A Book Review of considerable length

Ways and Means:

Lincoln and His Cabinet and the Financing of the Civil War

Roger Lowenstein

Penguin Press, New York, 2022

432 pages

Special to American System Now

Roger Lowenstein’s Ways and Means is a timely addition to the intense debate in the nation on the role of the Federal government in addressing the economic crises of our times.  It draws the implicit parallel between the economic policies which were debated during the Civil War and those of today and shows how Lincoln took the Hamiltonian path in order to save the Union.

Lincoln's Hamiltonian Financial Revolution

The enormity of the Civil War compelled the government of Abraham Lincoln to implement a financial and economic program which constituted a veritable revolution in banking and industry. To win the war, the Lincoln administration had to dramatically increase the power of the Federal government, and erect a new financial architecture to pay for the war and run the country. These innovations were in one sense not new, however; they were rooted in a revival of the American System policies last implemented by the President John Quincy Adams Administration and left in the cold by all succeeding presidencies.

The Lincoln Administration’s National Banking Acts, the Legal Tender Act, and the Internal Revenue Act used Hamiltonian principles to bring federal power to bear for the general welfare. The government also enacted what one observer called a “New Deal” of ancillary measures, including the Homestead Act, Department of Agriculture, Land Grant Colleges, the Transcontinental Railroad, anti-slavery laws, and the Emancipation Proclamation. [1]

Economic progress since the American Revolution had been checkered, but when it had been successful, it was the result of the imposition of “American System” policies as implemented by Alexander Hamilton, John Quincy Adams, Henry Clay, and their co-thinkers. The American System[2] favored an energetic Federal government, which created protective tariffs to build infant industries, a national bank to provide government credit to production, and internal improvements, today called infrastructure.

From the outset Lowenstein captures the nub of the conflict.  “This ideological debate [between a strong and weak government-ed.] had been raging since the Revolution itself. Federalists led by Alexander Hamilton had sought to establish a strong central government to marshal the country’s finances and develop its infrastructure and commercial potential. Jeffersonians adamantly objected.

By and large Jefferson had won. No fewer than six of his successors vetoed or thwarted federal legislation to build roads and canals, improve harbors and river ways, maintain a national bank, fund education, and even care for the indigent mentally ill. (pp. 1-2)

But through the course of the war, Lowenstein says, Lincoln made a “Hamiltonian government.” (p. 10)

President Abraham Lincoln was a lifelong advocate for national banking.

Under the emergency of war, Lincoln’s party formulated a new notion of what the federal government could do. They raised and spent unprecedented sums. They launched the country’s first truly national currency, pushing aside an inchoate system of thousands of disparate bills issued in the states. They created a national banking system and the first credible program for federal taxation. They inserted the government into railroads, education, agriculture, immigration, the sciences, financial regulation….

While one could contest Lowenstein’s formulation, his fundamental thesis is correct. Thus, despite some crucial omissions and gratuitous cynical swipes about motivation, Lowenstein’s book is well worth reading.

This Review

Ways and Means is a very detailed book, chronicling the implementation of Lincoln’s program in detail. At the same time, Lowenstein usefully situates the evolution of the administration’s financial policy both in the context of the ongoing Civil War and in contrast to the policies being adopted by the Confederacy.

He paints an excellent portrait of the collaboration of the main proponents of the new economy, i.e., Congressmen Elbridge Gerry Spaulding and Thaddeus Stevens, Senator John Sherman, Treasury Secretary Salmon Chase, financier Jay Cooke, President Lincoln, and others. Many of these men were familiar with the past intervention of American System and National Banking sponsors like Alexander Hamilton. While they had important differences with some of those predecessors, in the main the Lincoln policy was grounded in those precedents. The severe requirements of the crisis even forced Jacksonians like Chase and others into an uncomfortable embrace of Hamiltonian methods.

This review will be limited to exploring the step-by-step progress of the financial policy debate and implementation. We will trace how the Lincoln Administration went from a system dependent upon a private banking system dominated by New York City’s Associated Bank network and reliance on the nation’s gold supply, to one based on the full faith and credit of the Federal government. That credit, of course, depended on the government’s pursuit of national economic growth, which in fact skyrocketed during the Civil War, despite the massive wastage represented in war production and the horrendous loss of life.

Step One: Debt Finance  

At the beginning of the war, the U.S. government was virtually bankrupt. Tariff revenues, the main source of funds, were decimated by the secession of the South; there was no national bank to borrow from. Thus, Treasury Secretary Chase had to borrow from the private bankers, especially the New York City-based Associated Banking syndicate. The syndicate had substantial holdings of gold, and under pressure from Chase, loaned their specie to the government.

