I have read many books about the American Civil War, starting as a child. I have visited the Gettysburg battlefield on bicycle, which gives an up-close view of the killing fields. I have watched media presentations about the Civil War, from “Gone With The Wind” to “Roots” to Ken Burns’ series.
But somehow, it never occurred to me to wonder about the Macroeconomics of the Civil War.
Yes, we learned in school that the North was more industrialized than the South. But we never learned the details about how the governments raised the money to fight the incredibly expensive war.
I have just finished reading “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War,” by Roger Lowenstein. This book is either very boring or very interesting, depending on your perspective.
Before the war started, the U.S. did not have a currency. Banks printed paper notes that could be exchanged for gold at the bank. This led to a chaotic system. Banks sometimes failed and wouldn’t redeem their notes. Notes from a bank in one region wouldn’t be redeemable at a different bank in a different region.
To make a very long story very short, the North had to raise $2 million per day to finance the war. The price of gold was $20.60 per ounce in 1860. At today’s gold price of $1716 per ounce, that would be the equivalent of about $170 million per day.
The only source of revenue was tariffs since there was no taxation. This was an impossibly huge amount at the time.
The Union issued paper “legal tender” for the first time. It issued bonds that were sold to individuals as well as large investors and foreigners. It eventually began an income tax (which was repealed after the war). There was significant inflation during the war in the North but it wasn’t ruinous. The economy was strong and grew during the war. The government started many important projects, including the National Bank system, transcontinental railroad, the Homestead Act, land grant colleges and many more.
While the Union never created a central bank, the National Bank system, which were the only banks allowed to issue “legal tender” notes, gradually displaced the state banks that issued their own local notes.
Meanwhile, the Union blockaded the South, which had little manufacturing and relied on imports for armaments and replacement parts for what machinery they did have. But the blockade runners weren’t interested in heavy shipments. They focused on light, expensive luxuries like ribbons. Southern manufacturing plants shut down entirely for want of repairs and also because the few skilled mechanics were drafted into the Confederate Army.
Year Gold Price 1859 $20.67 1860 $20.67 1861 $20.67 1862 $27.35 1863 $31.23 1864 $47.02 High point of Union inflation as battles were lost. 1865 $30.22 1866 $28.26 1867 $27.86 1868 $27.95 1869 $25.11 1870 $22.88 1871 $22.59 1872 $23.19 1873 $22.74 1874 $23.09 1875 $23.54 1876 $22.30 1877 $21.25
The Confederacy made the fatal error at the start of the war to refuse to ship their cotton to Europe in the hopes that England and France would put an end to the war to keep their fabric mills operating. This removed the only source of revenue for the South. They printed paper money and ended up with hyperinflation and widespread starvation. The Confederacy also sold bonds to loyal Confederates but these were worthless after the war, wiping out capital.
Jefferson Davis said that the war was lost more in the financial arena than it was on the battlefield.
Of course, the history of the Civil War is very complex. These are just a few highlights of the book, which itself has a narrow focus on macroeconomics.
Our familiar system of income taxation and central banking didn’t arrive until decades after the Civil War.