Copperheads, and Southern sympathizers.[29]

Several times during the crisis the actions of one man saved the nation from its precarious monetary position. This little known and most unlikely hero was Jay Cooke, a public-spirited Philadelphia banker and financial genius. In the early days of the war he helped Secretary Chase obtain loans from the Associated Banks. Later he helped with the sale of government war bonds, some of which were sold below par over Cooke’s objections. Based on Cooke’s early successes and because he wanted the job, Chase appointed him the national Subscription Agent for the sale of the five-twenties.

Cooke used the services of 2,500 subagents across the nation. He launched a sales campaign the likes of which had never been seen before and would not be duplicated again until World War II. Of the $189 million in war bonds sold by the end of June 1863, he sold three-fourths of them. The rest were sold, primarily due to Cooke’s advertising, by the Treasury or through the various sub-treasuries. All sold at par with the greenbacks.

Critics then and now belittle Jay Cooke, claiming that he made a fortune from the Civil War. Not true. He did make commissions on the sale of war bonds, but he was already rich. The amount of his commissions? Three-eights of one percent, two-thirds of which went to his subagents for their advertising expenses and as commissions on the bonds they sold. It was his personal fortune that was always at risk: In dealing with 2,500 subagents over whom he had no real control; for cancellation of orders when the Treasury was weeks and sometimes months behind in printing the bonds; for receiving and exchanging hundreds of different kinds of currency from all over the country. With the first half billion dollars’ worth sold, the original allotment increased and new types of bonds issued, he continued to sell. His net profit, about one-sixteenth of one percent, was insignificant compared to the 24 to 36 percent bid by the New York bankers to finance the war.[30]

Cooke also worked as a secret agent of the Treasury. It was his idea to establish a secondary market for the war bonds, one that worked so well that on one occasion they sold at a 10 percent premium. And when New York gold speculators boldly proclaimed that gold would soon trade at a 400 percent premium, he resolved to teach them a lesson they would not soon forget. He secretly arranged with a tightlipped friend at Clark, Dodge and Company, where he had once been a member, to buy greenbacks with gold he borrowed from the New York sub-treasury. Arriving on Wall Street the next morning before anyone else, he casually carted $2,700,000 in gold, the amount of the previous day’s sales, to his friend’s office. There it was stashed under a counter and nonchalantly paid out later in the day.
 

With the first day’s sales the premium on gold dropped more than 16 percent. As the value of greenbacks climbed, stock prices tumbled, correspondingly raising the quotations on government war bonds. Some firms suspended trading. Cooke continued sales for several days, driving the premium on gold down by 25 percent. There he stopped, before panic spread into the business community, and repurchased the gold, making a profit for the government.

It did not take long for Wall Street to figure out what had happened and who was behind it. After that a favorite trick of the gold ‘bears’ was to have a telegram sent from Philadelphia warning that Jay Cooke was on his way to New York. Instantly the gold ‘bulls’ would stampede to cover their contracts.[31]

Cooke’s most significant accomplishment exceeded his efforts to finance the Civil War, touching the pocketbooks of everyone in the nation. Along with his brother, Henry Cooke, he became convinced of the merits of a national banking system as proposed by Secretary Chase. The Secretary had submitted a bill to establish such a system in his first report to Congress, December 1861. This was not a revival of the old United States Bank but a new law applicable to all the nation’s banks. It found few supporters in Congress although the evils of state-chartered banks were well known.[32]

At the outbreak of the war there were some 1,600 state-chartered banks operating under as many different systems as there were states and each issuing several kinds of notes. “Notes were printed upon every variety of paper and no two banks issued bills of similar appearance.” Sometimes their value dropped by 50 percent a day’s ride from the bank. At every opportunity state banks substituted one of their private notes, obtained for printing costs, for a greenback, quickly converting the greenbacks into an interest-bearing war bond. This frustrated the basic reason for selling the bonds, the object being to limit the total amount of currency circulating in the channels of commerce, thus maintaining its value. In addition, the nation was losing at least $50 million per year to failed banks, to counterfeiters, and to the cost of exchange between different points.

Using their contacts with the North’s newspapers, established through their vast sales agency for government bonds, the Cooke brothers started promoting the bill. Many of the editorials suddenly appearing in the papers were written by Henry, himself once an editor, who also lobbied Congress. Copies of papers published in their districts were daily laid on the desks of members of Congress. With sentiment quickly shifting in its favor, a bill that could not previously get a hearing passed in six weeks on February 13, 1863.

Under the new law banks were required to deposit with the Treasury interest-bearing government bonds equal to one-third of their paid-in capital. After making the deposit they could issue notes equal to 90 percent of their par value. A federal tax on the private issue of new state bank notes soon eliminated that form of currency. By the end of the war the nation would have a uniform currency from Maine to California supported by federal law. It also had $2,846,021,742.04 of national debt, having reached that peak on August 31, 1865.[33]
 

25 Oberholtzer, op. cit., I, pp. 172, 174; Vieira, op. cit., p. 169; Sumner, op. cit., p. 215 
26 Dr. Charles S. Norburn, M.D., Honest Money (1983, New Puritan Library, Inc., Fletcher, NC), p. 21 
27 Ibid., p. 22 
28 Oberholtzer, op. cit., I, pp. 214, 400 
29 Ibid., I, p. 410 
30 Ibid., I, p. 295 
31 Ibid., I, pp. 402–407 
32 Ibid., I, p. 326 
33 Ibid., II, p. 1