Withholding Created 75 Years Ago – Giving Us a ‘Charge It’ Government

A preliminary sketch Norman Rockwell did for a 1945 Saturday Evening Post cover, titled Income Taxes (Beating the Deadline), sold for $59,375 at a November 2014 Heritage auction.

“Our new Constitution is now established, and has an appearance of permanency, but in this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin, 1789

By Jim O’Neal

I suspect Benjamin Franklin would be pleased that our Constitution has become the most revered document of our United States, but mildly surprised that the U.S. Internal Revenue Code – while undoubtedly much more prosaic – now symbolizes the highly intimate relationship between the people and their federal government. Detailed IRS regulations guide the filing of federal tax returns, an activity that is the most universal civic act in our history. Its 14,000 pages and 4 million words represent a remarkable achievement unparalleled by any government on earth.

As the size and cost of government have grown, so has the size and difficulty of the tax return itself. In 1913, the first year the modern income tax was levied (an emergency income tax levied during the Civil War was allowed to expire in 1872), the top rate was 7 percent and then only for incomes over $500,000. The rate for people between $3,000 and $20,000 was just 1 percent, and below that zero. All but 1 percent of Americans were exempt from taxes. This was by design since advocates wanted a tax directed only at excess corporate and personal profits, not the wages of ordinary people. It was a way of reasserting the values of the early republic – now focused principally on equality – in reaction to gross inequities brought on by industrialization, and a way to force millionaire industrialists to share their wealth with society.

But WWI and the Great Depression increased the responsibilities of the federal government and rates took a quantum leap with the demands of WWII as the government took advantage of American patriotism. The number of tax filers rose to a point that what had been a “class tax” became a “mass tax.” The April 15 deadline is now a national rite, dreaded as much as it is observed. The complexity has become so pervasive that most filers require the aid of professional tax preparers. Looking back, it still seems remarkable that the income tax could have been extended to include so many people without creating a backlash. The wars helped, as did the success of government in defeating our enemies and the post-war economic growth. But the primary reason was that a new way had been devised to collect it.

For that, the IRS can thank Beardsley Ruml, a mid-century Macy’s executive who came up with a plan to institute what is politely called “withholding.” Until 1943, income tax was paid each year in a lump sum and filers were expected to put aside the money to make the payment. Yet that year, when the number of wage earners included under the tax grew by nearly 35 million and the Treasury Department became nervous about how many were actually prepared to pay, Ruml offered an idea. Aware that customers in his store were comfortable buying big-ticket items when they could pay in installments, he suggested the government get businesses to collect the tax in small increments and report that amount to the employees and IRS each year for future reconciliation.

To get the public’s endorsement, he also suggested a tax amnesty for the previous year. Congress did just that by forgiving 75 percent of the previous year’s tax liability while they installed the machinery for the withholding that has operated ever since. To appreciate the profound shift that a broad-based income tax brought to the Treasury, just consider that in 1910, tariffs and excise taxes brought in more than 90 percent of federal monies; by the end of the century, income tax had replaced tariffs, providing 90 percent of the nation’s revenue, or $2 trillion! More importantly, it changed the debates – from regional tariffs or whiskey producers versus cattle growers, to which income levels should be taxed more. Class versus class and a “soak the rich” is always the first reaction to feed the insatiable appetite at every level of government.

As an elastic source of revenue, the income tax became a fundamental part of statism, a tool to be used in the interest of creating a more democratic social order. Look to Washington, D.C., today to see what this has wrought: a city bursting at the seams with lobbyists, industry organizations, tax lawyers and political advocacy groups. Any tall building will have a group with the word “tax” in its title, all working to shape policy and regulations. Yet despite our best efforts, we have become addicted to spending more than our revenue and simply saying “charge it.”

I suspect even Mr. Ruml would be surprised about the success of our “buy-now-pay-later” system that so closely resembles his Macy’s secret sauce.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

Let’s Not Forget What Colonists Created 400 Years Ago

This 1976 Gold Bicentennial Medal, graded PR64 NGC, sold for $23,500 at a July 2017 Heritage auction.

