LOANS

The first necessity was that of temporary loans for both the state and

federal governments.

_Temporary loans to states._ Patriotic impulse prompted the immediate

offering of loans by the banks. In Massachusetts the bankers of Boston

tendered the state government a loan up to ten per cent of their

combined capital. In Illinois the banks of Springfield offered the

state $100,000 on the day Lincoln called for troops. This was

supplemented by the Chicago banks’ tender of $500,000. Throughout the

early days of the war the banks in all localities were called upon for

loans on the credit of the state. These were funded at seven per cent,

then the usual interest for such transactions.

_Temporary loans to the federal government._ The treasury of the

United States was in a desperate condition at the outbreak of the

Civil War. Lacking resources even for its daily needs, it was totally

unprepared for the great strain immediately placed upon it. Secretary

Chase did not have recourse to the bankers, however, until after the

battle of Bull Run in July had proved that the war was not to be an

affair of “three months.”

On the day that the news of the defeat at Bull Run reached

Philadelphia, a young banker recently removed to that city from Ohio,

an ardent partisan of Secretary Chase, drew up a paper offering to

advance to the Secretary of the Treasury specified sums for sixty days

at six per cent interest, returnable in specie or interest-bearing

treasury notes. With this proposal he visited the principal banks and

financial houses in his city, and raised for immediate government

needs nearly $2,000,000 in one day. Chase was interested and grateful,

and the fortunes of Jay Cooke, the young banker, were made from that

day.

Early in 1862, when the government’s daily needs were increasing

enormously, John J. Cisco, assistant treasurer of the sub-treasury at

New York, made arrangements for a loan from the city banks of their

temporarily idle funds. These were received on deposit for thirty

days, subject to withdrawal thereafter on ten days’ notice. At first

Cisco by this means secured much specie at four per cent; later, five

and six per cent were paid for these advances. This money was largely

used for the payment of the interest on the public debt. One banker in

New York, it is said, became uneasy after lending the sub-treasury

$1,000,000, and demanded its return. Cisco told him to send his carts

for it immediately. The next day his faith in the government was

restored and he concluded to leave his reserve with the sub-treasurer.

An instance of immediate aid to the government’s foreign diplomats is

related in the biography of the late J. Pierpont Morgan. Morgan was in

London on business for his house at a time when Charles Francis Adams

was endeavoring to prove to the English government that certain

vessels fitting in British ports were intended for Confederate

privateers. The officials were slow to accept Adams’ proofs, and he

was much alarmed lest the commerce-destroyers should get to sea before

he had succeeded in having an embargo placed on their departure. The

British authorities finally agreed to detain the ships on condition

that Adams should deposit £1,000,000 guarantee to indemnify the

government should the owners not prove to be Confederates. Adams was

in a dilemma: he could not well refuse such a proposition, but long

before he could receive the money from America the cruisers would be

at sea. He tried to borrow on his personal credit from London bankers,

only to be rebuffed. Young Morgan heard of the situation, sought the

ambassador, and promised to deliver $5,000,000 in gold into his hands

in two days, asking only his personal receipt in return, while

stipulating absolute secrecy concerning his patriotic action. In this

wise two of the commerce-destroyers were detained in port, and the

integrity of the American ambassador was vindicated.

_Secured, or long-time, loans to states._ Upon the news of the firing

on Fort Sumter and the subsequent call for troops every northern

legislature then in session appropriated a fund for war purposes.

Indiana, for example, voted $500,000 for arms and equipment, and

$100,000 for a contingent fund. Connecticut made an issue of $800,000

of war bonds. These funds were raised in various ways. In

Massachusetts and Connecticut they were offered for popular

subscription and sold at par. The western states placed their bonds on

the New York stock market, where in many cases they sold at a

considerable discount. Where the state’s credit was poor, and its

banking-system insecure, the bonds could not be placed, and were

recalled after being offered. Such was the case with Iowa and

Wisconsin. Ohio recalled its bonds, after they had been advertised in

New York, when it was learned that the federal government assumed all

war expenses, and would refund these to the states.

Wisconsin adopted an ingenious plan, suggested to the State Bankers’

Association by Alexander Mitchell. The state banks had deposited with

the state comptroller securities for their currency issues. The larger

proportion of these securities was made up of the bonds of the

southern or border states. Those of the secession states were

considered worthless, while those of Missouri, large holdings of which

were in Wisconsin, declined rapidly. The comptroller, as required by

law, made assessments upon the state banks, which they found it

difficult to meet. Mitchell proposed that the banks should purchase

the bonds of the state war fund at par, and that the comptroller

should accept them for the assessments. In this wise the credit of the

state was improved and the currency secured. The details of the

arrangement were that the banks took $800,000 of the war-fund bonds,

seventy per cent of which was paid at once, three-fifths in specie and

two-fifths in sound currency. The remaining thirty per cent was to be

met in fifteen annual installments. The adoption of this expedient

furnished the state with ready money, placed the banking currency on a

sound foundation, and restored confidence to the community.

