Lending money, even at a premium rate of interest, to a government facing existential crisis is hardly a safe proposition. Yet, it is often in these times of crisis, in these times of the greatest anxiety and disquiet that money is most desperately needed. During the American Civil War, the Union government’s Secretary of the Treasury, Salmon Chase, turned to a bond salesman with a new approach to marketing bonds. Jay Cooke sold the bonds which funded the war effort directly to individual investors, in the process earning a large profit for himself but one tiny compared to the value of the feat he accomplished.
The American Civil War began on April 12, 1861 with an attack on Fort Sumter in South Carolina by a nascent coalition of southern states, which was yet to include Virginia and other future members of the Confederate States of America. Despite early predictions to the contrary, the war proved long and costly. Paying for the war would be a challenge. The American federal government debt was $70 million and its credit was poor even before the war began. Spending rose as the war cost $2-3 million a day and this was not matched by an equal amount of new revenues. In 1864, the debt of the United States would reach $2.8 billion.
To pay for this, new taxes were introduced, including income taxes, inheritance taxes, and a stamp tax. However, President Abraham Lincoln was wary of raising taxes too much amidst the rebellion against his government. Thus, most of the funding for the war would be borrowed.
Tasked with funding the war was Salmon Chase. Chase was born in New Hampshire in 1808. A lawyer by training, he provided legal defense to runaway slaves before becoming governor of Ohio and a U.S. senator. Despite possessing little financial expertise, he was appointed Treasury Secretary under President Lincoln and would serve in his government before resigning in June 1864. Though perhaps none of the major financial initiatives of the day sprung from his own mind, they were seen through by him.
Money and Borrowing
Chase was starting with a system of money and finance quite alien to that of today. At the start of the war, America had no single national paper currency, but instead 7,000 kinds and denominations of banknotes from different banks circulated. During the war, new paper money was printed by the Union government. This began with $50 million in ‘demand notes’ authorized on July 17, 1861, so called because they were redeemable on demand at least when they were launched; this right was suspended later that year. The demand notes were one of five types of paper money issued by the Union government during the war.
The first ‘greenbacks’, a new national legal tender and successor to the demand notes, were issued in 1862. These were nominally convertible into precious metal coin or bonds payable in coin, but not on demand. Their value against gold slid as the war went on. This slide was cushioned by the fact that, compared to the Confederacy, the Union government relied less on printing currency to fund its war effort.
When it came to borrowing, three-fourths of Union government borrowing was on a short-term basis in 1861. Prospects for borrowing in Europe were poor on account of the war and diplomatic tension between the United States and Britain. So, the government turned to the domestic market for longer-term financing.
The Congress approved $250 million in borrowing and the first war bonds were placed with the public through banks in the summer of 1861. Nonetheless, Chase and others were skeptical of the existing banks’ ability to distribute the bonds necessary to fund the war, especially as early military setbacks reduced confidence. Making matters worse, declining bond prices slowed the pace of sales by the banks and triggered bank runs as they held on to the depreciating paper.
In the search for a better salesman for the government’s bonds, Chase decided on Jay Cooke. Cooke was appointed a Treasury agent, an important salesman of government bonds, in September 1861 and would effectively be in charge of government bond sales by 1862. It wasn’t entirely a chance encounter; he was already known to Chase through his father and brother who were, like Chase, also active in Ohio’s politics.
In any case, Cooke was a talented salesman and was certainly deserving of the role. He had previously sold a Pennsylvania state bond at par when expectations were in the area of at least a 20-25% discount to face value. Cooke accomplished this by selling the issue directly to the public, appealing to patriotism in advertising the issue, paying for this advertising himself. This was a novel approach, not used during the financing of the much smaller American war with Mexico, little more than a dozen years earlier.
In his new role, Cooke sold government bonds into the Philadelphia and Washington markets himself and used subcontractors to sell bonds elsewhere. Cooke managed a system of 2,500 salesmen, wrote and promoted editorials urging the public to invest and explaining how to do so, and spent lavishly advertising the bonds. The salesmen Cooke hired included former insurance or real-estate agents but some were influential leaders in their communities; they were all hired to put bonds in ordinary investors’ hands. By purchasing directly from a local salesman, small investors avoided the time and expense involved in transferring funds to a bank with which to make their purchase, an expensive hassle in 19th century America.
