Battle Cry of Freedom: The Civil War Era (91 page)

Anguished southerners sought scapegoats to blame for their woes. They accused "speculators" and "extortioners" of cornering the market in essential items until the rise in price enabled them to sell for fantastic profits. "We have in fact two wars upon our hands," declared a Georgia newspaper in September 1862. "Whilst our brave soldiers are off battling the Abolitionists . . . a conscienceless set of vampires are at home warring upon their indigent families." This "band of harpies preying on the vitals of the Confederacy," these "contemptible wretches" who "would bottle the universal air and sell it at so much a bottle" had "caused the present high prices, and they are determined to make money even if one-half of the people starve."
²⁷
Jefferson Davis himself stated that the "gigantic evil" of speculation had "seduced citizens of all classes from a determined prosecution of the war to a sordid effort to amass money." The
Richmond Examiner
lamented in July 1862 that "native Southern merchants have outdone Yankees and Jews. . . . The whole South stinks with the lust of extortion."
²⁸

Despite this condemnation of "native" merchants, the
Examiner
and many other southerners focused on Jews as the worst "extortioners." Jewish traders had "swarmed here as the locusts of Egypt," declared a congressman. "They ate up the substance of the country, they exhausted its supplies, they monopolized its trade." Jews were said to be more numerous in Charleston than in Jerusalem; the streets of Wilmington "swarmed" with "unctuous and oleaginous" Jews who bought up the cargoes of blockade runners. War Department clerk John B. Jones fulminated in his diary against "Jew extortioners" who had "injured our case more than the armies of Lincoln. Well, if we gain our independence, instead of being the vassals of the Yankees, we shall find all our wealth in the hands of the Jews."
²⁹

27
. Quotations from Moore,
Conscription and Conflict
, 150; Eugene M. Lerner, "Money, Prices, and Wages in the Confederacy, 1861–65," in Ralph Andreano,
The Economic Impact of the American Civil War
(Cambridge, Mass., 1962), 30; Coulter,
Confederate States
, 225.

28
.
O.R
., Ser. 4, Vol. 2, p. 810;
Richmond Examiner
, July 22, 1862.

29
. Coulter,
Confederate States
, 227; W. Buck Yearns and John G. Barrett, eds.,
North Carolina Civil War Documentary
(Chapel Hill, 1980), 74–75; Jones,
War Clerk's Diary
(Swiggett), I, 221.

Such diatribes were hardly unique to the Confederacy. As in other times and places, people suffering from causes beyond their comprehension fastened on an identifiable minority as scapegoats. There were Jewish merchants in the South, of course, and some of them speculated in consumer goods. So did a much larger number of southern-born Gentiles. But most merchants—Jewish and Gentile—were as much victims as perpetrators of shortages and inflation. To be sure, many of them sold goods at markups of 50 percent or more. But when inflation was running at 10 or 15 percent a month, they made little if any profit in real terms on much of what they sold.

By 1862 the Confederate economy had become unmanageable. The futility of trying to bring it under control was illustrated by the attempts of several states to curb "monopolies" or fix maximum prices. Anti-monopoly laws were aimed at speculators who tried to corner markets in any of several necessities, or to charge "exorbitant" prices for them. But these laws proved unenforceable, for they either created a black market or further exacerbated shortages. Richmond's czar of martial law, General John Winder, established maximum prices for several categories of food in April 1862. Farmers and fishermen immediately ceased to sell at these prices. After three weeks Winder admitted failure and lifted the controls, whereupon prices doubled or tripled. Under the pressures of blockade, invasion, and a flood of paper money, the South's unbalanced agrarian economy simply could not produce both guns and butter without shortages and inflation.

The northern economy proved more adaptable to the demands of war. But for a time in the winter of 1861–62, fiscal problems threatened to overwhelm the Union cause. Lincoln's administration entered the war with at least two financial advantages over the Confederacy: an established Treasury and an assured source of revenue from the tariff. But the lower rates enacted by the tariff of 1857 and the depression following the panic of that year had reduced revenues by 30 percent. From 1858 to 1861 the federal budget ran four consecutive deficits for the first time since the War of 1812. Secession produced a new panic. Specie fled the Treasury and the government's credit rating plunged. When Lincoln took office the national debt was the highest in forty years. Secretary of the Treasury Salmon P. Chase was a political appointee without prior financial experience—in contrast to the Confederacy's Memminger, who was an expert in commercial and banking law.

But Chase was an adept learner and turned out to be a good treasury secretary. His principal tutor was Jay Cooke, head of a Philadelphia banking firm, whose brother had been an ally of Chase in Ohio politics. Chase kept the Treasury afloat in the war's early months with short-term bank loans at 7.3 percent. Cooke persuaded some of his moneyed associates to buy longer-term bonds at 6 percent. Chase pioneered the concept of selling bonds to ordinary people, as well as to bankers, in denominations as small as $50 to be paid in monthly installments. Cooke undertook to market these bonds by patriotic advertising that anticipated the great war-bond drives of the twentieth century. Although this policy of financing a democratic war by democratic means got off to a slow start, Cooke eventually achieved great success in selling $400 million of "five-twenties"—6 percent bonds redeemable in not less than five or more than twenty years—and nearly $800 million of "seven-thirties"—three-year notes at 7.30 percent. Newspapers occasionally accused Cooke of getting rich from the commissions he earned on these sales. In fact his firm did earn some $4 million for marketing these bonds. But this amounted to a commission of about three-eighths of one percent, out of which Cooke paid all expenses for agents and advertising, leaving a net profit of about $700,000. This was a cheaper and more efficient means of selling bonds to the masses than the government could have achieved in any other way.
³⁰

