The Confederate Cotton Zombie Bonds

Confederate bonds are now prized by collectors of Confederate memorabilia. Since the bonds were never redeemed, thousands of these remnants of the South still exist for anyone to own.

One of the more interesting bonds produced by the Confederacy were the Erlanger bonds which were issued in London in an attempt to raise much needed foreign currency for the Confederacy.  These bonds were authorized by an Act of the Confederacy on January 29, 1863, and were the only bonds issued in foreign markets by the Confederacy. One of the more interesting aspects of these bonds is that they were Cotton Loan Bonds, backed by and redeemable in bales of cotton.

The reason for issuing Cotton Loan Bonds was that anyone who bought Confederate bonds faced the risk of default if the Confederacy lost the war. Even if the Confederate States were to survive the war, the Confederacy lacked the gold reserves requisite to back the bonds. However, the South had plenty of cotton, a commodity that was essential to the mills in England and the rest of Europe.

The Cotton Loan Bonds which were backed by bales of Confederate “white gold” at a price that would provide a profit to potential buyers if the bonds were paid off in kind rather than in cash.  The £100 bonds (about $485 in gold before the war) were redeemable for 8 bales (4000 pounds) of cotton. Additional bonds were issued at £250, £500 and £1000. The bonds paid 7% interest and were redeemable in 20 years.

The Erlanger bonds traded on both the London and the Amsterdam Stock Exchanges.  The performance of the bonds reflected traders’ faith in the Confederacy.  Declines in the value of the bonds occurred as the war turned against the Confederacy, and it became more evident that the Confederacy would lose the war and be unable to redeem the bonds.

A similar indicator of faith in the Confederacy is reflected in the gold premium for the Confederate Dollar.  At the beginning of the war, one paper Confederate Dollar was redeemable for one dollar in gold, but as the war progressed, the premium on gold rose. As you can see in the graph below, the Confederate Dollar depreciated consistently against gold during the war.  Initially, this decline was due to inflation in the Confederacy since it was funding the war primarily through paper money and through issuing bonds.  Toward the end of the war, the risk of default drove the rise in the gold premium.

The conversion rate for “bluebacks” as the Confederate currency was known, rose from 1.2 Confederate Dollars to a Gold Dollar at the beginning of 1862 to 3.25 at the beginning of 1863, 20 at the beginning of 1864, and 60 at the beginning of 1865. By April 1, 1865, just a week before the peace treaty was signed at Appomattox, the rate was at 70. After the South surrendered, the rate quickly collapsed, hitting 1500 by May 1, 1865.  This can be seen in the graph below.

Changes in the price of the Erlanger bonds also reflected the declining fortunes of the Confederacy. Surprisingly, the Erlanger bonds continued to trade on the London Stock Exchange for years after the war was over out of hope that the Federal Government would redeem the bonds either in full or in part, or at least provide the cotton that had been promised by the Cotton Loan.

The United States Federal Government was adamant that it would not redeem any Confederate Bonds, State Bonds, Confederate Currency or State Currency that had been issued during the war. The Fourteenth Amendment to the Constitution was passed on July 9, 1868 and Section 4 of the Fourteenth Amendment explicitly stated that “Neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

Confederate Bonds became Zombie Bonds. Though officially dead, speculators continued to keep them alive. Since British and French courts felt that the United States government was responsible for Confederate liabilities, despite the Fourteenth Amendment, speculators in London continued to buy the 7% Erlanger Cotton Bonds.  As the graph below illustrates, the price of the bonds collapsed in 1865, and fluctuated between £3 and £8 pounds from 1865 until 1871 when the bonds stopped trading on the London Stock Exchange. Thereafter, the bonds were usually quoted around £1, except between 1879 and 1884.

Two hoards of Erlanger Cotton bonds remained in London after the war. Between 1879 and 1884, some bond holders felt that a new effort to wrest money from the Federal Government might succeed. Speculators began buying the bonds at 2% of their value, causing bonds to flow into London from the former Confederate states. When these bonds dried up, Dutch counterfeits were produced to meet the demand.

A committee was formed to make the case for the bondholders, but to no avail. By 1885, the efforts had come to nothing, and most of the bonds were returned to their owners. Some bonds remained unclaimed and these bonds settled in the vault of Coutts Bank.  This hoard was sold in 1987 for over £350,000. The zombies had finally come back to life a century later.

Another hoard of bonds lay in the vaults of Erlanger Bank. This included about one-third of the bonds that had originally been issued, but not sold.  In addition to this, in 1863, the Erlanger Bank had bought up some of the bonds in an effort to support their price. The bonds remained in the bank’s vault for the next 100 years, surviving even the Nazi bombing of London during World War II.

In 1966, Douglas Ball, one of the experts on Confederate bonds, visited Mr. Leo Erlanger concerning the bonds in the bank’s vault. The bank had been sold in 1964, and Erlanger was winding down the bank’s operations. Douglas Ball, who was researching confederate bonds in preparation for his dissertation, wanted to know how many of the bonds were left.  When Mr. Erlanger said they still had the bonds, Douglas Ball let him know that he could probably make Erlanger over $100,000 by slowly releasing the bonds onto the collector’s market.

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