In antebellum days several firms provided an inexpensive "reporter" service to provide information to businessmen about the heterogeneous currency. Best known of the services was Thompson's Bank Note and Commercial Reporter, a weekly.

feiters practiced a profitable trade that bankers combatted with anticounterfeiting associations, which in turn hired specialists called "snaggers" to ferret out makers of spurious bills.

The problem of judging the authenticity of a bill continued and was complicated by the difficulty of determining the discount at which valid notes should be accepted. The presumption was that well-worn notes or those perforated many times by the teller's staple were genuine. But businessmen needed more technical assistance, and they invariably relied on a "bank-note reporter" or "counterfeit detector." The best of these publications, like Thompson's Bank Note and Commercial Reporter, each week provided alphabetical listings, by states, of the notes of banks and the discounts at which they should pass, along with descriptions of known counterfeit bills. Bicknall's Counterfeit Detector and Bank Note List specialized in the identification of bogus bills, whereas Hodge's Bank Note Safeguard furnished 300 pages of facsimile reproductions of genuine notes. However helpful these lists and periodicals may have been, they suggest the plight of the businessman who many times a day had to take his reporter from the hook to see what a particular bill was worth-if, indeed, it was worth anything.

The pre-Civil War banking system had faults; but it worked, and it was anything but "chaotic," as many of the old historians alleged. A lack of any federal coordination of the banking system unquestionably meant increasing costs to businesses and households from fees and charges. There was, moreover, the unfortunate possibility of being stuck with a counterfeit note or the bill of a broken bank. But those who managed banks showed a remarkable sense of responsibility, ethical standards on the whole being at least as high as those of their contemporaries in the business world. Working with new and untried institutions, feeling their way along to generally accepted principles of operations, 19th-century bankers probably did not understand all the social implications of their business acts. They nonetheless understood some of them.

The settled fact remains that early banks encouraged a rapid development of the American economy that would have been impossible without them. Whatever the hardships and costs imposed upon firms and households, the net effect of early commercial bank activity was to reduce the cost of finance. Moreover, the system assured the most aggressive entrepreneurs of a source of steady funds. No better way of guaranteeing creation of new money to finance new circuits of production could have been devised than this one, which allowed one group of enterprisers to set themselves up in business as dispensers of loans to another group of enterprisers who would take risks with the proceeds. Banks met the new

7 Many of the alleged weaknesses of the banking system should not be attributed so much to banks as to an unstable economy with its pronounced cyclical swings.

country's demand for money by the simple process of exchanging the notes (and the deposit credits) of banks for the promissory notes of business firms-that is, by exchanging one kind of debt for another. The bank's instruments of indebtedness simply had more general acceptability, at least as a medium of exchange, than the debt instruments of commercial or industrial firms. The pre-1860 money supply was created by monetizing private debt. There is a good case to be made for the proposition that this monetization occurred at an optimum rate in the absence of interference by the federal government.

Restriction of the antebellum money supply to gold and silver coin would have been disastrous. By a substantial majority the electorate supported Jackson's stand against a central bank, which could have provided a homogeneous currency while placing various financial restraints on the economy. So for three decades after 1832 the money supply depended upon: (1) net additions to the quantity of specie resulting from importation of precious metals and from domestic mining, and (2) the paper money and bank deposits created by commercial banks operating under various state laws. In the next chapter we shall see how this arrangement was modified by the federal government.

Establishing

A National Banking System

Bx

Y 1860 the United States was a major economic power. The preceding decade had been one of remarkable growth; at its close the United States was second only to Great Britain in manufacturing, and American agricultural products were steadily invading world markets. By modern. standards the individual firm was still small, and the banks that served them were even smaller. But the use of the corporate form of business organization was spreading rapidly; and though few firms except railroad companies required an actual investment of as much as a million dollars, signs were clear that the concentration of industry would soon bring much larger business units.

A part of the reason for the country's growth lay in the fact that it constituted a great common market, which assured maximum participation in the benefits of specialization. By the early 1840s three great economic regions had emerged. Beginning after the War of 1812 the South provided through the cotton trade a major impellent to economic growth.1 Cotton linked the United States to the Atlantic economy and the South to the Northeast, for it was the Northeast that provided the services necessary for transporting, financing, insuring, and marketing cotton. But the Northeast did more, for this section manufactured and exported goods to the West and to the South. The West in turn furnished the South a large portion of its food, at the same time exchanging its agricultural products for the manufactured goods of the Northeast. This tripartite regional specialization was at once the basis of strong economic bonds and weakening political divisions. For in the years. before the Civil War a pronounced sectionalism directed political energies toward county seats and state capitals, and even by the standards of the time federal receipts and expenditures were incredibly small. The wonder was not that ties of Union were severed in 1861 but that the Union had endured for nearly three-quarters of a century. The

1 See Douglass C. North, The Economic Growth of the United States, 1790-1860, Englewood Cliffs, N. J.: Prentice-Hall, 1961, pp. 66-100.

conflict between North and South began before the American Revolution. The constitutional crisis that led to Civil War emerged in the divisions that separated American leaders during the Confederation and was forebodingly apparent in the Constitutional Convention of 1787. Southern and Western insistence on states rights and an ineffectual federal government did little to remove these divisions, and those who wished to preserve the Union were seriously hampered by a feeble and inadequately supported government in Washington. The sorry state of national affairs is suggested by two facts: when Salmon Portland Chase became Secretary of the Treasury in the dismal spring of 1861, there was less than $2 million in the Treasury, and the government had recently been required to pay as much as 12 percent for short-term funds.

Secretary Chase was a man of considerable gifts. An ex-Governor and exSenator from the state of Ohio, he had fought his way very nearly to the top of the Republican Party, standing in 1861 so close to the peak of power that he could command the second post in the Cabinet. A humorless man, authoritarian and domineering, he was nevertheless a person of integrity and steadfastness of purpose. Unfortunately for his country, Secretary Chase knew little about public finance, his experience having been limited to that of director and counsel for a commercial bank. But in those days political preferment rather than technical competence made a Secretary of the Treasury. Chase's ideas on public finance were simply the conventional wisdom of hard-money advocates, and he refused to consider imaginative plans suggested by some of his contemporaries for financing the War.

We need sketch only the barest outline of Secretary Chase's approach to the country's financial problems. In the first place, he was persuaded against vigorous and prompt taxation, taking ex-Secretary Gallatin's view that the government need only raise taxes sufficient to cover peacetime expenditures plus interest on the growing public debt. As a consequence, of the more than $3 billion spent by the Lincoln administration during four years of war, less than one-fifth was paid for by taxes. The remaining four-fifths was defrayed by issuing unredeemable paper currency and by borrowing.

As early as the summer of 1861, Secretary Chase began to use noninterest-bearing demand notes, authorized by Congress in small amounts, to pay government salaries. With the passage of the Legal Tender Act

2 These notes were not specifically made payable in coin. However, before the suspension of specie payments, the Secretary of the Treasury proclaimed them redeemable in coin in certain cities, and they were universally regarded as coin notes. For detailed discussion of the controversies and unending perplexities of Civil War financing, see Gerald T. Dunne, “President Grant and Chief Justice Chase: A Footnote to the Legal Tender Cases," Saint Louis University Law Journal, 5, Fall 1959, pp. 539-553, and Bray Hammond, "The North's Empty Purse, 1861-1862," The American Historical Review, LXVII, October 1961, pp. 1-18.