The Mystery of Banking

218
The Mystery of Banking
12
John Jay Knox, historian and former U.S. Comptroller of the Cur-
rency, concluded from his study of the Suffolk System that private clearing
house service is superior to that of a government central bank: 
the fact is established that private enterprise could be
entrusted with the work of redeeming the circulating notes
of the banks, and that it could thus be done as safely and
much more economically than the same service can be per-
formed by the Government. 
John Jay Knox, 
A History of Banking in the United States
(New York: Brad-
ford Rhodes & Co., 1900), pp. 368–69.
13
On the Suffolk System, see George Trivoli, 
The Suffolk Bank: A Study
of a Free-Enterprise Clearing System
(London: The Adam Smith Institute,
1979).
Chapter Fourteen.qxp 8/4/2008 11:38 AM Page 218

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XV. 
C
ENTRAL
B
ANKING IN
THE
U
NITED
S
TATES
III:
T
HE
N
ATIONAL
B
ANKING
S
YSTEM
1. T
HE
C
IVIL
W
AR AND THE
N
ATIONAL
B
ANKING
S
YSTEM
T
he Civil War wrought an even more momentous change in
the nation’s banking system than had the War of 1812. The
early years of the war were financed by printing paper
money—
greenbacks
—and the massive printing of money by the
Treasury led to a universal suspension of specie payments by the
Treasury itself and by the nation’s banks, at the end of December
1861. For the next two decades, the United States was once again
on a depreciating inconvertible fiat standard. 
The money supply of the country totaled $745 million in
1860; by 1863, the money supply had zoomed to $1.44 billion,
an increase of 92.5 percent in three years, or 30.8 percent per
annum. The result of this large monetary inflation was a severe
inflation of prices. Wholesale prices rose from 100 in 1860, to
219
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211 at the end of the war, a rise of 110.9 percent, or 22.2 percent
per year. 
After the middle of 1863, the federal government stopped
issuing the highly depreciated greenbacks, and began to issue
large amounts of public debt. The accumulated deficit during the
war totaled $2.61 billion, of which the printing of greenbacks
financed only $430 million, almost all in the first half of the war. 
The Civil War public debt brought into prominence in Amer-
ican finance one Jay Cooke, who became known as “The
Tycoon.” The Ohio-born Cooke had joined the moderately sized
Philadelphia investment banking firm of Clark & Dodge as a
clerk at the age of 18. In a few years, Cooke worked himself up
to the status of junior partner, and in 1857 he left the firm to go
into canal and railroad promotion and other business ventures.
Cooke probably would have remained in relative obscurity,
except for the lucky fact that he and his brother Henry, editor of
the leading Republican newspaper in Ohio, the
Ohio State Jour-
nal
, were good friends of U.S. Senator Salmon P. Chase. Chase, a
veteran leader of the antislavery movement, had lost the Repub-
lican presidential nomination in 1860 to Abraham Lincoln. The
Cookes then determined to feather their nest by lobbying to make
Salmon Chase Secretary of the Treasury. After extensive lobbying
by the Cookes, the Chase appointment was secured, after which
Jay Cooke quickly set up his own investment banking house of
Jay Cooke & Co. 
Everything was in place; it now remained to seize the oppor-
tunity. As the Cookes’ father wrote of Henry: “I took up my pen
principally to say that H.D.’s (Henry) plan in getting Chase into
the Cabinet and (John) Sherman into the Senate is accomplished,
and that now is the time for making money, by honest contracts
out of the government.”
1