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When Lincoln's lessons apply

It is an interesting historical coincidence that just as we are about to celebrate the 200th anniversary of the birth of our 16th President, Abraham Lincoln, the nation elects a President who deeply admires him.

Certainly the crises that face the nation in 2008 are not the same as those that afflicted the country during Lincoln’s term of office, but the quality of dogged determination to set a goal and see things through despite the distractions and panics of those around him is certainly one that is needed in the coming months.

Tomorrow is the official unveiling of the Lincoln silver dollar (An earlier version posted two hours before this is written said four cents. My apologies. My automatic pilot must have kicked in as I was writing, but a kind reader sent me an e-mail about it.) The chosen place is Gettysburg, Pa., where the tide-turning battle for the Union was fought in early July 1863.

Tomorrow also happens to be the anniversary of Lincoln’s Gettysburg Address. The timing and location are good choices by the Mint for the event.

But while I am on the subject of Lincoln, there is something else that can be studied by our new leaders from the Lincoln administration. That is how the U.S. Treasury managed to raise the incredibly large sums to fight the Civil War without sending the country into an inflationary death spiral as some worry about today with our banking system bailout.

Salmon P. Chase’s Treasury was forced to be innovative. National Bank Notes were introduced, but instead of just printing them, every bank in the country that wanted to issue them had to first buy federal bonds – debt – to back them. These bonds guaranteed that should the bank go bust, the bonds could be sold to cover the value of the notes to holders of the currency.

The bonds were loans to the Treasury to pay for the war. The bonds also were assets of the banks that held them. This is a concept that has worked for almost a century and half. Even today, federal bonds are the assets of the Social Security trust fund. They also are loans to the federal government.

Chase proved that large sums of money properly handled need not be inherently destructive and in fact were beneficial.

On the other hand, the South had no such innovative finance. Paper money was printed in larger and larger quantities and an inflationary spiral helped destroy the Southern economy ahead of the Union Army.