U.S. Civil War

During the U.S. Civil War, the Union government demonstrated its capacity to raise large sums of money, and it established a national currency, a national banking system, and the nation’s first income tax. The war promoted the economic growth of the Northern states, while it retarded development in the states of the Confederacy.

With the outbreak of the Civil War, the Northern states experienced a severe recession (then called a “panic”). There were several causes for the downturn, including the disruption of trade with the South, inadequate banking reserves, and uncertainties about how the war would affect business. More than six thousand banks and commercial firms were forced to close their doors in 1861. Southerners owed Northern creditors more than $300 million, most of which was a complete loss. The prices paid for agricultural commodities dropped precipitously. In Illinois, for example, corn fell from almost $1 to as little as 10 cents per bushel. The recession continued into early 1862, but by the fall of that year, the Northern states were beginning to experience a wartime boom.Civil War, U.S.

Strategic Objectives

Like other wars, the ultimate success or failure of the armies in the Civil War was largely determined by their supplies of armaments, equipment, food, clothing, and other war materials. In turn, the availability of such materials depended on the underlying economic conditions of the sponsoring societies. From this perspective, the North had numerous advantages. According to the 1860 census, the twenty-five states of the Union had a population of 22.3 million, whereas the eleven states of the Confederacy contained 9.1 million people, including 5.47 million whites, 3.5 million slaves, and 130,000 free blacks. Ninety percent of the nation’s manufacturing was located in the North. In addition, the Northern states had about five times the amount of personal wealth, two and a half times the number of railway miles, and more than four times the amount of personal wealth.

The Confederate states, nevertheless, had the advantage of fighting a defensive war. To obtain its goal of independence, the Confederacy did not have to win a military victory; rather, it only had to do well enough to convince a majority of Northerners that the goal of preserving the Union was not worth a great sacrifice in lives and money. Many Southerners, moreover, hoped to obtain help from abroad. Because cotton, the nation’s major export commodity, was so essential to the Textile industrytextile mills of Great Britain and Western Europe, some Southern leaders proclaimed that “cotton is king.” They expected that the Europeans’ great appetite for cotton would force them to oppose the blockade, recognize Confederate independence, and eventually help the Southern cause with loans.

The strategy of King Cotton was a failure for several reasons. Although it was true that European manufacturers suffered from diminished supplies of cotton, other places in the world, including Egypt and the Caribbean islands, were able to expand production. European political and business leaders, moreover, were careful not to support a losing cause, and after the Northern victories of 1863, most informed observers expected that the Union forces would almost certainly prevail. In addition, after President Abraham Lincoln issued the Emancipation Proclamation in 1863, any support for the South would appear to endorse the institution of slavery, which was very unpopular in Europe.

Confederate Finances

One of the main reasons that the South failed to achieve independence was inadequate financial resources. Even if the Confederate government had pursued more effective policies, it is doubtful that victory would have been possible. The cost of the war to the Confederacy was an estimated $2 billion, and its total expenditures for the period were approximately $2.3 billion. Currency;ConfederateMore than 80 percent of this amount was obtained by printing paper money, which rapidly declined in value. When the war began in 1861, the Confederate government had assets worth about $27 million in money backed by gold or silver. The government also levied a small tariff on imports and a tax on cotton exports, but this brought in only $3.5 million during the entire war.

In large part because of its emphasis on state sovereignty, the Confederate Congress was hesitant to impose direct taxes. In August, 1861, the first tax law required most citizens to pay 0.5 percent of their assessed property values, with an exemption for heads of families having less than $500 in property. A provision of the law allowed the states to pay the tax on behalf of their citizens, and several states paid the tax with borrowed money. An 1862 law required Southern citizens to pay into the treasury the amount owed to their Northern creditors, but this measure proved almost impossible to enforce. Taxation;ConfederacyIn April, 1863, the Confederate Congress finally enacted a comprehensive tax law on almost everything taxable, including incomes, personal property, and agricultural products, but the deteriorating military situation increasingly prevented collection. Overall, the combination of taxes raised only about $200 million, which was less than 10 percent of Confederate expenditures.

