Paying For The War

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Cooke’s younger brother, Henry, had close political connections with Salmon P. Chase, the Ohio senator and governor and Lincoln’s first Secretary of the Treasury. The younger Cooke saw to it that his brother got to handle a $2,000,000 bond issue for Chase.

After the disastrous First Battle of Bull Run in the summer of 1861, Jay Cooke, according to his biographer Ellis P. Oberholtzer, “put on his hat, left his office, and visiting the bankers of Philadelphia, in a few hours collected over $2,000,000 on the security of three-year treasury notes.” A few days later Cooke accompanied Secretary Chase to New York and helped him raise an additional $50,000,000 from bankers there, pending the issuance of government bonds paying 7.30 percent interest. (The interest rate of these bonds, the so-called seven-thirties, was chosen, apparently by Chase, for no better reason than that they would pay two cents a day in interest for every hundred dollars in face value.)

The sum of $50,000,000 was a huge underwriting for the banks of those days, but a drop in the bucket compared with what Chase realized would be needed. The national debt had stood at $64,000,000 on July 1, 1860, and a year later had risen to nearly $91,000,000. Chase estimated that by July 1, 1862, it would stand at $517,000,000.

Until then the government had handled its debt by quietly placing bonds with the major bankers and brokers, who either held them in their reserves or sold them to their largest customers. Clearly a new system was needed, and Jay Cooke devised it.

Cooke was made the agent of the federal government to sell five-twenty bonds (so called because they could be redeemed in not less than five years or more than twenty; meanwhile, they paid 6 percent interest, in gold). He advertised the bonds widely in newspapers and handbills. He had the Treasury offer the bonds in denominations as low as fifty dollars, and he accepted payment on the installment plan. He deliberately tried to involve the little guy. Thus, Jay Cooke invented the bond drive, a major feature of every great war since.

By 1864 Cooke was selling bonds so successfully that he was actually raising money as fast as the Union could spend it.

Before the Civil War far less than 1 percent of the population had owned any securities whatever. Cooke sold government bonds to about 5 percent of the Northern population. John Sherman, an influential senator from Ohio, said Cooke made the virtues of these bonds stare “in the face of the people in every household from Maine to California.”

Not content with advertising, Cooke planted stories in newspapers. “Here is a letter from a lady in Camden who orders $300,” ran one called “A Day at the Agency for the Five-Twenty Loan.” “There is one from St. Paul, Minn, for $12,500. … Near one of the desks is a nursery maid who wants a bond for $50 and just behind her placidly waiting his turn is a portly gentleman, one of the ‘solid men’ of Philadelphia … He wants $25,000.”

In May 1864 Cooke was selling war bonds so successfully that he was actually raising money as fast as the War Department could spend it, about $2,000,000 a day at this point. Altogether the North raised fully two-thirds of its revenues by selling bonds. The South, with few large banks and little financial expertise, could raise less than 40 percent by this means.

Cooke’s successful bond drive caused a breathtaking rise in the United States’s national debt. In 1857, before the onset of the depression, the debt had stood at a minuscule ninety-three cents per person. Eight years later it had grown by a factor of eighty and stood at $75 per person, a height it did not reach again until World War I. But because the North could throw so much of the cost of the war onto the future, as the South could not, its economy remained intact, able to churn out the war matériel that finally overwhelmed the rebellion.

Confederate paper money and bonds, of course, died with the Confederacy, but the greenbacks and the national debt went on and on. Whether and when to return to the gold standard was, second only to Reconstruction, the leading issue in national politics after the war. Debtors wanted more, not less, paper money for its inflationary effects, while creditors, naturally, wanted “sound money.” The latter eventually prevailed, and greenbacks became redeemable in gold in 1879. But they wouldn’t be fully legal tender until 1933, and there was a Greenback party candidate for President as late as 1944—at which point the government was spending money at the rate of $260,000,000 a day.