Авторы: 159 А Б В Г Д Е З И Й К Л М Н О П Р С Т У Ф Х Ц Ч Ш Щ Э Ю Я

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1. The Civil War and the National Banking System

The Civil War wrought an even more momentous change in the nation’s banking system than had the

War of 1812. The early years of the war were financed by printing paper money—greenbacks—and the

massive printing of money by the Treasury led to a universal suspension of specie payments by the Treasury

itself and by the nation’s banks, at the end of December 1861. For the next two decades, the United States

was once again on a depreciating inconvertible fiat standard.

The money supply of the country totaled $745 million in [p. 222] 1860; by 1863, the money supply

had zoomed to $1.44 billion, an increase of 92.5% in three years, or 30.8% per annum. The result of this large

monetary inflation was a severe inflation of prices. Wholesale prices rose from 100 in 1860, to 211 at the end

of the war, a rise of 110.9%, or 22.2% per year.

After the middle of 1863, the federal government stopped issuing the highly depreciated greenbacks,

and began to issue large mounts of public debt The accumulated deficit during the war totaled $2.61 billion, of

which the printing of greenbacks financed only $430 million, almost all in the first half of the war.

The Civil War public debt brought into prominence in American finance one Jay Cooke, who became

known as “The Tycoon.” The Ohio-born Cooke had joined the moderately sized Philadelphia investment

banking firm of Clark & Dodge as a clerk at the age of eighteen. In a few years, Cooke worked himself up to

the status of junior partner, and in 1857 he left the firm to go into canal and railroad promotion and other

business ventures. Cooke probably would have remained in relative obscurity, except for the lucky fact that he

and his brother Henry, editor of the leading Republican newspaper in Ohio, the Ohio State Journal, were

good friends of U.S. Senator Salmon P. Chase. Chase, a veteran leader of the antislavery movement, had lost

the Republican Presidential nomination in 1860 to Abraham Lincoln. The Cookes then determined to feather

their nest by lobbying to make Salmon Chase Secretary of the Treasury. After extensive lobbying by the

Cookes, the Chase appointment was secured, after which Jay Cooke quickly set up his own investment

banking house of Jay Cooke & Co.

Everything was in place; it now remained to seize the opportunity. As the Cookes’ father wrote of

Henry: “I took up my pen principally to say that H.D.’s (Henry) plan in getting Chase into the Cabinet and

(John) Sherman into the Senate is accomplished, and that now is the time for making money, by honest

contracts out of the government.”1 [p. 223]

Now indeed was their time for making money, and Cooke lost no time in seizing the advantage. After

wining and dining his old friend, Cooke was able to induce Chase to take an unprecedented step in the fall of 1862: granting the House of Cooke a monopoly on the underwriting of the public debt. Cooke promptly

hurled himself into the task of persuading the mass of the public to buy U.S. government bonds. In doing so,

Cooke perhaps invented the art of public relations and of mass propaganda; certainly he did so in the realm of

selling bonds. As Edward Kirkland, author of Industry Comes of Age: Business Labor & Public Policy

1860-1897, writes:

With characteristic optimism, he [Cooke] flung himself into a bond crusade. He

recruited a small army of 2,500 subagents among bankers, insurance men, and

community leaders and kept them inspired and informed by mall and telegraph. He

taught the American people to buy bonds, using lavish advertising in newspapers,

broadsides, and posters. God, destiny, duty, courage, patriotism—all summoned

“Farmers, Mechanics, and Capitalists” to invest in loans.2

Loans which of course they had to purchase from Jay Cooke.

And purchase the loans they did, for Cooke’s bond sales soon reached the enormous figure of $1 to

$2 million a day. Approximately $2 billion in bonds were bought and underwritten by Jay Cooke during the

war. Cooke lost his monopoly in 1864, under pressure of rival bankers; but a year later he was reappointed to

that highly lucrative post, keeping it until the House of Cooke crashed in the Panic of 1873.

It is not surprising that Jay Cooke acquired enormous political influence in the Republican

Administrations of the Civil War and after. Hugh McCulloch, Secretary of the Treasury from 1865 to 1869,

was a close friend of Cooke’s, and when McCulloch left office he became head of Cooke’s London office.

The Cooke brothers were also good friends of General Grant, and so they wielded great influence during the

Grant Administration. [p. 224]

No sooner had Cooke secured the monopoly of government bond underwriting than he teamed up

with his associates Secretary of the Treasury Chase and Ohio’s Senator John Sherman to drive through a

measure destined to have far more fateful effects than greenbacks on the American monetary system: the

National Banking Acts. National banking destroyed the previous decentralized and fairly successful state

banking system, and substituted a new, centralized and far more inflationary banking system under the aegis of

Washington and a handful of Wall Street banks. Whereas the greenbacks were finally eliminated by the

resumption of specie payments in 1879, the effects of the national banking system are still with us. Not only

was this system in place until 1913, but it paved the way for the Federal Reserve System by instituting a

quasi-central banking type of monetary system. The “inner contradictions” of the national banking system

impelled the U.S. either to go on to a frankly central bank or to scrap centralized banking altogether and go

back to decentralized state banking. Given the inner dynamic of state intervention, coupled with the common

adoption of a statist ideology after the turn of the twentieth century, the course the nation would take was

unfortunately inevitable.