Confederate officials initially expected to rely heavily on the sale of government bonds, even though most planters had debts and not many Southerners possessed large amounts of liquid capital. In early 1861, the first bond issue of $15 million was quickly sold out. Within a few months, however, Confederate Bond industry;Confederatesbonds at 8 percent interest were selling slowly, not surprisingly in view of the inflation rate, which had reached 12 percent a month by the end of the year. By that time, moreover, the naval blockade was making it difficult for even the wealthiest of Southerners to obtain hard currency. Secretary Christopher Gustavus Memminger, Christopher GustavusMemminger devised the idea of a “produce loan,” which allowed farmers to obtain bonds in exchange for pledges for the proceeds of their cotton, tobacco, and other crops. This approach eventually resulted in bond sales of about $34 million. The government also tried to borrow money abroad. In early 1863, the French banker, Emile Erlanger, authorized the sale of $15 million dollars in cotton-backed bonds. The Northern victories in Vicksburg and Gettysburg, however, soon persuaded many Europeans that the Southern cause was probably doomed to failure, and they purchased only some $2.5 million in bonds. The total bond sales of the Confederacy totaled about $150 million, with at least two-thirds of this amount purchased with inflated Confederate paper money.

On March 9, 1861, the Confederate Congress, encouraged by Secretary of the Treasury Memminger, authorized the printing of $1 million in paper currency, which grew to $311 million by the end of 1861, representing three-quarters of the government’s revenues for the year. The currency (called “treasury notes”) was not backed by gold or silver, and each bill promised that the government “will pay the bearer with interest of two cents per day . . . six months after the ratification of a treaty of peace between the Confederate States and the United States.” As the cost of the war mounted, the printing presses produced more and more notes. Memminger in 1862 warned that the excessive dependence on paper money could eventually result in “depreciation and final disaster,” but the government appeared to have no other options for raising the necessary funds. By the war’s end in 1865, more than $1.5 billion in Confederate currency was in circulation. By this time, moreover, many states, counties, and even cities were issuing their own notes, often crudely printed, making them easy to counterfeit.

Awash in a sea of paper money, the Southern states inevitably experienced runaway inflation, resulting in severe hardships for the civilian population. In December, 1861, the Confederate dollar was worth only 80 cents in gold; by 1863, it was valued at about 20 cents; and by early 1865, it had declined to less than 2 cents. In the relatively good year of 1862, the wages of urban workers increased about 55 percent, while prices grew by about 300 percent. The conditions on the farms, where most Southern whites lived, were even worse. With so many adult men away from home, the crop yields declined significantly. On March 26, 1863, Congress enacted an impressment law that required farmers and merchants to turn over surplus commodities to the government in exchange for Confederate currency. The law also applied to slaves, who were impressed to work for the army. By March, 1865, more than $500 million in currency of little value had been exchanged for goods and slaves.

Union Finances

One of the main reasons for the Union victory was the government’s ability to obtain the funding required to fight the war, which amounted to $700 million in 1864 and over $1 billion in 1865. During the four years, the Union government raised some $3.2 billion, with about 25 percent coming from taxes and two-thirds from the sale of bonds and other securities. When Abraham Lincoln took office, the nation’s public debt, having increased from the Panic of 1857, stood at $64 million. By the end of the conflict, the public debt had grown to $2.68 billion.

Despite the wealth and fundamental soundness of the economy, the government faced significant monetary and inflationary challenges. The financial panic that occurred after secession significantly reduced the specie (or gold holdings) of the U.S. Treasury and weakened the government’s credit rating. Early in the conflict, moreover, the federal government did not have the machinery necessary to raise large sums of money. Before this time, governmental expenditures had been modest in comparison with the unprecedented expenditures of the war, and adequate revenue had been raised by a combination of the tariff and the sale of public lands.

Secretary of the Treasury Salmon P. Chase, Salmon P.Chase initially expected to finance the war primarily by the tariff and the sale of government bonds. In early 1861, Congress attempted to increase the government’s revenue with the Morrill Act of 1861Morrill Act, which raised the tariff on dutiable goods to 36 percent, and three years later the tariff was further increased to 47 percent. At Chase’s urging, in the summer of 1861, Congress authorized the sale of $50 million in twenty-year Bond industry;Unionbonds paying a high rate of interest (7 percent). The relatively high interest rate was necessary because of the temporary weakness of the government’s credit rating. In February, 1862, Congress authorized the issuance of another $514 million in bonds. When the bonds did not sell well, the administration contracted with a private firm, Jay Cooke, JayCooke and Company, to market them. Cooke, called the “financier of the Civil War,” skillfully secured the help of the press and employed 2,500 salesmen.

