Turning Points in the Civil War: Views from the Greenback Market

Timothy W. Guinnane,Yale University,
Harvey S. Rosen,Princeton University, and
Kristen L. Willard, Princeton University

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.

I. Greenbacks and the Market for Gold

During the first year of the Civil War, 1861, the Union's financial condition deteriorated, and in December the Treasury issued a very bleak report on the budgetary situation. In the face of such news, bankers concluded that investors would lose confidence in bank notes and that banks would soon experience a massive outflow of gold. On December 30, the banks suspended the convertibility of their notes into gold (Dewey [1939, pp.182-3]). The government almost immediately followed suit, suspending the right to convert Treasury notes into specie. Soon thereafter, in February 1862, Congress passed the first of the Legal Tender Acts. These acts authorized the government to issue an inconvertible currency popularly called "Greenbacks." Did people believe that the government would eventually redeem Greenbacks for gold? As Unger [1964, p.16] noted, "Little had been said on the subject of redemption when Congress debated the Legal Tender" issue. However, all the available evidence indicates that the public believed that at some future date, convertibility would be reinstated, and all Greenbacks would be redeemed in gold.

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.

II. Methodology

In a generic sense, our problem can be characterized as follows: Suppose that a time series is generated by some autoregressive process. Define a "break" in the series as a change in the intercept of that process, i.e., a shift in its mean value. How does one determine if there are breaks in the process, and if so, where they are? In our context, the breaks in the price of Greenbacks series mark the turning points of the war - long-lived changes in the price of Greenbacks, conditional on their past values.

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.

III. Results

Our methodology yields a list of seven dates that were significant breaks in the gold price of Greenbacks. Table 1 lists those turning points, the percent change in the conditional mean price of Greenbacks that occurred on those dates, the long run impact of that change (i.e., the percentage price change we would observe if no other shocks ever occurred), and the major associated events. The dates listed in Table 1 fall naturally into three groups. The first group is comprised of events, such as the victories at Gettysburg and Vicksburg, that are completely consistent with conventional historical views of the Civil War. In other instances the market reacted strongly to events that have received relatively little stress from historians, but are easy to understand as causes for concern or optimism. Our list also includes two dates for which the market appears to be responding to something, but from the historical record we cannot tell what it was. Finally, we discuss two types of events that did not make it onto the table. First are events that historians have suggested were important but which were not viewed as turning points by financial markets. Second are events that are associated with a substantial blip (a large one-day change) but were not persistent enough to be identified as mean shifts. We consider each class of event in turn.

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.


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."

Structural Breaks without Associated News

August 27, 1863: Most military news at this time was insignificant, and positive for the Union at that, making it hard to understand the Greenback's depreciation. The sacking of Lawrence, Kansas, by Confederate guerrillas occurred on August 21, but was viewed as minor by the New York newspapers (the Herald reported the event on p.5). The Union siege of Charleston had been under way for some time, and the Herald (August 28th, p.2) claimed that the fall in the Greenback price reflected disappointed expectations: "The opinion on the street is partly that gold has been oversold, on expectation about the taking of Charleston..." (Charleston did not actually fall to the Union until February of 1865.)

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.

Events Not Viewed as Major News by the Financial Markets

Table 1 is also noteworthy for the events it does not include. A number of military and political events that are often viewed as turning points did not induce participants in the gold market to revise their expectations about future costs of the war. For example, the Second Battle of Bull Run (August 30, 1862) did not even cause a blip in the price of Greenbacks. Neither did Lincoln's removal of McClellan from command on November 7, 1862. The overwhelming victory of Union forces at Chattanooga on November 25, 1863 led to a 3.17% increase in the price of Greenbacks on November 27 (the next trading day), but this appreciation was almost entirely canceled by negative movements over the next few days. Similarly, after Lincoln's re-election on November 8, 1864, the price of Greenbacks fell by a few percentage points, but it rebounded two days later.

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.

IV. Conclusion

To cover expenses during the Civil War, the Union issued Greenbacks, a legal tender currency that was not immediately convertible into gold. Any event that increased the expected future cost of the war decreased the likelihood that Greenbacks would eventually be redeemed with gold at par. Such events therefore tended to decrease the gold price of Greenbacks, ceteris paribus. Hence, the gold price of Greenbacks is a potential source of information on opinions regarding the progress of the war. In this paper, we analyzed daily price quotations to assess how people at the time evaluated military, political, and financial news.

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?


Banerjee, Anindya, Robin L. Lumsdaine and James H. Stock, 1992. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypotheses: Theory and International Evidence." Journal of Business and Economic Statistics 10(3):271-287.

Cornwallis, Kinahan, 1879. The Gold Room and the New York Stock Exchange and Clearing House. New York: A.S. Barnes & Co.

Dewey, Davis Rich, 1939. Financial History of the United States. New York: Longmans, Green and Co.

Friedman, Milton, and Anna J. Schwartz, 1963. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press.

McPherson, James, 1988. The Battle Cry of Freedom. New York.

Mitchell, Wesley C., 1903. A History of the Greenbacks. Chicago.

Mitchell, Wesley C., 1908. Gold, Prices, and Wages under the Greenback Standard. Berkeley.

Roll, Richard, 1972. "Interest Rates and Price Expectations during the Civil War," Journal of Economic History :476-498.

Unger, Irwin, 1964. The Greenback Era. Princeton: Princeton University Press.