Lincoln and the Banks

By Evan Sparks

It is a testament to the scale of Abraham Lincoln’s place in history that his notable accomplishments in the financial sector are little known today. Alexander Hamilton’s financial innovations are celebrated in a Broadway musical, and Franklin D. Roosevelt’s banking reforms are packaged with the rest of the New Deal policies as a legac. But Lincoln—whose policies on banks were as transformative as either Hamilton’s or FDR’s—is rarely thought of for his banking accomplishments.

And rightly so. Lincoln’s preeminence as architect of victory in the Civil War and poet of union and emancipation is well-deserved. But upon reflection on his own career, Lincoln might have named his banking legacy among his most important.

Banking from the start

In 1832, the 23-year-old Lincoln, just back from leading a militia unit in the Black Hawk War, stood as a Whig for a state assembly seat in the small central Illinois town of New Salem. His first public speech as a candidate ran as follows:

Fellow citizens, I presume you all know who I am. I am humble Abraham Lincoln. I have been solicited by many friends to become a candidate for the legislature. My politics are short and sweet like the old woman’s dance. I am in favor of a national bank. I am in favor of the internal improvement system and a high protective tariff. These are my sentiments and political principles. If elected, I shall be thankful; if not, it will be all the same.

This political program was right in line with the Whig Party’s focus on sound money, development of railroads and canals and funding the government through tariffs. Thus, while Lincoln began his political career with a financial regulation pitch, he may have been more inspired by his party affiliation than by that particular issue itself.

That Lincoln was a Whig at all was somewhat odd. In rural Illinois, Democrats predominated. When Lincoln was later elected to a term in Congress, he was the only Whig from Illinois. Given his background as the son of a homesteading frontier farmer, Lincoln might be expected to have been a Democrat. (He would certainly have been more likely to win his elections.) Farmers hated the concept of a central or national bank; as a debtor class, farmers of the time liked weak money policy and the inflation that often accompanied it. Instead of farming, Lincoln pursued upward mobility, the practice of law and the politics of the small but growing American middle class.

Regardless, as a Whig, Lincoln was attuned to the most party’s important priorities. Like other Whigs, he believed that banks in correspondence with a robust central bank would provide the strength and sustainability to fuel commerce, economic growth and infrastructure investments. At the time, the debate over the Second Bank of the United States—just four years away from the end of its 20-year charter—had reached a fever pitch. That same year, Andrew Jackson vetoed a bill to reauthorize the bank, making clear that he would not bow down to “the golden calf,” heated rhetoric that did not soothe tempers.

The failure to renew the charter of the Second Bank, which exerted some degree of restraint on the practice of banking, triggered a new wave of de novo banks across the country, including a state-chartered bank in Springfield, Ill. The bank was controversial almost immediately, absorbed in insinuations and accusations over stock distribution, interest rates, bribe-taking and other controversies. The bank was not popular on either side of the aisle. “The ultra Democrats are opposed to state institutions; they want specie,” reflected Democratic Illinois politician James Shields. “The ultra Whigs are opposed to state institutions, they want a national bank.”

In this formulation, Lincoln would have been an “ultra Whig,” for he firmly defended the erstwhile national bank. After the Second Bank’s charter lapsed, a precipitating factor in the debilitating Panic of 1837, Lincoln used the comparison to good effect. “We only ask you to examine the history of the times, during the existence of the two Banks, and compare those times with the miserable present,” he said in an 1843 speech.

Throughout his career, Lincoln would be guided by what he identified as the core purpose of a national bank: “No duty is more imperative on that government, than the duty it owes the people, of furnishing them a sound and uniform currency,” he said in 1839. The system of free banking resulted in excess liquidity during boom times, accelerating economic expansion beyond its natural pace, and then limited liquidity at exactly the times it was most needed, resulting in panics and crises. A central bank could provide infusions of liquidity to mitigate panics, and it could regulate the money supply to limit inflation and protect savers and investors. In short, a national bank was to Lincoln not just a prudential measure but a fount of republican virtue.

Defending the rule of law

Lincoln’s foray into the controversy over Illinois’ state bank is a magnificent illustration of his views on the intersection of virtue and finance. He had won election to the legislature by this point. One of his earliest recorded speeches in the state House of Representatives, made in January 1837, concerned a proposal to set up a committee to examine the bank and weigh the accusations.