By Jim O’Neal

We live on a landmass currently called North America that is relatively young in its present incarnation with most estimates in the range of 200 million years. In periods before, a large portion of it was called Laurentia, which drifted across the equator joining and separating from supercontinents in various collisions that shaped it. There are thick layers of sedimentary rocks that are up to 2 billion years old. Eventually, it was surrounded by ocean and anti-passive margins (i.e. no boundaries by tectonic plates). Then an island chain slammed into it, raising mountain ranges. For perspective, the Appalachians were as tall and majestic as today’s Himalayas.

For tens of millions of years, there was not a single human being in North America, primarily because it was covered by a thick sheet of ice and it was before mankind had evolved. As the Ice Age ebbed, adventurous souls began walking across land bridges as glacial movements changed the landscape. There were multiple migrations in and out of other areas of the world, but people who moved into the Americas were generally on a one-way ticket. In modern times, there is no consensus on who “discovered” America first.

North American exploration spans an entire millennium, with the Vikings in Newfoundland circa 1000 A.D. through England’s colonization on the Atlantic Coast in the 17th century. Spain and Portugal squabbled over the discoveries of Juan Ponce de León and Vasco da Gama, as France and the Netherlands had their own claims to litigate. But our America is really a British story starting with Jamestown, Va. (1607) that gradually grew into 13 colonies. They grew tired of the English yoke and declared independence in 1776 and conquered the British Army in a well-known story of revolution. They formed a somewhat imperfect union called the United States of America, with a constitution and a smallish national government that is still struggling with the line between states’ rights.

French sculptor Frédéric Auguste Bartholdi attended the 1876 Centennial Exposition in Philadelphia to celebrate the 100th anniversary of the signing of the Declaration of Independence. Bartholdi had a strong personal passion for the concepts of independence, liberty and self-determination. He became a member of the Franco-American Union organization and suggested a massive statue to commemorate the American Revolution and a century of friendship between our two countries. A national fundraising campaign was launched that included traditional contributions, as well as fundraising auctions, lotteries and even boxing exhibitions.

Bartholdi collaborated with engineer Gustave Eiffel to build a 305-foot-tall copper and iron statue, and after completion, it was disassembled for shipment to the United States. Finally, on June 17, 1885, the dismantled statue – 350 individual pieces in 200-plus cases – arrived in New York Harbor. It was a fitting gift, emblematic of the friendship between the French and American people. It was formally dedicated the following year in a ceremony presided over by President Grover Cleveland, who said, “We will not forget that Liberty has here made her home; nor shall her chosen altar be neglected.” The statue was dubbed “Liberty Enlightening the World.”

In 1892, Ellis Island opened as America’s chief immigration station and for the next six-plus decades, the statue looked over more than 12 million immigrants who came to find the freedom they were seeking and the “Streets of Gold” in NYC. A plaque inscribed with a sonnet titled “The New Colossus” was placed on an interior wall in 1903. It had been written 20 years earlier by the poet Emma Lazarus.

Gustave Eiffel was given little credit, despite having built virtually the whole interior of what would become the Statue of Liberty and he vowed not to make that mistake again. Perhaps that is why his magnificent Paris landmark is simply an incredible skeleton framework with none of the conventional sheathing of most tall structures of that era.

One thing is certain: We may not know who discovered America first, but there is little doubt that whoever follows us will be aware of what those few people huddled along the East Coast 400 years ago were able to accomplish. Maybe Elon Musk will have a colony on Mars that is still functioning when the ice or oceans envelop Earth again.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

Do We Risk Forgetting the Past … Again?

An illustration of Jimmy Carter and Gerald Ford, dated 1977 and attributed to Al Hirschfeld, sold for $4,500 at an October 2015 auction.

By Jim O’Neal

People of my generation recall the 1970s as a decade of chronic financial instability. A lethal combination of rising inflation, slower growth and unpredictable economic policies resulted in a level of volatility that made the stock market a tricky place to navigate. Although the Dow Jones Industrial Average had closed near $1,000 in 1966, it went sideways for the next 17 years. 1972 produced a boomlet for “Nifty Fifty” stock prices that was followed by a steep decline. By spring 1980, the Dow Jones was back below $800.

