Wesley C. (Wesley Clair) Mitchell.

A history of the greenbacks, with special reference to the economic consequences of their issue: 1862-65 online

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upon a popular loan seemed hazardous, not only because of
the ill success of recent ventures, but also because the
market for bonds was stocked with the securities of several
states which were negotiating war loans.' Circumstances
seemed, then, to indicate the banks as the most available
source from which to obtain means.

Fortunately the course of events had been such as to
render the banks, at least in the northern Atlantic states,
unusually strong. In the previous November the sudden
panic following Mr. Lincoln^s election had caused the banks
to curtail discounts. A severe pressure for money followed
and a suspension of specie payments was averted in New
York only by the combination of bank reserves and the

1 Report of the Secretary of the Treatury^ December, 1861, p. 8. These issues were
made in aooordance with the acts of June 22, 1800 (12 Statutes at Large, p. 79), and
March 2, 1861 {ibid., p. 178).

3 " It is utterly out of the question, in our Judgment," said the London Eeonomiet
of August 24, 1861, " 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 oannot.^'—Economist, 1861, pp. 927, 928. Qf. Blaine, Ttoewty Tears of Cor^
grcKy Vol. I, pp. 409, 410.

'New York and PennsyWania had authorized loans of $8,000,000 each; Connecti-
cut, New Jersey, Indiana and Ohio loans of $2,000,000; Massachusetts, Maine, Illinois,
and New York city had each offered loans of $1,000,000, Iowa of $800,000, Michigan of
$600,000, and Rhode Island of $100,000.— BanA;er«' Magazine (New York), Vol. XVI,
" Notes on the Money Market," and Applbton's American Annual Cyclopcedia for
1861, pp. 297, 807, 906.

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Suspension op Speoie/ Payments 21

[E/ :
1 1

issue of clearing-house certificates.' But most of the paper I
held by the banks was good; liquidation proceeded favorably I
and the threatened danger passed. The acute pressure was
followed by general stagnation. In the unsettled state of
the country there was a general disposition to avoid new
undertakings and to keep old ones on a most conservative
basis. The result was that the banks could make no new

During the winter difficulty was experienced in making
collections in the southern states. In the spring many firms
resorted to intentional failures to rid themselves of northern
obligations,' and in May a law was enacted directing that
such debts should be paid, not to the creditors, but into the
Confederate treasury.* The cessation of remittances from \
the South caused in May and June a series of failures ^
affecting especially large jobbing houses.' But, owing to \
the very conservative nature of the business that had been
done in the preceding half year, the crash did not become

1 Banken* Magazine (New York), Vol. XV, p. 500; Hutd's Merchants' Magazine^
Vol. XlilV, pp. 75-^, 196, and 327 ; Sumver, History of American Currency^ New York,
1875, p. 189; DuNBAii, Chapters on the Theory and History of BankinOt New York,
1881, pp. 68-73. The Boston banks rejected the use of olearing-honse certificates, bat
allowed 50 per cent, of balances at the clearing honse to be paid In a bank*s own
notes.— DuKBAii, op. ett, p. 79; ef, "Beport of the Massaehnsetts Bank Commis-
sioners," ExecuUve Document No. 25, pp. 48-60, 87th Cong., Sd Sess.

>" Inactivity, or increasing stagnation," wrote Mr. James Gallatin to Chase in
March, " is the characteristic of oar business a£Fairs."— Tioo Letters to the Honorable
8, P. Chase ilfew York, 1861), p. 5; c/. Hunt's MerchatUs' Magazine, Vol. XLIV,
pp. 787 £F.

^Hunt's Merchants' Magcusine, Vol. XLVT, p. 316; American Annual Cyclopcedia,
1861, p. SIS.

4 See text of the act in American Annual Cyclopaedia, 1861, p. 810; J. C. Schwab,
The Confederate States of America ( New York, 1901 ) , p. 113.

& Hunt's Merchants' Magazine, Vol. XLV, p. 106. The indebtedness of the South
to the North was estimated on the basis of B. G. Dun A Company *8 annual circular
for 1861 at $300,000,000.— J&td., Vol. XLVI, p. 817. The losses of northern creditors
were usually reckoned at $200,000,000. Cf. *'Beport of the Massachusetts Bank
Commissioners," October, 1861; Executive Document No, 26, p. 60, 87th Cong.,
3d Sess.; New York Tribune, September 18, 1861; President's Message, December
S, 1861, in A, Lincoln, Complete Works, ed. Nioolat and Hat, Vol. 11, p. 90.
Schwab considers this estimate exaggerated, op, cit,, p. 111.

