Market Speculation During the U.S. Civil War

Wars increase volatility in all sorts of markets by radically changing the circumstances of production and the final destination of the economy’s gross domestic product. New demand replaces old demand and the articles in shortest supply can quickly change. There is also considerable uncertainty in war; as the military theorist Carl von Clausewitz put it simply, ‘war is the province of uncertainty’. So, unless controlled, market volatility increases too, not just for physical commodities but for financial assets. This fact kept speculators busy during the American Civil War.

Markets

Even before the war, in the middle of the 19th century, buying activity on the New York Stock Exchange was powered with borrowed money. So, money markets in the city drove movements in stocks as a lot of buying was done with margin lending. In the 19th century, there was a seasonal dimension to this buying; money for margin lending was most abundant early in the year and was scarcest in October when cash was sent west for purchases of wheat, draining the city of credit. Early in the year, borrowing could increase the size of investors’ trades and the potential for quick gains in a stock market that was volatile and subject to frequent manipulation.

Stock prices fell when the civil war started in 1861. By the end of that year, New York banks resorted to suspending payments in precious metal specie. Despite this, the market stabilized in 1862 as the government printed money to fund the war spending which stimulated the economy. New paper money issuance was authorized and $431 million in new notes, the ‘greenbacks’, were outstanding by the war’s end. Meanwhile, the federal government debt grew from $65 million in 1860 to $2.25 billion by the war’s end.

During the war, paper currency depreciated while the extra money fed speculative episodes in the commodities and stock markets. At a time when speculation was considered seedy, many more people were attracted by the prospect of quick riches in financial markets than had been before.

Lithograph, ‘Running the “machine”’ by John Cameron, published by Currier & Ives, 1864

Speculation in Stocks

The war years saw new exchanges open, like the Open Board of Stock Brokers in New York which would merge with the New York Stock Exchange before the end of the decade. There was also the ‘Evening Exchange’, with trading until 9pm, which was opened in a New York hotel in 1864. An exchange for mining stocks, launched in March 1864, saw two hundred listings for companies with a combined $300 million in capital within just a single month of opening. New brokerage firms formed too, typically providing credit with very small margin requirements to their clients. The latter could lose their entire investment from a small movement in the stocks or commodities they were trading in.

Indeed, the success of a speculator was often short-lived. One example was that of Anthony Morse, who was buying large volumes of shares in early 1864 but who went broke before that very spring. The unravelling of his positions and the panic it caused sent share prices in some speculative mining companies down more than 90%. There was also Addison Jerome, a speculator who, in 1863, successfully cornered the market in some listed shares. The next year though, he was bankrupted when he was unsuccessful in cornering shares of the Michigan and Southern Railroad. As it happens, Addison’s brother Leonard Jerome, the grandfather of Winston Churchill, was also an active market speculator in this period.

Addison’s effort to corner the market in Michigan and Southern Railroad shares was frustrated by that company’s issuance of new stock. Behind the issuance was an investor in the railroad who happened to be its treasurer, Henry Keep, a Civil War-era speculator himself. Keep organized the first ‘blind pool’ during the war, a consortium of investors who placed their money with a speculator who would not disclose to his investors how he would trade with the money. This allowed the trades to be carried out without public knowledge which might frustrate the speculator’s efforts.

Gold

The suspension of the gold standard during the war meant that gold prices floated freely, which largely meant gold prices rose over time as paper money was printed liberally. Gold trading took place at the New York Gold Exchange, also known as the ‘Gold Room’. It was essentially a ‘spot’ market initially, as trades were settled next day with physical gold. Very quickly though, margin trading and futures trading developed on this exchange. After the war, this venue was the scene of an effort to corner the market for the precious metal in 1869, an event which triggered its own financial panic.

Another exchange, operating out of a nearby basement, facilitated special trades that fell outside the rules of the New York Gold Exchange. Across the exchanges, trading volumes grew as people from humble backgrounds placed bets on gold. Some trading was done with 10% margin requirements, meaning up to 90% of the positions of some investors was financed with borrowing.

These bets on gold were really bets on the future value of paper money and confidence in the greenbacks was volatile and gyrations in their value affected the price of everything else. These movements were usually prompted by news from the battlefield. Gold prices rose and bond prices fell whenever the Union army was defeated and gold prices fell and bond prices rose when the Union won. The gold price may represent a reduced need for a safe investment as the end of the war looked nearer with victories. This is an explanation that rests on the demand of investors for different stores of wealth. However, the tendency just mentioned also reflects the reduced prospects for future money printing if the war’s end was indeed near. This is an argument that rests on the relative supply of different stores of wealth.

Regardless, until the war ended, inflation in the United States was high largely because of large issuances of paper money. In late 1863, one gold dollar was worth about $1.50 in paper money but this price rose to over $2.00 in mid-1864. On September 3, 1864, one gold dollar was trading at a price of $2.54 in paper money. This sent prices expressed in terms of paper money higher. So, though perhaps unfair given the larger forces at work, people blamed gold speculators for price increases. Trading in gold was briefly prohibited by law in 1864 until this was reversed within less than two weeks.

Commodities

Speculative activity came under particular scrutiny when commodity inflation was particularly severe in 1864. A quarterly commodity price index for the period produced by economist Wesley Clair Mitchell rose from a level of under 180 at the end of 1863 to over 250 in late 1864 to early 1865. Commodity prices, expressed in terms of paper dollars, then fell as the war came to an end. The premium on gold also collapsed.

At the start of the war though, speculation in agricultural commodities abounded. Some speculators saw inventories of commodities as a safer store of value than paper money so even while holding their idle inventories, they would be better protected from loss. This turned out accurate as many private banknotes lost value early in the war and even ceased to be accepted.

The onset of war coincided with growing agricultural output in the rural Midwest; thus, trading activity on the region’s principal commodities exchange, the Chicago Board of Trade, was bound to grow. The circumstances of war did not make this easy though. Commodity prices in terms of gold came to be divorced from paper money. This made trade difficult, often slower, and prices volatile as gold was sometimes in too short a supply to facilitate trade in a medium with stable value.

Monetary developments and interruptions in credit further contributed to volatility in trade. Some speculators noticed that the price of gold in New York affected commodity prices and incorporated movements in these other markets into their trading strategies. Just as with gold, speculators in commodities like wheat were also blamed for price movements that likely resulted from the printing of money and wartime conditions.

Lesson

Wars are naturally conducive to financial speculation. Uncertainty and complexity in trade increases price volatility and this, in turn, increases potential trading profits. While even a field like insurance can draw new capital in search of high-risk high-return opportunities during war, the more common destinations are the stock market and commodities markets. During America’s civil war, liberal issuance of money made credit more available to speculators too. Making matters worse were the absence of any controls on this speculation. In later large wars, measures like rationing and punitive taxes on high incomes and excess profits would curtail speculation but these measures did not constrain financial markets in the 1860s.