Risk-averse investors piled into Money Market Funds (MMF) with high yields and low risk. Ross Perot supposedly bought $1 billion of 30-year Treasury Notes and locked in a 15 percent yield. Others chose to speculate in commodities or precious metals as a hedge against the pernicious effects of high inflation. President Ford waged a war on inflation with his WIN (Whip Inflation Now) program that was more of a slogan than a tangible set of financial policies. Cash was something to convert into tangible assets before it lost its buying power.

One prominent example in 1978 was the wife of the governor of Arkansas. The future first lady turned a modest bankroll of $1,000 into $100,000 in 10 short months by trading in cattle futures, soybeans and live hogs. She explained her market prowess was due to reading The Wall Street Journal. Perhaps even more remarkable was that her trades were mostly “shorts” at a time when cattle prices doubled.

But all commodities were generally on the rise and after the Soviets invaded Afghanistan in 1979, the price of gold rose to $875 an ounce. Nelson Bunker Hunt and his brothers tried to corner the silver market and bought control of 200 million ounces – equivalent to 50 percent of the world’s supply. In the process, silver prices shot up tenfold to $50. The Commodities Exchange (COMEX) and the Federal Reserve stepped in and changed the rules and the price quickly plummeted to $10 in March 1980. Despite losing over a billion dollars, they seemed to be mildly amused and still ended up in Johnny’s BBQ for the usual. Later, they were forced into bankruptcy, but a lot of silverware in Dallas homes got melted down, along with jewelry, teapots and other silver-based objects.

I lost a $20 gold coin when gold was at $430 and I bet it would fall to $400 before it hit $500. I had won it on a different bet by knowing a horse had to run 3 15/16th miles to win the Triple Crown. The Wall Street Journal was not involved in either case.

Then the 1980s gave way to the rise of the professional market trader after several leading investment banks had gone public; transforming cautious partners with limited capital to anonymously secret shareholders with large capital resources. “Proprietary Trading” produced quick profits and large bonuses that offset the elimination of fixed commissions by the NYSE. The flashy trader became a symbol of Wall Street – “Masters of the Universe” as chronicled in Tom Wolfe’s The Bonfire of the Vanities. It was now the era of greed and it became an international phenomenon as deregulation and globalization exploded.

Capital whirled around the globe in 24-hour trading and the remnants of conservatism from the Great Depression had quietly vanished. Debt was now viewed as a tax-efficient way to finance corporate takeovers and deregulation replaced supervision. Hedge funds and private partnerships proliferated like George Soros’ Quantum Fund, which generated 25 percent returns with highly leveraged bets on stocks, currency or “risk arbitrage.” In summer 1982, the Federal Reserve reduced the discount rate and incentivized the leveraged buyouts of public companies (LBO).

Falling interest rates and rising stock prices created a perfect setting for “junk bonds” and leverage became a strategy rather than a risk. Eventually it relied on trading on illegal proprietary insider information. Corporate raiders had a field day until 1986, when Ivan Boesky was arrested and the action moved to the federal courts. Naturally, the virus spread into the large home mortgage market and the savings and loan bubble collapsed.

It took a while for a new generation of greedy financiers to come along, and this time the leverage almost took down the world’s financial system in 2008.

Philosopher George Santayana was right: “Those who do not remember the past are condemned to repeat it.” What’s in your wallet?

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

Twain’s Era Marked America’s Emergence on the World Stage

An 1876 first edition, first printing of Mark Twain’s The Adventures of Tom Sawyer sold for $13,750 at an August 2015 Heritage auction.

By Jim O’Neal

American writer and satirist Mark Twain was born on Nov. 30, 1835 – exactly two weeks after Halley’s Comet made its appearance. In his 1909 biography, he wrote, “I came in with Halley’s Comet in 1835. It is coming again next year and I expect to go out with it. It will be the greatest disappointment of my life if I don’t go out with Halley’s Comet. The Almighty has said, no doubt, ‘Now here are these two unaccountable freaks, they came in together, they must go out together.’” Twain died shortly after the comet returned.

