Financing the American Civil War, Contrasting North and South

[Hawk1981]

The start of the American Civil War forced both the Confederate and Union governments to rapidly develop strategies to fund their military efforts. Both governments had to mobilize their armies and navies, develop military strategies, and finance these efforts effectively. Given their common heritage and history, and that the key decision makers on the two sides knew each other well from their previous experiences in Washington, it would seem plausible, and even expected, that both the Confederate and Union governments would pursue similar financial policies to set in motion and maintain their military forces.

The Union and Confederate governments had nearly identical decision making processes, political institutions, and knowledge of prior American financial policies, but decided to employ very different financial strategies.

In 1861, the hastily assembled Confederate government lacked the bureaucratic infrastructure to levy or collect internal taxes. Its citizens possessed neither a tradition of compliance nor a means to remit payment. Land and slaves comprised the bulk of southern capital; liquid forms of wealth like specie or paper currency were hard to come by in a predominantly agrarian region.

Confederate efforts to raise war revenue proved ineffective. The Confederate Congress enacted a minor tariff and a small indirect tax on real and personal property. But the government in Richmond was forced to rely on the individual states to collect the tax. Most states did not collect the tax at all, preferring to meet their quota by borrowing money or printing state notes to cover it. The Union blockade of Southern ports and the South's self-imposed embargo on shipping cotton, intended to "starve" Europe of cotton and force diplomatic recognition of the Confederacy, reduced tariff receipts to minimal amounts throughout the war.

The regional ideological predispositions developed over the antebellum period were carried over into Civil War politics. Generally, the northern Republicans’ support of a national banking system, a large national debt, and taxes turned out to be vital to finance the Union war effort. While the southern Democrats’ opposition to national financial institutions, a large public debt, as well as taxes to protect their most valued assets, slaves and land, led to financial policies that proved to be disastrous for the Confederacy.

 

[Hawk1981]

The Davis administration turned to loans to finance the early bulk of war debts, which were initially very successful. The two main types of loans issued during the war were "Cotton Bonds", denominated in pounds sterling and francs, and sold in London, and high risk unbacked loans sold in the Netherlands. The Cotton Bonds were also convertible directly into bales of cotton, with a caveat, included as a means of political pressure on European countries to recognize the Confederacy, that any such shipments needed to be picked up by the bondholder in one of the blockaded Southern ports. Cotton Bonds were honored throughout the war, and their price rose until the fall of Atlanta in 1864. In contrast, the price of the unbacked loans fell throughout the war, and were selectively defaulted on by the Confederate government.

 

[Hawk1981]

By necessity, the South turned to printing money to pay most of its bills. The foundation of Confederate war financing consisted of over $1.5 billion in paper dollars that began depreciating before the ink had a chance to dry. The government refused to establish the currency as compulsory legal tender, hoping that the currency would be backed by public confidence in the Confederacy’s survival and held for redemption at face value after the successful conclusion of the war. Further diluting the national notes were the issues of state, county and city currency which were often counterfeited. The result was a regressive form of de facto taxation through inflation, which topped 9,000 percent by the end of the war, and drove the Confederacy to a barter economy.

Later in the war, the Confederate government followed the Union's lead and enacted a progressive income tax, an 8 percent levy on certain goods held for sale, excise, and license duties, and a 10 percent profits tax on wholesalers. At first, the law exempted some of the most lucrative property owned by wealthy planters, their land and slaves, but even these became subject to direct taxes and the imposition of a 5 percent levy. The changes came too late to have an impact on the war effort.

 

[Hawk1981]

The North entered the war with several apparent institutional advantages, including an established Treasury and tariff structure, and a developed industrial base. The Republican-dominated Congress ratcheted up tariff rates throughout the war, reversing the pre-war trend. Protective tariffs were politically popular and would remain a hallmark of the post-war political economy of the Republican Party.