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22 History of the Gkeenbacks

i general. It had the effect, however, of making the times

. yet more dull; the transactions of the New York clearing

house declined from $129,000,000 in the second week of

March, to $80,000,000 in the corresponding week of August.'

VThe banks were not seriously weakened by the failures,* but

/found it still more difficult to lend their capital. From
December, 1860, to August, 1861, bank loans in New York
diminished $23,000,000; in Boston the fall from January
to July was $2,000,000 and in Philadelphia $3,000,000.*

This decrease of loans was accompanied by a slight
decline in circulation, a more decided increase in deposits,
and a marked gain in the amount of specie held. Small
imports — due partly to the Morrill tariff, but chiefly to the
depression of trade — and heavy exports of grain — the
rt mlt of gck)d crops at home and poor crops abroad —
combined to turn the balance of payment toward the United
States.^ During the spring and summer months sterling
exchange sold from two to three points below par in New
York.* Not only was the usual drain of specie to Europe
stopped, but the current was kept flowing in this direction,
so that, though the receipts from California declined and

« considerable amounts were sent into the interior, specie accu-
mulated in the vaults of the New York banks to an imprece-

iSee table of clearings in H. R. ExectUive Document No. 25y p. 107, 87th Gong.,

2 The Massachusetts commissioners stated in October that the losses of the
Boston banks by the repudiation of southern debts would not exceed in amount the
undivided profits on hand.— fxecuttv 6 Document No, 25, p. 50, 37th Cong., 8d Sess.

3 See table, p. SO, below.

* So large was the exportation of breadstuffs during the summer and autumn of
1861 that it more than offset the effect of the blockade in decreasing shipments of
cotton. The movement is somewhat concealed by the usual statements of commerce
by years ending June 90; but appears clearly in the official table of imports and
exports of merchandise at the port of New York by months. From January to April
imports exceeded exports, but from May to December there was an excess of exports,
amounting to five million dollars in June, two in July, two in August, four in
September, five in October, six in November, and six in December.— See tables in
Htmt'a MerehawU* Magazine, Vol. XLVI, pp. 277-81.

6 Bankers' Magazine (New York), Vol. XVI, p. 736.

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Suspension of Specie Payments 28

dented degree. August 17 the ratio of the specie held by
the associated banks of New York to their deposits and
circulation was 50 per cent. ; for Boston it was 27, and for
Philadelphia 39 per cent/ Thus the banks were unusually/
strong; but they were making little profit because the stag-
nation of trade gave them few opportunities of lending to
business men.

Consequently, when Mr. Chase appealed to them to assist
the goyemment, the banks were both able and willing
render efficient aid. A conference of representatives of the
New York, Boston, and Philadelphia banks,^ held August
10-17 in New York, at the secretary's invitation, drew up in
consultation with him a '^plan fqr assisting the United
States government." ' Fifty mjllinT] Hnlln^ wno^ to^ be
nHvam^t^ to ih^ trftBRury hy ^^/^ fff°^ntfid 1^°^^° ^^ tae
three citie s. In return they were to receive at par a like
amount of treasury notes running three years and bearing
interest .^^^ 7.80 p^^ ^fH^ ^"^hP^i ^^*^ bf^^ s ^^re giv en ;
the,j)ption of taking a second $50,000,000 of the notes on ;

same^ te rrp^ Opinh^r 15^ anH " third _ |507)OD,000
December 16.^ Mr. Chase considered the plan highly
adraHfageous to the government. In the face of war he
was borrowing money at "a rate of interest only 1.3-4 )er
cent, higher than the ordinary rate of 6 per cen f Besides
he received $50,000,000 immediately to meet the pressing

1 See table, p. 30, below.

2 " It waa greatly desired," said one of the most prominent of the New York
bankers, "to inclnde also the banks of the West, bnt it was found impracticable to
secnre the co-operation of the state banks of Ohio and Indiana ; and the state banks
of Hissoari, the only other organization under a compacted system, were surrounded
by combatants."— Letter of George S. Goe to E. Q. Spaulding, October S, 1878,
Spauloino, op. ctt. Appendix, p. 90.

^Report of the Secretary of the Trecwury, December, 1861, pp. 8, 9. A detailed
account of the conference is given by A. S. Bollbs in LippincotVa MontMy Magcusine,
VoL XXXVin, pp.,^00-206; reprinted in Bankers' Maaazine, Vol. XLI, pp. 868-7.

«For text of this agreement see Bankert^ Magagine (New York), Vol. ZYI, pp.

