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6-10-2015, 20:03

The War of 1812

The War of 1812 was financed mainly by borrowing rather than by taxation. Long-term loans, however, became hard to place, even after taxes were raised to provide for interest and eventual repayment. Short-term treasury notes, receivable for taxes, were issued as a stopgap. Table 14.i shows the amount outstanding toward the end of each year. The first issues paid

Table 14. i. Money and prices in the War of 1812 ($ million)

Government currency issues

Banknotes

Wholesale prices (1811 = 100)

1811

0.0

32.5

100

1812

2.8

36.8

104

1813

4.9

41.2

129

1814

10.6

45.5

145

1815

17.6

68.0

135

1816

3.4

62.6

120

1817

0.0

56.4

120

Sou'rce: See the data section of the bibliography.

Interest and had fairly large face values; the last issue included small, noninterest-bearing notes. But in some measure they were all substitutes for cash: the large denominations served as bank reserves and for business transactions, and the small denominations served as hand-to-hand currency. The banks expanded their note issues concurrently, and they suspended specie payments in August 1814, when the British attacked Washington, D. C.

It is clear that the inflation was fueled primarily by the expansion of liquid assets. But prices undoubtedly responded to many forces besides the number of dollars currently in circulation. Expectations of future government deficits, of future increases in the money supply, and of future inflation, all conditioned on expectations about the course of the war, must have influenced how people decided between buying goods and holding money. The war also disrupted normal patterns of trade and commerce, further exacerbating inflation.

After the war the treasury notes were funded into long-term debt. But the currency remained disordered for some time. The federal government had to keep track of four separate instruments used to make payments: local banknotes at par, local banknotes below par, treasury notes bearing interest, and treasury notes bearing no interest. The money supply had declined due to the withdrawal of short-term treasury notes, and the reduction of banknotes through bank failures and reduction of outstanding issues by surviving banks. But the price level remained high. As shown in able 14.i, the wholesale price index stood at 120 in i8i6 compared with ioo in i8ii, so resumption might have been further delayed. Congress pressed the banks to resume with a resolution that provided that only the notes of banks redeeming in specie would be receivable for taxes after February 1817, and partly for this reason resumption was accomplished in the early months of that year.



 

 

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