The frequency and relative speed of these journeys gave them, in the days before railroads reached the West, a significant economic impact—less because of the thousands of potential miners headed west, and more because the return trips were usually filled with the fortunes of those who’d struck it rich. The discovery of plentiful West Coast gold had fundamentally transformed the US economy, and much of the Western world’s as well. Through the 1830s, global production of gold usually averaged around $13 million annually; it hit $155 million in 1853. This bounty was reflected in an explosion in the US financial sector. After the Second Bank of the United States was liquidated in 1841, most businesses relied on state-chartered banks. Throughout the 1840s the number of these banks in the United States remained constant at a little more than 700; by 1856, that number had nearly doubled to about 1,400, and the amount of loans and notes in circulation more than doubled.25 An economic journal noted in 1852: “Every portion of the country is teeming with new undertakings requiring a heavy outlay of capital and labor, and indicating rapid strides in wealth and prosperity.” The effects were international as well. By increasing the overall amount of gold in money markets, California (and, after 1852, Australian) gold raised prices everywhere, which was especially a boon to British manufacturing and exports.26
Yet the economic boom made the shipping of gold neither easier nor intrinsically reliable. In September 1857, the USS Central America, part of the United States Mail Steamship Line, left Havana for New York with 572 people aboard.27 The ship encountered a major hurricane a few days later, about a hundred miles off the coast of Georgia. The Central America took on water fast, and a night of bailing was unable to keep the ship’s pumps and engines working. The captain ordered lifeboat evacuation of all female and child passengers, almost all of whom were eventually rescued by other vessels. The ship, however, sank with the captain, and more than four hundred of the passengers and crew lost their lives. Newspaper accounts called the event “one of the most fearful marine disasters ever known” and “the greatest single ship disaster of a commercial vessel attributable to a hurricane.”
The Central America sinking carried an extra dimension of public fascination that would last more than a century because so many of its passengers were returning east with large quantities of gold. As they scrambled to fill lifeboats, many had to choose between their quickly gained fortunes—the very reason they were on the ship to begin with—and their lives. Satchels of gold dust and suitcases of gold coins were left unattended or scattered about the ship. One passenger had strapped himself with twenty pounds of gold dust and was knocked overboard before the ship sank (and although the metal weighed him down, he was eventually rescued). The total value of gold that went down with the ship was estimated at about $1.3 million; this was some 30,000 pounds of gold and said to equal approximately 20 percent of the gold held in New York banks at the time. Beginning in the late 1980s, a team of marine explorers located the wreckage and recovered substantial amounts of gold (although that mission led to a major battle between its financiers and its chief salvager, Tommy Thompson, who disappeared several years after the gold was recovered).
It has become common in popular recollections to assert that the Central America sinking caused or contributed significantly to the economic downturn known as the Panic of 1857; one historian said, “the loss of its golden cargo helped strike a crippling blow to the American economy.”28 The Panic saw a wave of bank failures—particularly in New York, Ohio, Pennsylvania, and Rhode Island—as well as the collapse of several railroad stocks. Rapid layoffs in shipbuilding, manufacturing, and cigar-making brought a financial-sector crisis into the mainstream, and at the Panic’s peak in October, mobs of thousands of New Yorkers assembled outside of the city’s banks, almost all of which were forced to close their doors.29
The economic impact of the Central America’s demise was easy and natural to exaggerate, given the accident’s human toll and its proximity to the worst economic bust since the gold rush had begun. This was also one of the first sensational news events of the telegraph age, combining public fascination over mass death with the timeless mystery of fortunes lost at sea. And there can be no question that the overall economy had stretched into perilous territory; the growth associated with the discovery of gold had created rapid expansion and widespread stock speculation. In particular, bank and railroad stocks in the second half of 1857 were highly volatile and sensitive to any unexpected loss. Significantly, however, the gold on board the ship that belonged to banks and businesses—though probably not that belonging to individuals—was insured, and the insurers (mostly in London) agreed to remit payments immediately. Moreover, the economy on the East Coast had already shown signs of sputtering before the Central America had even set sail. The US stock market, troubled by rising interest rates in Britain and France following the Crimean War, showed weakness in the summer. Falling grain prices, overcapacity in railroads, and concern about the state of slavery and rebellion (the Dred Scott decision was handed down in March 1857) might well have caused a recession even without a sunken gold steamer. And in August, when Ohio’s largest bank went under, largely because the man running its New York office was an embezzler, the Panic had already begun.
