Juneteenth and Wall Street

June 21, 2021 | In this issue of The Institutional Risk Analyst, we comment on the refusal of the largest US banks to support the emancipation of slaves during the Civil War. The holiday now recognized nationally as Juneteenth, when federal forces made freedom a reality for millions of slaves in America, is significant for Wall Street. Why? Because the big banks in Boston, New York and London did not support “Lincoln’s War.”

The large state-chartered banks that existed in 1860 mostly were against the war of emancipation because it would interfere with the cotton trade, which was one of the largest export industries in the US in the early 1800s. American traders imported between 30,000 and as many as 100,000 enslaved Africans each year during the late 1700s and early 1800s to support the cotton trade and other agricultural endeavors. The big banks in Boston, New York and London financed this hideous trade in human beings.

William Edward Burghardt Du Bois (1868-1963)

The slave model of agriculture was “reckless,” to recall W.E.B. Du Bois in his classic Harvard University dissertation, “The Suppression of the African Slave Trade in the United States (1638-1870).” His meticulous description of the economics of slavery and the battle to suppress it exposed the fact that financing the slave trade was profitable for many banks and companies in the north.

When President Abraham Lincoln entered Washington as the new President in March of 1861, the Treasury was empty and the federal army had been paid and sent home. To finance the war to end slavery, Lincoln tasked a character named Jay Cooke to act as agent to sell Treasury bonds. Cooke became the foremost money lender of his day, but decades later went bust trying to buy the Northern Pacific Railroad.

Lincoln’s Treasury also issued unconvertible “greenbacks” (there was no central bank), that had no connection to gold. Of note to crypto enthusiasts, the laws declaring the unconvertible paper dollar “legal tender” were passed in 1862 and 1863. In 1860, total US government debt was $65 million, but by the end of the conflict the total federal debt was $2.6 billion. Hundreds of millions in unbacked paper money was issued to float the cost of the conflict.

The cost of the war to the Confederacy was equally large, about $2.25 billion. Of this, about $250 million was financed via taxes, about $500 million via borrowing and $1.5 billion via printing press money. By the end of the war, both federal greenbacks and the equivalent unbacked paper money of the Confederacy had depreciated to about 5% of face value measured in gold. And the banks in the north lent money to both sides.

Lincoln embraced the issuance of paper money during the darkest years of the Civil War, when the Confederacy seemed to be on the brink of military victory. And even as Union armies fought against the Confederacy, the big banks in the north were still supporting the cotton trade in the south. Du Bois describes the economic power of the southern cotton producers:

“By 1822 the large plantation slave system had gained a footing; in 1838-1839 it was able to show its power in the ‘cotton corner;’ by the end of the next decade it had not only gained a solid economic foundation, but it had built a closed oligarchy with a political policy. The changes in price during the next few years drove out the competition many survivors of the small-farming free labor system, and put the slave regime in position to dictate the policy of the nation.”

Lincoln and his Secretary of the Treasury, Salmon Chase, convinced Congress to pass the National Bank Act of 1863. The law established federally chartered banks to compete with the state banks led by JP Morgan. National banks were allowed to “double leverage” federal debt held in the vault, providing a very tangible incentive for investors to charter federal banks and buy government debt. And greenbacks, of note, paid interest during the Civil War, a feature that may return given the wild profligacy of the US Congress in 2021.

The textbooks say that national banks were established to create a more stable currency, but in fact these new banks were made to counter the monopoly power of state-chartered banks and, indirectly, to help finance the cost of the Civil War. Hixon (1993) notes that national banks created nearly $300 million in new “money” by issuing greenbacks and lending same to the federal government at a great profit.

Wall Street once ran from a graveyard to a river. Today it has become, in the measured words of Dr. Charles A. Beard, a new Appian Way of the world. But never forget that the antecedents of many of today’s biggest banks opposed the effort to end slavery. Wall Street would have happily left the cotton trade undisturbed. When the slave traded finally ended in the United States on June 19th, 1865, those working in lower Manhattan to finance and facilitate the slave trade turned to a new profession, namely the business of selling stocks and bonds.

In the years following 1865, the growing nation demanded more and more currency to satiate its need for finance and a means of exchange. Millions became billions and the builders of yesterday became the buyers and speculators of today. The railroad barons became bankers and the bankers bought the railroads in a swarm of amalgamation that pushed stock prices ever higher. Formerly a railroad right of way and stock yard where the trade in slaves was financed, the big Wall Street banks become the chief beneficiaries of that new evil, namely inflation.