Greenbacks and Wealth Transfer

Historiography

A History of the Greenbacks, With Special Reference to the Economic Consequences of their Issue: 1862-65

Wesley Clair Mitchell, 1903

This was one of several books exploring banking and currency that were published in the years immediately before the establishment of the Federal Reserve System. Wesley Mitchell placed a lot of the blame for the government’s need to resort to legal tender notes during the Civil War on the failure of the Buchanan Treasury to raise any money. Treasury Secretary Howell Cobb of Georgia (later Vice President of the Confederacy) “for four years had been contracting debts to meet annually recurring deficits.” Thus “Public confidence in the James Buchanan administration was shaken,” Mitchell says, and as a result “the government was compelled to pay such high rates of interest” as 12% on one year Treasury Notes.

“Though Mr. Salmon Chase brought with him little knowledge of financial administration, his mind was deeply impressed with certain financial theories,” Mitchell said. “From his former Democratic affiliations he had imbibed the ‘hard money’ principals of Jackson and Benton and their dislike for paper currencies...The early suspension of specie payments and issue of an irredeemable currency of legal tender paper in the Civil War occurred, then, under the administration of a secretary of the treasury who cherished a strong predilection for metallic money.”

Their failure at Bull Run showed the North that the war was not going to be quick, easy, or cheap. The government needed to raise a lot of money quickly. Luckily, eastern banks were in a position to help out (and profit by it), since Lincoln’s election had precipitated a “sudden panic [that] caused the banks to curtail discounts.” The banks were strong, because they had been hoarding specie in anticipation of war. And businessmen had cut back spending and borrowing. “Transactions of the New York clearing house declined from $129,000,000 in the second week of March [1861] to $80,000,000 in the corresponding week of August. The banks found it still more difficult to lend their capital. From December, 1860, to August, 1861, bank loans in New York diminished $23,000,000; in Boston the fall from January to July was $2,000,000 and in Philadelphia $3,000,000.” Heavy grain exports (due to good American and poor European harvests) shifted the balance of (gold) payments toward the US, offsetting the decline in California gold shipments as the western boom ended. In August 1861, “the ratio of specie held by the associated banks of New York to their deposits and circulation was 50 percent; for Boston it was 27, and for Philadelphia 39 percent. Thus the banks were unusually strong; but they were making little profit because the stagnation of trade gave them few opportunities of lending to business men.”

“The indebtedness of the South to the North was estimated on the basis of R.G. Dun & Company’s annual circular for 1861 at $300,000,000. The losses of northern creditors were usually reckoned at $200,000,000.” And “The specie in circulation was estimated by the director of the mint in October, 1861, at from $275,000,000 to $300,000,000, of which he thought not more than $20,000,000 was at the South and the bank notes reported as issued by the 1,289 institutions in the loyal states amounted to about $129,000,000.” But because bank notes were redeemable in specie (by state law in places like NY), banks began issuing certified checks instead of notes and “there was a marked contraction in the bank-note circulation in the first months of 1862. [On] January 4, the New York city banks had outstanding $8,600,000 of notes; by March 1 this circulation had fallen to $5,400,000.” But after greenbacks began circulating in April 1862, the banks resumed paying out their own notes again, and “by May 3 their circulation was practically as large as it had been January 4.”

“The first greenbacks in New York came in a remittance of $4,000,000 received by the assistant treasurer April 5 and from this time on issues were so rapid that $90,000,000 was outstanding before the 7th of June.” For smaller denominations and “change,” the government issued “postal currency.” Basically, stamps. Greenbacks became the standard of value and gold became a commodity. “From the published tables of the premium it appears that regular dealing in gold began on the New York stock exchange January 13, 1862.” Soon “gold became as favorite an article to speculate in as petroleum stocks or railway shares.” When it became a mere commodity, “The price of gold in currency” was a measure of the deflation of the dollar’s value [but how much it correlated to general price inflation is more complicated], and “as determined by transactions in these New York markets, was regularly reported by telegraph in all considerable towns of the United States, and everywhere accepted as authoritative.”  This may be the real point: that New York became the money center, because there was a valuation to be made in the first place and because there was a telegraph, to broadcast the news and create a uniform national price for gold. Did this function to stabilize prices across distances too, or did they vary with local conditions?

Price inflation was apparently less of a concern than “deflation” of the value of the dollar relative to gold. But when politicians and commentators discussed the question, “it was common to begin by demonstrating that the premium and the volume of the currency did not vary concomitantly, as they legitimately should have done [according to the accepted quantity theory of money], and then to launch into a tirade against unpatriotic gold gamblers.” Because it was not needed for currency, gold became an export commodity. “In the fiscal year 1861 imports of gold exceeded exports by $14,900,000, but after specie payments had been suspended in 1862 exports exceeded imports by $21,500,000, in 1863 by $56,600,000, in 1864 by $89,500,000, in 1865 by $51,900,000, and in 1866 by $63,000,000.” But even so, there was a desire among some [who, exactly?] to get back to a gold standard. Whereas his rival General George McLellan would probably have ended the war on terms favorable to the South, “Abraham Lincoln’s re-election meant an indefinite prolongation of the war, and hence destroyed any chance of a speedy redemption of the paper money. On the strength of this view there was a fall on the 9th from $40.65 to $38.46.  However, a reaction quickly followed.” 

But back to the question of prices and “real wages.” Mitchell showed that there was significant inflation during the war years. Based on a bundle of 36 retail commodities, prices rose from a “100”  level in 1860 to peak at “264” in West Virginia, “283” in Ohio, and “218” in Indiana in 1864, before settling down to an average of “200” across the Union by 1866. If this bundle was truly representative, retail commodities were twice as expensive at the end of the war as they had been at its beginning. Additionally, Mitchell mentioned that on “almost all loans made before 1864 and repaid at any subsequent time...the creditor found that the sum returned to him had a purchasing power much less” than when he loaned the money. This loss in value to the lender was theoretically a gain to the borrower, but since everything was suddenly more expensive, the borrower may not have felt like a winner either. Mitchell also suggested that “farmers of the loyal states were among the unfortunate producers whose products rose in price less than the majority of other articles, and that from this standpoint they were the losers rather than the gainers by the paper currency.” But is this conclusion based on Mitchell’s knowledge that this was a point of contention in later Populist arguments? If greenbacks had never been adopted, isn’t it possible that supply and demand conditions in the wartime economy would have resulted in depressed farm prices relative to suddenly scarce imports and non-defense manufactures?

Mitchell’s last point was that the Civil War increased the “rapid accumulation of an unusual number of fortunes,” and radically changed the distribution of wealth in the US. Most “war-time fortunes,” he said, “resulted in a very large measure from the mere transfer of wealth from a wide circle of persons to the relatively small number” of people who had access to the proceeds of wartime industry. This effect was probably given less attention than it deserved, Mitchell added, because we underestimate the severity of the transfer. “The same trait that leads fortunate people to flaunt their material prosperity in the eyes of the world,” he said, “leads the unfortunate to conceal their small privations. Even an attentive observer may fail to notice that the wives of workingmen are still wearing their last year’s dresses and that the children are running barefoot longer than usual.” Thus the enrichment of the few was noticed and reformers complain of it, but it’s not seen as due to the impoverishment of everybody else. We believed we were playing a positive sum game in the Gilded Age, when in fact we were not.