Current Draft: May 1994
First Draft: April 1993
JEL Classifications: N21, G1
The goal of this paper is to determine which events of the U.S. Civil War were viewed as turning points by people at the time. Our basic source material is quite different from that employed in conventional histories - rather than letters, diaries, speeches, and other verbal statements, we use asset prices. The U.S. issued an inconvertible currency called the Greenback starting in 1862. The Greenback's value in gold fluctuated over time, reflecting expectations of future war costs. Using data on the gold price of Greenbacks, we compare the reactions of participants in financial markets to the significance the same events have been assigned by Civil War historians. This is not a traditional event study. Instead of specifying a list of dates a priori and testing for their importance, we allow the data to identify the important dates, and compare them to the accounts of traditional historians.
Even after the appearance of Greenbacks, business people required gold dollars to complete international transactions and to pay some obligations to the U.S. federal government. A market emerged in New York to facilitate conversions between Greenbacks and gold dollars. The records of this market - daily quotations on the relative prices of Greenbacks and gold dollars - form our basic source. Our selection of the Greenback market, as opposed to some other financial market, is based on several factors. First, the exchange rate between gold and Greenbacks allows us to "measure the opinions of individuals who are no longer alive to express them directly" (Roll [1972, p.498]). People hoped that after the war they could convert their Greenbacks to gold dollars one-for-one. The longer and more costly the war, the more likely it was either that this conversion would not take place or that the U.S. would return to the gold standard at a different parity, in effect using inflation to raise some of the funds necessary to pay for the war. Thus, the Greenback's price, in terms of gold, provides a running commentary on the Union's fortunes, as perceived by participants in financial markets.
The United States did return to the gold standard at the pre-War parity, but not until substantially after the War's end, on January 1, 1879. In principle, one could also study Greenback prices during the post-War period; indeed, Friedman and Schwartz [1963] provide an excellent discussion of the Greenback's post-War career. However, we limit our study to the Civil War period for two reasons. First, there is a well-developed historiography of the Civil War that permits us to assess the importance ascribed by historians to events that may have occurred on any given day. Second, by its very nature, the War generated well-defined discrete incidents that are easier to characterize as surprises to contemporaries.
Our results can be viewed as a set of "Civil War greatest hits," which we compare to more conventional historical accounts. Our method agrees with conventional histories for some events, such as the Battle of Gettysburg, but also generates some surprises. Financial markets reacted strongly to several events that have not been assigned a central place in Civil War histories, and some events viewed as turning points by historians did not stir the financial markets.
Greenbacks and gold dollars were not perfect substitutes. First, transactions with foreigners required gold. Moreover, the government itself accepted only gold dollars for payment of customs duties. Finally, and most important, gold was demanded for speculative purposes. Although the Greenbacks represented promises to pay gold coin, "men did not esteem such promises as equivalent to gold itself after the promisors had given public notice that they were unable to redeem their promises for the present" (Mitchell [1903, pp. 182-83]). After a short time the Greenback depreciated from par with the gold dollar, and speculators began to bet on the Greenback/gold exchange rate. To a first approximation, the price of a Greenback was its expected payoff in gold dollars. This is true because the expected return on holding a Greenback was the expected appreciation of the Greenback minus the opportunity cost of holding the Greenback, plus the transactions value of a Greenback. The observed changes in the daily exchange rate are much greater than those in the interest rate. Hence, one can safely assume that changes in the expected payoff dominated the return to the Greenback and therefore its price.
Not surprisingly, a formal market for trading gold came into existence within two weeks of the suspension of convertibility. The first organized dealings took place at the New York Stock Exchange on January 13, 1862. At about the same time a second market formed in a basement on William Street in New York City. This market, whose venue changed several times, became known as the Gold Room. The prices in the Gold Room were regularly telegraphed to all major cities and accepted as authoritative. Except during a short period in 1864 when the government shut it down, the gold exchange operated until redemption in 1879.
An important question for our purposes is how the gold market used the information coming to it. Descriptive accounts support the basic premise of this paper: the gold market transformed information about war news into expectations about the Greenback's future value.
We use a two-step procedure for finding the turning points, based on Banerjee, Lumsdaine and Stock [1992]. First, we isolate periods in which a standard autoregressive model appears to be a poor approximation for the underlying data generating process. Then, within those periods, we attempt to locate structural breaks using a sequential F-test.
Structural Breaks that are not Surprises
September 23, 1862: The market reacted negatively to two closely-spaced events: the battle at Antietam (a costly Union victory) and Lincoln's official promulgation of the Emancipation Proclamation. The more likely cause of the structural break is that the Emancipation Proclamation destroyed any hope for a peaceful settlement to the war. The actual structure of the proclamation - it would not go into effect until January 1, 1863, and did not take effect at all in the loyal slave states - made the proclamation as much a threat as a concrete measure. At a cabinet meeting on July 22, Lincoln explained his determination to go ahead with the measure, and his cabinet approved (McPherson [1988, p.557]). Any doubts about his willingness to tolerate slavery in the seceded states, even if they should end the rebellion, would now be over. The New York Herald approved of the measure on the grounds that the South would certainly end the rebellion rather than risk the social upheaval of emancipation (September 23, p.4). In contrast, market participants did not believe that the Proclamation would hasten the war's end. Rather, the Emancipation Proclamation caused people to think in terms of a more "total" war, which would also be a more expensive war.