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tlemaiids upon the treasury.^ To the banks the plan offered
profitable employment for their idle capital'

The banks which thus undertook to lend the government
$150,000,000 in four months^ time had an aggregate capital
of but $120,000,000. Although unusually strong in specie
at the time the agreement was made, their combined coin
reserves amounted only to $63,200,000.' This sum would
hardly more than pay the first instalment of the loan. To
prevent its being exhausted at the very beginning, it was
necessary that the banks should be able to replace very
rapidly the specie which they paid to the government
They counted on doing this in two ways: First, they would
sell the securities received from the goverment to the public
for cash. It was part of the agreement that the treasury
should help in this by opening public subscriptions to the
loan in all parts of the country. Second, the specie given
to the government would be speedily paid out again in dis-
bursements for the immense purchases of war supplies. The
coin would thus be restored to the channels of trade, and
naturally flow again into the banks.

If the banks could collect specie in these two ways as
rapidly as they paid it out to the government, they could
continue to supply the treasury with funds indefinitely. But
the moment even a brief delay occurred in the return of
specie to the banks trouble would come. The reserves
would be depleted by the drafts of the treasury, and suspen-
sion would be inevitable. Such a delay would happen if
anything occurred to make the public slow in buying the

1 Chase's letter to Trowbridge, Warden, op, city pp. 886^.

sAt first the banks decided to divide the $50,000,000 among themselves in
proportion to their respective capitals. This would have given the flfty-fonr New
York banks $29,500,000, the forty-six Boston banks $15,500,000, and the nineteen
Philadelphia banks $5,000,000. But the Boston banks finally decided that they conld
not take more than $10,000,000; so that the New York institutions had to makeup
their subscriptions to $95,000,000.— JSTufU'a McrchantB^ MciOiuine^ Vol. XLV, p. 381.

8 See table, p. 90, below.

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Suspension of Speoib Payments 25

7.30 treasury notes from the banks, or to intermpt the (
govemment's payments of specie out of the subtreasory, or '
to prevent men from depositing again in the banks tJie coin
received from the government. The situation, both of the
banks and of the treasury, was thus very precarious. The
plan might work well in fair weather, but in the first storm
it was likely to collapse. Mr. Chase, however, seems to have
been unconscious that danger lurked in the scheme.

At the very outset the banks encountered an unforeseen I
obstacle. The independent subtreasury system required all ,
dues to the United States to be paid into the treasury in |
coin.' This would compel the banks to send the specie lent '
the government to the subtreasuries, there to lie in the
vaults until paid out in disbursements to public creditors.
But provision had been made by Congress with the special
intent of removing this difficulty.^ The law of August 5 (
had relaxed the rigor of the subtreasury system so far as to i
permit the secretary '^ to deposit any of the moneys obtained
on any of the loans .... in such solvent, specie-paying
banks as he may select," and allowed '^ moneys so deposited "
to "be withdrawn from such deposit for deposit with the
regular authorized depositaries, or for the payment of public
dues.'** Under this law the banks expected that the loan to '
the government would be managed in the same manner as a
loan to a private person ; they would credit the United States
with a deposit of $50,000,000 upon their books, against
which the secretary of the treasury could draw as he had
occasion. But Mr. Chase's instinctive distrust of bank
issues permitted no modification of the subtreasury system.

1 Aoto of July 4, 1840, sees. 19 and 20, 5 Siattites at Laroe, p. 385; and of Angost 6,
1810, sees. 18, 19 and 20, 9 StahUea at Laroe, p. 59.

3 See the letter of Mr. E. G-. Spauldins, who drafted the section in qnestion, op,
cit, Appendix, p. 51; and remarks of W. P. Fessenden, chairman of the senate
flnnnon committee, ContfreanancU Olobe^ S7th Ck>ng., 1st Sess., i>. 996.

• Sec. 6, 12 StatuUt at Large, p. SIS.

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He declined to make payments in bank checks on the ground
that, though the eastern institutions were ready to pay such
checks in coin, their western correspondents on whom they
! might draw would possibly ask creditors of the government
to accept bank notes in satisfaction. He therefore insisted
that the loan be paid in specie into the vaults of the sub-
treasury. Much against their will, the banks complied.*

