New Orleans Banking During the Civil War

In the United States, New Orleans was the premier banking center of the pre-Civil War South. The Civil War itself did not change this, but the situation did look bleak. Most of the city’s banks were closed or winding down after New Orleans was occupied and split from the rest of the South. There was also a shortage of money as old Confederate banknotes became worthless. However, the occupation helped perpetuate its regional importance after the war as New Orleans got a head start over other southern cities in developing a new banking system under the National Banking Act.

Pre-War

Generally, Southern banking was not as developed as it was in the North; New York provided financial services to southern clients because, in large parts of the South, there were too few banks, or rather, the banks there were too small. An exception was to be found in New Orleans, the largest port in the southern states. Half of the South’s cotton production transited through New Orleans each year and, since the city first became a part of the United States, it was an important financial center too. Both the First and Second Bank of the United States had branches established in New Orleans and the city also possessed a federal mint. New Orleans was further home to a wide variety of merchants, brokers, and bankers; many of these had arrived there from the northern states or from abroad.

The city’s banks were well respected and may have been among the strongest in the country. An 1842 banking law in Louisiana required the state’s banks to keep reserves in precious metals equal to one-third of their banknotes and deposits. Otherwise, the banknotes were appropriately backed by other short-term assets like loans or discounted bills due within ninety days. This composition of assets kept New Orleans banks, like the Citizens Bank, strong. New Orleans banks fared comparatively well during the Panic of 1857, either suspending payments only briefly or not at all.

New Orleans had eleven incorporated banks going into the war. These banks supplied the city and the region with widely-accepted money; they had issued liabilities of $19.8 million in the form of deposits and another $11.6 million in the form of banknotes. These were sizable amounts for any city’s banks.

Deposits in New Orleans banks comprised about half of those in southern banks altogether. Against these liabilities, the banks held $13.6 million in specie reserves, more than existed in the rest of the southern states combined and a stockpile second only to the banks in New York, which stood at $26.4 million. Besides its own domestic firms, banks of other states and from abroad employed agents in New Orleans. Banking and other financial services were also provided by private (unincorporated) bankers, merchants, brokers, and others.

“New Orleans from St. Patrick’s Church” print by J.W. Hill & Smith, 1852

Early War

After having been apprehensive for months following the election of 1860, the city saw a commercial crisis. Money was not lent anymore. Banks stopped making loans to shift the balance of their assets towards precious metal specie and reduce their liabilities. Those advancing money against merchants’ receivables suspended their operations. As for the city’s economy, the credit freeze was offset somewhat by frenzied export activity as buyers, nervous about the future, sought to buy up and export as much cotton as they could.

Still, the economy struggled in the winter as the credit crunch continued. By April 1861, the banknotes of New Orleans banks in circulation had declined by one-third. The short-term assets of the city’s banking system, much of it tied up in forms of trade finance, had fallen from $24.4 million to $14.1 million. Despite the crisis, New Orleans banks did not have to suspend withdrawals or redemptions into precious metal, something that cannot be said of banks elsewhere in the South and North alike.

When the war started, taxes had to be raised and money borrowed. The Confederate government used the bullion inventories of the New Orleans mint to make new coins. The offices of the American Bank Note Company in the city were employed to print new banknotes for the Confederacy.

New Orleans banks initially refused to accept or pay out Confederate banknotes. Such paper money would discourage the use of the banks’ own notes. True, the Confederate notes were not redeemable into precious metal specie whereas the banks’ own notes were, meaning it was more secure for the banking system to transition to the new paper money as the primary circulating medium. However, New Orleans banks had just survived a remarkable crisis without resorting to suspending convertibility into precious metals. The banks had also been building up their precious metal reserves, which increased to $17 million by April 1861.

Ultimately, the Confederate Secretary of the Treasury pressured the Louisiana Governor to force the city’s banks to relent. For its resistance on this point, New Orleans was subjected to suspicion by the Confederacy. In some ways, it was already the least southern of the South’s cities and its ties to northern and foreign capital were a major reason why. The city had also largely voted for the moderates in the 1860 presidential election, namely John Bell or Stephen A. Douglas, over the southern Democrat John C. Breckinridge.

Occupation

The city quickly felt the effects of the war. As in other southern cities, goods became scarce. Buying by city merchants in the countryside caused considerable tension between New Orleans and the population in rural Louisiana which faced its own shortages. The U.S. Navy blockaded southern ports and the Union army tried to split the Confederacy in two along the Mississippi River. This made capturing New Orleans an early military objective.

When the attack got underway, a retreating Confederate army took specie out of the city. At the start of the occupation, there was panic buying but grocers and others were uncertain about the value of money paid for these goods. When New Orleans was captured, locals began trading their goods for food obtained from Union soldiers in the city. With the occupation, Confederate banknotes ceased to circulate as money starting on May 27, 1862. Only private banknotes, Union ‘greenbacks’, gold, or silver could circulate as money under orders from the occupying army. People rushed to spend their Confederate money before it became demonetized.

