Napoleon may have said that an army marches on its stomach, and modern armies also need a sturdy supply train with weapons and ammunition, but governments fighting wars need money. In his illuminating new book on the financing of the American Civil War, Ways and Means, author Roger Lowenstein has an epigraph from Cicero,"The sinews of war are unlimited money."
Until now, my simplistic understanding of that conflict was that the Union won because it had more people and productive capacity to prevail in a war of attrition. I know now that deft diplomacy also kept foreign powers from recognizing and supporting the Confederacy and that generalship at key times kept the Union from giving up. What Lowenstein's book tells is how fractious politicians tossed aside their traditional views of money and government and responded creatively to the challenge of wartime financing.
The Union raised revenues by raising taxes, borrowing money,and printing paper greenbacks. The Confederacy did much the same, but less smartly and less effectively. By the end of the war, the South has only raised about 5 or 6% of its spending through taxes. [It had a smaller tax base, of course, but refused to tax the property held as slaves.] The North covered 21% of its spending with taxes, about the same as in World War I. The Republican Congresses also preferred high tariffs, raising them to an average duty of 47% by the end of the war.
When it came to borrowing money, the Union's efforts were uneven, depending on success on the battlefield and the innovative salesmanship of Jay Cooke, who earned hefty commissions peddling federal bonds throughout the North, beyond Wall Street. The South had good returns from Europe until after Gettysburg.
Both sides printed money, but the Union showed restraint. Only 1/6th of its war spending was in greenbacks, compared to 60% by the South. As a consequence. inflation in the Union was about 80%, compared to 9000% in the Confederacy.
I was surprised to learn that the value of greenbacks compared to gold plunged 50% after Gettysburg and didn't recover until the final weeks of the war. Until the capture of Atlanta in September, 1864, faith in Lincoln and a Union victory was on the verge of collapse.
The story centers on Salmon Chase, Secretary of the Treasury, whose loyalty to Lincoln was often subordinated to his own wish to be president. One delicious irony: named Chief Justice a few months after Lincoln had accepted a pro forma resignation, Chase was part of a court majority that ruled unconstitutional the Legal Tender Act allowing paper currency, despite having championed the law and having put his own picture on the money.
Congress comes across as ignorant and mercurial when it came to financing, at one point barring trade in gold futures and then repealing that law two weeks later. Many members strongly and openly opposed some provisions, only to embrace them when the votes were taken.
Another theme in Lowenstein's book is how the Republican Congresses during the war greatly expanded the scope and size of the federal government, finally enacting the activist role originally pushed by the Whigs. Lawmakers created an Agriculture Department to help farmers; funded a transcontinental railroad; established Land Grant Colleges; gave millions of acres of land to willing farmers under the Homestead Act; and established National Banks in order to create a single national currency.
After the war, however, the dominant Republicans insisted on a return to the gold standard and presided over three decades of deflation. But they had raised the money when it counted.
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