Lincoln's Hamiltonian Financial Revolution
Treasury Secretary Salmon Chase

Chase raised $8 million in bonds and short-term paper to finance the first three months of war, but war expenses were far outstripping his projections. At the Congressional Special Session in July, Lincoln asked Congress for $400 million more spending. (later trimmed to $320 million) That money was raised through bonds and notes, with a significant amount, $150 million in gold, from the banks.

But the needs of war kept escalating.  $1 million a day morphed into $2 million, and the ability of gold reserves held by banks and the government were overwhelmed. Hence a new system had to be devised.

In June 1861, the total government debt stood at $90 million. In response to President Lincoln’s appeal, Congress gave Chase the right to borrow $250 million, in addition to other sources of income.

Throughout 1861, Chase got the Associated Banks to purchase U.S. securities with gold. By December, the requirements outstripped the gold in their vaults. At year’s end, the banks suspended for payment for debt instruments in gold (specie), and the government followed suit shortly thereafter. Specie redemption would not resume until after the war. From 1862 on, the war would be fought with paper, as Lowenstein chronicles: government bonds.

The issuance of government debt accelerated and would now be marketed to all institutions. Lowenstein describes the intertwined roles of Secretary Chase, Ways and Means Chair Thaddeus Stevens, Ohio Senator John Sherman, and the ubiquitous bond salesman Jay Cooke. Chase, Sherman, and Cooke were all allies from Ohio and that relationship helped expedite the process.

New spending bills were shepherded through Congress by Chairman Stevens, Sherman, and their allies, and new bond authorizations were marketed by the aggressive Cooke. The bonds carried many durations and yields, but the most successful was the 20-year bond, with a five-year call date at 6% interest, (the 5-20s) which was authorized in early 1862.

Lincoln's Hamiltonian Financial Revolution
Ways and Means Chairman Thaddeus Stevens

Chase was authorized to sell $250 million of the 20-year bonds and three-year notes. He was also enabled to sell $50 million of Treasury notes of small denominations. These were redeemable in specie “on demand,” hence the name Demand Notes. This was first step in restoring power to the Federal government to run a credit system. The demand notes were to circulate as currency. They did so on a limited basis. Caution was the rule, and many merchants refused to accept them.

Later on, bonds of other denominations were also issued, including the 7-30 bond. Congress authorized $830 million in these bonds in early 1865. This bond paid 7.3% interest and was payable in three years. It raised large amounts of cash to pay war expenditures especially during the final year of war. Sales began at $770,000 per day but escalated to $3 million in February and March. On one February 1865, day, sales reached $8.7 million.

Ultimately two-thirds of the war was financed through bond sales. The key player in the operation was Cooke, who was retained by Chase with an ever more lucrative arrangement, to sell the bonds and raise the cash to pay for the war.

Cooke was an ardent Union supporter in addition to profiting mightily from the arrangement. He went directly to the public and to well-heeled businessmen. Using newspaper advertising, and a direct sales campaign, Cooke’s army of 2500 bond salesmen and collaborators raised over $511 million marketing the 5-20 bonds. His group later sold the 7-30s and raise millions more.

Lowenstein describes the pitfalls of the Chase-Cooke arrangement but highlights Cooke’s crucial role. By war’s end, having Cooke as the lead salesman was an implicit stamp of approval. Cooke also marketed small denomination bonds to average citizens, thus tethering the fortunes of the citizenry directly to the success of its government.

Lincoln viewed the debt as a pact between the government and people, the owners of the debt. “Men readily perceive that they cannot be much oppressed by a debt which they owe to themselves……the more nearly this property can be distributed among all the people, the better.” (p. 303)

Bond salesman Jay Cooke

He even proposed that Congress consider legislation to determine that the bonds held by individuals to be tax-free. They could be viewed as a long-term investment which could sustain the individual over time. He wanted to “enable every prudent person to set aside a small annuity against a possible day of want.” Lowenstein insightfully sees this as a forerunner of FDR’s Social Security program in the 1930s.

Step Two — Credit system, “Legal Tender”

The next leg of the financial revolution was the creation of the first unified credit system since the Second Bank of the United States (1816-1836). At the outset of the conflict, 1400 banks of all sizes had created 8,000 kinds of bank notes to circulate as a crude payment system. This scheme benefitted some local bankers and politicians but hampered the economic welfare of the country. To challenge this operation was to challenge the power of the states and their financial money lenders. But to win the war, a reliable currency was required to fund the war and the economy required to support it.

To the rescue came Congressman Elbridge Spaulding of Buffalo, New York. Chair of the Ways and Means Subcommittee on Currency, Spaulding was a New York banker, and devotee of Alexander Hamilton and national banking.

