“The treasury is now rather hard run. It would be a great comfort if you New York gentlemen could be patriotic enough to take some Five Millions of Treasury Notes.”
So, wrote Salmon P. Chase, in June 1861, just two months after Fort Sumter surrendered to Confederate forces. It’s difficult for us “moderns” to believe this is how the United States government once solicited money to pay for a war, but Abraham Lincoln’s treasury secretary was a desperate man. He felt even more anxious the following month when Union troops fled in panic after the crushing defeat at Bull Run. It now dawned on both Chase and Lincoln that this might be a long war, and an expensive one.
No one envied Chase for the job he faced. The federal government would eventually spend an estimated $3.0 billion on the war effort. To finance that astronomical sum, Chase would use the three methods at his disposal: taxes (including the first income tax in U.S. history), printed money, and loans.
In February 1862 Congress passed the Legal Tender Act, thus creating a uniform fiat currency to replace the system of vouchers army quartermasters used to pay their suppliers. But people viewed “greenbacks” with suspicion; many considered them outright fraudulent. Their value immediately nosedived and by the end of 1862 a one-dollar greenback had declined to just seventy-five cents. Inflation was a foreboding 12 percent. Excise taxes and customs duties contributed to the treasury’s coffers but were not nearly enough. The government would have to borrow money or give up the fight.
It wouldn’t be easy. Investment capital in early America was hard to come by. Historically, merchants were the money men, but they were selective in how they deployed it and the other main source of funds, banks, could be even more cautious. The early republic grew fast, but its financial system simply couldn’t keep up. By the 1840s partnerships were forming with the intent of facilitating the flow of capital between financiers and borrowers, the nation’s first investment banks. An ambitious young entrepreneur from Philadelphia named Jay Cooke started his own firm in January 1861; his timing couldn’t have been better.
Cooke was a go-getter and never suffered much from a lack of self-confidence. He believed he could market government bonds outside the traditional sources. With monthly spending deficits at around $25 million, Chase had to do something and finally gave him the chance in October 1862. Cooke immediately went to work selling bonds, to farmers, tradesmen, and anyone else with a bit of cash savings. In his first month as exclusive private agent for the Treasury, Cooke sold $10 million in government securities.
His marketing methods were revolutionary. Cooke built a network of some 2,500 agents sprinkled throughout the North, all working on commission—one of the first examples of a distributed sales force. Appealing to working families, he reduced bond denominations to as low as $50 and even offered a form of installment plan. He made prodigious use of newspaper advertisements and convinced editors to exhort their readers that patriotism required investing in the country. The plan was phenomenally successful.
Cooke performed even better in 1864 when the government reengaged him to market new “seven-thirty” bonds. With prospects for a Northern victory improving, the bonds sold well throughout the country and in European markets. Ulysses Grant is said to have quipped that Cooke’s effort exceeded “all the generals in the army.” In the end, Cooke raised an estimated $1 billion from bond sales, roughly one-third of all the money raised during the war.
As is so often the case with war, America’s tragic conflict helped spur an economic boom. After the fighting ended, exports soared, industry grew, and innovation thrived. There were almost three times as many patents issued in 1870 as ten years earlier. New businesses were formed by the thousands, including many poorly capitalized “bubble companies” that soon popped.
But real economic success required pooling national resources and harnessing the dispersed capital of a rapidly expanding middle class. Jay Cooke showed how it could be done. The result was explosive—the democratization of American investing. Wall Street speculation became a hobby for the masses, as it still is today, but the era also witnessed new investment banks intent on financing American development. Manufacturers and especially railroads benefitted from new sources of money and expertise. The dynamics Cooke introduced still shape how capital is raised today.
A century and a half later, the story is the same. At PCE, we help business owners navigate these same dynamics: accessing capital, positioning opportunities, and achieving their financial objectives.
Steven G. Krug, PhD, CFA, is a Director in PCE’s Valuation Group, specializing in valuations for financial reporting, transactions, tax and estate planning, ESOPs, and litigation support. His PhD in history informs his perspective on the evolution of American finance and capital markets.