Cooke stood to make a commission of three-eighths of one percent on the volume of bonds he sold, though one-eighth went to his agents and subagents and he had his own expenses to pay. In syndicating to the broader public directly, he may have been inspired by French bond issues of the 1850s which were also marketed broadly. Jay Cooke collected foreign press coverage of these bonds and relayed knowledge of that experience to Chase. To ensure price dips did not deter investors, Cooke received authorization from Chase to set up a stabilization fund to support market prices for the bonds.
The Union cause became only more reliant on Cooke with time. Whereas he sold one-fourth of a $100 million bond issue in 1861, he sold 80% of a $500 million issue two years later. Near the end of the war, Cooke’s sales force was selling an average of $2.5 million in bonds a day, and this pace only accelerated as the war came to a close. Some of these bonds were even sold in the South as the Union army made gains. Buyers there were unionists expressing their support and some supporters of the Confederate cause looking to hedge their bets. Cooke sold $1 billion worth of bonds in all. After paying his expenses out of the commissions earned, Cooke made $700,000 to $1 million from the sales.
One of the issues popularized by Cooke was the “5-20”, a Union government bond which matured in twenty years but redeemable at the government’s option after just five years. While selling bonds was an uphill task in 1861, the 5-20s became so popular that they often traded at a premium to face value in the market. The 5-20s paid 6% interest split in two semiannual payments and were available in denominations as small as $50. For investors earning incomes above $600, and therefore subject to the new income tax, the interest on these bonds was taxed at only half the normal rate.
For maximum convenience, the investor could choose to purchase the bond in either bearer or registered form; ownership in the latter form would be recorded in a registry, protecting against loss or theft of the actual paper bond. The bonds could be bought in greenbacks, though interest was paid in gold, which carried a premium to greenbacks. Records show that investors in the 5-20s included the President himself, a French noble, a future President of Peru, members of Congress, business owners, and foreign and domestic banks but also soldiers, sailors, ministers, and other common folk.
The 5-20s were issued between 1862 and 1864; $650 million were outstanding by October 1865. Another $830 million in “7-30s” were sold, where the name of this issue referred to the 7.30% interest rate on the bonds and not its redemption period. These succeeded the 5-20s and were issued in 1864 and 1865. Together, the successful sale of these bonds tightened the public’s ties to the central government, incentivizing American unionism as the war was slowly won.
Another of Chase’s contributions to American finance was the implementation of the National Banking Act, which became law in February 1863. This allowed the federal government to regulate new national banks. The government allowed these banks to operate anywhere but limited their banknote issuance to 90% of the value of bonds placed with the Treasury as collateral. The national banks were required to purchase U.S. government bonds in an amount equal to one-third of their capital. Thus, the National Banking Act enlarged the market for government bonds amongst the banks.
Jay Cooke supported the National Banking Act and formed First National in Washington, one of the first national banks, which also became a large distributor of government bonds. National banks’ notes replaced those of the state banks in circulation and put more of the money supply under federal government control. Some saw in the national banks a means to diversify away from a reliance on Cooke, who was increasingly disfavored after Chase’s resignation and allegations of corruption. However, efforts to sell bonds without him and rely solely on the banks were unsuccessful so he returned to sell the government’s bonds until the war’s end.
The Civil War changed American finance and, though the war was only a temporary period of great anxiety, the system of currency, public finance, and banking in place by the war’s conclusion was considerably more similar to that of today than the system which it replaced. Salmon Chase, whose likeness circulated on banknotes and for whom a large private bank was named in his honor, certainly deserves some credit but so too does the less well-known Jay Cooke. Cooke raised the money the war required in an environment not seemingly conductive to such large-scale borrowing. Future ‘war bond drives’ would mimic Cooke’s approach more closely than the loans floated to fund prior wars.
More from the Tontine Coffee-House
1. Markham, Jerry W. “Chapter 4 – The Civil War and Speculation – Part 1 – Union Finance.” A Financial History of the United States, Sharpe, Armonk, NY, 2002, pp. 206–222.
2. The Museum of American Financial History. America, Money, and War – Financing the Civil War, New York, NY, 1994.
3. Newman, Patrick. “The Origins of the National Banking System: The Chase-Cooke Connection and the New York City Banks.” The Independent Review, vol. 22, no. 3, 2018, pp. 383–401.
4. Thomson, David K. “‘Like a Cord through the Whole Country’: Union Bonds and Financial Mobilization for Victory.” The Journal of the Civil War Era, vol. 6, no. 3, 2016, pp. 347–375.