Spaulding describes the situation in his book History of the Legal Tender Paper Money Issued During the Great Rebellion, Being a Loan Without Interest and a National Currency, which he published in 1869, “The United States, at the breaking out of the Rebellion, had no national bank currency, and no gold or available means in the Treasury … to carry on the war for the Union; and consequently, the means to prosecute the war had to be obtained upon the credit of the government, and by taxation. The fundable legal tender currency was the most available form of credit which the government could use in crushing the rebellion. It was at once a loan to the government and a national currency.” (History, p. 5)

In the winter of 1861, Spaulding introduced legislation to create a new currency, Legal Tender, to circulate as money. These notes could pay for the war and also pay for new internal improvements and other useful investments.

The backing for the new paper currency was to be the “Full Faith and Credit of the Government,” and the output of the real economy engendered by the extension of this credit. That gigantic expansion of the industrial and public works engine would also generate the tax revenue to service and pay the loans that were being issued.

A greenback featuring the photo of Alexander Hamilton.

As Lowenstein elaborates, Spaulding’s bill created a currency that had no expiration date, no interest, and could be used to pay all debts and circulate as cash to pay all purchases and bills. They were money by proclamation, by government fiat. As Lowenstein put it, “acceptance would be compulsory and universal.” (p.90)[3]

The response by the states and the leading big-city bankers was outrage. These institutions would see their control over money and credit usurped. The new U.S. Notes would replace the multitudinous notes issued by the private banks.

Also, the Notes, soon dubbed Greenbacks (printed on the back of green paper), would not be backed by gold. Secretary Chase himself initially opposed this idea, but the needs of the war combined with the emptiness of the Treasury, pushed him to grudging acceptance.  On February 5, 1862, Chase wrote Spaulding “The public exigencies do not admit of delay.” (p. 94)

While under the strong guidance of Ways and Means Chair Stevens the Legal Tender Act passed the House, it met stiff resistance in the Senate. Under massive pressure from the largest, Wall Street-centered banking syndicates, the Senate amended the House version, adding two de facto poison-pill provisions, which would come back to haunt Legal Tender during the debate on Specie Resumption.

The first said that Legal Tender could be receivable for all claims and demands against the government, “except for interest on bonds and notes, which shall be paid in coin.” (p. 100)

The second called for the Treasury Secretary to sell U.S. Bonds at the market rate for coin or Treasury notes. Selling at the market rate would raise the yield, paid to the purchasers, i.e., the Associated Banks Syndicate, given the exigencies of the times. The face value would fall, and the result would be to further constrain the Treasury. Again, interest on the bonds would be paid in coin. As amended, the bill passed the Senate and was returned to the House for debate.

Lincoln's Hamiltonian Financial Revolution
New York Congressman Elbridge Spaulding, dubbed “Father of the Greenback”

In the final debate, Spaulding gave an extended speech excoriating the powers behind the changes. “The coin provision was deemed by many members to be an unnecessary discrimination in favor of the bondholders over other creditors of the Government equally meritorious. It was difficult to see the propriety of paying coin interest to the bondholders while the soldiers and others were paid in notes.”

As Spaulding continued, one can almost hear the echo of Mark Antony in Shakespeare’s Julius Caesar heaping calumny on the “honorable men.”

Who then, are they that ask to have a preference given to them over other creditors of the government? Sir, it is a very respectable class of gentlemen but a class of men who are very sharp in all money transactions. They are not generally among the producing classes—-not among those who, by their labor and skill, make the wealth of the country; but a class of men that have ‘accumulated’ wealth—men who are willing to lend money to the government if you will make the security beyond all question, give them a high rate of interest, and make it payable in ‘coin’.

Yes, sir, the men who are asking these extravagant terms, who want to be preferred creditors, are perfectly willing to lend money to the Government in her current embarrassment, if you will only make them perfectly secure, give them extra interest, and put your bonds on the market at the ‘market price’, to purchase gold and silver to pay them interest every six months. Yes, sir, entirely willing to loan money at these terms! (p. 128, History)

Equally upset at the treachery, Ways and Means Chair Stevens thundered, “It creates two classes of currency, one for bankers and brokers, and another for the people.” (p. 100, History)

Yet the blackmail succeeded, and the amended version was passed.

In the bill which authorized the issuance of $250 million in debt (the 5-20 bonds), the Congress also authorized printing $150 million in Greenbacks. That passed on February 25, 1862. The new currency was an immediate success, especially among the troops, who finally had a vehicle to use to purchase necessary commodities.

In July of 1862, another $150 million of Greenbacks were authorized, and in early 1863 a similar amount was printed.  $450 million in Greenbacks were in circulation by war’s end. Legal tender enhanced the credit of the government, as reflected in new government borrowings at lower interest costs. The availability of new currency allowed wages to be paid, purchases to be contracted by the quartermaster, and industrial expansion to accelerate. This also elevated national morale.

