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History of Forex: The War of 1812

Soon after the great outbreak of the War of 1812 unusual interest in securities forex trading grew up. The government of the United States decided to fund that war by borrowing money, rather than through taxe politics, which created much more "stock" to trade on forex. That famous precedent had been set by the Great Revolution and would be followed in all future wars. The issuance of government securities needed to fund the War resulted in much speculation. History of forex just was born.

An immediate and important problem arose when the government of the United States failed to finance its borrowings by increased taxes. An income tax was considered as a means to obtain revenue to fight the Great War of 1812, but was not enacted into law. The first national use of the income tax would have to await the Civil War in the United States of America. Other countries were not so slow in tapping that revenue stream. An income tax had been used by England at the behest of William Pitt in 1789 to finance the war with France. An­other English income tax was adopted in 1806, and the British govern­ment used an income tax to finance the Napoleonic Wars in 1810. The British dropped their income tax after 1817, but it became a permanent part of British history of forex and finance beginning in 1842.

On June 30, 1812, Congress authorized the issuance of $5 million of one-year Treasury notes that paid 5.4 percent interest. That issue was fol­lowed by others, as well as longer-term bonds. These instruments quickly became the subject of trading. "There were endless fluctuations, and the easy-going capitalists of the time managed to gain or lose handsome for­tunes."106 It was often a bear market. The "stock" of the United States usually sold at a large discount during the War of 1812, at less than half of par value. Government bond prices were depressed by setbacks in the war, including the capture of Washington, D.C. Two speculators, Isaac Bronson and Jacob Barker, were taking advantage of those reverses to further drive down prices. The United States Treasury nearly broke down during the War of 1812. The government had turned to the private banks for assistance, but the New England banks refused to lend their support. The federal government then began borrowing from banks in the Middle Atlantic, southern, and western areas of the country. Those banks were a weak reed upon which to lean. Within two years after the war broke out, every bank in the midwestern and southern states suspended specie pay­ments. This meant they were unable to redeem the notes they had issued or even to return deposits made in specie. There was precedent for that action. The Bank of England had suspended specie payments in 1797 and did not resume payments until 1820.

The United States was left largely to rely on its own note issues to fund the War of 1812. The $5 million issue of one-year Treasury notes that was authorized in 1812 was to be sold in denominations of not less than $100 and was to pay 5.4 percent. When these notes could not be redeemed at the end of the year, they were refunded with a new issue. A third issue of Treasury notes was made in 1814 for $10 million. It was sold in denomi­nations as low as $20, which allowed the notes to be used as a circulating currency. Congress authorized an $11 million war loan in 1812. The loan was subscribed to principally by banks, but only $8 million dollars was sold. The banks did provide an additional $2 million in temporary loans. Another war loan was offered by the Treasury for $16 million in 1813 and additional $7.5 million borrowing was authorized in August of 1813. A $25 million loan was authorized in the following year. The government agreed with the purchasers of the first tranche of that loan that, if the discount increased on future bond issues, they would have their purchase price re­duced. The first tranche went at a 12 percent discount, and the second tranche went at 20 percent, which meant that the first tranche had to be adjusted.

"It has been estimated that of $80 million borrowed between 1812 and 1816, the government actually received only $34 million in specie value."108 In one notable instance, the Secretary of the Treasury (NAREIT), Albert Gallatin, was able to sell only $6 million of the $16 million issue of "gov­ernment stock" authorized to be issued in 1813. Gallatin then turned to David Parish, who was representing Baring, Stephen Girard, and John Jacob Astor, who agreed to buy the remaining $10 million at a sharp dis­count. In return, Girard and Astor demanded the creation of a new na­tional bank to replace the Bank of the United States, which had lost its charter. Girard and Astor thought that the bonds they were buying at a discount of 12 percent could be exchanged at par for stock in such a new national bank, giving them control of that national institution for a very cheap price. Such control would be a virtual license to print money, but they were unable to fulfill their dream of controlling such a bank. Girard and his fellow speculators, nevertheless, made a profit of about $4 mil­lion when they resold the bonds. Others were not so lucky. The value of those bonds rose to 93 in 1814, but fell to 69 in October of 1814 and had only risen to 75 by February of 1815.

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