8.5 War Economies: Union Finance & Confederate Collapse (1861–1865)

Why Wartime Finance Is Tested

CLEP assigns 15% to economic developments and 25% to political institutions and public policy, and the Civil War is where they fuse. The war permanently changed what the federal government did: before 1861 Washington collected tariffs and sold land; by 1865 it printed the currency, chartered banks, taxed incomes, granted land to railroads, and funded colleges. The exam wants the mechanisms and the contrast between the two war economies.

The Union's Starting Advantages

Advantages of this scale do not win a war automatically — the South needed only to survive, not to conquer — but they meant the Union could equip, feed, and move armies indefinitely if it could raise the money.

Financing the Union War

Treasury Secretary Salmon P. Chase used three instruments, in ascending order of importance.

1. Borrowing (about two-thirds of the total). Chase and the financier Jay Cooke sold war bonds directly to ordinary citizens through a nationwide network of agents, mass advertising, and appeals to patriotism — the first mass-market bond campaign in American history. Roughly $2.6 billion was raised.

2. Paper money (about one-sixth). The Legal Tender Act (February 1862) authorized $150 million in United States Notes — "greenbacks" — declared legal tender for all debts but not redeemable in gold. Roughly $450 million eventually circulated. Greenbacks depreciated against gold, bottoming near 39 cents on the dollar in mid-1864, which is why the exam pairs "greenback" with "inflation." Union wartime inflation ran roughly 80% over four years — painful, but a rounding error next to the Confederacy's.

3. Taxation (about one-fifth). The Revenue Act of 1861 imposed the first federal income tax: 3% on incomes over $800. The Revenue Act of 1862 made it graduated (3% over $600, 5% over $10,000), created the Commissioner of Internal Revenue, and added excise taxes on nearly everything — liquor, tobacco, manufactures, licenses, inheritances. The income tax lapsed in 1872.

Banking. The National Banking Acts of 1863 and 1864 let banks obtain federal charters if they held federal bonds as reserves, and authorized them to issue standardized national bank notes. A 10% tax on state bank notes in 1865 drove those out of circulation by 1866. The result was the first uniform national currency since the Second Bank's demise, and it tied the banking system's solvency to the federal debt.

Republican Developmental Legislation

Secession removed the southern bloc that had blocked northern economic legislation for a generation, and Republicans passed it all at once:

Taken together this is the legislative charter of the postwar industrial economy — and it explains why some historians describe the war as completing a "second American revolution" in the relationship between the federal government and economic development.

The Northern Home-Front Economy

The war did not depress the northern economy. Some sectors suffered — cotton textiles lost their raw material, and river commerce with the South stopped — but agriculture boomed on wartime demand and European crop failures, and mechanization accelerated because farm labor went to the army; reaper sales tripled. Wool, iron, coal, meatpacking, and boots and shoes expanded sharply. Wages, however, lagged behind prices, so real earnings fell perhaps 20%, which drove union membership up and produced a wave of strikes in 1863–64.

The Confederate Economy

The Confederacy had cotton, land, and 3.5 million enslaved workers — and almost nothing else a modern war requires. Its fiscal choices were constrained from the start.

Taxation failed. The Confederate constitution barred protective tariffs, the Union blockade eliminated import duties anyway, and a states'-rights ideology made direct taxation politically explosive. An 1861 property tax raised almost nothing because states were allowed to assume the levy and paid it in Confederate notes. The tax-in-kind of April 1863 — 10% of farm produce, collected physically by agents — was widely evaded and deeply resented. Taxes covered only about 5–6% of Confederate expenditure.

Borrowing was limited. Domestic bonds absorbed roughly a third. The Erlanger loan (1863), a French issue secured by cotton, netted the Confederacy only a few million dollars.

Printing did the rest. Roughly 60% of Confederate war costs were met by issuing paper money, and states and cities printed their own on top of it. The consequence was hyperinflation: prices rose approximately 9,000% by 1865. Flour that cost $6 a barrel in 1861 reached several hundred dollars in Richmond. In April 1863, women rioted for food in Richmond, and only Jefferson Davis's personal intervention dispersed them.

Coercion followed. Impressment (March 1863) let army officers seize food, livestock, and enslaved labor at below-market prices, paying in depreciating currency — which drove farmers to hide crops and hardened states'-rights resistance to the Davis government. Governors Joseph Brown of Georgia and Zebulon Vance of North Carolina obstructed conscription and impressment throughout.

King Cotton failed. The Confederacy's opening gambit was an unofficial cotton embargo, withholding the 1861 crop to force British intervention. It backfired: Britain had a large surplus from the bumper crops of 1859–60, and by the time mills ran short, Egypt and India had expanded production. The embargo destroyed the Confederacy's only export earnings at the moment it most needed foreign exchange.

The Balance Sheet

By late 1864, Confederate railroads were failing for lack of rails, its currency bought almost nothing, desertion was accelerating as soldiers received letters describing hunger at home, and Sherman's and Sheridan's campaigns were destroying the productive base directly. Economic exhaustion arrived before military defeat, and each accelerated the other. In the North, by contrast, the war left behind a national currency, a national banking system, a vastly larger federal debt held by a broad investing public, and a Republican Party committed to using federal power for economic development.