Financing the War
FINANCING THE WAR
The scale and scope of the Civil War created unprecedented financial demands on both the Union and the Confederacy, whose governments spent a combined total of more than $3.4 billion for the war effort. These expenditures dwarfed those of the antebellum period: The federal government never spent more than $75 million per year in the 1850s. Each side faced a fundamental question: How would it pay the staggering sums needed to raise, equip, and supply its armed forces? Each had three basic options: extracting resources through taxes, tariffs, or outright confiscation; borrowing money by issuing bonds, interest-bearing notes, and other financial instruments; and inflating the money supply with fiat currency.
The Union used all three options but borrowed most of the money it needed. Borrowing did not alleviate the financial hardships of war—Northerners paid extraordinarily high taxes, and a general increase in prices resulted in declining real wages. The suffering of Northern families, however, paled in comparison to that of Confederate households. Lacking the financial resources of the North, the Confederacy had little choice but to rely upon new issues of paper currency. The resulting inflationary spiral made it increasingly difficult for the Rebels to sustain their cause.
The Union borrowed to pay for the bulk of its wartime expenses. Under the leadership of Treasury Secretary Salmon P. Chase, the national debt skyrocketed from $90.6 million in 1861 to almost $2.8 billion in 1866. The Union sold government bonds through two novel methods. Financier Jay Cooke, the brother of one of Chase's political associates, used massive publicity campaigns to sell hundreds of millions of dollars worth of bonds to ordinary citizens. These bond sales helped, but Chase also needed to tap the resources of banks, which had operated successfully for decades as state-chartered institutions that issued their own notes. When government demands threatened to overwhelm the state-chartered banks, the Republicans created a national banking network in 1863. Under this system, the federal government itself chartered banks. In exchange for the right to issue federal bank notes, banks had to buy large sums of government debt. This system, in essence, guaranteed that bankers would buy government bonds.
To ensure that the federal government could pay the interest on its mushrooming debt, Congress authorized a series of new taxes in 1861 and 1862. The federal government had traditionally relied on tariffs for the bulk of its revenue, but tariff revenues, despite sizeable increases in rates, could not keep pace with wartime demands. In August 1861, the government authorized its first income tax, which was eventually expanded to all incomes over $600. Income taxes provided the federal government $55 million in revenue during the course of the war, but a comprehensive series of excise taxes on certain goods and licenses proved much more important. The Internal Revenue Act of 1862, in the words of Republican politician James G. Blaine, was "one of the most searching, thorough, comprehensive systems of taxation ever devised by any government" (Hummel, p. 222). Taxing almost every type of good imaginable—from liquor and tobacco to iron and steel to butchered meat—federal excise taxes raised hundreds of millions of dollars. By the end of the war, Northern citizens paid higher taxes per capita than citizens of any other nation.
In periods of crisis, though, the Union had trouble raising money. Investors shunned bonds, and taxes could not provide an immediate infusion of revenue. The Union found itself in precisely such a situation in the winter of 1861–62, when a series of military reverses and the possibility of war with Britain threatened the solvency of both the nation's banking system and the treasury department. To overcome this crisis, the federal government issued its own paper money, known as greenbacks. To make sure that greenbacks circulated as currency, Congress made them legal tender; individuals, businesses, and the government had to accept all greenbacks for payment. The federal government eventually issued $450 million in greenbacks. The fiat money helped stabilize the economy, but it also contributed to sustained inflation. Northern prices rose 80 percent during the war, which led to a substantial drop in real wages for most workers.
The northern inflation rate was tame compared to the 9,000 percent increase in prices the Confederacy suffered. This extraordinarily high rate of inflation highlighted a central problem for the Confederacy: It was fighting a fundamentally modern war without the ability to pay for it. The Confederacy had far fewer banks than the Union and thus relatively little in the way of specie that could be used to pay investors in government bonds. The Union blockade and capture of key southern ports left Southerners without the ability to collect revenue from import or export taxes. Cotton, which many Confederates had regarded as a great potential source of revenue and collateral, provided little help as the South found itself increasingly isolated from foreign markets. Confederates exported two million bales of cotton between 1861 and 1865, a far cry from the more than 17 million bales the South had exported during the previous four years.
The Confederacy's solution to the problem was to print money to pay for government expenses. Secretary of Treasury Christopher Memminger recognized the dangers of this method, but a variety of taxes and bond issues had failed to raise sufficient funds. Despite aggressive measures—including a 10 percent tax-in-kind, paid in crops, livestock, and goods rather than in cash—taxation covered less than 7 percent of the Confederate government's income. Borrowing at home and abroad provided another 25 percent. Paper money covered the rest. Between 1861 and January 1864, the Confederacy's money supply increased elevenfold, and more dramatic increases occurred thereafter.
Confederate inflation essentially operated as a highly regressive tax that fell most heavily on ordinary households, which had great difficulty surviving as the prices of food and clothing grew at a far higher rate than wages and income. Southerners often blamed speculators for rapidly rising prices, fueling the sentiment that the conflict was, as the saying went, "a rich man's war and a poor man's fight." The Confederacy's inflationary spiral undoubtedly contributed to the increasing rates of desertion that plagued Rebel armies in the last year of the war.
The end of the Civil War hardly resolved the nation's financial problems. Greenbacks remained in circulation but were without the backing of either gold or silver. In subsequent decades, the nation and Congress tried to deal with major issues related to money, including the size of the nation's money supply and a bimetallic standard based on gold and silver. The North emerged from the war in a relatively strong financial position. The postwar South, on the other hand, found itself with a worthless currency of Confederate dollars, a paucity of banks, and an enormous debt. The Civil War and its postwar effects had created the conditions that began to transform the nation's currency and its financial institutions.
Ball, Douglass B. Financial Failure and Confederate Defeat. Champaign: University of Illinois Press, 1991.
Lerner, Eugene M. "Money, Prices, and Wages in the Confederacy, 1861–65." In The Economic Impact of the American Civil War, edited by Ralph Andreano. Cambridge, MA: Schenkman, 1967.
Paludan, Phillip Shaw. A People's Contest: The Union and the Civil War, 1861–1865, 2d edition. Lawrence: University of Kansas Press, 1996.
Surdam, David. G. Northern Naval Superiority and the Economics of the American Civil War. Columbia: University of South Carolina Press, 2001.