Twain – real name Samuel Langhorne Clemens – co-wrote a novel with his friend Charles Dudley Warner titled The Gilded Age: A Tale of Today. It was the only time Twain wrote with a collaborator and it was supposedly the result of a dare from their wives. Whatever the truth, the novel lent its name to the post-Civil War period, which has become widely known as the Gilded Age. The novel skewered that era of American history because of the widespread corruption and materialistic greed of a few at the expense of the downtrodden masses.

Twain

From a purely economic standpoint, the period of 1870-90 was when the United States became the dominant economy in the world. For the majority of recorded history, China and India were the global powerhouses, with 70 percent of world GDP. Economic output, up until about 200 years ago, was largely driven by large populations of people. But with the industrial revolution, followed by the information revolution, the significance of mere huge populations declined. While Europe was going through its resurgence following the Dark Ages, the Asian superpowers were divided into small kingdoms fighting each other.

Factors contributing to the post-Civil War growth were primarily in the North as industrial expansion surged while the slave-labor system was abolished and cotton prices collapsed. New discoveries of coal in the Appalachian Mountains, oil in Pennsylvania, and iron ore around Lake Superior fueled the growth of the United States infrastructure. Railroad systems more than tripled from 1860 to 1880 – concurrent with the Transcontinental Railroad (1869) that linked remote areas with the large industrial hubs; along with commercial farming, ranching and mining. London and Paris poured money into U.S. railroads and American steel production surpassed the combination of Britain, Germany and France. Technology flourished with 500,000 patents issued for new inventions and Thomas Edison and Nikola Tesla electrified the industrial world.

Capital investment increased by 500 percent and capital formation doubled. By 1890, the United States surpassed Britain for manufacturing output and by the beginning of the 20th century, per-capita income was double that of Germany or France and 50 percent higher than Great Britain.

Then, inexplicably, Europeans started a world war and 20 years later, both the European and Asian nations started another global conflict. The United States strategically entered both wars late, preserving our capital, military and human resources. Excluding a few ships here and there (e.g. Pearl Harbor), we kept 100 percent of our domestic infrastructure intact. Excluding 9/11, we have probably damaged more of our own cities in domestic protests and rioting than all foreign enemies combined in acts of war.

As Pogo wisely observed, “We have met the enemy and he is us.”

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

Usual Fireworks Expected with Latest Supreme Court Selection

This photograph, signed by Supreme Court Chief Justice William H. Taft and the eight associate justices, circa 1927, sold for $14,340 at a September 2011 Heritage auction.

By Jim O’Neal

It is that time again when the news will be filled with predictions of pestilence, war, famine and death (the Four Horsemen of the Apocalypse) as President Trump tees up his next candidate for the Supreme Court. One side will talk about the reversal of Roe v. Wade as an example of the terrible future that lies ahead. The other side will be quick to point out that this fear-mongering first started in 1981 when Sandra Day O’Connor (the first woman to serve on the court) was nominated by President Reagan and that nothing has happened in the intervening 37 years.

My prediction is that regardless of whoever is confirmed, there will be no evidence from the past on any opinions on “Roe” and he or she will have been groomed by the “Murder Boards” to answer that it is settled law. Murder Boards are groups of legal experts who will rehearse the nominee on how to answer every possible question the Senate Judiciary Committee might ask on any subject, not just Roe, in their role in giving advice and consent. It produces what former Vice President Joe Biden described as a “Kabuki dance” when he was in the Senate.

The questioning does produce great public theater, but it is a tradition that dates to 1925 when nominee Harlan Stone actually requested he be allowed to answer questions about rumors of improper ties to Wall Street. It worked and he was confirmed by a vote of 71-6 and would later serve as Chief Justice (1941-46). In 1955, John Marshall Harlan II was next when Southern Senators wanted to know his views on public school desegregation vis-à-vis Brown v. Board of Education. He was also successfully confirmed 71-11 and since then, every nominee to the court has been questioned by the Senate Judiciary Committee. The apparent record is the 30 hours of grilling Judge Robert Bork experienced in 1987, when he got “Borked” by trying to answer every single question honestly. Few make that mistake today.

