Panel 3 Necessary & Proper: Executive Power and the Economy

Kristin Wernig, Managing Editor for Submissions for the Government Law Review

Lincoln & the Birth of a National EconomyDr. Jenny B. Wahl, Professor of Economics, Carleton College

         Dr. Jenny Wahl opened the panel by pointing out that Abraham Lincoln could not have won the civil war and freed the slaves without the crucial step of figuring out how to finance that war.  When Lincoln began his term as President, he inherited a banking system that was in shambles and burdened by high debt.   It was the Civil War which exposed the country’s inability to deal with large scale expenditures and the need for change

        The financial system that existed at the beginning of Lincoln’s presidency had one significant restriction:  one could only spend what money he had on hand.  This type of system, known as a Fractional Reserve Banking system, as it existed at this time, worked “on faith”, meaning that its stability relied on the faith of the creditor that the bank could redeem their notes.  While this system allowed notes to circulate freely, if faith in the bank was lost and many creditors attempted to have their notes redeemed at the same time, the bank could default or go into insolvency.  Lincoln understood the problems with the system as it existed and knew that a change was necessary.  But as the war waged on and promises piled up, the need to fulfill these promises increased as did the need to finance these promises.

          It was the fall of Fort Sumter on April 13, 1861 and the events that followed, that gave Lincoln the opportunity he needed to bring change to the strained banking system.  The creation of greenback money eliminated the need for banks to keep full backing in reserve as with fiat money and the designation of them as legal tender eliminated the need for the various types of currency that had been circulating throughout the nation.  With the creation of a national banking system and the taxing of state bank notes, state banks were forced into the federal banking system, ensuring national implementation.

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