Chase and Sherman drove the new system through under cover of the war necessity: setting up

national banks to purchase large amounts of U.S. government bonds. Patterned after the free banking system,

the nation’s banks were tied in a symbiotic relationship with the federal government and the public debt. The

Jacksonian independent treasury was de facto swept away, and the Treasury would now keep its deposits in a

new series of “pets”: the national banks, chartered directly by the federal government. In this way, the Republican Party was able to use the wartime emergency, marked by the virtual disappearance of Democrats

from Congress, to fulfill the long-standing Whig-Republican dream of a permanently centralized banking

system, able to inflate the supply of money and credit [p. 225] in a uniform manner. Sherman conceded that a

vital object of the national banking system was to eradicate the doctrine of state’s rights, and to nationalize

American politics.

The Cooke-Chase connection with the new national banking system was simple but crucial. As

Secretary of the Treasury, Salmon Chase wanted an assured market for the government bonds that were being

issued heavily during the Civil War. And as the monopoly underwriter of U.S. government bonds for every

year but one from 1862 to 1873, Jay Cooke was even more directly interested in an assured and expanding

market for his bonds. What better method of obtaining such a market than creating an entirely new banking

system, in which expansion was directly tied to the banks’ purchase of government bonds—and all from Jay


The Cooke brothers played a major role in driving the National Banking Act of 1863 through a

reluctant Congress. The Democrats, devoted to hard money, opposed the legislation almost to a man. Only a

narrow majority of Republicans could be induced to agree to the bill. After John Sherman’s decisive speech in

the Senate in favor of the measure, Henry Cooke—now head of the Washington office of the House of

Cooke—wrote jubilantly to his brother: “It will be a great triumph, Jay, and one to which we have contributed

more than any other living men. The bank bill had been repudiated by the House, and was without a sponsor in

the Senate, and was thus virtually dead and buried when I induced Sherman to take hold of it, and we went to

work with the newspapers.”3

Going to work with the newspapers meant something more than gentle persuasion for the Cooke

brothers. For as monopoly underwriter of government bonds, Cooke was paying the newspapers large sums

for advertising, and so the Cookes realized that they could induce the newspapers to grant them an enormous

amount of free space “in which to set forth the merits of the new national banking system.” Such space meant

not only publicity and articles, but more important, the fervent [p. 226] editorial support of most of the nation’s

press. And so the press, virtually bought for the occasion, kept up a drumroll of propaganda for the new

national banking system. As Cooke himself related: “For six weeks or more nearly all the newspapers in the

country were filled with our editorials condemning the state bank system and explaining the great benefits to be

derived from the national banking system now proposed.” And every day the indefatigable Cookes put on the

desks of every Congressman the relevant editorials from newspapers in their respective districts.4

As established in the bank acts of 1863 and 1864, national banks could be chartered by the

Comptroller of the Currency in Washington, D.C. The banks were free in the sense that anyone meeting the

legal requirements could obtain a charter, but the requirements were severe. For one thing, the minimum capital

requirements were so high—from $50,000 for rural banks to $200,000 in the bigger cities—that small national

banks could not be established, particularly in the large cities.

The national banking system created three sets of national banks: central reserve city, which was then

only New York; reserve city, for other cities with over 500,000 population; and country, which included all

other national banks.

Central reserve city banks were required to keep 25% of their notes and deposits in reserve of vault cash of lawful money, which included gold, silver, and greenbacks. This provision incorporated the reserve

requirement concept which had been a feature of the free banking system. Reserve city banks, on the other

hand, were allowed to keep one-half of their required reserves in vault cash, while the other half could be kept

as demand deposits in central reserve city banks. Finally, country banks only had to keep a minimum reserve

ratio of 15% to their notes and deposits; and only 40% of these reserves had to be in the form of vault cash.

The other 60% of the country banks reserves could be in the form of demand deposits either at the reserve

city or central reserve city banks. [p. 227]

In short, the individualized structure of the pre-Civil War state banking system was replaced by an

inverted pyramid of country banks expanding on top of reserve city banks, which in turn expanded on top of

New York City banks. Before the Civil War, every bank had to keep its own specie reserves, and any

pyramiding of notes and deposits on top of specie was severely limited by calls for redemption in specie by

other, competing banks as well as by the general public. But now, all the national banks in the country would

pyramid in two layers on top of the relatively small base of reserves in the New York banks. Furthermore,

these reserves could consist of inflated greenbacks as well as specie.

The national banks were not compelled to keep part of their reserves as deposits in larger banks, but

they tended to do so. They could then expand uniformly on top of the larger banks, and they enjoyed the

advantages of having a line of credit with a larger “correspondent” bank as well as earning interest in demand

deposits at their bank.5

Furthermore, in a way pioneered by the free banking system, every national bank’s expansion of notes

was tied intimately to its ownership of U.S. government bonds. Every bank could issue notes only if it

deposited an equivalent in U.S. securities as collateral with the U.S. Treasury. Hence national banks could only

expand their notes to the extent that they purchased U.S. government bonds. This provision tied the national

banking system closely to the federal government’s expansion of public debt. The federal government had an

assured, built-in market for its debt, and the more the banks purchased that debt, the more the banking system

could inflate.