Nonetheless, the incident made plain the pitfalls of what had become, in a few short years, a financial system unhealthily dependent on gold. The western states’ bounty had created the semblance of an easy and endless supply of gold, and the illusion of an economy that only went up. Rapid expansion of credit to meet the economic opportunities created by the gold rush turned the largest East Coast banks into a kind of just-in-time financial system. As soon as the gold came in the door, it went out again in the form of expanded credit—and there was no easy way to reverse the process if the supply were disturbed. One contemporary banker summarized the Panic this way: “The immediate cause of the revulsion was the violent course of the Banks in the city of New York, who . . . expanded their loans in July from 117 to 122 millions of dollars, and then becoming alarmed by the loss of gold, endeavoured to see how quickly they could contract to 100 millions.”30 The discovery of plentiful, world-changing gold on American soil may, in the minds of millions, have represented divine will and the rise of El Dorado, but it was not enough to prevent the vagaries of human economic activity and the inevitability of recession.
And if the dictates of the business cycle disturb the harmony among gold, currency, and the American economy, war typically shatters it outright. War creates urgent, often unanticipated needs for new spending, which are usually paid for through tariffs and taxation, which can cause damage well after fighting stops. War shifts capital and manpower away from productive economic activity—such as farming and manufacturing—into destructive activity. And war can threaten every link in the chain of any economy (in the form of blockades, boycotts, or other barriers to supply and distribution). By 1860 the United States had experienced multiple wars, at least two of which—the War of 1812 and the Mexican-American War (1846–1848)—had long-lasting economic consequences.
One of the enduring arguments for hard money is that it keeps an absolute check on the size and expansion of government; the dawn of the Civil War put that truism into starker relief than any previous time in the Republic’s history. The outbreak of the Civil War provoked a dramatic shortfall in government’s spending capability and led to a fundamental restructuring of the relationship among the American government, its people, and its money. And while the currency saga of the Civil War may lack the pathos of hundreds of thousands of war dead and the emancipation of American slaves, its effects have been just as long-lasting.
In the years leading up to the Civil War, the finances of the US government were in unusually bad shape. The Panic of 1857 and the debt built up by the Buchanan administration had taken a heavy toll, and although few could have understood that gold production in the western states had peaked, the numbers had already begun to decline. At the time of Abraham Lincoln’s first electio
n in 1860, the coffers of the federal government were empty; there was, according to a treasury secretary of the era, “not enough money even to pay Members of Congress.”31 And thus when the Fort Sumter raid occurred a few months later and the Union government was faced with mass deployment and mobilization of troops, there was an urgent need for hundreds of millions of dollars to be raised and spent quickly. No person in the world had any plausible idea of where—in the absence of some radical change—the necessary funds would come from. From across the Atlantic, The Economist stated definitively: “It is utterly out of the question, in our judgment, that the Americans can obtain, either at home or in Europe, anything like the extravagant sums they are asking for: Europe won’t lend them; America cannot.”32
Warring parties before and since have found ways to meet their financial needs, and Lincoln’s cabinet and Congress did in fairly short order avail themselves of the usual methods: taxation, tariffs, and borrowing. But these techniques were neither fast enough, nor anywhere near large enough, to fund the needs of a fighting force of over two million. When Congress met in special session in July 1861, Treasury Secretary Salmon Chase provided his estimate for the first year’s war expenditures, which came to just over $318.5 million. For perspective, the entire gross national product of the United States at the time was an estimated $4.3 billion, and compared to annual government spending, the figure was astronomical; the Buchanan administration had raised eyebrows (and deficits) by borrowing some $10 or $20 million a year. Another yardstick of comparison is that during the three years that included the Mexican War (April 1846 to April 1849), the entire spending of the War Department amounted to $80 million.
Indeed, Chase had asked for more money to be spent on the first year of fighting the Confederacy than there was gold and silver currency in circulation—about $250 million worth—in both North and South at the time. That gap doesn’t represent a paucity of gold holdings—quite the contrary, gold was flowing into US banks at a record rate. Rather, it represents the massive cost of mobilizing for war. Moreover, the existing hard currency was not meaningfully available to the federal government. Even if all of that metal could easily be collected, such confiscation couldn’t be done without wrecking the state banks, since their laws required them to hold a certain percentage of gold reserves against their various loans and bonds.
