Money and Banking Since 1860
THE OUTBREAK OF THE WAR BETWEEN THE STATES in April, 1861, found the United States with a monetary structure consisting of standard gold coins, subsidiary silver and minor coins, and the note issues of some 1,600 state banks. Although, legally, the country was on the bimetallic standard, the mint ratio of 16 to I undervalued silver sufficiently to keep the full-weight silver dollar out of circulation.
The paper currency provided by the state banks was of all degrees of goodness. Some of it was accepted at par over a wide area, but a great deal of it was of such questionable value that it was subjected to a heavy discount when circulated at any considerable distance from the place of issue. Much of it was backed by the bonds of Southern or border states; and when the South seceded from the Union, the value of this security shrank seriously, with the result that banks failed by the wholesale and the volume of worthless currency outstanding decidedly increased.
President Lincoln had assigned the important post of Secretary of the Treasury to Salmon P. Chase, a former governor of Ohio, and United States senator from that state. Mr. Chase was a lawyer of ability, but had had no practical experience in finance. The administration had fallen heir to a bad fiscal situation. The large deficit and weak national credit which the new secretary found made his task all the more difficult.
Much criticism has been leveled at Secretary Chase for his policy of borrowing and of issuing paper money instead of inaugurating immediately a rigorous system of taxation. Granting that a war should be financed as much as possible by taxation, as little as possible by borrowing, and not at all by fiat paper money issues, the situation that confronted the Treasury during the first two years of the war must be considered before judgment is passed on it.
In the war's early stages the North, blindly confident that the "rebellion" could be put down in a few months, held out against the slow and unpopular device of taxation. Furthermore, the administration was____________________