When it comes to Europe, sovereign debt default is never far from anyone’s lips, with perennial bad-boy Greece the first place to look. A bond panacea among cash-crunched nations is not anything new. We have only to peer back those 150 years to the American Civil War to see that bonds were a first-look solution in a divided nation cash-strapped on both sides.
The great academic question over the costly conflict of 1861-1865 remains: what caused the war, slavery or states’ rights? There is, however, another major point of discussion – the Civil War’s huge cost and its enormous economic implications back then as well as now.
Following the National Bank Act of 1863, which established a national currency under the Hamiltonian concept and provided for a federal banking system, President Abraham Lincoln optimistically announced his financial emancipation proclamation, stating that “Finance will rule the world for the next fifty years.” He didn’t know how right he was. Fifty years out must have seemed a long, safe stretch of time to him. The great man was a fiscal visionary, though he was at least a hundred years short on his prediction.
Finance may rule the world, but that can have a downside as well as the Lincolnian upside. There are lessons to be learned from history, to be sure. History was kind to the Northern economy during the war. As the South fell apart, the Union only got stronger throughout 1861 to 1865. Except for an early run of incompetent military generals leading the armies, everything went the Union’s way. The stars in their courses set a timely gathering of economic, human, and historical factors for the North that resulted in prosperity unseen anywhere else in the world. But both sides quickly learned that their budgets at the outset of 1861 were woefully insufficient to support the massive war machinery required in the days ahead.
While the cost of lives at the price of blood was immeasurable, the monetary cost of the war, though painful in its own way, revealed a bounty of human and natural resources in the surviving Northern states, and territories beyond. On the human side, two men in particular became lynchpins to the growing Northern economy: one was Montgomery C. Meigs, a West Point graduate; the other, Philadelphia banker, Jay Cooke.
Meigs was newly-appointed to manage the Northern war effort. His job was more than formidable. It required great skill and efficiency in procurement of contracts with manufacturers, shippers, and suppliers. He had to deal effectively with countless companies, individuals, and institutions as well as manage the financial system that was the underpinning of everything. Meigs’ department accounted for over 90% of all government expenditure by the time the war was over. This amounted to more than $1 billion. At war’s end, the national debt had reached $2.5 billion from $65 million in 1860. The cost of the war for the North was $3.4 billion, just slightly more than that of the South. Despite the exorbitant cost, prosperity was rippling through every phase of the Union economy, then comprised of the twenty remaining United States.
With the national debt skyrocketing, coming up with cash became a daunting challenge. Bonds were the immediate answer. Jay Cooke was the man chosen by Lincoln for the job. The new head of the Treasury Department would have his own formidable challenge: sell $500 million in bonds to the public at 6% interest. The bonds were known as ‘Five Twenties,’ redeemable in five years with a maturity date of twenty years.
Cooke’s bond sale was a huge success. At the peak of the sale, the public was buying more than $1 million worth of bonds a day. About 25% of Union families bought bonds. All told, bond sales funded 65% of the North’s war chest. The timeliness of Union victories at Gettysburg and Vicksburg on consecutive days (July 3, and July 4, 1863) boosted public confidence so much that there was a sudden run on the bonds and the sale had to be closed quickly.
The economy soared. Still, the cost of the war was so high that the success of the bond sale alone was not enough; thus, the printing of paper currency, “greenbacks.” Initially $150 million of the new paper money was printed. The government made a move to underwrite confidence in the greenbacks by allowing their conversion to the Five-Twenty bonds.
The North had become an industrial and financial juggernaut. The influx of bond money, printing greenbacks, and sweeping tax changes provided a virtually unrestricted source of revenue. In hindsight, a permanent platform was laid for America’s means of handling its fiscal and monetary systems into the twenty-first century.
Hard times in the South
The lost cause of the South was quite a different story. There were no superlatively brilliant financial figures emerging to take what little resources the South had and parlay them into something even remotely approaching economic viability. The only thing the South really had going for it was its chief product, cotton. Prior to the start of the war, Southern cotton provided 75% of the world’s supply and accounted for 60% of U.S. GDP. But political miscalculations derived from thinking that cotton would save the day for the South were economic mistakes.
Attempting to leverage their cotton power, the Confederacy looked to Great Britain and France for financial and military help. It didn’t work. The Union blockaded Southern ports, thereby prohibiting international cotton commerce for the Confederacy. Blocking the South’s cotton exports did not matter, regardless. Britain addressed the temporary shortfall simply by turning to India and Egypt to fill the hole. The real commodity problem for England and France was, instead, a grain shortage caused by widespread European crop failures. The North, meanwhile, had an abundance of grain. Northern grain shipments to Europe doubled, thereby reducing even further the chance of an anti-Union alliance between the Confederacy and European powers. The grain exports, along with the North’s own consumption to feed its armies as well as the civilian population, infused vast capital into the economy. It also created a lot of jobs.
The Confederate States of America turned to the idea of bond sales just as the North was doing. But Confederate bonds were an unstable proposition from the beginning. Sales fell flat because of a shortage of cash all throughout the Southern states. Inflation set in and bond yields were obliterated. The inflation rate for the South rose 9000% by war’s end. That was 112 times greater than the Northern inflation rate of 80%. Confederate bonds more closely resembled Greek bonds of 2010 and 2011.
Before giving up on bonds altogether, the Richmond government tried an international bond market of sorts. A large Paris bank floated a $15 million bond, a so-called cotton bond, using Confederate cotton as its backing. It was designed to provide the CSA with European credit, but only $8.5 million was raised on account of the North’s stubborn blockade.
Eventually the Southern economy reached crisis stage. Bonds didn’t save the day, nor did graybacks --- the South’s version of greenbacks --- nor did any form of taxation. Everything the North did right, the South did wrong. The Southern government went on to accumulate $500 million in certificates of indebtedness through its futile Impressments Act of 1863, whereby private property was seized for the war effort.
When the South finally succumbed to military and financial failure, their society crumbled --- truly, gone with the wind. Strangely, the largest industry in the South had become healthcare (sounds familiar!). Practically every building had become a hospital. Health issues went beyond caring for wounded soldiers. Near-starvation and sanitation problems also affected the remaining general population of approximately five million non-slaves.
Looking Back, Looking Ahead
Reflecting on the course of America’s history, what the country is today can in large measure be traced back to the Civil War. Through that supremely painful ordeal, the war made the nation confront its own conscience on the value of humanity. The cost was high. But the result was an inescapable consequence that made the divided nation singular once again and powerful for decades to come.
This month, September, Americans endured two particularly somber annual observances in the country’s history: the highest single-day losses of life on the country’s own soil. Casualties from the terrorist attacks of September 11, 2001 looked first as though they might surpass those of September 17, 1862, the date of the Battle of Antietam. Casualties on 9/11 turned out to be 3,000. Antietam suffered 22,720 casualties. America survived a war in its own land a century-and-a-half ago. The country emerged a stronger nation for it. Let’s hope that the same can be said of the war that began a decade ago.