The economic history of the American Civil War concerns the financing of the Union and Confederate war efforts from 1861 to 1865, and the economic impact of the war.
The Union economy grew and prospered during the war while fielding a very large Union Army and Union Navy.Emerson David Fite, Social and industrial conditions in the North during the Civil War (1910) online edition The Republican Party in Washington, D.C. had a Whiggish vision of an industrialized country, with great cities, efficient factories, productive farms, all national banks, all knit together by a modern railroad system, to be mobilized by the United States Military Railroad. The Southern United States had resisted policies such as tariffs to promote industry and the Homestead Acts to promote farming, because slavery in the United States would not benefit. With the South gone and the Northern Democratic Party weak, the Republicans enacted their legislation. At the same time, they passed new taxes to pay for part of the war and issued large amounts of bonds to pay for most of the rest. Economic historians attribute the remainder of the cost of the war to inflation. According to Matthew Gallman, in terms of total war spending, the federal government of the United States spent $18 billion and the U.S. states spent $0.5 billion. This does not count long-term costs after the war ended, such as veterans' benefits. The Confederate federal and state governments spent the equivalent of $1.0 billion in US dollars. The US obtained 21% of the war funding from taxation, 66% from borrowing, and 13% from inflation. By contrast, the Confederacy obtained only 5% from taxation, 35% from borrowing, and 60% from inflation.Matthew J. Gallman, The North Fights the Civil War: The Home Front. (Ivan R. Dee, 1994) p 95.
In Washington, D.C., the United States Congress wrote an elaborate program of economic modernization that had the dual purpose of winning the war and permanently transforming the economy.Heather Cox Richardson, The Greatest Nation of the Earth: Republican Economic Policies during the Civil War (1997)
The wartime devastation of the South was great and poverty ensued; the incomes of White Americans dropped, but income of the freedmen rose. During Reconstruction, railroad construction was heavily subsidized (with much corruption), but the region maintained its dependence on cotton production. Freedmen became wage laborers, tenant farmers, or sharecroppers. They were joined by many Poor Whites, as the population grew faster than the economy. As late as 1940, the only significant manufacturing industries were textile mills (mostly in the upland Carolinas) and some steelmaking in Alabama.Gavin Wright, Old South, New South: Revolutions in the Southern Economy since the Civil War (1986).Roger Ransom, Conflict and Compromise: The Political Economy of Slavery, Emancipation and the American Civil War (1989)
The industrial advantages of the North over the South helped secure a Northern victory in the American Civil War (1861–1865). The Northern victory sealed the destiny of the nation and its economic system. The slave-labor system was abolished; sharecropping emerged and replaced slavery to supply the labor needed for cotton production, but cotton prices plunged during the Panic of 1873, leading the plantation complexes in the Southern United States to decline in profitability. Northern industry, which had expanded rapidly before and during the war, surged ahead. Industrialists came to dominate many aspects of the nation's life, including social and political affairs.Walter Licht, Industrializing America: The Nineteenth Century (1995) pp. 79–101.
Union policy
After the war began in April 1861, President Abraham Lincoln and Secretary of the Treasury Salmon P. Chase faced the massive challenge of funding it. In Congress Senator William P. Fessenden and Congressman Thaddeus Stevens took the lead.Heather Cox Richardson, The Greatest Nation of the Earth: Republican Economic Policies during the Civil War (1997) pp. 9–10. Congress quickly approved Lincoln's request to assemble a 500,000-man army, but initially resisted raising taxes to pay for the war. However, after the Union defeat at the First Battle of Bull Run in July, Congress passed the Revenue Act of 1861, which imposed the first federal income tax in U.S. history. The act created a flat tax of three percent on incomes above $800 ($ in current dollar terms). This taxation of income reflected the increasing amount of wealth held in stocks and bonds rather than property, which the federal government had taxed in the past.Weisman (2002), pp. 27–35. As the average urban worker made $600 per year, the income tax burden fell primarily on the rich.Paludan (1993), pp. 111–112
High protective tariff Congress passed the second and third Morrill Tariffs, the first having become law in the final months of Buchanan's tenure. These tariff acts raised import duties considerably compared, and they were designed to both raise revenue and protect domestic manufacturing against foreign competition. During the war, the tariff also helped manufacturers off-set the burden of new taxes. Compared to pre-war levels, the tariff would remain relatively high for the remainder of the 19th century.Paludan (1993), pp. 113–114 Throughout the war, members of Congress would debate whether to raise further revenue primarily through increased tariff rates, which most strongly affected rural areas in the West, or increased income taxes, which most strongly affected wealthier individuals in the Northeast.Weisman (2002), p. 85.
