US finances.
US finances.
[FONT=Arial, sans-serif]First, a couple of notes to explain the economics of that time, which were very different from today's. [/FONT]
[FONT=Arial, sans-serif]The term: “specie” is monetary metal – gold or silver. In those days, gold and silver were perceived to BE money, not just a medium of exchange. Bank notes were, in general, were accepted only to the extent that they could be redeemed for specie. Note, too, that there is no such thing as a US dollar bill. It wasn't until the Civil War that the US issued 'greenbacks'. Bank notes were issued by individual banks, and backed by the specie reserves that each bank (supposedly) held. Unfortunately, there was no government authority to check on bank capitalization. To some extent, that supervisory function was vested in the Bank of the United States (which doesn't exist for most of the war).[/FONT]
[FONT=Arial, sans-serif]Another strangeness is that the Bank of the United States (and even the Bank of England, at the time) were PRIVATE banks. They took deposits (from anyone) and made loans (to anyone). But at the same time they had quasi-national functions, they stored national reserves, they regulated other banks, etc. American readers, just imagine if OTL's Bank of America got to check out e.g. Citibanks books and had the powers of the Fed, while still competing commercially with Citibank. For Canadian readers, imagine RBC or BoM having the same powers over CIBC and TD. For British readers imagine the Royal Bank of Scotland having that role – which is actually particularly apt given the state it's in...[/FONT]
[FONT=Arial, sans-serif]Back to the story. [/FONT]
[FONT=Arial, sans-serif]US finances were in a perilous state at the start of the war. [/FONT]
[FONT=Arial, sans-serif]Several years before the war, they had been in much better shape. Gallatin as Secretary of the Treasury under Jefferson and then Madison, had managed to pay down the national debt considerably and even build up reserves – in 1807, he thought they'd have $11 million in reserves in 1808, enough to run a war for a year. (I'm not sure precisely what the 'reserves' were, as the debt wasn't extinguished, but that's how they calculated it.) However, those Republican administrations had also succeeded in doing away with some of the Federal legacies of Washington and Adams, including all internal taxes, and every time Gallatin tried to get Congress to raise customs duties or other fund, they refused. Similarly, when the charter of the Bank of the United States came up for renewal in 1811, they let it lapse. Among other things, this meant that $7 million in capital (specie) had to be returned to bank investors outside the country. Moreover, with the war in Europe interfering with commerce, the customs revenues dropped, which were almost the only source of Federal income, with no internal taxes. By 1812, the entire reserve was eaten up, and the government income didn't match peacetime expenses, let alone wartime ones. In January 1812, Gallatin told Congress that it was too late, that they had not only to double customs duties, but to raise some $5 million in taxes. The measure passed the House, but not the Senate, and hence failed. Many republicans called it “truly odious”, and while War Hawks wanted war, they didn't want to raise money to pay for it. [/FONT]
[FONT=Arial, sans-serif]So the US went into the war with insufficient funds for even peacetime operations, and relied on loans for war expenses. Note that, in 1812 and 1813 customs duties amounted to over 90% of US Federal income, which is a problem with the British blockade and the US non-importation acts. Moreover, iOTL, in none of the years from 1812-1815 did income meet as much as half of expenses. In fact in 1814 income was less than 1/3 expenses.[/FONT]
[FONT=Arial, sans-serif]March 1812 Congress authorizes $11M of loans, then in June 1812 $5M of Treasury notes (hereafter referred to as Tnotes, not quite paper money) (some interest bearing, some not, denominations as low as $3). [Eventually as much as $17M is in circulation at once.] [/FONT]
[FONT=Arial, sans-serif]In July 1812 it authorized doubling customs (plus taxes on e.g. foreign owned ships), but still refused to implement internal taxes.[/FONT]
[FONT=Arial, sans-serif]February 1813 it took out $16M in loans (but mostly sold at a discounted rate of 88.25 cents on the dollar to 3 financiers)[/FONT]
[FONT=Arial, sans-serif]By July 1813 Congress is finally starting to respond to the war crisis, and passed the taxes Gallatin had wanted the year before ($7M iTTL, $5M iOTL – the US has lost control of Lakes Erie and Ontario, but the depth of that problem hasn't sunk in yet), but because it took time to set up collection procedures, no money came in in 1813, and only $5.5M ($3.9M iOTL) the next year. Moreover, because of the blockade (hence lower customs), income DROPPED that year. [/FONT]
