Wars and Inflation – The Tricky Business of Conflict Finance

The History of Money: Installment 3 – Honest Abe

Written By: Larry LaBorde

Edited By: Christopher LaBorde

This article was originally crafted by my father for his readers in February of 2004, but its content is possibly more relevant now than ever before with multiple proxy wars threatening to bring down the US financial system.

A quick history lesson on Wars that are often won with finance skills as much as field tactics. A very important lesson as we are close to backing three wars at the same time and should probably listen carefully to the songs of history!

After the secession of the Southern States, Lincoln wanted to raise an army and invade the Southern states that had left the Union. To his dismay, he had a large overriding problem - MONEY! Raising an army and equipment for the purpose of war requires upfront cash and a large financial burden to be placed on a government and its people. Many of those people were not in favor of the war or the debt it would bring.

Contrary to the history books, there were quite a few US citizens outside of the South who were against Mr. Lincoln's war. Many newspaper editors, US congressmen, the entire Maryland legislature, and the mayor of New York were just some of the Northern citizens jailed for speaking out against the war. The New York Draft Riots were also evidence of a lack of compliance amongst the people when it came to fighting in a war that they did not support. I bring these issues up to demonstrate that the war was not a popular thought, and neither were the financial measures that were needed to make it happen, such as the new unbacked paper dollars.

During the War Between the States, the Secretary of the Treasury was Mr. Salmon Portland Chase. He came up with the idea that the government could issue non-gold-backed paper money directly as payment for debts and then issued an order stating that this paper money could not be redeemed for the normal gold-backed money of the time until a much later date. These new paper dollars were essentially small "no interest" bonds issued by the government with nothing more than a promise to redeem them at some unspecified time after the war. These were the first unbacked paper dollars issued by the federal government. On February 25", 1862 the Union government printed $150,000,000 of these new "greenbacks". They were used to pay and make purchases for the army.

The Union government agreed to continue to pay its interest payments on its regular bonds in gold and naturally demanded that all taxes continue to be paid in gold. However, the Union government insisted that the greenbacks were just as good as the gold redeemable currency and should circulate side by side with the regular gold redeemable currency, thus confirming the existence of a two-level currency to be used in the same marketplace.

Several congressmen of the day spoke out against these greenbacks, but the greenbacks were reluctantly voted into existence. Many of the yes votes were qualified on the floor of the House and senate with statements to the effect that "however bad greenbacks may be, we see no other alternative and we therefore reluctantly vote for them." Forcing the public to loan money to the government as they printed unbacked money was clearly unconstitutional, and the representatives and senators knew it at the time! Newspaper editors and concerned citizens pointed this out and some were imprisoned for their opinions.

Lincoln’s greenbacks paid for the war, but they were not considered equal to the currency of the day. As you might imagine, two prices for everything developed. One price for greenbacks and another in gold. The legal tender law prevented two-tier pricing, however, those who abided by the law quickly became bankrupt. The exchange rate between the two currencies changed almost daily as the fortunes of war changed with each battle. When the Union was doing well the greenbacks exchanged well. When the Union was doing poorly, it was best to buy your groceries with gold-backed currency.

On July 11, 1862, and March 3, 1863, the second and third infusions of $150,000,000 were authorized and printed. At the low point for the greenback, its value was only 1/3 of its gold-backed counterpart. Over the course of the war, the Union printed a total of $450 million dollars in greenbacks, or over $70 billion in today’s purchasing power.

Meanwhile down in Dixie President Davis was having his own problems raising his army to defend the newly formed government of the southern states. Nearly one billion notes were issued by the Southern government during its brief existence, and during their five-year span from 1860 to 1865, prices in the North rose by 46%, but prices in the South rose by 10,000%. The inflation in the South started slowly at about 12% per year but quickly picked up steam. Unfortunately, the newly formed southern government had less than $50 million in assets to back the confidence of its currency and had pledged not to implement any type of national tax system. Its very essence was designed around a weak central government with strong state governments, but this led to a real problem in raising funds to continue the national defense of the southern states. Lincoln knew that with enough time the southern states did not have the economic fortitude or structure to remain at war, as their currency was weak. As a result, one of his primary strategies was to make sure the union would simply outlast the newly formed southern government.

Despite this money problem, men in the South volunteered to defend their homes and continued to show up to fight for a war taking place in their backyards. If given enough time the currency problems may have been overcome in the same way that the Continental dollar crisis was resolved in the American Revolutionary War, but it would have been a big hurdle. However, on the very short timeline of the US Civil War, it was a death knell to the efforts of the southern states for their independence from a centralized government. John Kenneth Galbraith wrote, "The miracle of the Confederacy, like the miracle of Rome, was not that it fell but that it survived so long."

The second part of Lincoln's war strategy was to break the "economic back" of the South by crippling its ability to continue as a prosperous financial powerhouse. He achieved this by destroying railroads and restricting its trade with Europe. He then ordered Sherman's "march to the sea" where towns, farms, private property, and the entire City of Atlanta were burned to the ground. Orders were also given that women and children could be treated as combatants or left to starve without homes or food before the winter. General Sheridan was also given similar orders to loot the entire Shenandoah Valley and engage noncombatants. The idea was that if the women and children were drawn into the war, the southern soldiers would eventually get word on the front lines and abandon their posts for their families. All this was done in spite of the newly formed Geneva Convention of 1864. This economic and physical devastation of property along with the harm to non-combatants left bitter feelings long after the war was over and left the country itself in a half-crippled state for years to come.

When the South finally collapsed, the loss of one billion dollars to its economy from the failure of its currency, along with the utter destruction of the farms and industry, left it handicapped for generations. The richest area of the country before the war was locked in as one of the poorest areas after the war in a world that had moved on without it.

The Union's greenbacks were finally redeemed fifteen years later in full. Many people in the north lost money and many speculators in greenbacks became rich men. The Supreme Court then declared the greenback unconstitutional money and it was retired, until 1965 when a new version of it became our current unbacked dollar.

Who was the man who led the Supreme Court to strike down the very financing tool of the North's victory? It was the same man who ushered in its birth. For you see by 1870 the chief justice of the Supreme Court was none other than former Secretary of the Treasury, Salmon P. Chase, who was then given the tidy opportunity to put to bed the monstrosity that he had created many years prior.

Always remember, that the victors write the history books.

********