Initially, Secretary of the Treasury Salmon Chase hoped to finance the Civil War in the same way that the Mexican-American War had been financed in the 1840s, raise money through loans to cover the war's costs, and use current revenue to pay the government's operating expenses and service the interest payments from the loans.

In contrast to the Confederacy, which relied on loans for about 35 percent of its war finances, the Union raised over 65 percent of its revenue this way. A sophisticated marketing campaign sold bonds in smaller amounts to middle class purchasers as well as to the wealthy. By the end of the war, sales of bonds topped $3 Billion.

The success of the North's bond program required an unrestricted currency supply for citizens to pay for them and a source of income to guarantee the interest. The Legal Tender Act of 1862 provided the currency with the issuing of $150 million in "Greenback" Treasury Notes. Congress required citizens, banks, and governments to accept Greenbacks as legal tender for public and private debts. The income source was met with a broad system of internal taxation that not only paid interest, but shielded the North from the ruinous inflation endured by the South. Over the course of the war the inflation rate in the North was only about 80 percent.

 

[Hawk1981]

The Internal Revenue Act of 1862 soaked up much of the inflationary pressure by placing excise taxes on just about everything, including sin and luxury items like liquor, tobacco, playing cards, carriages, yachts, billiard tables, and jewelry. It taxed patent medicines and newspaper advertisements. It imposed license taxes on practically every profession or service except the clergy. It instituted stamp taxes, value added taxes on manufactured goods and processed meats, inheritance taxes, taxes on the gross receipts of corporations, banks, and insurance companies, as well as taxes on dividends or interest they paid to investors.

The first federal income tax in American history set in August 1861, was moderately progressive and ungraduated, imposing a 3 percent tax on annual incomes over $800 that exempted most wage earners. Because it did not tax property directly, congressional leaders viewed the income tax as indirect, and thus immune from constitutional issues. Over the course of the war, the Union expanded the progressive nature of the earlier act while adding graduations: In 1862 it exempted the first $600, imposed a 3 percent rate on incomes between $600 and $10,000, and a 5 percent rate on those over $10,000. Further graduations and increases occurred in 1864.

The affluent upper middle classes of the nation’s commercial and industrial centers complied widely with the income tax. Ten percent of all Union households had paid some form of income tax by war’s end; residents of the northeast comprised 15 percent of that total. The northeast, a sector of American society that owned 70 percent of the nation’s wealth in 1860, provided the most critical tax base, remitting 75 percent of the revenues. In total, the North raised 21 percent of its war revenue through taxation, as opposed to the South, which raised just five percent this way. Tax receipts increased from over $20 million in 1864 (when collections were made under the 1862 income tax) to almost $61 million in 1865 (when collections were made under the 1864 act and emergency supplement).

Federal taxes were also instrumental in instituting a system of national banking with the National Banking Acts of 1863 and 1864 imposing a system of "free banking," establishing national banks by general incorporation as opposed to specific charters, allowing them to issue national bank notes, and by imposing a ten percent tax on state bank notes to drive them out of circulation. Since one third of a national bank’s capital had to consist of federal bonds, the National Banking Acts thus served as another means to induce bankers to purchase federal bonds.

 

[whitehall]

The South could never hope to conquer the North and they knew it. The strategy was to convince the North that it would be easier for them to allow the South to leave the Union. The South wasn't entirely rural either. There was an iron foundry in Richmond that produced cannons but it was no match for the industrial might of the North. On the other hand it seems that Lincoln was convinced that a civil war would only last a couple of months.

 

[Picaro]

Not much to discuss here. The South never developed much in the way of industry outside of cotton and dyes. the finances followed the typical laissez faire fad of most of its capital following the highest returns with no concerns or allowances for diversification, hence they never developed much a steel industry, which they could have done around the iron fields; U.S. Steel did so later,early in the next century with good success, so it wasn't like they didn't have enough resources. Same with shipping and ship building; they allowed the North the monopoly on that. Even steamboats were built largely in the northern regions, Pittsburgh and other cities along the Ohio and other rivers. This why the South had to win quickly or lose, and they all knew it. The North had bonanza farming on the plains, exported all kinds of goods during the war, and of course the oil boom in northwestern Pennsylvania started during the war.