Step Three — Taxation

Debt could not pay for the totality of the war costs. The Lincoln Administration knew it also had to increase revenue through taxation.

The first foray was launched in the summer of 1861 and led by Ways and Means Chair Stevens. Lowenstein describes how Stevens initially brushed aside the argument that a new tax would be “disagreeable.” If the new taxes were disagreeable, the Confederates had forced on the Union “many disagreeable things. It is unpleasant to send your sons and brethren to be slaughtered in this unholy war.” (p. 58)

Lincoln's Hamiltonian Financial Revolution

Stevens also identified the deeper historical issue. He noted that the failure to enact a rigorous federal tax policy after the American Revolution was a key contributing factor to the doom of the Articles of Confederation government. It left the “federal government, financially, at the mercy of the states. ‘It was mainly on account of this great defect that a convention was called, and the present Constitution was framed.’” Stevens was determined to rectify that lingering flaw.

The initial debate seesawed between a direct tax on land and some form of tax on income. The western states vehemently opposed the former, so Stevens reduced that toll and landed more heavily on the latter. The first income tax rate was modest, 3% on incomes above $800. As the nation possessed no collection agency, there was no way to calculate how much income would be raised. On August 5, 1861, a fledgling tax bill passed; but little was done to implement it.

A new bill was enacted July 2, 1862, the Revenue Act of 1862. A key provision dramatically enhanced the taxing authority of the federal government. The new bill imposed excise taxes on professions and commercial entities, taxed interest, dividends, and inheritances. As for personal incomes, the tax was progressive. The rate for high earners was greater than that for the ordinary citizen.

This bill created a Bureau of Internal Revenue (changed in 1953 to the Internal Revenue Service) inside the Treasury Department. Dividing the nation into 185 districts, it deployed tax assessors and collectors throughout the entire nation. The commissioner started with a staff of three, but that mushroomed to 4,000 within the year.

Opposition was fierce. Businesses wanted to lessen the amounts. The states wanted authority to collect the taxes rather than the Federal government. Ultimately, the income tax was imposed only on annual earnings above $600. The rate was 5% for incomes above $10,000.  Farmers received preferential treatment relative to manufacturers. But the taxing ability of Washington had been cemented; the revenue was desperately needed to help defray the dramatically increased demands of the war.

Senator Justin Morrill, the prime mover behind the tariff and taxation bills.

In March 1864, Congress tripled the tax on liquor, but revenue was still short.  Chase demanded that tax revenue be doubled. Eventually a new bill was introduced which dramatically increased taxes by raising the levy and increasing the number of activities taxed. Manufacturers and producers were among those heavily targeted. The list was large and included: ships, barges, stages, theaters, operas, circuses, on brokers, breweries, and more.

The bill finally passed in June. It created a new graduated income tax where earnings above $10,000 were taxed at 10%. In 1864, taxes had generated $110 million, an amazing amount relative to the absence of such a line item in 1861. In 1865 that take would double to over $200 million!

Step 4 — Tariff Policy

The other major area of revenue-generation the Lincoln Administration turned its attention to was tariffs. Tariffs had been part of the American System, as developed from the Washington administration onward. Until the Civil War, tariffs had been the main vehicle used by the government to generate revenue. The pillars of the American System philosophy were internal improvements, national banking, and tariffs. All of these elements had been virtually set aside for nearly all the decades since Andrew Jackson; at the start of the war, the U.S. had the lowest tariff rate of all major industrial nations.

The first tariff increase was passed before Lincoln took office. The Morrill Tariff raised average levies from 17 to 26%. In August these rates were raised again, by another 10%. By the end of 1861 tariff income had risen by 70%.

While revenue was a major consideration in these actions, so was the protection of U.S. manufacturing. The Morrill tariffs penalized imports of iron, clothing, and other manufactured goods from the U.S.’s previous major supplier, Great Britain. The British were not happy.

Lowenstein acknowledges the critical role played by Lincoln’s economic advisor Henry C. Carey in shaping tariff policy., although he foolishly disparages Carey’s economic work as a whole. He notes that Carey placed his protégé and “eyes and ears” William Elder into a senior position in the Treasury Department. There Elder was able to push Chase into support for the higher tariffs.

Within a year, the need was even greater, and the Revenue Act of 1862, which established the Bureau of Internal Revenue, also raised duties an average of 37% above the bill from 1861 and eliminated most of the “duty free” categories previously adopted. Lowenstein is biased against free trade so he is not enamored by the 1862 bill. But he acknowledges that “a curtain of protection had been draped over the country, a more rigid version of the ‘American System’ pursued by the Whigs and Henry Clay.” (p. 129)[4]

In 1864, the tariff was again raised, with the average duty becoming 47%.

