Wednesday, August 5, 2015

Civil War Arbitrage

 US-$1-LT-1862-Fr-16c

Wouldn’t it be great if an act of Congress enabled your federal government bonds to be worth twice what you paid for them?

That’s precisely what happened for many federal Civil War bond investors during the Reconstruction Era.

In the second year of the War in 1862 it was obvious the federal government could not finance the war without creating new financial instruments and issuing an unprecedented amount of bonds. Federal indebtedness increased from $65 million to $2,700 million during the war. The federal government also issued about $450 million in greenback paper currency. Greenbacks were legal tender for all debts except for customs duties, which still had to be paid in gold.

Consequently, the value of the greenback dollar fluctuated in relation to the gold dollar based upon market confidence, or lack of it, that greenbacks would ultimately be redeemed in gold at face value. In June 1864, for example, the market quote required 2.7 greenback dollars to buy a single gold dollar. In reciprocal terms, 37 cents in gold could be exchanged for a greenback dollar.

The differential created an arbitrage opportunity in the US Government Bond market.

2 comments:

  1. Back in the last century that mattered there was a song that went "Hang on to your confederate money, boys, the South will rise again." I didn't.

    ReplyDelete