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Lincoln’s Inflationary Finances

It did not take long after Fort Sumter for Northern war expenditures to reach staggering proportions. James Randall in his “Civil War and Reconstruction” (1937, DC Heath) wrote: “With the treasury nearly empty, financial markets shaken, foreign bankers unsympathetic, taxation inadequate, and loans unmarketable except at a discount, the door of escape by way of paper money seemed most tempting.” Lincoln resorted to the printing press to create money.

Bernhard Thuersam, www.Circa1865.com

 

Lincoln’s Inflationary Finances

“The classic study of Union inflation was Wesley Clair Mitchell century-old “History of the Greenbacks.” Initially the war was to be financed with the use of government bonds, tax revenues would be used to pay the normal expenditures of government, and the gold standard would be retained. However, this system quickly collapsed in late 1861 and the first of three legal tender acts was passed in February 1862 with a total of $450 million in greenbacks authorized for issue.

When an economy has two types of money, such as gold and paper, and they are both defined in the same units, such as dollars, Gresham’s Law states that bad money will drive good money out of circulation. And in accordance with Gresham’s Law, greenback dollars quickly displaced gold dollars as the circulating medium of exchange.

The value of greenbacks quickly depreciated in terms of gold and fell to a low point of only 35 cents worth of gold on July 11, 1864. Amazingly, the Union currency had depreciated as much in three short years as the dollar has in the thirty years since the United States went off the gold standard. The prices of goods appreciated in terms of greenbacks from an index value of 100 in 1860 to a maximum of 216.8 in 1865.

Citizens tended to blame higher prices on business, speculators, and foreigners. Some government officials believed that speculators in the gold market were somehow causing the value of greenbacks to fall, but the real culprit for inflation was the government itself.

In addition to an ever-increasing supply of greenbacks, Mitchell showed that the value of greenbacks in terms of gold would change on the basis of expectations that in turn were based on peoples’ estimated probability that the greenbacks would be redeemed for gold after the war. Battlefield losses were associated with declines in value while victories meant higher values for the greenback.

Higher prices also meant that the Union government would have to issue more greenbacks in order to purchase war supplies and pay its soldiers [and pay enlistment bounties]. Because the Union government would eventually have to pay its war debts and redeem the greenbacks in gold, Mitchell . . . calculated that greenbacks had increased the real cost of the war to the government itself by $528 million. Of course, the politicians who borrowed and spent the money during the war were not necessarily the same ones who had to pay off the debt and redeem the greenbacks after the war.

Mitchell also found that the switch from gold to paper . . . [created] an illusory increase in property values, an increase in extravagance and the purchase of luxury goods, a crippling of economic efficiency, and a decrease in real wages for farmers, laborers, professionals, teachers and soldiers. As expected, the Union’s inflationary finances created an illusion of general prosperity that greatly upset the ability of entrepreneurs, workers, consumers, and bureaucrats to make accurate economic calculations.”

(Tariffs, Blockades and Inflation: The Economics of the Civil War; Mark Thornton and Robert Ekelund, Jr., Scholarly Resources Books, excerpts, pp. 68-69)

Dec 30, 2016 - Economics    Comments Off on French Bankers Fleece the Confederacy

French Bankers Fleece the Confederacy

At the height of Southern success in September 1862, French banker Emile Erlanger suggested a $25 million loan to the Confederacy through John Slidell, Confederate commissioner in Paris. Erlanger would raise the money in gold, in exchange for Confederate bonds at eight percent interest. For every dollar received the Confederate government would pledge its only source of wealth – cotton. Erlanger and his investors envisioned themselves upon Confederate victory the owners of $10 million worth of cotton, acquired for only one-fifth that amount.

Bernhard Thuersam, Circa1865.com

 

French Bankers Fleece the Confederacy

“Cotton on Southern plantations or in Southern warehouses hardly possessed the value that inhered in the same material deposited in Europe – that fact was recognized; yet the proffered security was very real and, at a sufficiently low price, might tempt adventurous foreigners. On this basis arose the so-called cotton bonds.

The plan was simply one to borrow money, giving as mortgage cotton lying un-transported in Southern States, owned by the Confederate Government. The plan met with indifferent success. Still, this distant cotton, — distant, that is, in European eyes, — even though it found little favor with conservative investors, presently made a strong appeal to the speculator.

A combination of events in the fall and winter of 1862-1863 gave zest to this gambling instinct. The first of these was the high price of cotton in Europe and the comparatively low price in the Confederacy. Textile areas in in Lancashire and in the northern region of France had reached an appalling depth of unemployment and misery, and millions of English workers were . . . in a state of impending or actual starvation.