The pyramiding process was spurred by several other provisions of the national banking act. Every

national bank was compelled to redeem the obligations of every other national bank at par. This provision

erased a severe free market limit on the circulation of inflated notes and deposits: depreciation increasing as

one got farther away from the headquarters of the [p. 228] bank. And while the federal government could

scarcely make the notes of a private bank legal tender, it conferred quasi-legal tender status on the national

banks by agreeing to receive their notes and deposits at par for dues and taxes. And yet, despite these

enormous advantages granted by the federal govern ment, national bank notes fell below par with greenbacks

in the crises of 1867, and a number of national banks failed that year.6

While national banks were required to redeem the notes and deposits of each other at par, the

requirement was made more difficult to meet by the government’s continuing to make branch banking illegal.

Branch banking would have provided a swift method for banks calling on each other for redemption in cash.

But, perhaps as a way of blocking such redemption, inter state, and even more, intrastate, banking continued

to be illegal. A bank was only required to redeem its own notes at its home office, making redemption still

more difficult. Furthermore, the redemption of notes was crippled by the federal government’s imposing a

maximum limit of $3 million a month by which national bank notes could be contracted.7 In addition, limits which had been imposed on the issue of national bank notes were removed in 1875, after several years of the

banks’ straining at the maximum legal limit.

Furthermore, in June 1874, the structure of the national banking system was changed. Congress, in an

inflationist move after the Panic of 1873, eliminated all reserve requirements on notes, keeping them only on

deposits. This action released over $20 million of lawful money from bank reserves and allowed a further

pyramiding of demand liabilities. The result was a separation of notes from deposits, with notes fled rigidly to

bank holdings of government debt, while demand deposits pyramided on top of reserve ratios in specie and

green backs.

Reserve requirements are now considered a sound and precise way to limit bank credit expansion, but

the precision can [p. 229] cut two ways. Just as government safety codes can decrease safety by setting a

lower limit for safety measures and inducing private firms to reduce safety downward to that common level, so

reserve requirements can serve as lowest common denominators for bank reserve ratios. Free competition, on

the other hand, will generally result in banks voluntarily keeping higher reserve ratios. Banks now keep fully

loaned up, expanding to the limit imposed by the legal reserve ratio. Reserve requirements are more an

inflationary than a restrictive monetary device.

The national banking system was intended to replace the state banks completely, but many state banks

refused to join as members, despite the special privileges accorded to the national banks. The reserve and

capital requirements for state banks were more onerous, and national banks were prohibited from making

loans on real estate. With the state banks refusing to come to heel voluntarily, Congress, in March 1865,

completed the Civil War revolution of the banking system by placing a prohibitive 10% tax upon all state bank

notes. The tax virtually outlawed all note issues by the state banks. From 1865 national banks had a legal

monopoly to issue bank notes.

At first, the state banks contracted and withered under the shock, and it looked as if the United States

would indeed have only national banks. The number of state banks fell from 1,466 in 1863 to 297 in 1866,

and total notes and deposits in state banks fell from $733 million in 1863 to only $101 million in 1866. After

several years, however, the state banks began expanding again, albeit in a role subordinated to the national

banks. In order to survive, the state banks had to keep deposit accounts at national banks, from whom they

could “buy” national bank notes in order to redeem their deposits. In short, the state banks now became the

fourth layer of the national pyramid of money and credit, on top of the country and the other national banks.

The reserves of the state banks were kept, in addition to vault cash, as demand deposits at national [p. 230]

banks, from whom they could redeem in cash. The multilayered structure of bank inflation under the national

banking system was now compounded.

Once the national banking system was in place, Jay Cooke plunged in with a will. He not only sold the

national banks their required bonds, but he himself set up new national banks which would have to buy his

government securities. His agents formed national banks in the smaller towns of the South and West.

Furthermore, he set up his own national banks, the First National Bank of Philadelphia and the First National

Bank of Washington, D.C.

But the national banking system was in great need of a powerful bank in New York City to serve as

the base of the inflationary pyramid for the country and reserve city banks. Shortly after the start of the system, three national banks had been organized in New York, but none of them was large or prestigious enough to

serve as the fulcrum of the new banking structure. Jay Cooke, however, was happy to step into the breach,

and he quickly established the Fourth National Bank of New York, capitalized at an enormous $5 million.

After the war, Cooke favored resumption of specie payments, but only if greenbacks could be replaced

one-to-one by new national bank notes. In his unbounded enthusiasm for national bank notes and their

dependence on the federal debt, Cooke, in 1865, published a pamphlet proclaiming that in less than 20 years

national bank note circulation would total $1 billion.8 The title of Cooke’s pamphlet is revealing: How our

National Debt May Be a National Blessing. The Debt is Public Wealth, Political Union, Protection of

Industry, Secure Basis for National Currency.9