May

6

On June 30, 1865, the U.S. Treasury's net borrowings outstanding were $2.7B. This was 41 times what they had been on June 30, 1860 when the net debt outstanding was $.07B. The peak was not reached until the last bills from the war came in; that came in the August 31, 1865 statement, whose closing balance showed a total debt less cash on hand of $2.8B. (As Grant notes, in the last page of his memoir, after Appomattox he set out to hurry back to Washington to cancel the outstanding war orders.) The June 30, 1865 statement showed these balances:

1. Irredeemable Currency (U.S. Notes aka Greenbacks) - $.46B - Unlike the Gold Notes that were exchangeable on demand for specie, the Greenbacks had no accrued interest costs.

2. Immediate Demand Notes (aka "Gold Notes") $.58B - Average Annual Interest Cost: 5.3%

3. Debt Due in 5 Years or Less (Avg. Maturity 3 Years) $.70B - Average Annual Interest Cost: 7.2%

4. Debt Due in More Than 5 Years (Average Maturity 21 Years) $.95B - Average Annual Interest Cost: 5.8%

Even as they looked at the massive accumulation of debt and wondered how it could be managed, the Republican majority in Congress discovered that they were being snookered. The Constitutional Amendment to abolish slavery had been adopted by Congress in 1864; but it had yet to be ratified by the states. With 36 states in the country and only 22 states in "the Union", at least 5 of the secessionist states would have to be formally readmitted to the Union and vote to ratify the Amendment. In what would now be called "bi-partisanship", the Democrat President Johnson and the Senate leadership under Seward worked the cajole the former rebels into accepting the 13th Amendment. They succeeded; with the admissions and ratifications of Tennessee (April 7, 1865), Arkansas (April 14th), South Carolina (November 13th), Alabama (December 2nd), North Carolina (December 4th), and Georgia (December 6th), the vote of the required 3/4ths of the states was secured and the 13th Amendment became part of the United States Constitution.

The Republicans had not fully anticipated was how eager the Southern Democrats and President Johnson would be to adopt the the abolition of slavery. What they finally realized - as Florida negotiated for its readmission - was that the 13th Amendment was about votes in the House of Representatives and the Electoral College, not about abolition at all. With the final ratification of the 13th Amendment, the Democrat Southern states had gained an increase in representation; they now had more seats in the House and votes in the Electoral College than they had possessed when they seceded from the Union. Apportionment of these states' rights under the 1860 Census had been on the count of ALL all adult white and 6/10ths of all mulattos and blacks. (White, Mulatto and Black were the 3 racial categories in the 1860 Census form.) Now the Southern states had the added House seats and Electoral College votes that came with the full enfranchisement of adult Black and Mulatto males. The coming elections offered the Southern Democrats and their Copperheads allies a very good chance of taking immediate control of the House in 1866 and regaining the Senate and the Presidency as well in 1868. After all, many in the North were as opposed to emancipation as the Southerners had been; New Jersey, for example, had not even ratified the 13th Amendment.

If the Democrats regained control, they would do one or the other of two things regarding Federal finance:

1. The Congress would repudiate ALL the debts incurred during the Civil War; OR

2. The Congress would do an Alexander Hamilton and assume ALL the debts incurred during the Civil War, including the $1.4B owed by Confederate States of America and their secessionist member states

For the Republicans and the Democrats, the Congressional election campaign of 1866 became a referendum on the question of the debt. The Republicans argued that the price paid for the war, in blood and in treasure, would all have been for nothing. They hammered away at the theme that, if the Democrats were elected, the Federal government would repudiate the loans issued during the Civil War as being Unconstitutional; and the bondholders would get nothing. The Democrats did their best to dress up default as part of a populist cause: the poor striking back at the rich. To an amazing extent modern historians like Foner and Richardson actually buy that argument. They think "the people" should have been for at least partial repudiation i.e. paying off the debt not in gold but in greenbacks - non-redeemable, non-interest-bearing paper.

The voting public did not. To understand why is to begin to understand how different the world of the 19th century really was. The holders of U.S. debt in 1866 were radically different people from those who currently hold Uncle Sam's IOUs. Instead of the Fed and foreign central banks and U.S. financial institutions who are the present buyers and sellers, the owners of U.S. Treasury debt after the Civil War were the country's individual citizens. Jay Cooke's 19th century biographer estimated that Cooke created 3 million bond customers; even Foner, who despises Cooke, concedes that he had 1 million subscribers. That meant that, at the very least, 1 out of every 12 adults living in the North in 1860 were bondholders. Treasury debt ownership was as widespread as ownership of U.S. savings bonds was after WW II; but in 1866 "the public" owned ALL of the debt, not just the small denominations.

As a result, the Republicans won - bigly; and they learned their lesson about bi-partisanship. Congress set to work adopting still more Amendments to the Constitution and adopted a new standard for a state's readmission to the Union. In order to have its representatives seated in Congress , a state would have to ratify the 14th Amendment and approve its specific debt and enforcement debt provisions, including Section 4: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void."

By 1868 the Democrats were resolved that repudiation and race war would be their party platform. In his final State of the Union message Johnson announced: "This vast debt, if permitted to become permanent and increasing, must eventually be gathered into the hands of a few, and enable them to exert a dangerous and controlling power in the affairs of the government. The borrowers would become servants to the lenders, the lenders the masters of the people. We now pride ourselves upon having given freedom to 4,000,000 of the colored race; it will then be our shame that 40,000,000 of people, by their own toleration of usurpation and profligacy, have suffered themselves to become enslaved, and merely exchanged slave owners for new taskmasters in the shape of bondholders and tax gatherers."
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What the present period does share with the one after the Civil War is the insistence by the voters that the Federal debts be paid. And, then, as now, the smart money thinks that is impossible.