The “famine” had forced cotton up to fifty cents a pound, or $200 a bale in the European market. Yet in the Southern States this same product was offered at ten or twelve cents a pound. Such possible profits would obviously justify great risks.

One preeminent fact, in the winter of 1862-1863 . . . Europe confidently believed that the war was approaching its end. The military events of 1862 . . . soon turned the balance in favor of the South. The collapse of McClellan’s Peninsular campaign, the second battle of [Manassas], and the tragedy of Fredericksburg indicated to the average Englishman and Frenchman a quick Confederate victory.

Lord Palmerston openly joked about the discomfiture of the Yankees; Gladstone made his famous speech, declaring Jefferson Davis had “created a nation”; and now, for the first and, as it proved, the only time, Great Britain seemed to be planning to recognize the Davis Government.

At this crisis – 1862 and the early part of 1863 – the Confederacy stood at its peak. If money was to be made in cotton speculation, the time to act had come. If the Union, as English observers said, was as dead as the Anglo-Saxon Heptarchy, its end would bring to the lucky holders of cotton a great increase in wealth. The eyes of European speculators dazzled at the prospect.

Out of this combination of circumstances – Federal defeats, the impending recognition of the Confederacy by Great Britain and France, the anticipated early end to the war, the low price of cotton in the South, and its extremely high price in Europe – came into being the celebrated Erlander loan. For the important fact to be kept in mind is that this was not a loan, as such governmental transactions are usually understood, but a huge speculation in cotton.”

(French Bankers Fleece the Confederacy; Statesmen of the Lost Cause: Jefferson Davis and His Cabinet, Burton J. Hendrick, Literary Guild of America, Inc., 1939, excerpts, pp. 217-219)

Public Debt, Then and Now

Abraham Lincoln was a devotee of the Alexander Hamilton/Henry Clay “American System” of public debt, tariff protectionism, government subsidies and a national bank. To finance his war in 1861, Lincoln turned to an income tax, and then succumbed to printing money. Nowhere in the United States Constitution is the federal government authorized to make paper money legal tender. By 1865, the public debt was $2.6 billion, and the direct/indirect cost of Lincoln’s war would reach $8 billion by 1900.

www.Bernhard Thuersam, www.Circa1865.com

 

Public Debt, Then and Now

“Contrary to official capitalist wisdom, debt does not create economic growth. This idea is a swindle. Interest to the very rich . . . does not produce anything. It does not multiply creatively into new enterprises and jobs; it merely diverts ever-greater proportions of earning that might be fruitfully invested.

The proof is all around us. How could the vast unpayable federal debt, which absorbs much of the government’s income just for the interest bondholders, foreign and domestic, possibly be an economic stimulus? How can the immense and near universal burden of personal mortgage and credit card debt possibly indicate a healthy economy and commonwealth?

The matter is simple, obvious to anybody except a politician, a captive economist, or a media flack, and it ought to be conveyed to the people at every opportunity. Debt is killing us. Every wise man in recorded history has affirmed that debt is not a good thing. Debt can destroy a family, a government, a society.

Alexander Hamilton, an upwardly mobile immigrant bastard with a Napoleon complex, declared that “a public debt is a public blessing.” Troubled, but not surprised, Jefferson noted a connection between debt cruel taxation that undermined the independence of the citizens, warning that “we must not let our rulers load us with perpetual debt.”

Weighed down by government debt, the people would have to labor ever harder to pay the debt-holders, leaving them “no time to think, no means of calling the managers to account.” Jefferson avowed as a core principle that “the earth belongs in usufruct to the living,” but the living had no right to consume the earnings of posterity.

Antebellum statesmen like John Taylor of Caroline and John C. Calhoun and economists like William Gouge and Condy Rageut made the same case. After the War Between the States, so did William Graham Sumner, Thomas E. Watson and countless other public men and thinkers.

Republicans (and their predecessors) have always been the party of bankers and bondholders, service to the rich being for them a natural and essential function of the federal government. Opposition to the federal debt was long a plank in the Democratic platform, but Democrats today are just as guilty as the Republicans in regard to the issue.

Lip service to the virtue of “low public debt” continued until Franklin Roosevelt discovered Keynes and declared that debt is no problem “because we owe it to ourselves” – “ourselves” being a conveniently vague and collective being.

