THE AMERICAN CIVIL WAR was the largest war fought in the Western world in the century between the Battle of Waterloo, fought on June 18, 1815, and the outbreak of World War I on August 1, 1914. Spread across half a continent, the troops moved by railroads and commanded by telegraph, the people informed by large-circulation newspapers, it was also the first great conflict of the industrial era.
The carnage was without precedent. In the single day of September 17, 1862, at the Battle of Antietam, the Union Army had casualties of 2,108 killed and 9,549 wounded. That was more casualties than the United States Army had sustained in the entire Mexican War, which had lasted two years. The total military deaths in the war on both sides—officially 498,333—exceeded 3 percent of the American male population in 1860, four and a half times our percentage losses in World War II.
Because the Civil War was far more like the great conflicts of the twentieth century than such earlier struggles as the Napoleonic Wars, both sides faced demands on their government finances and the economies that supported them that no nation had faced before. The fact that the North, with a far larger economy and a government fiscal system already in place, was better able to meet these demands played no small part in the war’s eventual outcome.
Because of the depression that had started in 1857, the federal government had been operating in deficit since that time. In 1860 the national debt stood at $64,844,000 and the Treasury was nearly depleted. In December of that year, as the Deep South states began to secede one by one, there was at one point not even enough money on hand to meet the payroll.
Abraham Lincoln appointed Salmon P. Chase as secretary of the treasury. Chase, a man of great intellect if no sense of humor, and a former Ohio senator and governor, knew that he faced unprecedented problems. At the outbreak of the war, on April 15, 1861, the federal government had been spending around $172,000 a day in all departments. Three months later, at the time of the first Battle of Bull Run, the War Department alone was spending a million dollars a day. By the end of the year, spending would be up to $1.5 million a day.
How could such expenses be met? Governments have only three ways to raise money to pay their bills. They can tax, they can borrow, and they can print. The federal and Confederate governments both resorted to all three. The particular mix of the three means that was used by North and South, however, turned out to be crucial.
Since the demise of the Second Bank of the United States, the federal government had financed deficits mostly by borrowing, often short-term, from banks. The banks would then hold the bonds in their reserves or sell them to their largest customers. Because it lacked a central bank, the government had no means of its own in place to borrow money or transfer sums from one area of the country to another.
By July 1, 1861, three weeks before the first Battle of Bull Run, the debt had risen to $91 million. Immediately afterward, when the battle had shown that the war was likely to be a protracted one, Chase raised $50 million from Wall Street bankers in anticipation of federal bonds that came to be known as seven-thirties because they paid an interest rate of 7.30 percent. (The rate was apparently chosen because it meant that the bonds would pay 2 cents a day for every hundred dollars invested).
Fifty million was a huge underwriting for Wall Street at that time, and Chase estimated that a year later the national debt would stand at $517 million, a figure quite without precedent in American history. The secretary realized that the fiscal demands of modern warfare could not be met in the old way.
Fortunately for Chase (and the country), he was acquainted with a young Philadelphia banker named Jay Cooke, whose father had been an Ohio congressman. Cooke was made the agent of the federal government to sell a new issue of bonds called five-twenties (so-called because they could be redeemed in no less than five years nor more than twenty and, meanwhile, would pay 6 percent interest, in gold).
Cooke bypassed the banks and went directly to the people. He advertised heavily in newspapers and passed out handbills. He arranged for the Treasury to issue the bonds in denominations as small as $50, and allowed customers to pay on the installment plan. Thus he deliberately tried to involve the average citizen in buying government securities. In the words of Senator John Sherman of Ohio (the older brother of General William Tecumseh Sherman), Cooke made the virtues of these investments stare “in the face of the people in every household from Maine to California.” Cooke thereby invented the bond drive, an important part of every major war since.
This had a profound effect on how Americans handled their assets. In the 1860s only a small percentage of the population had bank accounts and less than 1 percent owned securities of any sort. Most families kept whatever surplus cash they had under the mattress. By the end of the war, however, Cooke had sold bonds to about 5 percent of the population of the loyal states, turning them into mini-capitalists. Equally important, the dead capital hidden in their mattresses had been liberated for productive purposes. Cooke’s bond drive was so successful that by May 1864 the government was actually raising money as fast as the Navy and War departments could spend it, about $2 million a day at that point.