Roe v. Wade was a 1973 case in which the issue was whether a state court could constitutionally make it a crime to perform an abortion, except to save the mother’s life. Abortion had a long, legal history dating to the 1820s when anti-abortion statues began to appear that resembled an 1803 law in Britain that made it illegal after “quickening” (start of fetal movements) using various rationales such as illegal sexual conduct, unsafe procedures and the state’s responsibilities in protecting prenatal life.

The criminalization accelerated from the 1860s and by 1900, abortion was a felony in every state. Despite this, the practice continued to grow and in 1921, Margaret Sanger founded the American Birth Control League. By the 1930s, licensed physicians performed an estimated 800,000 procedures each year. In 1967, Colorado became the first state to decriminalize abortion in cases of rape, incest or permanent disability of the woman. By 1972, 13 states had similar laws and in 1970, Hawaii was the first state to legalize abortion on the request of the woman. So the legal situation prior to Roe was that abortion was illegal in 30 states and legal in the other 20 under certain conditions.

“Jane Roe” was an unmarried pregnant woman who supposedly wished to terminate her pregnancy and instituted an action in the U.S. District Court for the Northern District of Texas. A three-judge panel found Texas criminal statues unconstitutionally vague and the right to choose to have children was protected by the 9th through the 14th Amendments. All parties appealed and on Jan. 22, 1973, the Supreme Court ruled the Texas statute was unconstitutional. The court declined to define when human life begins.

Jane Roe’s real name was Norma McCorvey and she became a pro-life advocate before she died and maintained she never had the abortion and that she was the victim of two young, ambitious lawyers looking for a plaintiff. Henry Wade was district attorney of Dallas from 1951 to 1987 and the longest serving DA in United States history. He was also involved in the prosecution of Jack Ruby for killing Lee Harvey Oswald. After he was convicted, Ruby appealed and the verdict was overturned, but he died of lung cancer and is constitutionally presumed innocent.

Stay tuned for the fireworks.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

For North, Tariffs and Taxes to Fund War Gave Way to Printing Money

Series 1861 $10 Demand Notes were placed into circulation in 1862 and were among the first of U.S. Federal banknotes ever issued. This sample, graded PMG Very Fine 30 EPQ, sold for $381,875 at an August 2014 Heritage auction.

By Jim O’Neal

A follow-up to my previous post:

The North had a tough time raising money for the war as well. After the defeat at Bull Run, they suffered a new crisis: the collapse of the bond market. Under the Constitution, the U.S. House of Representatives had responsibilities for originating all revenue measures and under pressure from Treasury Secretary Salmon P. Chase started considering legislation to raise taxes. Ways and Means started with tariffs, but a storm of criticism erupted since it would fall on the poor who needed tea, coffee, sugar and whiskey.

The next option was real estate via “direct taxes,” but Congress objected by noting that wealth in stocks and bonds was excluded, which meant the wealthy could escape paying any taxes quite easily. The more Congress debated the property tax the louder the opposition became. U.S. Rep. Schuyler Colfax from Indiana (a future Republican vice president) said, “I cannot go home and tell my constituents I voted for a bill that would allow a man, a millionaire, who has put his entire property in stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax!” Colfax proposed a tax on stocks, bonds, mortgages and interest on money – and income earned from them. An income tax (inevitably).

U.S. Rep. Thomas Edwards from New Hampshire proposed calling the new tax something other than a direct tax. “Why should we not impose the burdens which are to fall on this country equally, in proportion to their ability to pay them?” An amendment was passed imposing a 3 percent tax on incomes over $600 per year. Someone quoted John Milton in Paradise Lost – he compared the taxpayer to Adam and Eve, driven by necessity “from our untaxed garden, to rely upon the sweat of our brow for support.” An income tax it was.

Secretary Chase was skeptical. He doubted merely labelling the income tax to be indirect would not make it constitutional. More importantly, there were no provisions made for a bureaucratic or enforcement mechanism. The income tax was not collectible. Since it was only a recommendation, he ignored it since he was far too busy with the need to borrow money for the war. As banks were all reluctant to loan a shaky government any money, he turned to a young Philadelphia banker, Jay Cooke, who had a scheme to market the government debt to the public, with Cooke taking a sales commission.