The bipartisan bailout of misbehaving bankers and brokers that we saw a few years ago, and the failure of a multitude of presidential candidates to mention the matter, is not promising.”

(It’s the Debt, Stupid, Clyde N. Wilson, Chronicles, February 2016, excerpt pg. 16)

Dec 25, 2016 - Economics, Southern Patriots, The War at Sea    Comments Off on “Rhett Butler” and the Other Runners Speak

“Rhett Butler” and the Other Runners Speak

The port city of Wilmington, North Carolina, was the most successful and lasting entry for blockade-running during the war, not falling until mid-January 1865. Though Governor Zeb Vance had created State-owned runners to bring in military supplies, the Richmond government forced private runners into limiting luxury items and carrying government cotton and goods – thus reducing their profits. The “Captain Roberts” mentioned below was in fact Augustus Charles Hobart Hampden, a British sailor of fortune who wrote “Never Caught” in 1867, a personal account of his 27 trips through the Northern blockade. The home he rented is passed on the “Confederate Wilmington” walking tour, see: www.cfhi.net.

Bernhard Thuersam, www.Circa1865.com

 

“Rhett Butler” and the Other Runners Speak

“Shortly after the various features of the 1864 legislation were put into effect, Captain Roberts, one of the most successful blockade-runners, ceased all activities, saying:

“The game, indeed, was fast drawing to a close. Its decline was caused in the first instance by the impolitic behavior of the people at Wilmington, who, professedly acting under orders from the Confederate Government at Richmond, pressed the blockade-runners into their service to carry cotton on Government account in such an arbitrary manner, that the profit to their owners, who had been put to enormous expense and risk in sending vessels in, was so much reduced that the ventures hardly paid.”

Another of the most famous blockade-runners – often believed to have been the real-life model for Margaret Mitchell’s character of Rhett Butler . . . was Thomas Taylor, who made twenty-eight trips through the blockade. Unlike Captain Roberts, Taylor continued to run the blockade because he had negotiated a secret profit arrangement with the Confederate Commissary-General that compensated him for the 1864 legislation.

Late in the war, despite his best efforts to the contrary. Taylor accurately predicted the downfall of the Confederacy. Writing to his superiors on January 15, 1865 [the date of the Northern attack on Fort Fisher], he said, “I never saw things more gloomy, and I think spring will finish them unless they make a change for the better.”

As he had put it, had blockade-running been encouraged, “instead of having obstacles thrown in the way, I am convinced that the conditions of affairs would have been altered very materially, and perhaps would have led to the South obtaining what it had shed so much blood to gain, viz., its independence.”

It appears that the blockade-runners could adjust to the advances of the Union blockade, but not to the economic constraints of the Confederate legislation. As Captain Roberts explained, “the enterprise had lost much of its charm; for, unromantic as it may seem, much of the charm consisted in money-making.”

Economic motives, however much we support or reject them ethically, morally, or philosophically, appear to have determined the outcome for the lifeline of the Confederacy.”

(Tariffs, Blockades and Inflation, the Economics of the Civil War; Mark Thornton and Robert B. Ekelund, Jr., Scholarly Resources Books, 2004, excerpts, pp. 53-54)

 

Unproductive Republican Economic Policies

April, 1865 witnessed the victory of Northern industrial capitalism over the conservative, agrarian South – no longer could Southern statesmen restrain the North in the halls of Congress. Post-1865 America saw the rise of corporations, the completion of Manifest Destiny and near-extermination of the Indians, and the gilded age of “evil robber barons.”

Bernhard Thuersam, www.Circa1865.com

 

Unproductive Republican Economic Policies

“Historians have tended to treat the Civil War as a boon to industry and the American economy. Thomas C. Cochrane cites several prominent historians . . . who variously praised the impact of the conflict on wartime production and its stimulating effect on postwar economic and industrial development.

Cochrane . . . examined statistical data on industrial production and found that, in general, there was not a strong case for a positive impact and that the war had a retarding effect on industry and the economy. Cochrane also found little support for the claims of beneficial effects of the Civil War on postwar development. He concludes with this speculation:

“From most standpoints the Civil War was a national disaster, but Americans like to see their history in terms of optimism and progress. Perhaps the war was put in a perspective suited to the culture by seeing it as good because in addition to achieving freedom for the Negro it brought about industrial progress.”

[Charles and Mary] Beard’s claim that the Civil War was a spur to industry and the rise of the American economy is based on the lasses-faire philosophy of the Republican Party and its success in implementing its major policy goals, such as subsidies to the intercontinental railroads, the establishment of a national currency and the protective tariff.