Wisconsin’s banks resumed specie payments at the date fixed by law,

December 1, 1861, and maintained them for some time after the New York

banks had suspended such payments.

On the basis of these war-fund appropriations state agents flocked to

New York to arrange for the purchase of war material. Arms and

ammunition had to be largely secured from Europe. The New York banks

arranged these transactions, and furnished exchange and information.

The competition between the several state agents and those of the

federal government raised prices inordinately. This was remedied when

the federal government assumed full responsibility for all equipment.

_The federal loans._ The most important function of the banks was the

aid they furnished the Secretary of the Treasury in floating the great

federal loans that were required by the war necessities. The special

session of Congress which met in July, 1861, appropriated $250,000,000

for the immediate needs of the government, leaving large latitude with

the Secretary of the Treasury as to the method by which this amount

was to be raised.

The defeat at Bull Run put a very serious strain on the credit of the

United States, and the forced sale of securities in a foreign market

would have been disastrous to the future conduct of the war. In the

dilemma in which he was placed, Secretary Chase paid a visit to New

York, where Cisco, the assistant treasurer, invited the prominent

financial authorities to meet him for consultation. Chase frankly

stated the serious nature of the situation, and requested assistance

and advice. From the standpoint of policy this was a wise measure,

since previous to this time the New York bankers had held somewhat

aloof from the operations of the federal treasury. Their prompt

support at this crisis is to their perpetual credit, for although they

largely profited in the end by this government connection, at the time

of the operation the transactions were of daring boldness. The banks

realized that without a firm government their own operations were

imperiled, and thus they risked their all to support the government in

its crisis.

At the first conference George E. Coe, president of the Exchange Bank,

proposed an association to subscribe for the government loan. A

committee appointed to develop a plan reported on August 15 for

thirty-nine New York banks. Representatives from Boston and

Philadelphia were likewise present, and the loan was apportioned among

the three cities in accordance with the bank capital of each; that is,

seventy per cent was to come from New York, twenty per cent from

Boston, and ten per cent from Philadelphia. The association thus

formed agreed to take immediately $50,000,000 of treasury bonds

payable in three years with interest at seven and three-tenths per

cent. This rate, representing a payment of two cents a day on each one

hundred dollars loaned, had been adopted by Secretary Chase in the

hope of popularizing the bonds with the people. The banks composing

the association were to pay over to the sub-treasuries of the three

cities in specie ten per cent of the amount subscribed; the remainder

was to be placed to the credit of the United States upon the books of

the subscribing institutions. Meanwhile the bonds were to be offered

to the people, both by the banks and the sub-treasurers, and no other

United States securities were to be sold, except in Europe, while

these subscriptions were being solicited. The associated banks also

agreed to float a similar loan of $50,000,000 in October--if it had

not by that time been taken by popular subscription--and another

$50,000,000 in December.

This was the largest financial operation that had ever been attempted

in the United States. Its successful accomplishment at that time was

of the greatest possible value in maintaining public confidence, and

in uniting the fortunes of the financiers with those of the federal

government. It was a tribute to the organizing ability as well as to

the patriotism of the founders of the bank association. The capital of

the united banks was but $120,000,000, and their coin assets only

$63,000,000. Their subscription to $150,000,000 of government

securities was thus an act of faith.

In practice this agreement did not work out as the bankers had hoped.

Chase refused to suspend the sub-treasury act, though authorized to do

so by Congress, in order that the banks might pay the government’s

creditors in clearing-house certificates; thus the specie began

draining away from the banks into the sub-treasuries. The Secretary

also began the issue of demand notes on the treasury in considerable

amounts. Moreover, the public sales were less than had been

anticipated. The bankers were accused of attempting to dictate to the

government concerning the conduct of the war. The inevitable result of

all this friction was the suspension of specie payments by the New

York banks December 30, 1861.

With the immense strain upon the government’s resources, the

catastrophe of suspension would no doubt have occurred sooner or

later; but financial historians believe that had Secretary Chase been

more willing to accept the bankers’ propositions, had he coöperated

with them more fully, the financing of the Civil War might have

wrought less damage in the business world than it did.