As revenue demands increased, Chase decided it was necessary for the government to issue non-interest-bearing Treasury notes, which were commonly called Greenbacksgreenbacks because of their color. The Legal Tender Act of 1862Legal Tender Act of 1862 authorized the printing of $150 million in greenbacks not exchangeable in specie (metal coin), and additional legislation resulted in a total printing of almost $450 million by the war’s end. The notes announced: “Legal tender in payment of all debts, public and private, within the United States, except duties on imports and interest.” Although backed by the federal government, the value of the greenbacks declined significantly in relation to gold. Their decline in value was one of the major causes for the inflationary conditions that heightened the government’s growing need for funds. A greenback dollar purchased only 67 cents in gold by the spring of 1863, and it continued to decline until it was worth only 35 cents in gold at its lowest point, July 11, 1864, when troops under Confederate General Jubal Early were “at the doors of Washington.” Although detested by most bankers and wealthy investors, the greenbacks were quite popular with the general public, particularly debtors.

On August 5, 1861, Congress enacted the nation’s first Income tax;personalincome tax, which was expanded in 1862, 1863, and 1865. In its final form, incomes between $600 and $5,000 were taxed at the rate of 5 percent, and incomes above $10,000 were taxed at 10 percent. By the end of the war, the income tax brought in more than $20 million. On July 1, 1862, Congress passed the Internal Revenue Act of 1862Internal Revenue Act of 1862, which levied a comprehensive system of taxes on all kinds of goods and services, including natural resources, manufactured items, transportation, farm products, bank deposits, newspapers, and insurance policies. An annual tax was levied on interest payments and other income in excess of $600, and stamp duties were also attached to all business and legal documents. To assess and collect the various taxes, the statute created the Office of Commissioner of Internal Revenue within the Department of the Treasury. The president was authorized, by executive order, to divide the country into collection districts and to appoint an assessor and collector for each district. Because of the complexities in developing new institutions, some of the taxes were not levied until May, 1863.

Early in the war, Secretary Chase advocated the creation of a national banking system to exercise control over the approximately 1,600 state banks that issued their own banknotes, resulting in more than 7,000 different forms of currency used in business transactions. However, many Americans, especially the Jacksonian Democrats, feared the power of a “monster bank.” After President Lincoln effectively lobbied on behalf of the measure, Congress, by a narrow margin, passed the National Bank Act of 1863National Bank Act of 1863, which organized a network of National Banks chartered by the government. To qualify for a charter, a bank had to possess minimum Capital;minimum for bankscapital of $20,000 to $200,000, depending on the size of the city in which it was located.

Each chartered bank was required to invest a minimum of either $30,000 or one-third of its capital in government bonds, and the bank then received a new type of hard currency, national banknotes, in an amount equal to 90 percent of its bond holdings. The banknotes could be used as legal tender for almost all purposes. From the government’s perspective, the new institution had two major benefits: First, it helped sell government bonds, and second, it provided a uniform currency throughout the country. The system was also profitable to banks, because with the same capital, they could collect interest from the bonds and at the same time use the bank notes to make loans to customers. Initially, nevertheless, most banks, especially those in New York, were slow to apply for a national charter. In March, 1865, Congress drove the state banknotes out of circulation by imposing a 10 percent tax on them. Within a year, the vast majority of state banks had converted to federal charters.

Economic Development

During the four years of war, the economies of the Union states generally grew in all major sectors, including manufacturing, agriculture, mining, financial institutions, and railroad construction. Government spending, which was only $60 million in 1860, rose to $1.2 billion in 1865. The availability of government contracts helped many businesses. The credit-rating service, R. G. Dunn, reported that the number of business failures in the Northern states declined from 2,733 in 1860 to only 510 in 1864. The war created particularly strong demand for iron products, which especially helped manufacturers in Pittsburgh and Cleveland. The shipment of iron ore from the Lake Superior region more than doubled during the Civil War. The woolen textile industry also experienced phenomenal growth because of the need for military uniforms combined with the inability of the cotton textile industry to obtain needed supplies. The amount of wool used by manufacturers grew from about 85 million pounds in 1860 to 200 million pounds in 1865.