These funding mechanisms were nothing short of amazing. Taken together, the tariff and taxes supplied 21% of the federal budget, up from the 5% at the outset of the conflict. This was virtually identical to the 22% share in WWI. Again, the war drove a dramatic centralization of the economy and broke down the barriers to enhanced revenue collection.

Step 5 — National Banking

One of the pillars of the American System was national banking. Dating from Alexander Hamilton’s First Bank of the United States, and continuing with the Second Bank, this policy of public credit was a linchpin of Republican dogma and ardently promoted by Lincoln himself.[5] A national bank of some sort was crucial to the success of his economic program. The power of the state-based banking syndicates had to be broken. The nation had to have one circulating currency and Federal regulation over credit disbursement.

Despite his Jacksonian roots, Chase turned to the idea of national banking as early as June of 1861, He floated the idea of a national banking system in his Annual Report to Congress July 1, 1861. As Lowenstein put it:

Chase’s original scheme was laid out in great detail in the report. He proposed to organize a new system of banks, privately owned but chartered by the federal government. These banks would be required to invest in government bonds—bolstering the government’s credit. The notes of the new banks would become the country’s money—-uniform, stable, secure.  (p. 83)

This plan echoed Hamilton. Like the first Treasury Secretary, the issuance of bank credit, circulating currency, would be tied to Treasury bonds, much like Hamilton’s capitalization of the Bank of the United States. There would be one stable currency for the nation, not a myriad of paper notes, many of which were of dubious value. Control over the system would reside in the Federal government.

The First Bank of the United States, still standing in Philadelphia

Chase shelved the plan in 1861, but brought it back again in 1862, and launched a campaign to have it adopted. He argued that the current system of 1400 state banks, each issuing approximately six different bills, had to end. The notes were too different, too extreme in their valuations, and lacked interstate viability.  Plus, they locked up too much wealth which could otherwise be deployed by the federal government.

Chase proposed a system of “national banks” be created. The current state banks would be granted “national” charters in place of their state charters, but they would continue to operate as private, commercial banks. They would be required to invest a portion of their capital in Treasury bonds, thus providing the Treasury with a new source of liquidity. Chase envisioned the government issuing Treasury notes to the national banks, which would replace the thousands of pieces of paper then in circulation.  The idea was to create one sound, uniform currency of equal value across the nation.

The new legislation was called The National Currency Bank Act and encompassed all features of Chase’s plan.

Chase’s biggest advocate was the President, whose support for a national bank was well known.  When he signed the Legal Tender Act in February of 1862, Lincoln had called upon Congress to pass the Banking Act.

The fight over the Banking Act was waged hard and long. Opposition crystallized in the East where the state banks were strongest. Support tended to come from the West. Of the 2200 state banks west of the Alleghenies, 25% would default on their own notes by 1863, and financial uncertainty roiled the region.  Many parts of the west had no banks at all. There were 55 banks in New York and 1 in Chicago. Bank circulation in Ohio, a booming industrial state, was $9 million compared to $50 million in New England.

Late in 1862, a new convert to the plan emerged in Ohio Senator John Sherman of the Senate Finance Committee. In a speech to Congress on February 10, 1863, Sherman made the issue one of patriotism.  The national banking bill would evoke the “sentiment of nationality. The policy of the country ought to be to make everything national as far as possible, to nationalize our country, so that we shall love our country.” (p. 173)

Lincoln's Hamiltonian Financial Revolution
President Lincoln and Treasury Secretary Chase working on Lincoln’s National Banking System.

Lowenstein correctly underscores the continuity of this legislation to the program of Alexander Hamilton, repeatedly citing Hamilton’s influence on the process.

As finalized, the legislation had the following provisions:

  • Banks must have large amounts of capital to charter as national institutions, viz. $50,000 for banks in smaller cities; $100,000 for large municipal banks
  • Large Reserve requirements
  • Prohibition on real estate loans
  • Bank notes had to be secured by Treasury bonds
  • Shareholders faced double liability; if their banks failed, they would also be responsible for raising additional capital
  • Total National Bank Notes to be printed would be capped at $300 million
  • Only the National Banks would serve as depositories of federal funds
  • Each National Bank Note would be identical; all engraved in Washington

There were compromises to get the bill passed in February 1863. The New York, Philadelphia, and Boston banks would have a privileged role in redeeming notes. The tax on state bank notes would be held at 2%, hardly discouraging to the continued business of the state banks. Even with concessions, the bill barely passed the Congress. One last holdout was Spaulding.