Nor was this the only point in which the banks found the
Dolicy of the treasury an obstacle to the success of the loans.
/jBeside borrowing from the banks to secure filnds, Mr.
/ J Chase took advantage of his discretionary power to issue
*' I non-interest-bearing treasury notes.' Though payable on
demand in gold at the subtreasurieS^, and receivable for taxes
and customs dues, these notes were accepted with reluctance.
To facilitate their circulation, the secretary and other treasury
officials signed a paper agreeing to take them in payment of
their salaries, and General Scott issued a circular setting
forth the superior convenience of paper money to soldiers
desiring to send home a portion of their pay.* But the
banks feared the government paper money would drive their
own issues from circulation, and declined to receive the
demand notes except on "special deposit'* Should they
receive the notes as current funds, bankers said, they would

1 Secretary Chasers reasons for refosing to draw directly on the banks are given in
a letter to Mr. Trowbridge,(WAiiDBN, Life of Cha»e^ p. 887). The side of the banks is
represented in G. S. Coe*s letter to Spanlding {History of iht Legal Tender Paper
Money, 2d ed., Appendix, pp. 91, 92) ; J. B. Williams's letter to Chase of October 4,
1861 {ihid.t pp. 97-0), and his War Loant of the Attociated Banks to the Oovemment
in 1861, (New York, 1876) ; Jambs Gallatin, The National Finances, Currency, Bank-
ing', etc. (New York, 1864). Most writers have concurred in the opinion that Mr.
Chasers refusal was an error. C^. Our National Finances, What Shall be Done?
[anon.] (Boston, 1862) ; Spauldimo, op. cit.. Introduction to 2d ed., pp. 1-4, and
Appendix, pp. 51-3; F. A. Conklino, ibid.. Appendix, p. 85; J. S. Oibbonb, The
Public Debt <^ the United States (New York, 1867), pp. 185, 136; H. V. Poor, Money
CMd its Laws, 2d ed. (New York, 1877), pp. 562^; Horace White, Money and Bank-
ing (Boston, 1806), pp. 150-52.

3 Acts of July 17, 1861, sec. 1, 12 Statutes cU Large, p. 2S0, and of August 6, 1861,
sec. 5 (ibid., p. 813).

8 Text in American Annual Cyclopaedia, 1861, p. 290.

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Suspension of Specie Payments 27

be tmder obligation to redeem them in coin on demand, and
this would increase the burden which their reserves had to
carry, and so endanger the maintenance of specie paymenta
Furthermore, the existence of a large amount of obligationsT^
which the treasury might be called upon to redeem in coin \
at any moment of panic, was a standing menace to the sol- '
vency of the government, and in so far injured its credit, and
made more difficult the rapid sale of the securities held by
the banks to the public, on which the success of the loans
depended. But it was in vain that the banks appealed to
Mr. Chase to cease his issues. He replied: *' If you can
lend me all the coin required, or show me where I can
borrow it elsewhere at fair rates, I will withdraw every note
already issued, and pledge myself never to issue another;
but if you cannot, you must let me stick to United States
notes." * Unable to induce the secretary to alter this reso-
lution, the banks again reluctantly yielded.'

But though the position of the banks was weakeneii byj
Mr. Chase's refusal to allow the proceeds of the loan to !
remain on deposit until paid out to the creditors of the
government, and by his issue of paper money, all went well
for a time. Mr. Chase appointed agents in over two hundred

1 Letter to Trowbridge, Warden, op. cit, p. 888.

3 The banks were the more annoyed at Mr. Chasers refusal to make pajrments in
cheeks drawn upon them and at his issue of treasury notes, because when the
arrangement regarding the loan was made they, had understood him to agree to
conform his action in these respects to their wishes. See J. E. Williams's letter of
October 4, 1801, to Chase and G«orge S. Coe's letter of October 8, 1865, to Spaulding in
Spaui,dino, op. ciL, Appendix, pp. 97-9 and 92 respectively. Mr. Chase, however,
said in his report of December, 1861, that ** it was .... understood that the secre-
tary of the treasury should issue a limited amount of United States notes, payable
on demand" (p. 9).

On the inconvenience caused the banks by the issue of the demand notes, see
'* Objections to Government Demand Notes, by a New York Bank OfiBcer," Bankers^
Magatine (New York), Vol. XVI, pp. S5S-7; Gboboe Mabsland, "The Banks and the
Greenbacks," Bankers^ Magcusine (New York), Vol. XXXI, pp. 17S-81; Bollbs, Finan^
eialHutory of the United Staiea, 1861-85, pp. 34 and 87; H. V. PooB, Money and iU
Law, 2d ed. (New York, 1877), pp. 564 ff. ; J. K. Upton, Mcmey in Politics, 2d ed. (Bos-
ton, 1895), pp. 72 ff. ; R. M. Bbeckbnbtdoe, '' The Demand Notes of 1861," in Sound
Currency, (New York, October, 1898), Vol. V, pp. 896, 837.