Greenbacks The revenue measures of 1861 proved inadequate for the funding of the war, forcing Congress to pass further bills designed to generate revenue.Weisman (2002), pp. 37–38. In February 1862, Congress passed the Legal Tender Act, which authorized the minting of $150 million (~$ in ) of "greenbacks." The debate was fierce as "paper money" seemed a route to excessive inflation and had no prewar support. But the Army needed to pay its suppliers and soldiers without delay. Greenbacks were the first banknotes issued by the federal government since the end of the American Revolution, when the "Continentals" caused runaway inflation and became almost worthless. The new Greenbacks were not backed by specie (gold or silver), but rather by the requirement that merchants honor their face value for purchases and debts. By the end of the war, $450 million worth of greenbacks were in circulation.Roger Lowenstein, Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War (2022) pp. 88–106. They were highly effective and (after borrowing) were the major solution the Treasury needed to finance the warPaludan (1993), pp. 109–110Richard Striner, "How to Pay for What We Need: Congress Could Create Money, As It Did During The Civil War, Funding Public Projects That Shock The Economy Back To Life." The American Scholar 81.1 (2012): 32-41 online.
Taxes As military expenses soared, the Union armies faltered in their plan to capture Richmond. Pessimism grew in financial circles. The Congress passed the Revenue Act of 1862, which established a new excise tax that affected nearly every commodity.Paludan (1993), p. 111 The new tax was similar to the sales tax imposed by state governments in the 20th century. According to one newspaper account, it set a federal tax on:Roger Lowenstein, Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War (2022) p. 126. Liquor, beer, tobacco, cigars, lard, linseed oil, paper, soap, salt, shoe leather, flour, railroad passengers (per mile), steamboat passengers, ferry boats, trolleys, advertisements, and carriages. The new law also imposed the first income tax, starting at 3% on incomes over $600 a year and 5% on incomes over $10,000.Weisman (2002), pp. 40–42. Dozens of lobbyists fought back, warning that even a small 5% tax would bankrupt small business; Congress pushed ahead because the war crisis was urgent.Lowenstein, Ways and Means (2022) p. 127. The new law also imposed the first national inheritance tax. To collect these taxes, Congress created the Office of the Commissioner of Internal Revenue within the Treasury Department. Starting with three clerks it quickly expanded to 4,000 clerks and field agents in 185 districts.Lowenstein, Ways and Means (2022) pp. 126, 128. Lincoln signed the Revenue Act on July 1, 1862, and two weeks later signed the new tariff law, that raised rates to 37%. Britain was the largest trading partner, and its protests were ignored by Americans annoyed that it had created and funded a system of blockade runners to supply the South with food and munitions.Lowenstein, Ways and Means (2022) p. 129.
Despite these new measures, funding the war continued to be a difficult struggle for Chase and the Lincoln administration.Weisman (2002), pp. 81–82. The government continued to issue greenbacks and borrow large amounts of money, and the United States' national debt grew from $65 million in 1860 to $2 billion in 1866. Congress passed the Revenue Act of 1864, which represented a compromise between those who favored a more progressive tax structure and those who favored a flat tax.Weisman (2002), pp. 84–88. The act established a five percent tax on incomes greater than $600, a ten percent tax on incomes above $10,000, and raised taxes on businesses. In early 1865, Congress passed another tax increase, levying a tax of ten percent on incomes above $5,000. By 1865, the income tax constituted about one-fifth of the revenue of the federal government. The federal inheritance tax would remain in effect until its repeal in 1870, while the federal income tax was repealed in 1872.Weisman (2002), pp. 90-91, 99–101.
Hoping to stabilize the currency, Chase convinced Congress to pass the National Banking Act in February 1863, as well as a second banking act in 1864. Those acts established the Office of the Comptroller of the Currency to oversee "national banks," which would be subject to federal, rather than state, regulation. In return for investing a third of their capital in federal bonds, these national banks were authorized to issue federal banknotes. After Congress imposed a tax on private banknotes in March 1865, federal banknotes would become the dominant form of paper currency in the United States.
Borrowing Both sides tried to borrow; the Union did a much better job, primarily because the new national banking system had monetized the North's wealth. Philadelphia banker Jay Cooke democratized financing. He organized highly publicized campaigns that enabled ordinary middle class citizens to purchase $50 savings bonds in monthly installments. Sales reached $1.2 billion and paid for 40% of the federal war budget.Richardson, Greatest Nation, pp. 31-66. The purchasers of bonds gave up money that would have been spent on civilian goods, in return for the promise that they would be repaid with interest after the war. They were; the bonds were eventually paid off by taxpayers who were children in 1860, and who by 1890 were much wealthier than their parents. Taxes also diverted spending from the civilian into the military sector, but the burden fell entirely upon the wartime taxpayer. Probably half the savings of the North went into the war effort, but there was much left over to invest in new factories, railroads, and enterprises. The private sector flourished in the North, and shrivelled away in the South. In Philadelphia, one new factory opened every week; in the South, one closed every week.Faulkner p. 344 .Melinda Lawson, "Jay Cooke and the War Bond Drives." in Major Problems in the Civil War and Reconstruction: Documents and Essays (2010): 231+.