An Aside: Spaulding’s Ideas in Support of the National Currency Bank Act[6]

Spaulding’s decision to finally endorse the national banking legislation was directly influenced by his appreciation of Alexander Hamilton, whom he had studied in depth. We know this from his statements in the Senate, which he included in the appendix to his 1869 book.

On February 19, 1863, a week after the National Banking bill’s passage, Spaulding gave an extended speech in support of the Act, some of which bears repeating here. His argument traced the movement for national banking from its roots in Hamilton to the conduct of the Civil War.

Alexander Hamilton, painted posthumously by John Trumbull in 1806.

He began by asserting the constitutionality of the act, while also acknowledging the necessary role of the state banks in the absence of any National Bank.

Spaulding underscored the importance of the bill’s creation of the National Bank Note, which would be a national currency circulating along with the Legal Tender Notes (greenbacks). The new currency will be uniform everywhere and “secured by a pledge of U.S. stocks, deposited in the Treasury of the United States.” This method hearkens back to the Bank of the United States model.  He also drew out the connection between the new National Bank Notes and Legal Tender.

The Legal Tender notes are issued directly from the Treasury, bear no interest, circulate as a national currency, and are a loan to the government by the people, in the words of Spaulding. The Greenbacks are backed by the full faith and credit of the government and the taxable property of the nation. By levying taxes, Congress could redeem the greenbacks and retire them from circulation.

The National Currency Bank Act brings private capital under the purview of the federal government by creating a system of privately owned national banks who move their own wealth into the arrangement.  Their wealth would add to the potential of the government to direct credit into the economy.

An additional feature was added to induce the banks to join.  Legal tender notes could only be redeemed by the government, but National Bank Notes would be redeemed by the National Banks. The latter will also be backed by the full faith and credit of the government, and the Legal Tender Notes could be used to redeem the National Bank Notes. Specie was suspended for the duration of the war, so Greenbacks filled in the gap.

The Bank Notes would carry six percent interest and that would be payable to the banks, not the Treasury.  Spaulding noted that this additional interest would be an inducement to the newly formed banks to engage in national banking. This is analogous to the Hamiltonian offer of additional interest to holders of Treasuries to invest those instruments into the Bank of the United States as capital.

Further, the Treasury would be authorized by the government to issue new 20-year 6% bonds and sell them to the new banks, who would then keep a ratio (25%) on deposit at the Treasury. Those bonds would be held as security. Against them, the Comptroller of the Currency (a newly created position) would then issue National Bank Notes to the banks for circulation and investment. The Comptroller was authorized to issue as much as 90% of the value of the Treasury security in Notes to the banks.

Spaulding listed several additional benefits to “rich men” to invest their money with the government, and receive a national currency.

  • The national character of the bills to circulate at par across the country.
  • The notes will be receivable at par for all internal taxes and other payments to the government
  • The banking associations will be exempt from all state and federal taxation

There were other provisions which would guard against speculators from participating in the system.  This was similar in intent to the Glass-Steagall legislation adopted in 1933 under Franklin Roosevelt.

Reflecting on the significance of the bill, Spaulding said: “It is now most apparent that the policy advocated by Alexander Hamilton, of a strong central Government, was the true policy. A strong consolidated Government would most likely have been able to avert this rebellion; but if not able to prevent it entirely, it would have been much better prepared to have met and put down the traitorous advocates of secession and State rights.

A sound national bank, upheld and supported by the combined credit of the Government and rich men residing in all the States of the union, would have been a strong bond of Union before the rebellion broke out, and a still stronger support to the Government in maintaining the army and navy to put it down.

He then elaborated on the 80-plus year fight to create a national bank. He cited Thomas Jefferson as opposing all banks and highlighted the role of Hamilton in championing the national bank policy, and the devastating consequences for the nation in the failure to continue it. He took particular aim at the treacherous role of Andrew Jackson in this regard.

Spaulding underscored the urgent need to rectify this situation.

But now, when engaged in a gigantic war when the very existence of the Government is in such imminent peril, it is of the highest importance that it should exert all those great powers to maintain itself, preserve its own dignity, and enforce its own prerogatives. Congress and the Executive cannot fail now to do all in their power to save the Government and restore the national Union.

Sir, this Government has power to issue a national currency entirely independent of State authority; power to support armies independent of Governors of States or State laws; power to provide and maintain in like manner… As a necessary means for ‘supporting’ such an army and ‘maintaining a navy, we may provide for the issue of a national currency, through the agency of banks, or by the issue of legal tender notes directly from the Treasury….

The power to do this is located only in Congress and the Executive.

The Congressman then connected national banking and currency issuance to taxation and tariff collection. The total amount of taxable property in the nation, including the states in rebellion, was $16 billion, Spaulding said. This would be the security for the ever-increasing public debt.

