Fateful Lightning: A New History of the Civil War & Reconstruction Allen Guelzo (novels to read .txt) 📖

who might otherwise have hesitated to support Lincoln in making what amounted to war on their investments now swung behind the war as the only hope of reclaiming what the Southerners owed them. At the same time, European financiers who had invested in American bonds and notes now hurriedly unloaded them for whatever they could get on the open market, thus telescoping American foreign indebtedness and leaving American businesses with more unobligated gold in their reserves than they had expected.59

All of this was a voyage of discovery for Chase, and notwithstanding Lincoln’s confidence that Chase could learn his way around fiscal matters, it took Chase time to figure out what was happening, how much money he would have to get to pay for the war, and where (and in what form) he was going to get it. At the very beginning, Chase greatly underestimated the amount of money needed to fund the war (he thought $320 million ought to do the job), and he was reluctant to ask Congress to raise more than a quarter of it by taxation, which in Democratic eyes was the unpardonable political sin. But Chase soon found that the war was costing the federal government $1 million a day, and by the end of 1861 he could foresee the price tag on the war hitting $350 million just to get to the end of the fiscal year in June 1862. As the war’s bills multiplied, the enthusiasm of bankers and investors for government securities cooled, and Chase did not help matters by irritably questioning their patriotism. As he did so, Chase found himself in the peculiarly un-Democratic posture of supporting Republican senator John Sherman’s Omnibus Revenue Act in August 1861, which allowed the levying of a direct income tax and the issue of $150 million in short-term Treasury notes and another $100 million in long-term bonds.60

The old Democratic insistence that Treasury transactions be made only in gold hobbled the sale of these notes, and what was actually raised from the marketing of these securities turned out to be hopelessly inadequate. By February 1862 all the proceeds had been spent, and a further issue of bonds and notes would be taken by the financial markets as a confession of desperation. At this point Congress stepped in with its own measures for war finance, on February 25, 1862, passing the Legal Tender Act, which authorized Chase to print $150 million in paper money to pay government debts. The issue of paper money was a particularly difficult pill for Chase to swallow, since Jacksonian economics confidently predicted that the use of notes, bonds, and especially unsecured paper money rather than specie would destroy public confidence in the economy, feed financial speculation on the money markets, and send prices through the roof. In fact, successive issues of another $300 million of legal tender notes (or “greenbacks,” from the green ink used to print their reverse sides) helped to inflate prices in the North by almost 80 percent during the war. Chase had little choice, however: “It is true that I came with reluctance to the conclusion that the legal-tender clause is a necessity,” he admitted, “but I came to it decidedly and I support it earnestly. The Treasury is nearly empty. … You will see the necessity of urging the bill through without more delay.”61

In July, at the prompting of Thaddeus Stevens as chair of the House Ways and Means Committee, Congress carefully propped up the Treasury’s paper issues with the Internal Revenue Act of 1862, which used a graduated income tax to bring in $600 million in new revenue and take the inflationary steam out of the greenbacks. In fact, Congress eventually began to take its financial cues more from Stevens (a longtime Whig) than Chase, and at Stevens’s prodding Congress took another step away from the era of Jacksonian finance in 1863 when it passed the National Banking Act. The act resurrected the issuance of federal charters for banks, which had been killed when Jackson destroyed Nicholas Biddle’s Second Bank of the United States in the 1830s, and created a national banking system, which effectively turned private banks into depositories and receivers for federal funds. The new national banking system adopted greenbacks as their national banknotes, and Congress drove the old state banknote issues permanently out of existence by slapping a ruinous 10 percent tax on their use.62

For long-term borrowing, Chase wisely and conveniently washed his hands of the un-Jacksonian chore of hawking government securities through the Treasury by designating a fellow Ohioan, Jay Cooke, as the Treasury’s bond agent. Cooke, a natural-born financier, had made his fortune in banking before retiring at the tender age of thirty-seven, and in 1861 Chase had actually offered him the post of assistant secretary of the Treasury. Cooke preferred a free hand, and in July 1861 he countered Chase’s offer with an ambitious proposal for funding the war through the sale of a new and complicated series of government securities. With Chase’s hesitant approval, Cooke opened a Washington office at 452 15th Street, across from the Treasury building, and oversaw the issuing of a bewildering variety of government bonds and notes, carrying variable interest rates over varying terms. In October 1862 Chase made Cooke the Treasury’s general subscription agent for selling bonds across the country.

The most popular of these securities was the “5-20” bond (rather like modern federal savings bonds, these were discounted bonds that were redeemable after a minimum of five years but came to full maturity in twenty years), and through his network of 2,500 subagents Cooke was able to sell $362 million of them in their first year of offering. Not only were the redemption dates reasonable and the minimum purchase low (anyone with $50 could purchase 5-20s with interest rates as high as 7.5 percent), but the direct taxes enacted by Congress assured investors that the Treasury would have the money in hand to redeem the bonds at time of maturity. “Talk not of Taxes!” announced