The speech begins with an expression of caution over what is not known about the bank’s condition. Rumors had been floated—for example, that the bank had refused to convert notes to specie on demand as required in its charter. (This turned out to be true a few months later as the Panic of 1837 unfolded but was not yet apparent.) But the legislation seeking to examine the bank cited no other activity that would contravene the charter, Lincoln said. Instead, he argued, the bank’s enemies were using innuendo to neutralize the bank through the disruptive visit of the legislative examiners—and, in due course, as a pretext to kill it.

“We have no right to make the examination,” Lincoln continued. “To the law-abiding part I say: examine the bank charter, go examine the Constitution, go examine the acts that the General Assembly of this state has passed, and you will find just as much authority given in each and every of them to compel the bank to bring its coffers to this hall and to pour their contents upon this floor, as to compel it to submit to this examination which this resolution proposes.”

(Lincoln added that he was “by no means the special advocate of the bank.” He had in the previous legislative session proposed an amendment to a bank-related bill that would require certain reports from the bank to the legislature, failing which an examination might be made. But the legislature rejected this amendment, and Lincoln noted the irony.)

Moreover, Lincoln asked, whom would such an extra-legal examination serve? It would serve only to injure the bank’s credit, he pointed out. Astutely aware of the interlocking nature of a bank’s role in the economy, he emphasized that it is small depositors and note-holders who are harmed by undue interference. “You cannot injure, to any extent, the stockholders,” he said. “They are men of wealth—of large capital; and consequently, beyond the power of malice. But by injuring the credit of the bank, you will depreciate the value of its paper in the hands of the honest and unsuspecting farmer and mechanic, and that is all you can do.”

He concluded: “I am opposed to encouraging that lawless and mobocratic spirit, whether in relation to the bank or anything else, which is already abroad in the land and is spreading with rapid and fearful impetuosity, to the ultimate overthrow of every institution, of every moral principle, in which persons and property have hitherto found security.”

Lincoln’s fear of mob rule was the theme of his best-known early speech, delivered a year later to the Young Men’s Lyceum of Springfield. In this speech, he turns from extra-legal bank examinations to the prevalence of vigilante justice as the sectional conflict over slavery grew hotter. As he decries these excesses, each of which he believes makes a tiny tear in the fabric of the republic, he offers his famous prescription:

Let every American, every lover of liberty, every well-wisher to his posterity swear by the blood of the Revolution never to violate in the least particular the laws of the country, and never to tolerate their violation by others. . . . Let reverence for the laws be breathed by every American mother to the lisping babe that prattles on her lap; let it be taught in schools, in seminaries, and in colleges; let it be written in primers, spelling books, and in almanacs; let it be preached from the pulpit, proclaimed in legislative halls, and enforced in courts of justice. And, in short, let it become the political religion of the nation; and let the old and the young, the rich and the poor, the grave and the gay of all sexes and tongues and colors and conditions, sacrifice unceasingly upon its altars.

Lincoln in the Lyceum Address foresaw the great rupture that providence would grant him the duty to heal. American political institutions had lasted for 50 years at that point—why wouldn’t they continue in perpetuity? “To conclude that no danger may ever arise would itself be extremely dangerous,” Lincoln warned. The generation of the founders had passed; rising men of “towering genius” might well “disdain a beaten path” and take advantage of a decaying rule of law to usurp constitutional government. “And when such an one does it will require the people to be united with each other, attached to the government and laws, and generally intelligent, to successfully frustrate his designs.”

One can see a direct line between the plainspoken floor speech on the state bank and the elegant words of the Lyceum Address. Lincoln’s political concern had begun with banking, but the deeper questions of union and slavery were existential. His passion for the rule of law would see him turn his attention to these greater questions for the duration of his pre-presidential career. He would rarely mention banks during these years, and when he did he made little effort to introduce possible reforms. “The question of a national bank is at rest,” he wrote in 1848. “Were I president, I should not urge its re-agitation upon Congress; but should Congress see fit to pass an act to establish such an institution, I should not arrest it by the veto, unless I should consider it subject to some constitutional objection from which I believe the two former banks to have been free.”

It would take the republic’s passage through its darkest days to bring a version of Lincoln’s banking vision to pass.

National banks, not a national bank

The Civil War was immensely costly in terms of lives lost or wounded, but it was also vastly expensive for the government. The government’s 1860 budget was $63 million; in the years after the war the federal budget routinely exceeded $300 million. The war left the union with a debt of $2.7 billion, which seems tiny now but whose interest payments alone were more than double the prewar budget.