Largely thanks to Cooke, the North was able to throw much of the cost of the war onto the future, raising fully two-thirds of its revenues in the war years by selling bonds. The Confederacy, with a far smaller middle class, few large banks, and little financial expertise, was able to raise only about 40 percent of its revenues through borrowing. The situation for the South was made worse by the fact that the South had an economy notoriously lacking in liquidity. Thus the South’s wealth could not be easily translated into money and spent on war matériel. While the South had 30 percent of the country’s total assets at the outbreak of the war, it had only about 12 percent of the circulating currency and 21 percent of the banking assets. The word land-poor was not invented until Reconstruction days, but it also described the Southern economy in 1861.
The Northern bond sales caused a breathtaking rise in the national debt. It had stood at a minuscule 93 cents per person in 1857, before depression hit. Eight years later it stood at $75 per person. It would not be that high again until World War I, when the economy would be far larger. This caused a great increase in the amount of money that flowed annually through the federal government. Before the Civil War, the United States government had never spent more in a single year than $74.2 million (in 1858). Since the Civil War, it has never spent less than $236.9 million (1878). In 1865 alone it spent $1.297 billion, the first time in history that any nation had a billion-dollar budget.
A tax system based almost wholly on the tariff was obviously as inadequate to meet the emergency as had been the old way of borrowing money. In August 1861 the first American income tax was shepherded through Congress by Salmon Chase (who, ten years later while sitting as chief justice, would find it unconstitutional). It taxed all income “whether derived from any kind of property, rents, interests, dividends, salaries, or from any trade, employment or vocation carried on in the United States or elsewhere, or from any source whatever.”
It originally called for a tax of 3 percent on incomes of more than $800 (then a middle-class income), rising to 5 percent on incomes of more than $10,000, a very comfortable income indeed at that time. In 1864 the income on taxes in excess of $10,000 was doubled to 10 percent.
Virtually everything else was taxed as well. Stamp taxes were imposed on legal documents and licenses, excise taxes on most commodities. The tax on liquor reached $2.50 a gallon, when the price, untaxed, would have been about 20 cents. The gross receipts of railroads, ferries, steamboats, and toll bridges were taxed. Advertising was taxed. The tariff was sharply raised. Altogether the federal government raised fully 21 percent of its revenues by taxation. And yet, while the level of taxation was far higher than Americans had previously experienced in their history, there was little evasion as, indeed, there would be little during later great conflicts. People, it seems, are willing to pay without complaint very high taxes in time of war or other serious national emergency. The South, with its less developed and cash-poor economy, was able to raise only about 6 percent of its revenues by taxation.
Thus the Confederacy had to rely for more than half its revenues on the third way for a government to met expenses: printing money. As early as May 1861 the Confederate government was issuing Treasury notes that would not be redeemable in gold and silver until two years after the signing of a peace treaty establishing independence. By the end of the war the South had issued more than a billion and a half dollars in paper money. Nor was the government in Richmond the only one in the South resorting to the printing press to pay its bills. City and state governments also issued notes. And because the South had no good paper mills or state-of-the-art printing facilities, counterfeiters had a field day.
The consequences of issuing large quantities of what economists call fiat money—money that is money only because the government says it is money—are inevitable and were as well known then as now. The first thing to happen is that Gresham’s law kicks in. Good money—gold and silver in this case—disappears into mattresses as people hoard it, while they spend the money perceived to be less valuable or trustworthy.
The second thing to happen is that inflation takes off. As printing-press money flooded the Southern economy, inflation increased rapidly, more than 700 percent in the first two years of the war alone. As the war continued, the inflationary spiral deepened and the Southern economy began to spin out of control while the currency became essentially worthless.
Hoarding, shortages, and black markets spread inexorably as support for the war effort eroded and living standards fell sharply. The movie of Gone With the Wind is not good history in many, many ways, but the scene of the black butler, hatchet in hand, pursuing a scrawny rooster through the pouring rain, saying it is going to be Christmas dinner for the white folks epitomizes the facts of life for hundreds of thousands of Southern households in the last, desperate years of the war.
