Currency

Both the Union and the Confederacy faced major problems in financing the Civil War. The war called for the creation of armies that quickly dwarfed any previously seen on the North American continent. Equipping, supplying, and paying these troops put monumental strains on governmental budgets and on the general economies of both sides.

As the war began, both sides believed it would be a brief conflict. Both greatly underestimated the costs, efforts, and the changes that fighting the war would produce in their respective societies. Historian John Steele Gordon has noted, "While individual battles may be decided by tactics, firepower, courage, and—of course—luck, victory in the long haul of war almost always goes to the side better able to turn the national wealth to military purposes" (Gordon 1997, p. 67). The North had a much larger economy, and had a governmental system already in place for administering the borrowing and taxation that would be needed to finance the war. This was a decided advantage in the Union's favor.

The Union and Confederate governments both used a combination of borrowing, taxing, and printing paper money to finance the war. The Union raised about 20 percent of its war financing through taxes, the Confederacy only about 10 to 12 percent (Hughes and Cain 2003, pp. 258–259; McPherson 2001, p. 222). The fact that the Union paid for the war primarily through increased taxes and borrowing, rather than by simply printing paper money, was another important advantage for the North.

Background

When the Civil War began, the only currency in the United States was gold and silver coins, and the paper money issued by state and private banks. Gold and silver money was called "specie." Silver was used only for small-denominations coins. Many people believed that only specie was real money, and distrusted paper money—a distrust that went back to the nation's experience during the American Revolution, when the Continental paper money issued by the government depreciated so badly that the phrase "not worth a Continental" was used to describe something worthless. Earlier in the nineteenth century the banknotes issued by the Second Bank of the United States had functioned as a sound, respected paper currency. However, Andrew Jackson (1767-1845), who had a lifelong distrust of all banks and a special enmity for the Second Bank of the United States, had killed the bank, and no similar institution took its place.

Confederate Currency

The Confederacy borrowed heavily to raise money to finance the war. By the end of the war the Southern government had sold $2 billion in bonds. The first bonds the Confederate government, issued in 1861 in the amount of $15 million, sold quite well because of enthusiastic responses by the Southern people. But the liquid assets—especially the gold assets—of the Southern populace were quickly depleted, and later issues of bonds did not sell as well.

The Confederate government eventually turned to the printing press—printing paper money, backed by nothing. This kind of money is sometimes called "fiat money" because it has value only because of a government decree (or "fiat") that declares it has value. Overall, the Confederacy raised about 10 percent of the war costs by taxes, about 30 percent by borrowing, and about 60 percent by printing money (McPherson 2001, p. 222). Christopher G. Memminger (1803-1888), the secretary of the treasury in the Confederate government, was a "sound money" man who distrusted paper currency, but the Confederate Congress balked at increasing taxes or depending more on loans. One of the major financial problems in the Confederacy was this use of paper money as the primary way to finance the war effort. In many ways, this was unavoidable. Although there was much wealth in the Southern states, a great deal of that wealth was tied up in property: land and slaves. There was not much liquid wealth for the government to tax, and at the beginning of the war, there was no governmental mechanism in place to administer and collect taxes or arrange bond sales or other forms of loans. To further the problem, when the Confederate government did enact taxes, state governments often paid the taxes for their citizens—but the payments were made in state-issued paper currency, which contributed to further inflation.

There was a wide variety of paper money circulating in the South during the war. Paper money was issued not only by the Confederate national government and state governments, but also by cities, towns, and even private businesses, in small denominations. Some of these, called "shinplasters," were for denominations of less than $1. The South did not have printing establishments capable of turning out high-quality banknotes, and in fact, at the beginning of the war some Confederate money was printed surreptitiously by banknote printers in the North. The difficulty of getting these notes delivered to the South finally ended this practice. Currency printed in the Confederacy was generally low quality, on low-grade paper. In a form of economic warfare aimed at disrupting the Southern economy, the North produced counterfeits of the Confederate currency and tried to get these circulated in the South, hoping to further erode the Southern people's confidence in their currency. Even Southern newspapers noted that these Northern counterfeits were generally better quality than authentic Confederate money.

Confederate paper currency depreciated rapidly, especially at times when the war effort was going badly for the South. Consumer prices inflated tremendously in the South due to commodity shortages and the depreciation of the currency. The economist Eugene Lerner believed that the stock of currency in the South increased eleven times over during the war (Lerner 1955, p. 21). Eventually, there was much more currency in circulation than the South's economy really demanded; this is the classic recipe for inflation—too much money chasing too few goods. Memminger estimated that by late 1863 there was $700 million worth of currency circulating in an economy capable of absorbing only $200 million (Thomas 1979, p. 257).

When money began to depreciate rapidly, people had little incentive to hold on to it—the longer one held it, the less it would be worth. So people spent the paper currency rapidly, which in turn contributed further to depreciation and the rising prices of goods. Many businesses refused to take Confederate notes as payment on debts or for purchases. The Confederate government had never made the currency "legal tender," which would have required businesses to accept it. Commodities came to be used in business transactions, sometimes in simple bartering arrangements, and at times in combination with paper currency. Confederate paper money could not be used to pay taxes to the Confederate's national government, or to buy its bonds. As the historian Emory Thomas suggested, "A government which refused to accept its own money did not exactly inspire soaring confidence" (Thomas 1979, p. 82). Economic historians continue to debate the precise rate of inflation in the South during the Civil War, but all agree it was incredibly high. James M. McPherson, one of the preeminent historians of the Civil War era, cites a figure of 9,000 percent (2001, p. 226).