[FONT=Arial, sans-serif](In OTL, all together, there were 5 loans that raised a nominal $55M, but actual 49M$ due to discounting. Even worse, those loans only amounted to 28M$ in specie-equivalent as so many were paid for by bank-notes which averaged 65% face value. In September 1815, total debt was 119.6M$ as opposed to 45.2M$ at the beginning of 1812. iTTL, it will be worse.)[/FONT]
[FONT=Arial, sans-serif]Note, too, that one of the purposes and functions of the Bank of the United States was to keep watch on the state banks. With no BUS, the state banks expanded their issuing of bank notes far beyond their capital levels. This led to people not trusting banknotes. Soon even banks didn't accept notes from banks in other states. People went to the banks to withdraw specie – which the banks ran out of, and suspended payment. Pretty universally, specie payment stopped in September 1814 (iOTL). ITTL, with increased war spending, the collapse is just starting to happen in November 1813, and Congress takes action to deal with the crisis. New England (especially Massachusetts) banks still had specie, but they refused to take other banks' paper, or even loan the government hard money. Monroe moaned that Massachusetts once could have thrown off the invader herself, but now won't even lend the money to let other people fight. [/FONT]
[FONT=Arial, sans-serif]This lack of trust started early, long before the 'official' crises. When Harrison was accumulating supplies in the fall of 1812, already at that time banks in Ohio would not accept 'eastern' notes (including e.g. a bank in Philadelphia), while they did take notes from e.g. neighbouring Kentucky. At one point, the government had to cart in $600k in specie to allow the operation to continue. [/FONT]
[FONT=Arial, sans-serif]During all of this, the Treasury could not demand payment in specie, as there was little/none available. So had to take payment in state notes, etc. Worse, if e.g. North Carolina notes aren't accepted outside North Carolina, and the US doesn't have many expenses in North Carolina those taxes paid in North Carolina notes are almost useless.[/FONT]
[FONT=Arial, sans-serif][the following is very much TTL] In November 1813, Congress is faced with the disasters in Ohio and in Vermont, and with the increased infrastructure and military spending that Monroe has started. Many want to impeach and condemn Monroe for making promises that can't be met, but they eventually realize that without those measures, the US has no chance at fighting the British at all. So they, after some incredibly bitter debate, decide to enact several measures. Firstly, they authorise $24M in loans, and $14M in Tnotes, secondly they raise customs duties again and enact $10M in new taxes ($8M direct), although it will take several months for that money to start flowing. Madison wants to enact an Embargo and non-intercourse act, to stop commerce with Britain, but that would affect the customs receipts, which at this time are considered more important. Thirdly, they agree to re-charter the Bank of the United States. [/FONT]
[FONT=Arial, sans-serif]At this time, too, Alexander Dallas is appointed Secretary of the Treasury to formally replace Gallatin. Gallatin had been in Europe (Russia, England, Sweden, Spain, etc.) trying to get peace negotiations started, and his temporary replacement was a disaster. While Dallas was opposed by e.g. Pennsylvania, one of the many tradeoffs made during the whole financial restructuring mess was that Dallas manages to be appointed at this time. [OTL, it took until the equivalent mess in September 1814 for him to be acceptable.] One of the trade-offs was that Pennsylvania gets to sell her grain abroad (although nominally not to the British), which means that she's prepared to give up her opposition to Dallas.[/FONT]
[FONT=Arial, sans-serif]The initial offering of Tnotes (in 1812) was only for 1 year, which meant that in June 1813, the Treasury was spending a lot of time just replacing expired notes. So this November issue has more longer term notes, some 2 years, some 5. With longer term notes, many with no interest, and a larger proportion in smaller denominations, the distinction between Tnotes (which Congress and the Treasury are prepared to issue) and paper money (which they are not) is, in fact, fading fast. Tnotes are still not 'legal tender for all debts public and private', but functionally, they are being traded for private transactions/commerce, as they are guaranteed to be at least good for paying taxes, if nothing else. Once there are enough out there, the Treasury decides that it will only take tax payments in currency at least as hard as Tnotes. [/FONT]