They finally got a consortium of 39 banks to loan $150 million in gold to be paid in three $50 million installments for sale to private individuals. The first $50 million barely sold and the second round failed completely, which killed the scheme. By Dec. 30, 1861, the banks were so stressed they were forced to stop honoring gold payments to their other customers, which was almost tantamount to becoming insolvent.

By the start of 1862, Chase realized he had grossly underestimated the costs of the war. His new estimate for year one was $530 million and the assumed revenues from taxes, tariffs and other schemes were falling short and the Treasury funds were almost depleted. New taxes or loans could not possibly fill the gap in time. With no other alternatives available, Chase and President Lincoln overcame their misgivings and endorsed the idea of simply printing money – $50 million in green paper money that the government would just declare to be valid legal tender, though not redeemable in gold or silver.

Then Congress passed the Legal Tender Act in February 1862, providing for $150 million in currency that became known as greenbacks – the first paper money ever issued by the U.S. government … a practice that continues today as the debt has exceeded $20 trillion and seems to be accelerating. I hope to be around to see how it ends.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

Confederacy Relied on Creative Ways to Finance its War

This 1861 Confederate States T1 $1000 Montgomery Issue note from the “Colonel” E.H.R Green and Eric P. Newman collections sold for $76,375 at an October 2015 Heritage auction.

By Jim O’Neal

Several readers have asked how the Civil War was waged for so long with both sides short of the resources needed to wage war. Here is a short example of how it was possible.

Still desperate for money, Confederate States Treasury Secretary Christopher Memminger proved to be creative. After Fort Sumter, he proposed a series of 12.5 percent duties on coal, lumber, cheese, paper and even iron – despite the military need for wood and iron for railroads. He came up $25 million short because of the blockade, especially in New Orleans. But after the surprise Confederate victory at Bull Run, he went back to the Confederate States Congress and asked them to impose taxes on real estate, slaves and any other personal property, since these assets were valued at almost $6 billion. Farmers effectively killed this effort since it hit them disproportionately. The Treasury then resorted to a “war tax,” but it was a real dud.

So, the only way out was to turn to the old tactic of printing money … short-term notes, longer-term bonds. The notes were, in reality, simply “script” forced on soldiers, retailers, suppliers and anyone else the Confederate government owed. Predictably, Confederate currency was issued in bigger and bigger amounts and redemption dates deferred longer into the future. By the end of 1861, the total had grown from $1 million to $30 million, to $450 million in 1862, and doubling into billion territory in 1863. Gold and silver were really the only currencies of value and they were being hoarded as their value continued to grow. In a mark of futility, merchants, railroads and other businesses started issuing their own paper currency, commonly called “shinplasters” since there were basically worthless. An editor in Mississippi wrote, “Great God, what a people. 250 different sorts of shinplasters and not one dime in silver to be seen.”

As the money devalued, a “greenback” was worth four Confederate dollars, a gold dollar went from three to 20, and in the final years, the exchange rate was 1,000 to one … if it was available. For consumers, inflation meant ruinous prices … coffee four times in 1861, 25 times higher a year later, then 80 times higher in 1863, and by the end of 1864, 125 times more expensive. The Daily Telegraph in Macon, Ga., said: “An oak leaf will be worth just as much as the promise of the Confederate Treasury to pay one dollar.”

By the end of the war, the South was a land of blackened cities, destroyed factories, destitute families and rotting wharves. Twenty-five percent of military-age men were dead, 40 percent of livestock and thousands of miles of railroads ruined, and its system of slave labor, the foundation of its economy, was gone. Sixty-five percent of the South’s wealth simply vanished. The South became a place of death, destruction, debt, ruin and humiliation. Recovery would take 100 years.

A good analogy was Germany in the 1920s when they tried to print money until a loaf of bread cost a wheelbarrow of money. It continued to escalate until the paper was worth more than the finished printed money.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

As Nation Moved to Civil War, the North had the Financial Edge

Richard Montgomery was an Irish soldier who served in the British Army before joining the Continental Army.

By Jim O’Neal

Richard Montgomery (1738-75) was a little-known hero-soldier born in Dublin, Ireland, who became a captain in the British Army in 1756. Later, he became a major general in the Continental Army after the Continental Congress elected George Washington as Commander in Chief of the Continental Army in June 1775. This position was created specifically to coordinate the military efforts of the 13 Colonies in the revolt against Great Britain.

