Following is a book review by David Vaught - Ways and Means: Lincoln and his Cabinet and the Financing of the Civil War by Roger Lowenstein
The debt ceiling, the Fed, and continuing issuance of Treasury bonds appear daily in our news today. Their historic roots tell us something about how they have worked, or failed in the past.
President Lincoln faced the daunting task of the Civil War with a traitorous military rebellion, a traditional limited federal budget, and a not yet complete national banking system. How he and his Treasury Secretary, Salmon Chase, confronted this multi-front crisis tells us a great deal about the successful origins of our financial system today.
Roger Lowenstein traces that history in his recent book, Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War, and successfully lends understanding to events today, 160 years after the Civil War. Lincoln appointed his rivals for the Republican presidential nomination into his cabinet. One of the first named to his inner circle was Salmon Chase (whose name lives on as part of an important bank, JP Morgan Chase, a successor to the one he founded after the Civil War).
A former Ohio Governor and Senator, Chase lost to Lincoln for the Republican Presidential nomination. Lincoln invited him to Springfield less than a month after he was elected President. Difficult practicalities swirled before Lincoln took office: a looming rebellion, an already deepening recession, and the teetering solvency of the federal government. With a federal government already failing to meet its payroll, European investors dumping US bonds, new Treasury notes not selling, and the Treasury Secretary of the incumbent administration resigning, the President-elect with no financial expertise offered the chance to meet these challenges to Salmon Chase.
Lincoln’s inauguration took place in March of 1861, and the Civil War began almost immediately, in mid-April. By the time Chase understood the costs of the impending war, he knew he needed an annual budget of $540 million, ten times the amount of existing total federal revenues. The banks, all chartered by states, tied their balance sheets to gold, and there was not enough gold to support the broader scope of the Civil War. There was trouble selling even a $50 million issue, or perhaps two such issues, before their gold reserves would be near exhaustion.
Conducting the war required a de-coupling of the government’s finances from an inadequate money supply measured in the value of gold in vaults. Chase issued Treasury notes and Greenback paper currency and finally persuaded Congress to declare his paper currency as “legal tender,” acceptable for the full payment of all debts. Such changes were earth shaking to bankers, foreign governments and business people accustomed to relying only on the soundness of “specie” payments in gold or silver. This revolution in the definition of money and its inherent value ultimately rested on the strength of the country’s economy, which held.
Financing the larger government necessary to conduct a long war remained constrained by a banking system where states chartered the banks. The old state system lacked the centralized system of federal banking powers and regulation we have today. It was Chase who persuaded Congress to authorize the first “national” banks, regulated by the central government, and subject to its regulations and controls. These financial reforms, re-definitions, and procedures remain with us today, enhanced even more by the creation of the Federal Reserve System in the early 20th Century. The limited dollar backed by gold and de-centralized system of state bank currency was greatly improved by this new system whose roots are in the Civil War. They have led to a strong international currency where dollars are used throughout the world to foster trade, investment and capital markets. These robust markets depend on the solvency and strength of the US Treasury and its issuance of bonds to finance the government and the economy.
The rebels’ vision was much more limited. They relied on enslaved people to farm cotton, and aristocratic landowners to sell their limited commodities to textile-manufacturing businesses in the northern United States or in Europe. Their effort to maintain a de-centralized system with a non-diversified economy did not work. The South lacked the capability to conduct a war for their independence without a solid strategic plan for making it so. They lost the strategic military war by the time of their military defeats in 1863 at Gettysburg and Vicksburg, but they obstinately battled on costing the country 600,000 casualties on both sides. Their flawed premises subjected the South to another century of decline and despair through their defeat.
By the end of the War in 1865, Lincoln and Chase had multiplied the size of the Federal budget tens of times, created more federal debt than all that had been issued since the country’s founding, established the first income tax, replaced a state banking system with national banks, grown the national economy, launched the transcontinental railroad, given away 10% of all the land in the country to homesteaders and land grant colleges, and emancipated four million people. Transforming the Federal government, the financial system, and the economy, they won the war, put down the rebellion, and forever strengthened our nation. Their financial and economic transformation had perhaps done more to win that war than the generals leading it in the field.
Lowenstein’s book is far better reading to help understand today’s economic and fiscal challenges than the chattering on the big media that unfortunately dominates so much of our national discussion today. Twenty-four hour news cycles with a focus on the latest culture war controversy simply fall short of creating such understanding. Economic change and the moral fortitude to make it work for all were a key part of Lincoln’s vision. The traitors and hostage takers of today, whose claim to challenge our economic and governmental system relies only on short term political whims, should take note of the result of short-sighted incompetence. It has been tried before by the rebels in the Civil War with great costs and burdens that should never be repeated.