A new plan of finance, he said, must revolve around two items: debt and taxation. The former included supplies for the army and navy, building the economy to generate the supplies, and conducting the war. There was a large need to incur debt to accomplish this, borrowing on the full faith of the government. Taxation fell on the entire property, the commerce, and business of the nation. He emphasized that the “GNP,” not in those words, was adequate to pay both the principal and interest on the obligations.

To execute both policies, Spaulding then returned to his major theme, i.e., the need to wield the immense power of the Federal government. Only the Federal government had the constitutional mandate to address the interconnected requirements of debt and taxation.  The time was ripe, and passage of the new bill was paramount.

Toward the end of his speech, Spaulding cited the ironic fact that the total output of the economy would be sufficient to service the debt and pay the principal. While war production was a net drain on the economy, the cost could, and would be overcome by the massive expansion of the real economy.

After much arm-twisting, the National Currency Bank Bill passed on Lincoln’s birthday, February 12, 1863.

Following the vote, the New York Times described the plan as “a centralization of power such as Hamilton might have eulogized as magnificent.” (p. 286)

National Bank Act of 1864

Implementation of the new act proved elusive.  The major East Coast banks refused to join the system. Barely over 100 banks, mostly small ones in the West, joined.  The ability to circulate National Bank Notes allowed these banks to add to their borrowing and lending capability, and generate new investments. However, they only issued a meager $4 million in new bank notes, barely a blip on the screen.

Lincoln's Hamiltonian Financial Revolution
James Gallatin, head of the Associated Banks, the center of opposition to the Bank Act.

The larger, mainly East Coast, banks did not need the perks of national banking and did not welcome the oversight. They were taking in other banks’ deposits and using significant amounts to invest in the stock markets. They were also clearing financial transactions of all types. In the decade prior to the war, the New York banks cleared $22 million per day; in 1864, they were clearing $115 million daily. These banks had become the center of financial transactions in the markets, earned significant money in the process, and exerted inordinate power on the trajectory of all forms of investment (good or speculative).

National banking threatened their racket. Under the National Currency Bank Act of 1863, banks which joined were required to keep 25% of their assets in their vaults. This provision was designed to make the banks safe, and to guard against wild speculations. Rural banks had to maintain a smaller amount in their vaults.

This provision partially curtailed the ability of small banks to move their deposits into New York, thus cutting back stock market action by the New Yorkers. One obvious purpose of the bill was to rein in the power of the Associated Bank syndicate. Their actions did not always conform to what was in the national interest, and Chase was determined to slam on the brakes.

But Chase knew that national banking was dead unless the cooperation of the Associated Banks was secured. Chase thus summoned the redoubtable Jay Cooke to create a new bank, a National Bank, in New York to compete with Wall Street. Cooke happily agreed. Chase announced that the Treasury would comply with the provision in the 1863 bill which required federal funds to be deposited only in National Banks. Cooke’s institution became the New York repository.

Cooke’s new bank and Chase’s threat began to shake Gotham. While both sides were considering their next steps, a new bank bill was drafted to enhance the 1863 legislation. A new provision would increase the tax on state bank notes with the intent of driving the state banks out of existence. Intense negotiations ensued; some provisions were accepted, but an unfortunate compromise was also agreed upon. Reserve requirements were lowered, and the high tax on state bank notes (called the “death tax”) was shelved.

The lowered reserve requirement would enhance the flow of rural deposits into Wall Street. Removing the “death tax” allowed the large banks to continue business as usual. The two clauses cemented the power of the east coast banks. This would be the seed of the post-war rise of the New York money center banks.

Lincoln's Hamiltonian Financial Revolution
A picture of Wall Street in the early 1860s

However, Chase ensured that the government would deposit its federal funds only in National Banks. And National Banks, reasonably constituted, would be the recipients of National Bank Notes for their own investment and under national supervision (the Controller of the Currency).

There were very juicy inducements to join the system. While the banks would have to purchase Treasury bonds as security for their ration of the Notes, they would receive 6% interest on these bonds. In addition, the National Bank Notes also paid interest, 6-7%, and that money also accrued to the participating banks. So, the banks could earn upwards of 10% annual interest for joining the system.

The National Bank Act of 1864 passed in June of 1864. National Banks in large metropolitan areas were to be capitalized at $100,000 and banks in rural jurisdictions at $50,000. Banks had to purchase Treasury bonds equal to 30 percent of their paid-in capital, and put them on deposit with the Treasury. They received National Bank Notes equivalent to 90% of their deposited Treasuries.  Participation skyrocketed after passage. By the end of 1864, nearly 600 banks had joined the system, including 100 in New York. Despite the compromise, a national system had been created, a national currency had been set up and power had shifted from the states to the federal government.