July 6, 1863: Gettysburg and Vicksburg were, as noted above, clear and significant military victories for the Union. Historians have argued that, at the time, observers did not view Vicksburg for what it was: the end of Confederate control of the Mississippi, and so the severing of the western from the eastern part of the Confederacy. In contrast, historians have noted that contemporaries clearly understood the significance of Gettysburg. Unfortunately, since news of these two battles reached the east at about the same time, we cannot make any statistical distinctions between market reactions to the two separate events.
Surprises
January 8, 1863: The day before, a bill approved by the Congressional Ways and Means Committee to increase the supply of Greenbacks by $300 million was made public. The simplest explanation for the decrease in the Greenback's price is the increase in its supply. However, participants in financial markets may have viewed this proposal as an admission that the fiscal measures taken to that date - previous Greenback issues, borrowing, and taxes - were insufficient to meet the Union's needs. Thus, the government was acknowledging, however indirectly, that it expected the war to be more expensive than earlier anticipated.
July 12, 1864: This is the largest shift (in absolute value of the percent change) of the entire war; at 4.85% it dwarfs the next largest, 2.6%. The large value reflects good military news. Jubal Early's Army, in a threatened raid on Washington, had approached to within five miles of the White House by July 11th. Until the raid on July 11, it was unclear what Early's objective was; on July 10th, the Washington Evening Star published a dispatch from Baltimore: "The excitement in this city is intense and on the increase. Crowds are thronging the bulletin boards, and a thousand wild and improbable rumours are in circulation." Since Grant had withdrawn most of Washington's defenders to aid in the siege of Petersburg, many feared for the safety of the Union capital. On July 12th, however - partly in response to the hasty arrival of Union reinforcements - Early decided to break off the raid and return to Virginia. Historians generally view this as a minor footnote to the war. Financial traders, apparently, took Early's threat very seriously indeed.
August 24, 1864: News of the only important military event close to this date - the fall of Fort Morgan on August 24th, which virtually completed the Union blockade of Confederate ports - could not have caused the price movement, since this would require essentially instantaneous transmission of information, which is implausible. The New York Times, in commenting on a rise in Greenback prices on the 24th, advanced what is probably the real reason. Throughout July and August peace feelers from the Confederacy had put Lincoln (who was also facing re-election) under great pressure to drop his commitment to abolition as a condition for negotiations. The Times (August 25, 1863, p.8) reported rumors to the effect that Lincoln, under the pressure of a re-election campaign against a peace-minded Democratic, planned to change his position. According to McPherson [1988, p.770], the rumors were not baseless: "Lincoln almost succumbed to demands for the sacrifice of abolition as a stated condition of peace."
March 8, 1865: There was virtually no military news at this time. Grant was bogged down in his assault on Richmond, and Sherman was somewhere in North Carolina - his precise whereabouts, and so his activities, were unknown. Newspaper stories give the impression of being desperate for some real news to report.
These mean shifts show that, much like modern financial markets, some movements in Civil War gold prices did not correspond to real news. We find this neither surprising nor puzzling. While one could certainly scour the news accounts for events to "explain" these mean shifts, we think that it makes more sense simply to acknowledge that some long-lived price changes may be inexplicable.
Because these events are not even associated with substantial short-term changes, we are confident that participants in the financial markets did not regard them as important news: either the events had no permanent effects on people's expectations or they were fully anticipated and so had already been incorporated into prices. Of course, the assessment of financial market participants and the general population need not be the same. Still, despite the importance these events have been assigned by historians, they apparently did not rate as turning points in contemporaries' estimates of prospects for the war and eventual redemption.
In some respects our results are consistent with conventional accounts: for example, the Battle of Gettysburg was viewed as a major turning point. In other cases, however, we have found that contemporaries gave more weight to certain events than historians generally have. Once such example is Jubal Early's retreat from Washington in July of 1864. Largely downplayed by modern historians, Early's retreat triggered jubilation in the Gold Room.
More generally, our methodology provides a useful way for studying how people in the past responded to various events that were happening around them. One could, for example, use financial market information from the early 20th century to gauge reactions to the threats of war and feelers for peace that preceded the outbreak of war in August 1914. Participants in financial markets may not, of course, be "typical" of their contemporaries. But why should the opinions of thousands of people, distilled in market prices and expressed at the risk of their own personal fortunes, be viewed as any less representative than those manifested in the literary sources more commonly used by historians?
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