Abstract
We examine the monetary experience of New Orleans when it was occupied during and immediately following the Civil War, using newly assembled data regarding the quantity and market value of the city’s municipal notes and the city’s fiscal position. Municipal notes, acceptable for taxes, circulated at face value in retail transactions (and at only a small discount in broker transactions) as long as their supply was sufficiently limited, and they fell out of circulation and were priced at a discount relative to interest-bearing municipal bonds, when concern arose about their overissue. The spontaneous rejection of New Orleans municipal notes exemplifies how choice in currency works when insufficiently backed money is not supported by legal tender laws.
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Notes
In today’s jargon, the required specie reserve was merely an “initial margin” requirement and was not a “maintenance margin” requirement.
However, Green (1972), who described a specie reserve as unproductive and convertibility as inflexible, specifically endorsed bond collateral because it promoted development.
The suspending banks were, unsurprisingly, Free Banks.
By the end of the war, it was learned that about half of this gold was sent to Europe in payments on certain Confederate gold bonds and that the rest “disappeared.”
Pecquet (1986) describes a similar episode in the choice of fractional currency.
This bank was restored to its management the next year (Bee 23 June 1863).
The liabilities of five of these banks eventually rose to par. Only one was liquidated at a loss to its note holders, viz., the Bank of Louisiana. The Bank of Louisiana, a chartered bank, having had an enormous specie reserve, should have been able to survive hard times. But, its specie proved to be its undoing, since it was removed by the Confederates during their evacuation of the city.
The notes of the stronger state-chartered banks rose to a premium which approached 10% in the cases of the Canal and Citizens Banks. We also found one quotation, at a slight premium, on the notes of the Bank of America (Bee 3 February 1863).
E.g., “bank notes along with legal tender circulate freely with City currency at par,” Bee 13 February 1864, see also 12 April 1864, 3 June 1864, 24 June 1864, 9 August 1864, 28 August 1864; Price Current 7 October 1864, 4 November 1864, 28 April 1865, 19 May 1865, 15 September 1865, 2 June 1866.
The data is presented in table form in the Appendix. A few words are in order concerning our sources. Prior to the war, New Orleans was served by two newspapers specifically addressed to the city’s business community, the Commercial Bulletin and Price Current, and a number of general interest newspapers. During the period of our study, the Commercial Bulletin suspended publication in June 1862 and the Price Current—already in suspension—only resumed publication in September 1864. Some information was gleaned from the general interest newspapers that published during this period, including the Bee, Picayune, and True Delta and, beginning in May 1863, the Bee began a regular market commentary. Accordingly, from May 1863 onward, initially relying on the Bee and later on the Price Current, we are able to track market values of bank notes and other securities (as shown in Fig. 1). Some of these sources were damaged during the flooding of New Orleans that followed Hurricane Katrina.
E.g., “City Treasury notes rule at ¾ to 1 per cent discount, National currency being the standard” Price Current 19 September 1866, see also 16 March 1867, 10 April 1867, and 13 April 1867.
Our estimates of the quantity of city notes in circulation are based on the emissions and retirements included in the city’s financial statements, along with official estimates of the quantity of city notes in circulation at two different points in time (True Delta 15 April 1864, Price Current 29 June 1867). From these sources, we developed monthly estimates, although we only report end of year estimates in Table 1.
Through early 1867, state notes were accepted by “many” retailers at par, although brokers discounted them at 5% or so (e.g., Price Current 23 May 1866, 16 June 1866, and 16 March 1867). Then, it is only said that “several” retailers accept them at par (23 March 1867). At about this time, the city of New Orleans declined to accept the state notes for municipal taxes, and their value fell to a discount of 20% or so (4 April 1867).
The state Supreme Court eventually declared the state scrip to be unconstitutional (Price Current 12 June 1867).
Five dollar denominations initially traded at discounts between the large and small denominations and eventually became indistinguishable with the larger notes.
The city indicated that it could print $30,000 in small notes per month, about enough only to pay half the salaries of policemen and teachers (Republican 5 September 1867).
This we do not deny.
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A prior version of this paper was presented at the 2005 meeting of the Southern Economic Association.
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Pecquet, G.M., Thies, C.F. Money in occupied New Orleans, 1862–1868: A test of Selgin’s “salvaging” of Gresham’s Law. Rev Austrian Econ 23, 111–126 (2010). https://doi.org/10.1007/s11138-009-0090-8
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DOI: https://doi.org/10.1007/s11138-009-0090-8