Chase and Sherman never gave up their quest to curtail the power of the state banks. In the Spring of 1865, Senator Sherman spearheaded a drive to enact punitive taxes on the state banks. On March 3, 1865, a 10% tax was levied on the state bank notes. The dual state/federal bank system still exists, but the power of national banking had been cemented.

In summary, by war’s end the following new configuration of credit and banking had been created:

  • Government debt creation was issued as the primary mechanism to finance the war
  • A new tax system, including income and other taxes had been created to collect revenue to help defray costs of the war and running the government
  • Tariffs levied on incoming products had dramatically increased, bringing more money into federal coffers and spawning a tremendous increase in American production
  • Two forms of national currency, i.e., Legal Tender and National Bank Notes, had been created to supplant the state bank note system. This further cemented federal power and streamlined the process of credit creation.
  • Two National Banking Acts had been passed, creating a federal national banking system under national supervision (Comptroller of the Currency). This brought needed revenues into the Treasury, created a uniform currency, and allowed banking policy to flow from Washington not the states. While imperfect, the new system was a vast improvement over the previous deregulated structure.

Industrial Juggernaut

The massive infusion of capital into the physical economy led to successful prosecution of the war, and the transformation of the U.S. economy into an industrial behemoth. The new banking and credit policy “directed” investment into winning the war. The byproduct was the creation of the most powerful industrial economy on the planet. Author Lowenstein chronicles these developments throughout the book.

Completion of the Transcontinental Railroad, in 1869 at Promontory Point, Utah.

There were dramatic explosions of production and a new infrastructure to support the expansion.  Lowenstein points to the central role of transportation. “Tonnage over the Great Lakes (beneficiaries of painstaking harbor improvements) nearly doubled over the course of the war. The North’s lead in railroad track gave it a decisive edge … tonnage between New York City and the Midwest grew 75%. Railroad dividends and stock prices rose in step. By the later part of the war, ninety trains entered Chicago every day, where none had gone as recently as 1850.” (pp 195-96).

Factories in lakefront cities including Detroit, Toledo, and Milwaukee produced machine tools, leather goods and industrial equipment. Iron boomed in Pennsylvania, which became the productive capital of the world.

U.S. agriculture also flourished. Despite the nation having a million men under arms, northern farms were increasingly manned by women and immigrants, and most importantly, underwent mechanization. Mowers, reapers, steam-powered threshers, and other new implements drastically increased productivity. Wheat and corn production set records. On top of U.S. consumption, farm exports between 1860-63 trebled, feeding much of Europe in the process.

Immigration played a significant role in the expansion as the North was flooded by newcomers seeking to make a new life for themselves, even in the midst of war. Lowenstein reported that Illinois gained 430,000 new citizens during the war; Minnesota 78,000, and similar figures occurred in the entire region. New farms were created, and colonization of the western states began to occur in earnest.

In 1864 and 1865, the economy was booming. Iron and coal production were thriving, mining was expanding nationwide to produce the inputs of the iron industry. New businesses were being formed overnight. Despite the defection of the cotton, textile, and related industries of the south, total manufacturing in 1864 was greater than at the onset of the conflict, even allowing for the massive investment needed to build the Transcontinental Railroad.

Studies and reports on the topic are voluminous. Suffice it to say that the fruits of the new financial architecture and the northern will to win the war, had created an industrial behemoth which became the envy of the world.

As Lowenstein put it, “The federal government had not only acquired a taxing power to pay for the war, but a banking system and a viable currency. Before the war began, every state had had its own money; presently, the United States would have only two: Greenbacks and National Bank Notes. Its debt, a measure of the public investment, had reached the towering sum of $2.68 billon, forty-one times as much as at the onset of secession. Yet with all its borrowing, America’s credit was strengthened. It now borrowed much bigger sums than under Buchanan at much lower interest rates. The federal government had not only paid for the war; it had emerged from it financially stronger.” (p. 314)

Hamiltonian credit had done its job.

[1] These “New Deal” measures are covered at some length by Lowenstein but are not included in this review. Suffice it to say that they involved the deployment of government credit to support advances in the technologies, infrastructure, and knowledge needed to fuel economic development.

[2] See “What Is the American System?”  on this blog.

[3] There were two exceptions. Customs duties and interest on government debt had to be paid in specie.

[4] Actually, the tariffs during the 1825 to 1830 period had been higher.

[5]  See https://americansystemnow.com/lincolns-campaign-for-a-national-bank/

[6] This background on Spaulding’s thinking is not included in Lowenstein’s book, but has been added by the authors to underscore the overall thesis.


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