The New Nation

by Frederic L. Paxson

In the spring of 1869 the railroad was finished and a spectacular celebration was held near Ogden, in Utah Territory. The finishing stroke was everywhere regarded as national, since not only had Congress given aid, but the union of the oceans was an object of national ambition. With the completion, the problem shifted from the exciting risks of construction and finance to the prosaic duties of paying the bills, and with the shift came a natural falling-off in enthusiasm.

The Union Pacific was the longest railroad of the sixties, and aroused the greatest interest. In an economic way it is merely typical of the speculative expansion of the North that began early in the Civil War and continued increasingly thereafter. The United States was engaged in a period of hopeful growth such as has followed every panic. After a few years of depression, stagnation, and enforced economy, business had revived about 1861. Confidence had increased, loans had been made more freely, and capital had taken up again its search for profitable investment. In the newer regions, where permanent improvements were least numerous, the field for exploitation had been great. The climax of exploitation was reached throughout the West.

As had been true at all the stages of the westward movement, the West was heavily in debt, and upon a forced balance would generally have shown an excess of liabilities over assets. Borrowed money paid much of the cost of emigration. During the first year the pioneer often raised no crops and lived upon his savings or his borrowings. He and his local merchant and his bank and his new railroad had borrowed all they could, while the creditor, living necessarily in the older communities where saving had created a surplus for investment, lived in the East, or even in Europe. The necessary conditions of settlement and development had prepared the way for a new sectional alignment of business interests, those of the Far West and the Northwest taking their tone from the interests of a debtor class, while those of the East represented those of the creditor. The possible cleavage was revealed as real when the United States Treasury Department, in its work toward financial reconstruction, approached the subject of the greenbacks.

The legal-tender greenbacks, which were in circulation to the extent of $433,000,000 in 1865, constituted not only a part of the debt of the war, but the foundation of the currency in circulation. Throughout most of the war they were supplemented by the notes of state banks, local token-money, and fractional currency, or "shinplasters," of the United States. Coin ceased to circulate in 1862 and was used only by those whose contracts obliged them to pay in gold or silver. In 1863 Secretary Chase inaugurated a system of national banks, to circulate a uniform currency, secured by United States bonds, but these did not become a factor in business until the state bank notes had been taxed out of existence in 1865. After this time national banks were formed in large numbers, replacing the uncertain notes of the state banks with their own notes, which were quite as good as greenbacks. But all paper money was below par in 1865, and gold remained out of circulation, at a premium, until the end of 1878.

The depreciation of the greenbacks reflected a popular doubt as to the outcome of the Civil War. They entailed hardship upon all who received them as dollars, since their purchasing value was below the standard of one hundred cents in gold. When the Government, desperate in war time, forced its creditors to accept them at par, it did an injustice which it regarded as real, though necessary. The speedy restoration of the greenbacks to par received the immediate attention of the Treasury upon the return of peace.

Hugh McCulloch, of Indiana, who became Secretary of the Treasury in 1865, was a banker of long experience and success. He proposed, if allowed, to reduce the whole war debt, including the greenbacks, to long-term bonds bearing a low rate of interest, and to create a sinking fund which should redeem them as they fell due. This involved the withdrawal from circulation of the greenbacks, and the destruction of that amount of the money used in business. Congress authorized it, however, and McCulloch canceled greenbacks from month to month until he had reduced the total to $356,000,000 in February, 1868.

The withdrawal of the legal tenders had not been long under way before protests began to come in upon the Treasury and Congress from the West. Bad as the depreciated currency was, it was the only currency available for the active business of the country. If the greenbacks should go there would be nothing to take their place until coin should finally emerge from hiding. The reduction of the volume of money in a time of increasing business would enforce upon each dollar an enlarged activity and a greater market value. The price of money rising, the price of all commodities measured in money would necessarily fall, and in a period of falling prices the West thought it saw financial catastrophe. There was enough real truth in the contention that resumption meant a fall in prices for the Treasury to be compelled to make the difficult choice between this evil and the other evil of a depreciated currency forced upon the people.

The creditor East regarded the possible increase in the purchasing value of the dollar with entire complacency. Its selfish interests harmonized with sound theories of finance. But in the debtor West the process had so different an aspect that the financial obligations of the United States were obscured by the local interest.

The great "boom" of the West began after the depreciation had commenced. Most of the Western debts, whether on the farm of the settler, the stock of the merchant, or the bonds of the industrial corporation, had been created in legal-tender dollars of the value of the depreciated greenbacks. Any appreciation which might come to the greenbacks must increase the content-value of the debt. If "dollars," borrowed when they were worth sixty cents in gold, were to be repaid in "dollars" worth eighty or more cents in gold, the debtor was repaying one third more than he had received, and no appeal to the importance of public credit could make him forget his loss. He resented not only the decrease in the actual amount of money, but the appreciated value of the remainder.

McCulloch, trained in finance, was ready to sacrifice the debtor for the sake of national solvency,—and, indeed, one or the other had to yield. But Congress felt the pressure, which was strong from all the West, and most strong from the Northwest, between Pittsburg and Chicago, whose industry had been reorganized during the years of war. In February, 1868, the retirement of more greenbacks was forbidden by law, the amount then in circulation being $356,000,000. The inflation which war had brought about was legalized in time of peace, and the Supreme Court ultimately ruled[1] that the issue of legal tenders, in either war or peace, is at the free discretion of Congress.