For a few months in the second half of 1861, Chase tried to cobble together war funds using traditional methods. The government issued bonds and Treasury notes (though because of the country’s volatile state the interest rates were very high, when the notes could be sold at all) and arranged with northern banks to loan the government money. The loan plan was convoluted and probably doomed; among other hurdles, the law dating to 1846 stipulated that the federal government could only accept and make payments in gold and silver; even states’ banknotes were not permissible as payment. In November, when a US naval captain arrested two Confederate envoys aboard a neutral British mail ship, causing a major diplomatic flap—this was dubbed “The Trent Affair”—the nation looked perilously close to being at war with Britain as well as with itself, and Chase’s delicate scheme unraveled. The stock market panicked and forced nearly every bank in the country to suspend payments of specie in late December. Most of the notes that Treasury had issued that year were suddenly orphaned, and it became obvious that more drastic measures were required, and immediately.33
These were the dire circumstances behind the introduction of the United States’ first legal-tender act. On the same day that the New York banks announced their suspension of payments, a bill was introduced in Congress to create a paper currency, legally tender for all debts but not redeemable for any kind of metal. It was not entirely without precedent—many European countries already had paper currency issued by central banks, and prior to the Revolutionary War, several colonies issued paper currencies that were legal tender. Some, such as Virginia’s, were deemed successful, particularly if they covered a stated loan for a stated period of time. But for many in the commercial and political class, paper currency was synonymous with ruin; the Continental Congress, for example, had issued paper currency, which depreciated rapidly and led to the popular phrase “not worth a Continental.” That experience had contributed directly to the Constitution’s insistence that “no state shall . . . make anything but gold and silver coin a tender in payment of debts.”
And thus creating a nationwide paper currency, with nothing but government fiat behind it, that also carried the force of legal tender, was wholly outside the American experience. The very notion assumed and asserted a government financial sovereignty that had been highly controversial since the days of Alexander Hamilton and that paralleled the very states-versus-federal tension behind the Civil War itself. The legal-tender bill was created by Congressman Elbridge Spaulding of New York, a Republican former banker who called it “a war measure.” Whether he was expedient or sincere, Spaulding was unambiguous in his justification; he repeatedly said that the bill’s ends—“we were never in greater peril than at this moment”—justified its unusual means.
It borders on unthinkable today that such a revolutionary overhaul of the nation’s currency—especially in wartime—could take place without the total support of the executive branch. Yet it is conspicuous in contemporary accounts that Lincoln’s view of the greenback question is scarcely even referred to, let alone trumpeted or denounced; the few details sometimes discussed are dubious.34 The central figure outside of Congress was Chase, who portrayed his personal position on the bill as reluctant acquiescence. Chase’s economic experience prior to Treasury had been minimal, though he shared the Jacksonian view on the importance of hard money. He had offered two alternative plans at the end of 1861 that Spaulding and his Ways and Means committee had deemed insufficient to the urgent tasks of funding the army and navy (he estimated the cost at $1.6 million a day). Pressed by Congress to offer his opinion on the question of paper notes, Chase agreed that they had become “indispensably necessary.” Yet even here he felt the need to distinguish his personal view from practicality; he said that his preference would be not to make the notes legal tender, but because some companies and individuals would refuse to use them they needed to be made universally acceptable. It is emblematic of American hostility toward paper currency that this use-case argument—as opposed, say, to the constitutional issues at stake—was so widespread and seemingly persuasive. The apparent lack of coordination between Treasury and Congress partly reflected the hands-off approach of the independent Treasury system created in the 1840s and may have reflected tensions between Chase and Spaulding; the politically ambitious Chase, as we shall see in the next chapter, may well have had his eye on the future. Regardless, as one commentator put it, “no more striking illustration of the unsympathetic relations of a cabinet minister with the legislative branch can be found in the range of fiscal history.”35
Predictably, most of the powerful American banks initially opposed Spaulding’s bill; legal-tender paper currency would both threaten the value of their existing assets and provide them competition that carried a government imprimatur. Congressional opponents were even more vehement. They pointed with obvious justification to the constitutional prohibition against anything but silver and gold. Not only, these opponents held, did the Constitution’s framers explicitly deny the federal government the power to issue money, but they had done so deliberately; “it was intentionally left out of the Constitution, because it was designed that the power should not reside in the Federal Government.”36 They argued that to make greenbacks legal tender (and thus applicable to all debts) was to undermine existing contracts, because the paper money was sure to depreciate and all creditors would be getting less than they’d bargained for.
Because the debate concerned paying for a devastating war, it evolved into posturing about national pride and public morality. Some maintained that paying soldiers with paper money was both destructive and a kind of fraud. Assuming the intrinsic failure of
paper currency, Congressman Justin Morrill rejected the very premise of a wartime justification: “If this paper money is a war measure, it is not waged against the enemy, but one that may well make him grin with delight. I would as soon provide Chinese wooden guns for the army as paper money alone for the army.” Others considered greenbacks an admission of failed virtue. “The bill says to the world that we are bankrupt, and we are not only weak, but we are not honest,” said V. B. Horton of Ohio.37 Even when discussing the practical aspects of legal-tender paper money—e.g., predicting that it would cause financial ruin, create runaway inflation, drive out legitimate money, and encourage the issuance of paper money forever—the bill’s opponents conjured up an image of a dark Satanic paper-money mill, a monetary reflection of the Industrial Revolution’s failed morality. “Cheap in materials, easy of issue, worked by steam, signed by machinery, there would be no end to the legion of paper devils which shall pour forth from the loins of the Secretary,” warned one congressman.38
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