In the decades after the Civil War, both the voters and the smart money were both proved right. As the smart money had predicted, the debt was not, in fact, repaid; it was simply rolled over and gradually increased for the remainder of the 19th century. But, at the same time, the public was paid, and in full. The debts were not repudiated; and the dollar, instead of collapsing, actually gained in purchasing power. Even as the debt remained and slowly grew larger, the demand to own and hold U.S. Treasury obligations strengthened. Both "the people" and the smart money worldwide grew ever more bullish on the dollar and U.S. debt, as they discovered that dollars to paid out in the future were worth even more in goods and services than they were in the present.

This all happened because of one man - Ulysses Grant. By determination and sheer force of will, Grant forced the Congress - both Democrats and Republicans - to pass the legislation that did three seemingly contradictory things:

1. The money "supply" would be increased; contrary to the arguments of both Johnson's Treasury Secretary McCulloch and Republican Senator John Sherman, the greenbacks in circulation would not be "retired"; and the privately-owned banks in the country would be free to issue as many of their own Federal bank notes as they thought prudent.

2. All paper currency obligations - privately issued Federal bank notes and Treasury greenbacks - every piece of printing that the law recognized as legal tender for the payment of private and public debt - would be exchangeable for gold or (for small denominations only) silver coin. Redemption of their Federal bank notes from their reserves of coin would be the obligation of the private banks. Redemption of Treasury greenbacks, gold notes and bonds would be paid out of the Treasury's own specie (gold and silver bullion and coin) reserves.

3. The Federal government would keep straight books and would not spend more than it collected in taxes which would be tariffs only, no income taxes

Grant's reputation suffers to this day precisely because he won a victory in the debt and currency war that followed the Civil War that came with full and unconditional surrender:

1. By adopting the Scottish model of free banking, the United States acquired overnight a responsive and adaptable system of private lending and bond issuance that became the marvel of the world - one that stood in direct opposition to the central bank model that Europe was adopting. Within two decades American private banks and their depositors had become the healthiest in the world, strong enough to be able to bail out the Federal government in 1893.

2. By requiring all paper money to be as good as gold, the United States avoided the corruptions that the arbitrage of legal tender bimetallism inevitably creates. Thanks to the restricted authority given to the Federal government, the temptations for Congress and the President to muck about with the nation's currency and credit were successfully limited. As a result, credit panics were limited in scope and reach; even national crises were over within a matter of days, not years, because no institutions were too big to fail.

Grant's first legislative act as a new President was to sign the bill that Johnson had vetoed - the Public Credit Act : "(I)n order to remove any doubt as to the purpose of the Government to discharge all just obligations to the public creditors and to settle conflicting questions and interpretations of the laws by virtue of which such obligations have been contracted, it is hereby provided and declared that the faith of the United States is solemnly pledged to the payment in coin or its equivalent of all the obligations of the United States not bearing interest known as United States notes and of all the interest bearing obligations of the United States except in cases where the law authorizing the issue of any such obligation has expressly provided that the same may be paid in lawful money or other currency than gold and silver. But none of said interest bearing obligations not already due shall be redeemed or paid before maturity unless at such time United States notes shall be convertible into coin at the option of the holder or unless at such time bonds of the United States bearing a lower rate of interest than the bonds to be redeemed can be sold at par in coin. And the United States also solemnly pledges its faith to make provision at the earliest practical period for the redemption of the United States notes in coin."

By the time finished his second term, his financial system was so well-established and supported that no successor President - Republican or Democrat - dared to mess with the legislative structure he had created for the rest of the century. (The only comparable legislative success in terms of permanently reshaping American finance would be Roosevelt's New Deal.) The only small move made towards British ideal of a government monopoly over money was John Sherman's move to give the Bureau of Engraving sole authority to actually print the U.S. Notes for the individual banks; even this change towards sole Federal authority had to wait until 1877, after Grant had left office. (Grant had opposed Sherman's "reform" because he knew that this would create a supply bottleneck that would result in purely artificial "shortages" of bank notes. As the British had already demonstrated, allowing a single Note Department meant that all banks - both sound and unsound - could be prohibited from increasing lending in times of crisis.)

It was only after extravagance of the Spanish-American War and the foreign exchange crisis of 1907 that Congress once again decided that a new, modern "flexible" (sic) system of Federal government borrowing was needed. Teddy Roosevelt, the first Progressive Republican President, was all in favor because he wanted to raise the money for the Panama Canal. Woodrow Wilson, the first Progressive Democrat President, was desperate to establish an income tax that would extend the reach of the government and its central bank into everyone's private finances and give the Federal government the monopoly power to expand its own "money supply" at will.

Contrary to what is now taught, the U.S. did not "inflate" its way out of its debt crisis after the Civil War. Neither did it suffer the ruins of deflation that every college and graduate student who wants an A on his/her exams learns by rote. The purchasing power of "the dollar" grew as enterprise and invention made things and services better, cheaper and far more broadly available. The size of the U.S. debt remained comparatively enormous compared to what it had been in 1860 and before; but the growth of the country made it possible to carry that obligation with ease while maintaining the Constitutional standard for money that Washington and others had insisted on when they founded the country itself.

And now, after 3 World Wars and the bloodiest century in human history, all financed by fiat money and government debt-reserved banking, here we are once again - looking at Federal promises to pay of a size that, even a decade ago, was beyond imagining.


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