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\ towns to receive sabscriptions for 7.30 treasury notes/ and
I issued an urgent address, appealing to the people to assist in
I making the '^ national loan'' successful' His efforts were
warmly seconded by the newspaper press, which explained
the advantages of the loan to investors, and represented sub-
scription as an act of patriotism. On their side the New
I York banks strengthened themselves by putting their coin
I into a common fund, and reviving the organization entered
/ into to check the panic of the preceding November. The
/ "loan committee," then appointed under the chairmanship
of Moses Taylor, was entrusted with the superintendence of
the execution of the contract with the government. It was
part of the arrangement that the stock of specie should not
be allowed to fall below one-fourth of the net liabilities,
exclusive of circulation and the credit given the treasury. In
case any bank failed to maintain this proportion of reserve,
the loan committee was directed to charge interest on the
deficit, and to pay the interest received to the institutions
holding the highest percentage of specie.'

The associated banks agreed to divide the subscriptions
to the loan between themselves in proportion to their respect-
ive capitals. Each bank was to pay 10 per cent, of its sub-
scription into the subtreasury at once, and to place the bal-
ance to the credit of the government upon its books.^
Against these credits Mr. Chase was to draw only as fast as

1 See list in Banken^ Magazine^ (New York), Vol. XVI, pp. 806-10. Aside from
treasury officials there were 148 agents.— H. R. Executive Document No, 69, p. 2,
88th Cong., 1st Sess.

3 Text is to be fonnd in Banken* Magazine^ Vol. XVI, pp. 290-2. The notes were
o£Fered at par, and were to draw interest from Augost 19, but on taking the bonds
subscribers were required to pay interest from that date to day of subscription, so
that the interest received by the purchaser began with the date of his purchase.

s Of, note 1, p. 82, below. The best authority for the banking operations is the
"Report of the New York Loan Committee," June 12, 1862, published in the Banken'
Magaxine^ Vol. XVII, and in H, R, Executive Document No. 26^ 37th Cong., 8d Sess.,
pp. 125-42.

* See text of agreement of banks with goTemment, and proceedings of the meet*
ing of bankers in reference to it,— Bankers^ Magtutine^ Vol. XVI, pp. 161-70.

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Suspension of Spbcib Payments 29

he needed funds for disbursement. It was anticipated that
his drafts would be about 10 per cent, of the loan a week.*
Consequently, the effect of the transaction may be traced in
the weekly bank returns of the three cities. In New York
the first instalment of the loan, $3,500,000, was paid into the
subtreasury August 19, 1861.* Comparing the reports of
August 17 and August 24, one finds a decrease of $2,600,-
000 in the specie holdings of the banks, and a like increase
in the coin held by the subtreasury.' At the same time the
balance of the government loan was added to the line of dis-
counts, increasing the loans reported by $29,000,000.
Finally, the sum placed upon the books of the banks to the
credit of the government to be drawn against produced a
nominal increase of $26,500,000 in the deposits.^ Similar
changes are seen on comparing the situation of the Boston
and Philadelphia banks on August 17 and 31. In Boston
payments to the subtreasury diminished reserves less than
$300,000, while discounts and deposits were increased
$3,600,000 and $4,200,000, respectively, in consequence of
the government loans. The Philadelphia banks lost $600,-
000 in specie during the two weeks, and increased their dis-
counts $4,600,000 and their deposits $3,700,000.

But the situation immediately began to change. The
banks paid over the loan in instalments of about $5,000,000
at intervals of six days.* Each payment thus made into the
subtreasuries decreased the sum credited to the government
as a deposit. Loans also declined, for as fast as the 7.30

1 American AnnwU Cyclopaedia, 1861, p. 64. Cf. Chase's letter of October 2,
1861, to Lars Anderson, in Schuckbbs, Ldfe of Chase, pp. 490, 4S1.

3"Beportof the New York Loan Committee," Bcmken' Magazine^ Vol. XVII,
p. 190.

>For this and the similar subsequent comparisons see the table showing the
condition of the banks of New York, Boston, and Philadelphia, p. 3u, and the accom-
panying chart.

* Cf. '' Report of the Bank Commissioners of Massachusetts, October, 1861,"
H R, Executive Document No. 25, p. 56, S7th Cong., 8d Sess.

& Letter of O. S. Coe, in Spauldinq, op. cit.. Appendix, p. 02.

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Online LibraryWesley C. (Wesley Clair) MitchellA history of the greenbacks, with special reference to the economic consequences of their issue: 1862-65 → online text (page 3 of 51)