The North as well resorted to the printing press. In December 1861 the nation’s banks were forced to stop paying out specie, and the federal government followed suit shortly afterward. The country had gone off the gold standard, and Wall Street panicked. “The bottom is out of the tub,” Lincoln lamented. “What shall I do?”
What he did was issue paper money. With congressional authorization, the Treasury began issuing greenbacks, so-called because they were printed in green ink on the reverse. (Salmon P. Chase, his eye ever on achieving the White House, put his own face on the $1 bill in hopes of becoming better known.) By 1865 the country had issued $450 million in greenbacks. This was a vast sum by the standards of the time, but it amounted to only about 11 percent of federal spending in those years. And while there was, inevitably, a surge of inflation, it was a manageable 75 percent or so.
While the federal government was resorting to the printing press to finance a part of the war, Congress took advantage of the situation to reform both the American banking system and the chaotic supply of paper money. In 1863 (considerably amended in 1864) Congress established a system of nationally chartered banks. These banks had to have at least $50,000 in capital, a relatively large sum in those days, of which $30,000 had to be invested in U.S. Treasury securities. These banks were allowed to issue banknotes, but only those designed and engraved under the direction of the federal government, and these notes had to be backed 100 percent by pledged Treasury bonds.
It was thought that the state-chartered banks would take national charters, but few in fact did. So in March 1865 Congress narrowly passed a bill laying a 10 percent tax on the face value of banknotes issued by state-chartered banks. This had the effect of both driving the state banks to take national charters (there were only two hundred state banks remaining in 1866) and finally ending wildcat banking and a money supply consisting of thousands of different issues. By the end of the Civil War there were only two forms of paper money in the country, national banknotes, backed by bank reserves, and greenbacks.
ALTHOUGH THE FEDERAL GOVERNMENT had no hesitation in paying its bills with greenbacks, and requiring people to accept them by making them legal tender, the federal government itself did not accept them in payment of taxes. Taxes had to be paid in gold, and international trade continued to operate strictly on a gold basis.
This meant, of course, that there had to be some method of converting greenbacks into gold. While the federal government required that greenbacks trade at par with gold, that simply didn’t comport with economic reality, and the law was ignored. The New York Stock and Exchange Board quickly began trading gold. But because, not surprisingly, the price of gold, as measured in greenbacks, tended to fluctuate inversely with the fortunes of the Union Army, the exchange banned the trading the next year as unpatriotic.
The curb brokers, who traded stocks out on Broad Street, then organized a place called Gilpin’s News Room (although it is not quite clear who Gilpin was) in which to trade gold. Anyone willing to pay an annual $25 fee was welcome to trade there. Respectable merchants who needed gold for business purposes or to hedge against fluctuations in the price of greenbacks used Gilpin’s, as did the hundreds of pure speculators hoping to make a fortune out of the vicissitudes of a war being fought for their country’s very existence. These speculators were not very popular, often being referred to as “General Lee’s left wing in Wall Street.” Abraham Lincoln publicly wished that “every one of them had his devilish head shot off.”
It made no difference to them what they were called; there was simply too much money to be made by the lucky or the prescient. And they went to a good deal of trouble to assure that prescience, employing agents stationed with both armies to keep them informed. Indeed, they were often better informed than was Washington, and Wall Street learned the outcome of the Battle of Gettysburg before President Lincoln did.
On June 17, 1864, Congress tried to stem the speculation by making it illegal to trade gold anywhere but in a broker’s office. The effect of this law, besides closing Gilpin’s and forcing gold trading out onto Broad Street, where it couldn’t be regulated at all, was to increase the spread between gold and greenbacks. (The spread had reached its height just before Gettysburg, when it took 287 greenback dollars to buy 100 gold dollars.) The law was repealed just two weeks later and Gilpin’s reopened.
That fall several members of the Wall Street establishment, including the very young J. P. Morgan and Levi P. Morton (who would later be governor of New York and vice president under Benjamin Harrison), established the New York Gold Exchange. The trading floor featured a large clocklike dial with a single hand that indicated the current price of gold. While it had higher standards and better enforced rules than Gilpin’s (which quickly shut down), the New York Gold Exchange was still no place for the fainthearted.