Montgomery was killed in a failed attack on Quebec City led by General Benedict Arnold (before he defected). Montgomery was mourned in both Britain and America as his remains were interned at St. Paul’s Chapel in New York City.

A remarkably diverse group of schools, battleships and cities named in his honor remain yet today. Montgomery, Ala., is the capital and second-largest city in the state; it’s where Rosa Parks refused to give up her bus seat to a white passenger on Dec. 1, 1955, sparking the famous Montgomery bus boycott. Martin Luther King Jr. used Montgomery to great advantage in organizing the civil rights movement.

Montgomery was also the first capital of the Provisional Congress of the Confederate States when the first meeting was convened in February 1861. The first seven states that seceded from the United States had hastily selected representatives to visit the new Confederate capital. They arrived to find the hotels dirty, dusty roads, and noisy lobbyists overflowing in the statehouse. Montgomery was not prepared to host any large group, especially a large political convention.

Especially notable was that most of the South’s most talented men had already either joined the Army, the Cabinet or were headed for diplomatic assignments. By default, the least-talented legislators were given the responsibility of writing a Constitution, installing the new president (Jefferson Davis), and then authorizing a military force of up to 400,000 men. This conscription was for three years or the duration of the war. Like the North, virtually everyone was confident it would be a short, decisive battle.

Jefferson Davis was a well-known name, having distinguished himself in the Mexican War and serving as Secretary of War for President Franklin Pierce. Like many others, he downplayed the role of slavery in the war, seeing the battle as a long-overdue effort to overturn the exploitive economic system that was central to the North. In his view, the evidence was obvious. The North and South were like two different countries: one a growing industrial power and the other stuck in an agricultural system that had not evolved from 1800 when 80 percent of its labor force was on farms and plantations. The South now had only 18 percent of the industrial capacity and trending down.

That mediocre group of lawmakers at the first Confederate meeting was also tasked with the challenge of determining how to finance a war against a formidable enemy with vastly superior advantages in nearly every important aspect. Even new migrants were attracted to the North’s ever-expanding opportunities, as slave states fell further behind in manufacturing, canals, railroads and even conventional roads, all while the banking system became weaker.

Cotton production was a genuine bright spot for the South (at least for plantation owners), but ironically, it generated even more money for the North with its vast network of credit, warehousing, manufacturing and shipping companies. The North manufactured a dominant share of boots, shoes, cloth, pig iron and almost all the firearms … an ominous fact for people determined to fight a war. The South was forced to import foodstuffs in several regions. Southern politicians had spoken often of the need to build railroads and manufacturing, but these were rhetorical, empty words. Cotton had become the powerful narcotic that lulled them into complacency. Senator James Hammond of South Carolina summed it up neatly in his “Cotton is King” speech on March 4, 1858: “Who can doubt, that has looked at recent events, that cotton is supreme?”

Southerners sincerely believed that cotton would rescue them from the war and “after a few punches in the nose,” the North would gladly surrender.

One of those men was Christopher G. Memminger, who was selected as Confederate States Secretary of the Treasury and responsible for rounding up gold and silver to finance the needs of the Confederate States of America (CSA). A lawyer and member of the South Carolina legislature, he was also an expert on banking law. His first priority was for the Treasury to get cash and he started in New Orleans, the financial center of the South, by raiding the mint and customs house.

He assumed there would be at least enough gold to coin money and commissioned a design for a gold coin with the goddess of liberty seated, bearing a shield and a staff flanked by bales of cotton, sugar cane and tobacco. Before any denominations were finalized, it was discovered there was not enough gold available and the mint was closed in June.

This was followed by another nasty surprise: All the banks in the South possessed only $26 million in gold, silver and coins from Spain and France. No problem. Memminger estimated that cotton exports of $200 million would be enough to secure hundreds of millions in loans. Oops. President Lincoln had anticipated this and blockaded all the ports after Fort Sumter in April 1861. No cotton, no credit, no guns.

In God we trust. All others pay cash.