Their announcement they would only have a 10% tariff instead of the 300% Morrill tariffs Lincoln and his bankers wanted for the U.S. is why Lincoln needed the war and got one. The negative consequences for northern trade would be disaster for them if they couldn't plunder the South to pay for all the railroad and other corporate welfare programs, and the South would have dominated trade in the central and western U.S. with a low tariff versus Lincoln's.

 

[Tom Paine 1949]

The Morrill Tariff would never have passed had the South not seceded. As is well known, tariffs had been negotiated down to keep the South in the Union, and tariff rates & the products subject to tariffs had been carefully crafted before the war broke out to also protect Southern agricultural products like sugar from Central American competition. While higher tariffs certainly helped American industry (centered in the North) and were passed once the Southern states seceded (especially since more money was needed for the war) the Civil War itself was not fought over tariffs. The “irrepressible conflict” was rooted in the many problems of a “House Divided” by slavery and by different values and cultures produced by slavery and a more modern capitalism based on “free soil, free labor, free men.” Like in “Bloody Kansas,” differences over tariffs was not the major issue.

I think Picaro raises some good points — the South did have the resources to develop industry. It would seem that a whole society based on slavery produced ruling oligarchs and a dominant culture not much inclined toward industrial entrepreneurship. But another important factor was that by the 1850s “King Cotton“ was never more profitable, commanding high prices and expanding successfully to the Deep South, which absorbed the energy and capital of the South’s own entrepreneurs. I believe the Banking Crisis of 1857 also hurt Western land speculators, railroad building enterprises and huge Northern banks much more than the agrarian South, which recovered quickly, and this too reinforced the arrogance and delusions of Southern elites about their own centrality to U.S. economy.

 

[Picaro]

The Morril Tariff would never have passed had the South not seceded. As is well known, tariffs had been negotiated down to keep the South in the Union, and tariff rates & the products subject to tariffs had been carefully crafted before the war broke out to also protect

Total rubbish. The votes of the Senators of the 6 seceded states wouldn't have blocked the first tariff, which passed before Lincoln was even inaugurated, and then there were the Morril Land Act and other platforms that were certain to pass with Lincoln's election. The Republican plurality in the House gauranteed eventual passage or that first Act and nearly all the other platforms, like the 'Homestead Acts', a disaster implemented to assist the Railroad Acts, and changed the tax code to benefit speculators and swindlers.

Morrill Tariff - Wikipedia

en.wikipedia.org

lol at 'sugar protection'; how was that going to offset the costs of all the South imports or reduce the costs of what they purchased from northern manufacturers??? Southern purchases led to the textile industry's development of standard sizes for clothing and spurred the shoe making industry to mass production. Think they would have kept up that kind spending on domestic products with the three high tariffs choking their profits??? Their slaves certainly wouldn't have been impressed, since they were the end consumers of the mass purchases.

 

[Picaro]

Also see all the stuff re the 36th and 37th Congresses, the roll call votes, etc., preferably the stuff that isn't from crank sites.

 

[mikegriffith1]

A little-known fact is that Jefferson Davis turned down a massive European loan that would have virtually guaranteed European intervention if the Confederacy began to fall. He turned it down and accepted a much smaller loan because he did not want the CSA to get started with such a massive debt on its back. This was just one of many bone-headed decisions that Davis made.

 

[Tom Paine 1949]

The Morril Tariff would never have passed had the South not seceded. As is well known, tariffs had been negotiated down to keep the South in the Union, and tariff rates & the products subject to tariffs had been carefully crafted before the war broke out to also protect

Total rubbish. The votes of the Senators of the 6 seceded states wouldn't have blocked the first tariff, which passed before Lincoln was even inaugurated, and then there were the Morril Land Act and other platforms that were certain to pass with Lincoln's election. The Republican plurality in the House gauranteed eventual passage or that first Act and nearly all the other platforms, like the 'Homestead Acts', a disaster implemented to assist the Railroad Acts, and changed the tax code to benefit speculators and swindlers.