Wall Street in general prospered almost beyond calculation in the Civil War years. Although the outbreak of the war caused panic, as the sudden onset of a great war always does, it was soon clear that the business of the Street—the trading of securities—would greatly increase. As the national debt soared by a factor of forty, bond trading soared equally. More, it was clear that much of the money the government was spending would go to firms such as iron mills, gun foundries, railroads, telegraph companies, and textile and shoe manufacturers. The profits of these firms would be invested in Wall Street and their capital needs met by it.
Before long the greatest expansion of business in the history of the Street was under way and Wall Street quickly blossomed into the second largest securities market on earth, second only to London. Fortunes were made in the next few years. In 1864 J. P. Morgan, only twenty-seven years old, had a taxable income of $53,287, fifty times what a skilled worker might expect to earn in a year. So busy were the brokers that the lunch counter was invented to afford them a quicker meal than could be had by going home. Fast food is, perhaps, not the least of the country’s legacies from the Civil War.
The New York Stock and Exchange Board, which changed its name to the New York Stock Exchange in 1863, continued to hold its twice-daily sit-down auctions, but they were nowhere near adequate to handle the new business that flooded into the Street, and new exchanges opened up to handle the overflow, while business on the curb expanded dramatically.
The Mining Exchange, which had collapsed after the panic of 1857, was soon back in business, trading such stocks as Woolah Woolah Gulch Gold Mining and Stamping Company. In 1865 the Petroleum Board opened to handle stocks of the new companies exploiting the Pennsylvania oilfield. The most important of the new exchanges began, rather unpromisingly, in a basement known as the Coal Hole. It was soon doing more volume than the New York Stock Exchange and in 1864 reorganized as the Open Board of Brokers. It didn’t use the old sit-down auction format, but rather adopted the continuous auction, each stock traded at a particular spot on the floor marked by a post (so-named after the lampposts on Broad Street, where the curb brokers traded individual stocks).
By 1865 the annual volume on the Street was above $6 billion. “Many brokers earned from eight hundred to ten thousand dollars a day in commissions,” James K. Medbery wrote in 1870 in Men and Mysteries of Wall Street. “The entire population of the country entered the field. Offices were besieged by crowds of customers…. New York never exhibited such wide-spread evidences of prosperity. Broadway was lined with carriages. The fashionable milliners, dress-makers, and jewelers reaped golden harvests. The pageant of Fifth Avenue on Sunday, and of Central Park during the week-days was bizarre, gorgeous, wonderful! Never were there such dinners, such receptions, such balls. Anonyma startled the city with the splendor of her robes and the luxury of her equipages. Vanity Fair was no longer a dream.”
DURING THE CIVIL WAR, the industrialization of the American economy, already well under way, expanded exponentially. The unprecedented demands of what became the largest army in the world and a navy second only to Britain’s naturally greatly fueled the increased production. So did the tariff, which was raised to previously unseen levels to help pay for the war. As a result, American industry, still often less efficient than Britain’s, was able to take away markets, and imports dropped sharply. In 1860 American imports had been valued at $354 million. Two years later they were only $189 million, despite the quickly expanding economy.
The difference was more than made up by American manufactures. In 1859 there had been 140,433 manufacturing firms in the United States. A decade later there would be 252,148. The domestic production of iron railroad rails, a good measure of industrial might as the nineteenth century continued, went from 205,000 tons in 1860 to 356,000 five years later (by 1870 production would be 620,000 tons). But industries less central to the economy were also boosted by the war. The process patented by Gail Borden for canning condensed milk in 1856 saw a great increase in demand, and this helped to spark a boom in the entire food processing industry.
The labor shortages caused by so many men being in the army fostered still more mechanical ingenuity than usual and were partially offset by continued immigration from Europe—more than eight hundred thousand people in the war years.
The South, too, saw industry grow because of the war, but from a much smaller base and with far greater constraints. The only full-scale iron mill in the South was the Tredegar Iron Works outside Richmond, and it greatly increased production. It had seven hundred workers in 1861 and twenty-five hundred by January 1863. But it could never get more than about a third of the supply of pig iron it needed to operate at full capacity, although Alabama was a major producer of iron ore.