[FONT=Arial, sans-serif]In the northern tier of states, this is no problem at all. New England has specie and their banknotes are still worth money. [/FONT]
[FONT=Arial, sans-serif]In New York, Pennsylvania and Ohio, the Federal government is hiring wagons, buying food, building roads, etc., etc. In the middle states (Virginia, NJ, DE), there is a fair bit of industry, e.g. naval supplies, cannon, gunpowder, etc., that the government needs to buy. Similarly, Kentucky streams wagons, wagoneers, beef and pigs north into Ohio and Pennsylvania for the war effort. So, in all these states, there is an ample sufficiency of Tnotes in circulation that can be used for paying taxes. While e.g. a wagoneer in Ohio would rather get paid in specie or specie backed notes, no one is offering that anymore. Getting paid in Tnotes means that they can either pay taxes with them for the full amount in dollars, or sell/trade them to someone else who needs to pay taxes. So, they're sure better than nothing. They'll even take Ohio banknotes backed by Tnotes reserves that bank holds. While iTTL the financial crisis happens earlier than OTL due to the increased spending, Congress responds fast enough that, for the Northern states, it's really only a hiccup and an inflationary bump. Note, too, that the impending recharter of the BUS means that State chartered banks know that they'll be held accountable for the notes they issue and they don't issue quite as many as they would have (as they did iOTL). The lack of specie-backed currency in most of the country means that the public doesn't trust Tnotes as much they did 'real' money, so Tnotes are taken at a discount to specie (about half the value in most of 1814). This means there is some inflation, as a farmer wants more dollars in Tnotes than they would in gold. It's not quite as bad as it might be, because the farmer can't GET gold, so he doesn't (and can't) demand twice as much (however, if someone DID offer gold, they'd get the grain for less – if you have gold, there's DEflation). Now, because the banks in most of the northern states now have a supply of Tnotes to back them, most of the northern banknotes are convertible to Tnotes (even if not to specie) and so they are now, to some extent, convertible to each other. Thus some of the illiquidity that was causing the US financial situation to almost collapse has been averted.[/FONT]
[FONT=Arial, sans-serif]Note that I talked about Northern banks. Most of the southern states are in a worse situation. They don't have any more specie than the northern banks did, and the government isn't flooding the area with Tnotes. If the blockade wasn't happening, they could sell food and materiel north by sea or export goods for specie – but they can't. The government does federalize some militia, and they do buy some materiel, but it is not much, and doesn't match the taxes being collected. Southern banks, states and large taxpayers have to take extraordinary measures – like taking out loans from northern banks to be able pay the required taxes. As a result, southern bank notes are discounted massively, so a dollar issued by South Carolina, say, might be worth only 10cents in a harder currency.[/FONT]
[FONT=Arial, sans-serif]One result of this mess is that the southern states cry out loudly for e.g. an invasion of Florida so that Federal money can flow into their states. On the other hand, this really amounts to Georgia and South Carolina, as Mississippi and Alabama are still territories and Louisiana has a small enough population and enough trade that her direct tax is sustainable. Still, Congress wants some victories to report, so they do authorize the invasion of the Floridas in April 1814. This ups the cost of the war, and the strain on the whole country's finances, but eases the strain within the country. [/FONT]
[FONT=Arial, sans-serif]Another result of the southern currency collapse was the change in power between small farmers on the one hand and plantation owners and banks on the other. If young Johnny goes off to war and sends home his pay, his parents have hard cash, and can probably pay off a mortgage on the farm at about 10 cents on the dollar, as the southern banks are so desperate for Tnotes or other 'hard' currency. In fact, arrangements are soon made so that the southern enlistees (regular or federalized militia) only get paid part of their pay – and the rest is sent 'home'. This encourages families to send their sons off to war, and ups the number of soldiers available for the US military. While some decry the 'mercenary companies' thus raised, most just figure this is the best way out of a mess. [/FONT]
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