Investors and speculators in the stock market made huge profits. The war stimulated a frenzy of trading that allowed many people to acquire great wealth, as least on paper. Between 1862 and 1864, people buying and selling stocks realized capital gains estimated at $250 million. This accumulation of capital helped prepare for the modernization and expansion of big business that occurred from the end of the Civil War until World War I.

The war years also promoted the expansion of Northern Agriculture;U.S. Civil Waragriculture. The number of hogs butchered in Chicago, for example, grew from 270,000 in 1861 to 900,000 in 1865. Farmers found unusually good markets for their products. Civilian demand was greater than in peacetime, and the federal government purchased huge quantities of food. Also, poor European harvests from 1860 to 1862 helped drive up prices. The wheat production in the midwestern states grew from 80 million bushels in 1859 to 100 million bushels in 1865. Before the war, wheat sold for $1 or less per bushel, but the price for a bushel increased in many places to $2.25 in 1864. Because of the labor shortage, more farm machinery was manufactured than ever before. In 1864 alone, about 90,000 mowers and reapers were manufactured. Much of the farm labor was performed by women and children. The need for labor was partially met by the continuing stream of immigrants, many of whom were farmers. Although the number of immigrants declined to about 91,000 in 1862, it grew to 176,000 in 1863 and then to 248,000 in 1865.

The secession of the Southern states allowed the Republican-dominated Congress to enact a number of historical reforms that Northern political and business leaders had advocated for many years. The Pacific Railway Act of 1862Pacific Railway Act of 1862 launched the construction of a transcontinental railroad. The Morrill Land-Grant Act of 1862Morrill Land-Grant Act of 1862 helped expand the public financing of higher education. The Homestead Act of 1862Homestead Act of 1862 allowed settlers to acquire 160 acres of free public land, provided that they agreed to reside on the land for five years. Other reforms included the establishment of a national currency, a national banking system, and an income tax (which was ruled unconstitutional in 1895). Several of these reforms helped lay the foundation for the industrial economy that emerged after the Civil War.

The war, unfortunately, devastated the economies of the eleven Confederate states. In addition to killing about one-quarter of the white men of military age, the war destroyed half the farm machinery, a third of the railroad mileage, and thousands of farms and businesses. It also increased the disparity in wealth between the North and the South. According to the census, Northern capital increased by 50 percent, compared with a 74 percent decline in the total capital of the Confederate states. In 1860, these states possessed about 30 percent of the national wealth, but the ratio declined to approximately 12 percent by the war’s end in 1865. Inadequate capital and infrastructure would continue to retard the economic development of the South well into the middle of the twentieth century.

Further Reading

  • Gallman, J. Matthew. The North Fights the Civil War: The Home Front. Chicago: Ivan R. Dee, 1994. A study of how the North mobilized and how it was changed by events and economic forces.
  • Goodwin, Doris Kearns. Team of Rivals: The Political Genius of Abraham Lincoln. New York: Simon & Schuster, 2005. A lively written account of Lincoln’s cabinet members, their policies, and their disagreements.
  • McPherson, James C. Battle Cry of Freedom: The Civil War Era. New York: Oxford University Press, 1988. Although this outstanding text emphasizes military conflict, it provides excellent introductions to economic and political aspects of the war.
  • Massey, Mary Elizabeth. Ersatz in the Confederacy: Shortages and Substitutes on the Southern Homefront. Charleston: University of South Carolina Press, 1993. A study of the South’s attempt to deal with desperate shortages of manufactured items and essential commodities.
  • Pauldan, Phillip Shaw. A People’s Contest: The Union and Civil War, 1861-1865. New York: Harper & Row, 1988. An excellent source of detailed information about domestic affairs in the North.
  • Richardson, Heather Cox. The Greatest Nation on Earth: Republican Economic Policies During the Civil War. Cambridge, Mass.: Harvard University Press, 1997. Argues that the Republicans’ probusiness policies established preconditions responsible for the growth and modernization of the postwar years.
  • Wagner, Margaret, Gary Gallagher, and Paul Finkelman, eds. Civil War Desk Reference. New York: Simon & Schuster, 2002. A concise and useful guide to almost all topics relating to the war, including business and finances.

Confederate currency

Cotton industry



Homestead Act of 1862


Military-industrial complex

Panic of 1857

Slave era



Transcontinental railroad