“A number of persons have called on me since Monday with Confederate money to buy groceries, saying that was all the money they had. I was willing to receive their money to relieve their distress, but did not dare to. So I went to Genl. Butler to get his permission to receive it, but he refused sternly & positively.” – diary of New Orleans grocer H.A. Snyder, May 31, 1862 (quoted in Hans Rasmussen’s The Monetary Crisis of the Fall of New Orleans)

A shortage of money ravaged the city. Few silver coins circulated in practice, so paper money issued by private banks, the city government, or merchants were practically the only money in use. Paper notes had to be printed in denominations as small as five cents. Even trolley tickets changed hands as money. In these conditions, merchants found it difficult to collect on debts and trading in securities stopped because there was no money.

City of New Orleans $1 Note, 1862 (source: The Historic New Orleans Collection)

To address the situation, New Orleans’s city government printed small-denomination notes to replace the myriads of monies issued by city merchants, generally redeemable only in merchandise and which were easily counterfeited. These municipal notes were accepted in payment of taxes. Issuance of the money grew in 1863 and there were $2.23 million of these notes outstanding by February 1864. Especially in 1864, money from the north, specifically the greenbacks introduced during the war, came to circulate more and more. Still, this municipal government money circulated as well, albeit trading at a small discount to greenbacks.

Banks

The replacement of their banknotes, first by Confederate notes and then by municipal and Union government notes, reflected the reduced state of the banks. New Orleans banks continued to hold loans made to borrowers in parts of the state beyond the front lines. They also held Confederate securities. With the dubious quality and marketability of these assets, bank solvency was questioned. They became financially unable to redeem their banknotes for permitted legal tender. Banks were then sued for nonpayment and often ordered to liquidate.

By February 1863, six banks in the city had closed. At least two of the remaining five seemed to have suspended many operations or were winding down. Banknotes in liquidating banks were changing hands at discounts of up to 30% and bank deposits contracted from nearly $20 million in 1859 to $10 million by 1865.

An important new bank was formed in this period of contraction though. The First National Bank of New Orleans launched in January 1864. It was chartered under the National Banking Act, enacted during the war in the North. The bank helped Union greenbacks circulate more widely and the establishment of the First National Bank of New Orleans marked a turning point in the city’s banking system.

Post-War

After the Confederacy surrendered, banks across the South closed. As in New Orleans, new ones opened, including banks organized under the National Banking Act. These eventually complemented state-chartered banks and increased the use of greenbacks in the south. In New Orleans, the recovery had gotten underway sooner, due to the city’s early occupation and the creation of the First National Bank of New Orleans earlier than the formation of similar banks in the South.

The old New Orleans banks never recovered gold taken by the retreating Confederate army. However, their position did recover nonetheless. The city’s banks saw other sources of uncertainty, namely the outcome of their loans to planters as well as municipal and state bonds they held, resolved in their favor. Courts ruled that old debts to planters remained valid and bond prices recovered after the war. With the positive news, confidence in private banknotes was restored and they began to be accepted at face value once more.

Together with the greenbacks, the revitalization of the city’s banks reduced the need for municipal banknotes. This came at a good time. There were concerns that the notes were overissued at the end of the war. Other cities and even the state government were issuing similar notes. The value of the municipal notes dropped when there was discussion of New Orleans issuing them to finance state government deficits, besides just for the city’s own needs. This idea was eventually dropped. Nonetheless, doubts about similar notes issued by the state government discredited the city notes too. The city government withdrew its paper money from circulation starting from the late 1860s.

The financial system of the South remained behind that of Northern cities but New Orleans remained an exception. New institutions emerged. The New Orleans Cotton Exchange opened in 1871, trading in cotton and cotton futures contracts, and a stock exchange opened in New Orleans in 1875.

However, the money supply was restricted until precious metal reserves could be accumulated. Eventually, the ratio of banknotes to bullion was at a point where the redemption of banknotes for gold could be restored in 1879. This came at a cost though as money, and therefore credit, remained scarcer in New Orleans, like much of the South, than in the North.

Lesson

The Civil War cut New Orleans off from other financial centers, both in the northern states and abroad. The city’s banks were then separated from many of their Louisiana customers by the occupation of New Orleans early in the war. Required to honor redemptions and withdrawals in hard money or Union banknotes and much of their assets trapped outside the occupied city, even conservatively run banks couldn’t continue operating. The extent of a banking system marks the boundaries of a certain economic zone. Splitting a bank’s territory into two parts with an impassable frontier between them, two invertible currencies, and different regulations required, in the case of New Orleans, nothing short of the creation of a new banking system.

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