Morrill Tariff - Wikipedia

en.wikipedia.org

lol at 'sugar protection'; how was that going to offset the costs of all the South imports or reduce the costs of what they purchased from northern manufacturers??? Southern purchases led to the textile industry's development of standard sizes for clothing and spurred the shoe making industry to mass production. Think they would have kept up that kind spending on domestic products with the three high tariffs choking their profits??? Their slaves certainly wouldn't have been impressed, since they were the end consumers of the mass purchases.

I won’t respond with a long refutation of Picaro’s point/s. I think the long Wikipedia article he cites itself provides an excellent refutation, investigating the question at length and giving the views of many historians.

 

[Tom Paine 1949]

A little-known fact is that Jefferson Davis turned down a massive European loan that would have virtually guaranteed European intervention if the Confederacy began to fall. He turned it down and accepted a much smaller loan because he did not want the CSA to get started with such a massive debt on its back. This was just one of many bone-headed decisions that Davis made.

Hmm. Can you give me a link? I do think both sides entered the war thinking it would be over relatively quickly, just as many had truly deluded themselves that “the other side” would step back from the brink altogether.

 

[Picaro]

The Morril Tariff would never have passed had the South not seceded. As is well known, tariffs had been negotiated down to keep the South in the Union, and tariff rates & the products subject to tariffs had been carefully crafted before the war broke out to also protect

Total rubbish. The votes of the Senators of the 6 seceded states wouldn't have blocked the first tariff, which passed before Lincoln was even inaugurated, and then there were the Morril Land Act and other platforms that were certain to pass with Lincoln's election. The Republican plurality in the House gauranteed eventual passage or that first Act and nearly all the other platforms, like the 'Homestead Acts', a disaster implemented to assist the Railroad Acts, and changed the tax code to benefit speculators and swindlers.

Morrill Tariff - Wikipedia

en.wikipedia.org

lol at 'sugar protection'; how was that going to offset the costs of all the South imports or reduce the costs of what they purchased from northern manufacturers??? Southern purchases led to the textile industry's development of standard sizes for clothing and spurred the shoe making industry to mass production. Think they would have kept up that kind spending on domestic products with the three high tariffs choking their profits??? Their slaves certainly wouldn't have been impressed, since they were the end consumers of the mass purchases.

I won’t respond with a long refutation of Picaro’s point/s. I think the long Wikipedia article he cites itself provides an excellent refutation, investigating the question at length and giving the views of many historians.

Well, that's because you can't. And the next piece of idiocy is your claim of these ' big giant cotton prices n stuff'. You just don't know what you're talking about, and can't even handle basic stuff like keeping dates correct and events in proper order.

Now that you know the Morril Tariff was indeed on the table far earlier than you tried to claim, maybe you can learn to do your own research instead of relying on parroting crap you read from your favorite sweat lodge of lying hacks, just because you like what they say. Actually, all we need is Lincoln's own words on why he launched an illegal war, but apparently you and the other suckers for the Lincoln Myth don't consider Lincoln a valid source for some reason, so you rely on making up dumbass claims that are easily refuted..

 

[mikegriffith1]

A little-known fact is that Jefferson Davis turned down a massive European loan that would have virtually guaranteed European intervention if the Confederacy began to fall. He turned it down and accepted a much smaller loan because he did not want the CSA to get started with such a massive debt on its back. This was just one of many bone-headed decisions that Davis made.

Hmm. Can you give me a link? I do think both sides entered the war thinking it would be over relatively quickly, just as many had truly deluded themselves that “the other side” would step back from the brink altogether.

I haven't been active in Civil War discussions and research for some time, but I do know that the PBS documentary Jefferson Davis: An American President includes a segment on Davis's decision to accept a smaller loan rather than the huge one he was offered.