Unlike the Confederacy, which relied on loans for less than two-fifths of its war finances, the Union raised two-thirds of its revenues by this means. And while the South ultimately obtained only 5 or 6 percent of its funds by actual taxation, the northern government raised 21 percent in this manner. Congress revised the tariff upward several times during the conflict, but wartime customs duties averaged only $75 million a year—scarcely more, after adjustment for inflation, than the $60 million annually in the mid-1850s. Far more important in potential, though not at first in realization, were the new internal taxes levied in the North, beginning with the first federal income tax in American history enacted on August 5, 1861. This revolutionary measure grew from a need to assure the financial community that sufficient revenue would be raised to pay interest on bonds. The Republican architects of the 1861 income tax made it modestly progressive by imposing the 3 percent tax on annual incomes over $800 only, thereby exempting most wage-earners. This was done, explained Senate Finance Committee Chairman William

30
. Ellis P. Oberholtzer,
Jay Cooke: Financier of the Civil War
, 2 vols. (Philadelphia, 1907); Henrietta M. Larson,
Jay Cooke: Private Banker
(Cambridge, Mass., 1936).

Pitt Fessenden, because the companion tariff bill was regressive in nature. "Taking both measures together, I believe the burdens will be more equalized on all classes of the community."
³¹

Most of these taxes would not be collected until 1862. Meanwhile the government would have to depend on loans. But the legacy of the Jacksonian divorce of government from banking created complications. Gold for purchase of bonds had to be literally deposited in a government subtreasury. An ambiguous amendment to the war-loan act of August 5 seemed to repeal this requirement and permit the Treasury to leave the gold on deposit to the government's credit in banks, where it would form part of the legal reserves to support the banks' notes. But Chase, something of a hard-money Jacksonian in his fiscal views, chose not to proceed in this manner. Instead, he required banks and other purchasers of bonds to pay in specie, which then sometimes remained idle for weeks in government vaults while bank reserves dropped toward the danger point.
³²

Union defeat at the battle of Ball's Bluff in October 1861 and McClellan's failure to advance on Richmond eroded confidence in northern victory. Then came the threat of war with Britain over Captain Wilkes's seizure of Mason and Slidell from the
Trent
. The panic on financial exchanges caused a run on banks, whose specie reserves plummeted. The sequel was inevitable. On December 30 the banks of New York suspended specie payments. Banks elsewhere followed suit. Deprived of specie, the Treasury could no longer pay suppliers, contractors, or soldiers. The war economy of one of the world's richest nations threatened to grind to a halt. As Lincoln lamented on January 10, "the bottom is out of the tub. What shall I do?"

What indeed? Lincoln, no financial expert, played little role in congressional efforts to resolve the crisis. Chase proposed the chartering of national banks authorized to issue notes secured by government bonds. This would free the currency from direct specie requirements, pump new money into the economy, and create a market for the bonds. These ideas eventually bore fruit in the National Banking Act of 1863. But

31
.
CG
, 37 Cong., 1 Sess., 255.

32
. Bray Hammond,
Sovereignty and an Empty Purse: Banks and Politics in the Civil War
(Princeton, 1970),
chaps. 3
–
5
. For all practical purposes, "specie" meant gold, because the high price of silver in recent years had made a silver dollar worth more than a dollar for its metal, thus driving silver coins almost out of circulation.

Congressman Elbridge G. Spaulding of New York, chairman of the House subcommittee charged with responsibility for framing emergency legislation, believed that the immediate crisis demanded quicker action than the lengthy procedures necessary to establish a new banking system. A delegation of bankers tried to persuade Spaulding (himself a banker) to introduce legislation allowing banks to become depositories of public funds, thereby ending the wasteful practice of transferring gold from banks to subtreasury vaults, and to authorize a new issue of bonds to be sold "at the market" rather than for face value. Since such bonds would sell below par, investors would reap high interest rates and large profits at government expense. Spaulding rejected this proposal along with "any and every form of 'shinning' by Government through Wall or State streets . . . [and] the knocking down of Government stocks to seventy-five or sixty cents on the dollar."
³³
Instead, he introduced a bill to authorize the issuance of $150 million in Treasury notes—i.e., fiat money.

This bill seemed to imitate the dubious Confederate example—but with a crucial difference. The U.S. notes were to be legal tender—receivable for all debts public or private except interest on government bonds and customs duties. The exemption of bond interest was intended as an alternative to selling the bonds below par, with the expectation that the payment of 6 percent interest in specie would make the bonds attractive to investors at face value. Customs duties were to be payable in specie to assure sufficient revenue to fund the interest on bonds. In all other transactions individuals, banks, and government itself would be required to accept U.S. notes—soon to be called greenbacks—as lawful money.

Opponents maintained that the legal tender bill was unconstitutional because when the framers empowered Congress "to coin money," they meant
coin
. Moreover, to require acceptance of paper money for debts previously contracted was a breach of contract. But the attorney general and most Republican congressmen favored a broad construction of the coinage and the "necessary and proper" clauses of the Constitution. "The bill before us is a war measure," Spaulding told the House, "a
necessary means
of carrying into execution the power granted in the Constitution 'to raise and
support
armies.' . . . These are extraordinary

33
. Robert P. Sharkey,
Money, Class, and Party:
An
Economic Study of Civil War and Reconstruction
(Baltimore, 1959), 32.

times, and extraordinary measures must be resorted to in order to save our Government and preserve our nationality."
³⁴