Civil War Arbitrage

Wouldn’t it be great if an act of Congress enabled your federal government bonds to be worth twice what you paid for them?

That’s precisely what happened for many federal Civil War bond investors.

In the second year of the War in 1862 it was obvious the federal government could not finance the war without creating new financial instruments and issuing an unprecedented amount of bonds. Federal indebtedness increased from $65 million to $2,700 million during the war. The federal government also issued about $450 million in greenback paper currency. Greenbacks were legal tender for all debts except for customs duties, which still had to be paid in gold.


Consequently, the value of the greenback dollar fluctuated in relation to the gold dollar based upon market confidence—or lack of it—that greenbacks would ultimately be redeemed in gold at face value. In June 1864, for example, the market quote required 2.7 greenback dollars to buy a single gold dollar. In reciprocal terms, 37 cents in gold could be exchanged for a greenback dollar.

The differential created an arbitrage opportunity in the US Government Bond market. Suppose an investor had $1,000 in gold when the exchange rate was two greenbacks for each gold dollar. Thus, she could exchange her gold for $2,000 in greenbacks and buy a like amount of federal war bonds with an interest rate of—say—6% annually. Since the US Treasury was required to pay bond interest in gold, she would collect $120 of interest annually instead of a mere $60. Basically she doubled her annual investment yield from 6% to 12%.

But eventually she discovered a bigger opportunity—arbitrage. She lobbied Congress to redeem her bonds at par in gold. Because she represented herself as a “sound money” advocate—instead of someone who would profit personally—four years after the end of the war Congress ruled (with President Grant concurring) that all bonds be redeemed at par in gold when they matured. Therefore her $1,000 gold investment would be returned as $2,000 in gold when the bond matured. Until then our shrewd lady earned a 12% annual interest rate on her original $1,000 gold investment.

As the logical reader no doubt concludes, when investors get “something extra for nothing” somebody else pays for it. The “somebody else” is composed of the taxpayers who didn’t own federal war bonds. Many Northern families bought the bonds, which were aggressively marketed by Jay Cooke & Company to individuals instead of institutions. National banks were also large holders because the federal government ruled that such bonds could be counted among a banks reserves. The chief group of taxpayers who did not hold such bonds was Southerners, black and white.

The federal government paid-off Civil War bonds over a period of decades after the war. Non-bondholders not only had to pay their share of the taxes to repay the bonds, but also had to help fund the extra bonus that par value gold redemption provided.

If you enjoyed the above commentary, consider reading one of my books:

The Confederacy at Flood Tide
Lee’s Lost Dispatch and Other Civil War Controversies
Trading With the Enemy
Co. Aytch: Illustrated and Annotated


4 thoughts on “Civil War Arbitrage

  1. Phil Leigh Post author

    Perhaps the most comprehensive book on the Greenback is Irwin Unger’s “The Greenback Era” (Princeton, N.J.: Princeton University Press, 1964)

  2. Cotton Boll Conspiracy

    Can you recommend any books on Civil War- and Reconstruction-era government finance, such as that detailed in your post? The amount of chicanery that went on during this period is really astounding.

    1. Phil Leigh Post author


      Brands, H. W. Greenback Planet (Austin: University of Texas Press, 2011)

      Cashman, Sean America in the Gilded Age (New York: New York University Press, 1984)

      Cohn, David L. The Life and Times of King Cotton (New York: Oxford University Press, 1956)

      Cooper, William J. and Terrill, Thomas The American South: A History Volume Two (Lanham, Md.: Rowman and Littlefield, 2009)

      Hummel, Jeffrey Emancipating Slaves, Enslaving Free Men (Chicago: Open Court, 1998)

      Johnson, Ludwell Division and Reunion (New York: John Wiley & Sons, 1978)

      Randall, J. G. and Donald, David The Civil War and Reconstruction (Boston: D. C. Heath & Company, 1961)

      Rothbard, Murray N. A History of Money and Banking in the United States (Auburn, Alabama, Ludwig von Mises Institute, 2002)

      Simkins, Francis and Roland, Charles A History of the South (New York: Alfred A. Knopf, 1972)

      Studenski, Paul and Krooss, Herman Financial History of the United States (New York: McGraw Hill, 1952)

      Academic Papers and Proceedings

      Holt, Byron W. Publications of the American Economic Association 3rd Series, Vol. 8, No. 1 Proceedings of the Nineteenth Annual Meeting, December 26 – 28, 1906 “The Relation of Protective Tariffs to Trusts”


      National Park Service, Industry and Economy during the Civil War,


      “The Battle of Smoot-Hawley” The Economist December 18, 2008


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