The leading banks of New York, Boston, and Philadelphia suspended specie payments (i.e., exchanging paper money for gold or silver) due to depleted reserves. This suspension thrust the northern states into a financial crisis.
By year’s end, the Federal government was struggling to find ways to pay for the war. Treasury Secretary Salmon P. Chase had estimated that it would cost $320 million to win the conflict, but only $80 million was obtained through taxation. The rest had to come from import tariffs, public land sales, and the sale of government bonds. The first two did not raise nearly enough to meet the need, and banks were reluctant to buy bonds if they had to pay for them in specie.
The Federal supply of gold and silver had been rapidly dwindling since the war began because the government was required to pay its soaring debts to war contractors in specie. In addition, people concerned about the dwindling supply began hoarding their precious metals, adding to the shortfall.
An economic downturn ensued, made worse by the loss of southern markets. Nearly 6,000 businesses failed this year, and an article in the New York Tribune stated, “Never before perhaps in the history of this country has such a feeling of uncertainty, of alternate hope and fear, prevailed in the business community.”
Federal defeats earlier this year, along with General-in-Chief George B. McClellan’s seeming reluctance to invade the Confederacy, had also shaken public confidence in financial stability. And when news of British reaction to the Trent affair reached the U.S. on December 16, a panic occurred among the exchanges. New York banks experienced a run during which $17 million was withdrawn in three weeks. All of this threatened to deflate the value of paper money.
After the New York banks voted 25 to 15 to suspend specie payments, banks throughout the North followed suit, except those in Ohio, Kentucky, and Indiana. In all but those three states, people could only pay their debts by check or paper money (i.e., treasury or bank notes). This made it extremely difficult for the Federal government to pay its skyrocketing number of contractors, employees, and soldiers. This in turn made it difficult to obtain loans to continue to pay for the war.
The suspension meant that new financial measures needed to be enacted. In his annual report to Congress, Chase proposed creating a national bank system in which banks would receive membership by buying government bonds. The bonds would then be used to back the issuance of a new form of paper money. Congressional debate on this proposal continued into the next year.
Bibliography
- Jackson, Donald Dale, Twenty Million Yankees: The Northern Home Front. Alexandria, Va.: Time-Life Books, 1983.
- Long, E.B. with Long, Barbara, The Civil War Day by Day. New York: Da Capo Press, Inc., 1971.
- Longacre, Edward G. (Patricia L. Faust ed.), Historical Times Illustrated Encyclopedia of the Civil War. New York: Harper & Row, 1986.
- McPherson, James M., Battle Cry of Freedom: The Civil War Era. Oxford History of the United States Book 6, Oxford University Press (Kindle Edition), 1988.
- Schweikart, Larry and Allen, Michael, A Patriot’s History of the United States. New York: Penguin Books, 2004.