In February 1864 the Confederate congress attempted to deal with the oversupply of currency by passing a currency reform act that required that all existing Confederate currency be redeemed for new notes at a rate of three-to-two. This did reduce the amount of currency in circulation and succeeded in stabilizing prices for a few months, but the fear that such a forced redemption might be required again in the future further eroded people's confidence in the currency.

Union Currency

The notes circulated by private banks and by the U.S. Treasury before the Civil War were supposed to be redeemable in gold on demand. However, in December 1861 banks and private businesses suspended the practice of converting notes into gold. The government soon followed suit, suspending the convertibility of its Treasury notes into specie. In February 1862 Congress passed the Legal Tender Act, allowing the government to issue the first inconvertible currency, which came to be called "greenbacks" because of the color of the paper. As the term "legal tender" implies, businesses were required to accept this money. Although some taxes could be paid with the greenbacks, tariff duties (import taxes) had to be paid in gold, and the government made interest payments on its own bonds only in gold.

However, government bonds could be purchased with the paper money. There was no provision in the law for the ultimate convertibility of the greenbacks into specie, but many people believed that at some future date, after the war ended, the greenbacks would be redeemable in gold. Resorting to the use of paper money was generally seen as an unfortunate emergency measure demanded by the crisis of the war. Like the Confederacy's Memminger, Salmon Chase (1808-1873), the secretary of the treasury in Lincoln's cabinet, distrusted paper money. He believed issuing paper money was immoral and destructive. However, with an eye to getting name recognition that might help in future political endeavors, Chase put his own picture on some of the first issue of greenbacks. After the Civil War Chase became chief justice of the Supreme Court, and ruled in one case that the issuance of the greenbacks had been unconstitutional. Similarly, many of the politicians who had supported the issuance of the greenbacks during the war quickly called for their suspension when the war ended.

The National Banking Acts passed in 1863, 1864, and 1865 were among the clearest examples of the wartime expansion of federal authority during the Civil War. Under the 1863 law federally chartered banks could be created if they met certain standards. These banks could issue banknotes if they held a required percentage of their assets in U.S. government bonds, as guarantees that their banknotes could be redeemed. This provision meant that these banks not only supplied a sound currency, they also constituted a market for the government's own bonds. The 1865 act imposed a 10 percent tax on state banknotes. Because anyone using greenbacks or the notes from the federally chartered banks could avoid paying this tax, the state banknotes were quickly driven out of circulation.

Greenbacks were not backed by any precious metal; they were valuable only because the government decreed that they were legal tender and must be accepted by creditors and merchants in payment of debts and for purchases. As in the South, these greenbacks depreciated, but never to the extent that Confederate paper money did. Estimates of the rate of inflation suffered by the North range from 80 to 100 percent; it is probably safe to say that the cost of living roughly doubled in the North because of wartime inflation. Greenbacks were preferred to Confederate money by some merchants in the upper tier of Confederate states, and even the Confederate treasury in Richmond held some Union greenbacks as financial assets in its vaults. The first issue of greenbacks was $150 million. By the end of the war a total of $450 million had been issued.

Aftermath

The Fourteenth Amendment included a provision that guaranteed the repayment of the federal war debt, but disallowed the repayment of the Confederate war debt. This meant that all Confederate bonds, as well as all Confederate currency, technically became worthless as soon as the war ended, although some of these documents eventually acquired considerable value as collector's items. In the decades after the Civil War the question of what kind of money the United States should have was debated repeatedly. Groups such as the Greenback Party and later the Populists wanted an expansion of the amount of currency in circulation, in part because this caused inflation that could help debtors pay off debt. The Greenback Party wanted the paper money from the Civil War to stay in circulation, whereas those who advocated a "hard money" or "sound money" policy wanted all the greenbacks to be redeemed and the country to go back to a gold standard as quickly as possible.

BIBLIOGRAPHY

Curry, Leonard P. Blueprint for Modern America: Nonmilitary Legislation of the First Civil War Congress. Nashville, TN: Vanderbilt University Press, 1968.

Gordon, John Steele. Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt. New York: Penguin Books, 1997.

Hammond, Bray. "The North's Empty Purse, 1861–1862." American Historical Review 67, no.1 (October 1961): 1–18.

Hammond, Bray. Sovereignty and an Empty Purse: Banks and Politics in the Civil War. Princeton, NJ: Princeton University Press, 1970.

Hughes, Jonathan, and Louis P. Cain. American Economic History, 6th ed. New York: Addison Wesley/Pearson Education, 2003.

Lerner, Eugene M. "Money, Prices, and Wages in the confederacy, 1861–1865." Journal of Political Economy 63, no. 1 (February 1955): 20–40.

McPherson, James M. Ordeal By Fire: The Civil War and Reconstruction, 3rd ed. New York: McGraw-Hill, 2001.

Thomas, Emory M. The Confederate Nation, 1861–1865. New American Nation Series. New York: Harper and Row, 1979.

Willard, Kristen L., Timothy W. Guinnane, and Harvey S. Rosen. "Turning Points in the Civil War: Views from the Greenback Market." American Economic Review 86, no. 4 (September 1996): 1001–1018.

Mark S. Joy