Wisconsin adopted an ingenious plan, suggested to the State Bankers’ Association by Alexander Mitchell. The state banks had deposited with the state comptroller securities for their currency issues. The larger proportion of these securities was made up of the bonds of the southern or border states. Those of the secession states were considered worthless, while those of Missouri, large holdings of which were in Wisconsin, declined rapidly. The comptroller, as required by law, made assessments upon the state banks, which they found it difficult to meet. Mitchell proposed that the banks should purchase the bonds of the state war fund at par, and that the comptroller should accept them for the assessments. In this wise the credit of the state was improved and the currency secured. The details of the arrangement were that the banks took $800,000 of the war-fund bonds, seventy per cent of which was paid at once, three-fifths in specie and two-fifths in sound currency. The remaining thirty per cent was to be met in fifteen annual installments. The adoption of this expedient furnished the state with ready money, placed the banking currency on a sound foundation, and restored confidence to the community. Wisconsin’s banks resumed specie payments at the date fixed by law, December 1, 1861, and maintained them for some time after the New York banks had suspended such payments.
On the basis of these war-fund appropriations state agents flocked to New York to arrange for the purchase of war material. Arms and ammunition had to be largely secured from Europe. The New York banks arranged these transactions, and furnished exchange and information. The competition between the several state agents and those of the federal government raised prices inordinately. This was remedied when the federal government assumed full responsibility for all equipment.
The federal loans. The most important function of the banks was the aid they furnished the Secretary of the
Treasury in floating the great federal loans that were required by the war necessities. The special session of Congress which met in July, 1861, appropriated $250,000,000 for the immediate needs of the government, leaving large latitude with the Secretary of the Treasury as to the method by which this amount was to be raised.
The defeat at Bull Run put a very serious strain on the credit of the United States, and the forced sale of securities in a foreign market would have been disastrous to the future conduct of the war. In the dilemma in which he was placed, Secretary Chase paid a visit to New York, where Cisco, the assistant treasurer, invited the prominent financial authorities to meet him for consultation. Chase frankly stated the serious nature of the situation, and requested assistance and advice. From the standpoint of policy this was a wise measure, since previous to this time the New York bankers had held somewhat aloof from the operations of the federal treasury. Their prompt support at this crisis is to their perpetual credit, for although they largely profited in the end by this government connection, at the time of the operation the transactions were of daring boldness. The banks realized that without a firm government their own operations were imperiled, and thus they risked their all to support the government in its crisis.
At the first conference George E. Coe, president of the Exchange Bank, proposed an association to subscribe for the government loan. A committee appointed to develop a plan reported on August 15 for thirty-nine New York banks. Representatives from Boston and Philadelphia were likewise present, and the loan was apportioned among the three cities in accordance with the bank capital of each; that is, seventy per cent was to come from New York, twenty per cent from Boston, and ten per cent from Philadelphia. The association thus formed agreed to take immediately $50,000,000 of treasury bonds payable in three years with interest at seven and three-tenths per cent. This rate, representing a payment of
two cents a day on each one hundred dollars loaned, had been adopted by Secretary Chase in the hope of popularizing the bonds with the people. The banks composing the association were to pay over to the sub-treasuries of the three cities in specie ten per cent of the amount subscribed; the remainder was to be placed to the credit of the United States upon the books of the subscribing institutions. Meanwhile the bonds were to be offered to the people, both by the banks and the sub-treasurers, and no other United States securities were to be sold, except in Europe, while these subscriptions were being solicited. The associated banks also agreed to float a similar loan of $50,000,000 in October—if it had not by that time been taken by popular subscription—and another $50,000,000 in December.
This was the largest financial operation that had ever been attempted in the United States. Its successful accomplishment at that time was of the greatest possible value in maintaining public confidence, and in uniting the fortunes of the financiers with those of the federal government. It was a tribute to the organizing ability as well as to the patriotism of the founders of the bank association. The capital of the united banks was but $120,000,000, and their coin assets only $63,000,000. Their subscription to $150,000,000 of government securities was thus an act of faith.
In practice this agreement did not work out as the bankers had hoped. Chase refused to suspend the sub-treasury act, though authorized to do so by Congress, in order that the banks might pay the government’s creditors in clearing-house certificates; thus the specie began draining away from the banks into the sub-treasuries. The Secretary also began the issue of demand notes on the treasury in considerable amounts. Moreover, the public sales were less than had been anticipated. The bankers were accused of attempting to dictate to the government concerning the conduct of the war. The inevitable
result of all this friction was the suspension of specie payments by the New York banks December 30, 1861.