One small consolation was that his counterpart in the North, Salmon P. Chase, was also having trouble raising cash and had to resort to the dreaded income tax. However, both sides managed to keep killing each other for four long years, leaving a legacy of hate.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

Telegram Pushed War-Weary America into World War I

A British recruiting poster issued in the wake of the sinking of the ocean liner Lusitania by a German U-boat in 1915 was offered in a December 2016 auction.

By Jim O’Neal

World War I officially began in Europe on July 28, 1914, but the strong isolationist sentiment in the United States prevented our involvement for nearly three years. The U.S. economy was booming and the tragic events in Europe were broadly viewed as a “foreign affair,” 3,000 miles across the Atlantic Ocean and something to be avoided. Further, it had only been 51 years since our Civil War had ended, with General Robert E. Lee surrendering to Ulysses S. Grant at Appomattox. The United States had not fully recovered from a military readiness standpoint and another war would be hard to sustain. The rebuilding of the South simply added to the problem.

Then there were the American bankers, who would make massive loans to Great Britain and France that would produce a nice, steady stream of profits. They were more than content to stay on the sidelines as long as their capital seemed secure. Show me a war and I will bet there are always groups profiting from making the bullets and bombs that create jobs. Other industries like steel or food production generally end up on the positive side of the export equation. Twenty-five years later, gearing up for World War II would help the country break the grip of the Great Depression. (Our military budget is currently over $700 billion … and growing.)

Another important factor were the immigrants in the United States, whose support was dependent on their country of origin. Most had left behind family and friends who would end up in harm’s way if America escalated the war. Naturally, there were also the permanent peaceniks like the Quakers and other religious groups who were simply pacifists by virtue of their beliefs. Two million socialists could be lumped into this group, as well as numerous women’s organizations.

The 8 million German-Americans had little loyalty to Germany, and were surprisingly neutral in addition to being strongly against any war, especially if it involved Germany. Their primary concern if the United States entered the war revolved around the reprisals against them as questions about their allegiance to America were already at a simmering level. This apprehension had been growing since the sinking of the British passenger ship Lusitania and German U-boats sank six American merchant ships, including the Housatonic – all without any warning.

On Nov. 7, 1916, President Woodrow Wilson was re-elected on an anti-war platform and a campaign slogan of “He kept us out of war” (note the past tense). He had defeated Supreme Court Justice Charles Evans Hughes Sr. by dominating the Southern vote and in the run-up to the election knew it would be a competitive battle. With a war raging in Europe, Wilson was concerned that if he lost, he would be a lame-duck president for four long months. He devised a clever plan that involved making Hughes the Secretary of State and then he and Vice President Thomas R. Marshall would immediately resign and Hughes would become president, as the rules of succession applied at that time.

Wilson was the first sitting Democratic president to win re-election since Andrew Jackson in 1832. Six months later, we would be in World War I due to a quirk of fate or a German blunder: the Zimmermann Telegram.

In January 1917, a coded message was sent from German Foreign Secretary Arthur Zimmermann to Germany’s Ambassador to Mexico that was to be relayed to Mexican President Venustiano Carranza. “We intend to begin on the first of February unrestricted submarine warfare. We shall endeavor to keep the United States neutral … If not succeeding, we make Mexico a proposal on the following basis; make war together, make peace together, generous financial support … Mexico is to re-conquer the lost territory in Texas, New Mexico and Arizona. The settlement detail is left to you.”

On Feb. 1, 1917, Germany began unrestricted U-boat warfare in the Atlantic. U.S. ships came under attack and the USA broke off diplomatic relations with Germany.

March 1, President Wilson authorized the State Department publication of the Zimmermann Telegram in the press and, as intended, it inflamed American public opinion against Germany.

April 2: Wilson addressed a special session of Congress to declare war.

April 4: Senate approved 82-6 (the House concurred 373-50).

April 6: Wilson signed a formal declaration of war on Germany.

And so war came again to America despite the reluctance of many people.

BTW: On April 14, after the formal declaration of war, President Carranza formally declined the German proposal. It is interesting to speculate on the outcome if the decision had been in the affirmative. I suspect we might have ended up with a few more stars on the flag.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].