The Republican’s economic philosophy was not truly laissez-fair. In fact, their policy agenda was the opposite . . . in that it advocated special treatment for big business and a much larger role for the federal government. This can be seen in Republican policies to subsidize railroads, provide protective tariffs [for select private industries], and increase government debt and government control over money and banking as well as in their attitude toward labor.

Their policies [of tariffs and subsidies] . . . are now considered economically wasteful . . . and considered nothing more than special interests seeking a handout from the taxpayer through the government. [That Republican policies were productive] ignores the negative effects on the agriculture, service and cultural sectors. The Republicans’ policy would be better labelled as mercantilist in that it facilitated rent-seeking behavior.

Capital diverted to railroad building would surely have been put to good use elsewhere in the economy . . . [and] Moreover, had railroads not been highly subsidized, a better built, lower cost, and more timely system could have been put in place.

Tariffs were a centerpiece of Republican policy. They reversed a relatively free-trade policy . . . [and] protectionism forced consumers to pay higher prices for both imported and domestically produced goods protected by the tariff – that is, they purchased fewer of these products, used less desirable substitutes, and had a lower standard of living.

On net, the losses to consumers and the overall economy are greater than the gains to the protected producers and the tax revenue that accrues to the government.”

(Tariffs, Blockades and Inflation, the Economics of the Civil War; Mark Thornton and Robert B. Ekelund, Jr., Scholarly Resources Books, 2004, excerpts, pp. 84-87)

Corporate Tricks and Devices

Few, if any, Gilded Age tycoons were expert economists – but all understood theories of supply and demand, the law of diminishing returns, and assumed that every man was motivated by the selfish love of gain. Most also believed in unfettered competition, theoretically, unless bribed government officials could be used to handicap competitors. U.S. Grant’s notorious administration of corrupt and bought politicians helped pave the way into the Gilded Age – the predictable outcome of Lincoln’s revolution.

Bernhard Thuersam, www.Circa1865.com

 

Corporate Tricks and Devices

“Nobody expounded the folly of tampering with the laws of economics more eloquently than Yale’s great teacher of political economy, the dynamic William Graham Sumner. In his book What Social Classes Owe to Each Other, published in 1883, he had put the reformers to rout.

“The yearning after equality,” he had written, “”is the offspring of envy and covetousness, and there is no possible plan for satisfying that yearning which do aught else than rob A to give to B; consequently all such plans nourish some of the meanest vices of human nature, waste capital, and overthrow civilization.”

This emphatically did not mean that Sumner was opposed to a better life for everybody. On the contrary, as a man of high and generous principle – he had begun his working life as a clergyman – he was heartily in favor of it. But he believed in the wider extension of opportunity, not in changing the rules under which business was conducted. He argued that:

“[Instead] of endeavoring to redistribute acquisitions which have been made between the existing classes, our aim should be to increase, multiply, and extend the chances. Such is the work of civilization. Every improvement in education, science, art or government expands the chances of man on earth. Such expansion is no guarantee of equality. On the contrary, if there be liberty, some will profit by the chances eagerly and some will neglect them altogether. Therefore, the greater the chances, the more unequal will be the fortune of these two sets of men. So it ought to be, in all justice and right reason.”

Sumner would not have argued that there were not some ways in which legislation could protect the economically helpless. But he thought that most reform legislation was conceived in ignorance and drafted in folly.

“You need not think it necessary,” he would tell his Yale classes, “to have Washington exercise a political providence over the country. God has done that a good deal better by the laws of political economy.”

The irony of the situation lay in the fact that for generations men have been tinkering with economic law to their own advantage, and in the process had produced institutions which were emphatically not God’s work – as most of Sumner’s hearers presumably supposed them to be – but man’s.

The corporation, for instance, was not an invention of God’s. It was an invention of man’s. It was a creature of the state . . . [and] one of the great inventions of the nineteenth century . . . Yet be taking adroit advantage of the legislative acts which defined its privileges, one could play extraordinary tricks with it. Corporate devices could be used to permit A to rob B – or, let us say, more charitably, to permit A to drain off all the gravy in sight and leave none for B.

It was largely as a result of the discovery of tricks that could be played with corporations, and particularly with their capital stock, that the wealth produced in such a tremendous spate at the turn of the century flowed in large proportion into a few well-placed hands.”

(The Big Change, America Transforms Itself, 1900-1950, Frederick Lewis Allen, Harper & Brothers, 1952, pp. 67-69)

 

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