[Baek Yeongran's History Bookstore] The US Civil War Was a Bond War

Key Issue in Civil War War Fund Procurement
War Outcome Decided by Bond Issuance
Southern Speculation Leads to Cotton Bond Issuance
Prices Fluctuate with War Situation
Efforts Made for Bond Success
But Lost Cotton Production Areas, Ultimately Defeated

Since its founding, the United States had been divided into two distinct economic zones: the industrial capitalism of the North and the cotton agriculture of the South. The North invested in machinery, while the South invested in slaves.

The industrial capitalists in the North, who needed protective tariffs, imposed import duties, whereas the export-oriented South supported free trade.

The North developed what was called the American System, controlling 70% of the wealth and 80% of bank assets. Although the South belonged to a backward economic system based on slavery, Southern plantation owners were wealthier than any other rich individuals. The cotton economy formed a global system spanning from the Mississippi Delta to banks in New York and textile factories and financial institutions in Europe.

As with all wars, financing the Civil War (1861?1865) was a critical issue. The financial cost of the war is estimated at approximately $5.2 billion. Collecting taxes was, of course, the first solution. The North even imposed income tax for the first time.

However, war expenses could not be covered by taxes alone. Issuing bonds was more common during wartime than relying solely on taxes. Both the North and South issued paper money and bonds. The success or failure of bond issuance by the North and South to finance the war was arguably decisive in determining victory or defeat.

Initially, the North struggled to issue government bonds because New York banks were uncooperative in purchasing them. On December 28, 1861, New York banks notified the government that they would stop paying in gold and would not fulfill their promises to buy government bonds. This was, in a way, a rebellion by the New York banks. Behind this were England, which needed Southern cotton, and the Rothschild banks. Unlike the North, the South and England shared mutual interests.

In this crisis, bond king Jay Cooke (1821?1905) emerged. A supporter of the North in the Civil War and a longtime opponent of slavery, Cooke soon participated in financing the Union. Cooke, who started his business in Philadelphia the day before the Civil War began, took on the agency role for bond sales. In this critical situation, Treasury Secretary Chase granted Cooke full authority. Cooke raised 70% of the war expenses through bond issuance.

Cooke completely revolutionized bond marketing. Instead of selling bonds to financial institutions, he sold them to individuals. He employed 2,500 sales agents who canvassed households nationwide, selling $500 million in government bonds. Over time, the North became increasingly dependent on Cooke. In 1861, he sold one-quarter of $100 million in bonds issued, but two years later, he sold 80% of $500 million issued.

As the war neared its end, Cooke’s sales agents sold an average of $2.5 million in bonds daily, and this pace accelerated as the war concluded. Cooke sold a total of $1 billion worth of bonds. He earned approximately $1 million from bond sales.

As hoped by Lincoln in his 1861 annual address, American citizens were able to finance the war. Cooke’s innovation in bond sales not only determined the outcome of the Civil War but also had a profound impact on the American economy. It transformed 5% of the federal population into small capitalists and liberated capital that had been dormant under mattresses, enabling it to be productively consumed.

Compared to the North, the South’s monetary and fiscal policies were generally unsound. While indiscriminate printing of paper money was a feature of wartime finance in both the South and North, it was much more pronounced in the South. The currency depreciated, and shortages of goods triggered inflation. This widened the value gap between paper money and gold coins. Moreover, the South issued various local bonds excessively, struggling to raise war funds.

One of the extraordinary financial methods used was the cotton bond issued in 1863, also known as the “Erlanger Loan.” It was proposed by German banker Erlanger to John Slidell, a Louisiana senator and diplomat. The two later became related as father-in-law and son-in-law.

The cotton bond was a $15 million bond issued secured by cotton. It was the first derivative financial product issued as a government bond. The South, suffering from a shortage of funds, desperately needed the bond to succeed, and the bond’s terms were crafted by the financier Erlanger to ensure its success.

First, investors were to receive a 7% coupon paid in gold coins. On the other hand, investors paid their investment in installments over seven months. This was not the optimal condition for immediately raising war expenses. This was because Southern bonds were issued under the conditions typical of speculative bonds in the 19th century. The terms were designed to ensure success, attracting European investors to buy the cotton bonds. However, bond prices fluctuated according to the course of the Civil War.

Whenever bond prices fell, the Southern government repurchased the bonds to defend their price. It is known that by mid-1863, the South had repurchased more than half of the bonds issued through agents. Why did they make such a foolish decision despite the immediate shortage of war funds?

Because the structure allowed investors to pay in installments. If prices had plummeted before the first or second installment was made, investors might have accepted losses and abandoned the bonds.

The South always tried to keep its promises and ensure the bonds’ success. However, there were promises they could not keep. The cotton was overseas in the South, and even if the South tried to deliver it, circumstances made it impossible.

This was because during the war, Northern forces occupied key Southern cotton production and export points. Ultimately, the South was defeated in the war.