The unanticipated duration and cost of prosecuting the war left Lincoln and his treasury secretary, Salmon P. Chase, hard up to find new revenues. As the war dragged on, hoarding of gold accelerated, and by the end of 1861, banks and the Treasury ended specie redemption. Starting in 1861 and 1862, the Treasury issued new demand notes and U.S. notes (the first “greenbacks”), paper money backed only by the credit of the United States.

A well-known sound money man, Lincoln was reluctant to issue the notes but pragmatically recognized that “[d]uring the existing war it is peculiarly the duty of the National Government to secure to the people a sound circulating medium,” as he wrote in a message to Congress in 1862. Later that year, he told Congress that its “judicious legislation . . . securing the receivability of these notes for loans and internal duties and making them a legal tender for other debts, has made them an universal currency, and has satisfied, partially at least, and for the time, the long-felt want of an uniform circulating medium, saving thereby to the people immense sums in discounts and exchanges.”

Lincoln acknowledged that a return to specie-backed notes was desirable. After all, “[f]luctuations in the value of currency are always injurious, and to reduce these fluctuations to the lowest possible point will always be a leading purpose in wise legislation,” he wrote. “Convertibility, prompt and certain convertibility, into coin is generally acknowledged to be the best and surest safeguard against them.”

But here Lincoln exploited a political opportunity. Specie redemption would not make a swift return. (It would not resume in full until 1879.) “It is extremely doubtful whether a circulation of United States notes payable in coin and sufficiently large for the wants of the people can be permanently, usefully, and safely maintained,” he cautioned Congress. As an alternative, he urged “the organization of banking associations, under a general act of Congress.” Instead of a national bank—still viewed with skepticism in much of the country—it would be a network of private-sector national banks, each of which could issue U.S. notes “on the security of United States bonds deposited in the treasury. These notes, prepared under the supervision of proper officers, being uniform in appearance and security and convertible always into coin, would at once protect labor against the evils of a vicious currency and facilitate commerce by cheap and safe exchanges.”

Lincoln raised the stakes in a message to Congress a month later after directing Chase to issue $100 million in new greenbacks. “It seems very plain that continued issues of United States notes without any check to the issues of suspended banks, and without adequate provision for the raising of money by loans and for funding the issues so as to keep them within due limits, must soon produce disastrous consequences,” he wrote. He asked Congress to pass a currency bill that he and Chase had devised.

In this bill and the one that followed it—the National Currency Act of 1863 and the National Bank Act of 1864—the essential framework of the U.S. monetary and financial system took shape. Instead of the money supply being limited by the amount of specie, it would be limited by supervision of the examiners in the Office of the Comptroller of the Currency. To ensure their soundness and ability to redeem the national banknotes they issued, national banks would purchase interest-bearing U.S. government bonds equaling a third of their paid-in capital—a solution designed to promote both sound currency and provide a steady stream of payments to the cash-strapped Treasury. “It seems quite clear that the Treasury can not be satisfactorily conducted unless the Government can exercise a restraining power over the bank-note circulation of the country,” Lincoln wrote in 1864.

The system worked as intended, avoiding the hyperinflation of previous paper money issues and fueling confidence in banks. “Since these measures have been in operation all demands on the Treasury, including the pay of the Army and Navy, have been promptly met and fully satisfied,” Lincoln wrote at the end of 1863. By the end of 1864, after the second bill had been passed, 584 national banks had been organized and state banks continued to convert.

By the time of Lincoln’s assassination in 1865, so many national banks had been chartered and so many state banks had converted that many believed state banks would disappear entirely. But it was not to be. After Lincoln’s death, state banks fought for their existence and the dual chartering system that is so distinctive of U.S. banking became a fixed feature. But Lincoln’s great financial policy accomplishment—a distributed central bank, as we might call it today—endured and evolved.

He is remembered today for his achievements in winning freedom for slaves and in restoring the bonds of union. Without his vision, articulated and developed over decades, of a national banking system, the federal government might never have been able to sustain the war. Lincoln’s greatness as a banking president made possible the accomplishments for which we rightly revere him today.

About Evan Sparks

Evan Sparks
Evan Sparks is editor-in-chief of the ABA Banking Journal and vice president for editorial services at the American Bankers Association.