Still, a cannon foundry was established at Macon, Georgia, and several bronze foundries there and elsewhere. The Confederacy built the largest gunpowder factory in North America, located in Augusta, Georgia. The South managed to keep its forces supplied with ammunition and was self-sufficient in small arms. Josiah Gorgas, who headed the Confederate Ordinance Bureau, wrote proudly in his diary in 1863, “Where three years ago we were not making a gun, pistol nor a sabre, no shot nor shell—[nor] a pound of powder—we now make all these in quantities to meet the demands of our large armies.” When Lee surrendered at Appomattox, his troops were out of food, indeed they were half starved, but had an average of seventy-five rounds of ammunition per man and sufficient artillery shells.
The Confederate Navy laid plans for constructing 150 ships. It didn’t meet that target, of course, but its construction of about 50 ships, including 21 ironclads, was no small accomplishment under the circumstances. And it had no small effect on the war and the future of the American economy.
Confederate raiders, some constructed in Britain, such as the legendary CSS Alabama, roamed the seas snapping up Union vessels. The result was that American shipowners hastened to reflag their vessels with British colors to make them immune to capture, and many of these vessels never came back.
The United States had been a major maritime power since the earliest colonial days, for most of that period second only to Britain itself. But the Civil War precipitated a long decline in terms of freight carried in American bottoms. The country’s merchant marine has never really recovered. In 1860, of the 8,275,000 tons of shipping clearing American ports that year, 5,921,000 tons, more than 71 percent, was American-owned. In 1865 less than 48 percent was American-owned. By 1890 only 22 percent was American. A major casualty of the Civil War was what had been the first great American industry.
Despite the prodigies of industrial improvisation the South accomplished during the war, most of its industries were eventually destroyed by the war along with much of the rest of its economy. The bonds and paper money issued by the Confederate and state governments became worthless, wiping out the region’s liquid capital. Its agriculture—the very heart and soul of the Southern economy—had been devastated as much of the enslaved workforce abandoned the fields as soon as they could. The cotton crop, unable to be exported because of the Northern blockade (although much was clandestinely smuggled out to keep New England mills operating) rotted in warehouses.
With the end of the war and slavery, a new system of agriculture had to be developed in the South. The former slaves now controlled the use of their labor, but had not land, equipment, or expertise in dealing with a free economy. The former slaveowners for the most part kept their ownership of the capital assets needed to produce crops, such as the land and cotton gins, but often lacked the cash to pay farmhands’ wages.
Numerous arrangements were tried, but soon a system of sharecropping, in which laborers were paid with a share of the crop, arose in the Deep South (it was largely unknown elsewhere in the country) and it would dominate southern agriculture until after World War II. But it never excluded other types of arrangements, nor was sharecropping limited to black workers. Many poor white families were also sharecroppers, and about 25 percent of black farming families owned the land they worked by 1880, a remarkable accomplishment only fifteen years after the end of slavery.
But the South retained the essential attributes of what today is called a Third World country: ownership of the means of production by a small, privileged elite; desperate poverty and grinding toil for most of the population; and an economy based on agriculture and extractive industries rather than manufacturing and services.
Worse, while the abolition of slavery was the greatest accomplishment of the Civil War, the virulent racism engendered by it persisted unabated. With the end of Reconstruction, southern whites reasserted political control, and blacks were largely disenfranchised for nearly a century. The intimate but uneasy relationship between the races in the South discouraged nonsouthern entrepreneurs from moving to the region to utilize such comparative advantages as low cost of living and cheap labor. Meanwhile a steady stream of talented and ambitious southerners migrated north in search of the much greater opportunities available there. For eighty years after its catastrophically failed attempt to achieve independence, the South would remain a Third World country, inside one that would develop the largest and most dynamic First World economy on earth.
Somewhat paradoxically, it was the Armageddon of the Civil War, with all its cost in blood and treasure, that brought this new dynamism into being. The very size of the struggle induced a solemn and profound pride in what had been saved thereby: the American Union. The Civil War transformed the United States (a phrase that, before the war, had been grammatically construed in the plural) from a collection of associated states into a nation, one whose name was construed as singular. The ancient motto of the country, E pluribus unum, had been achieved, at the cost of half a million dead. Among the Great Powers today, only ethnically homogeneous Japan has fewer centrifugal forces at work in its body politic.
Salmon P. Chase felt the new attitude as early as 1863. “We began without capital,” he wrote that year, “and if we should lose the greater part of it before this [war] is over, labor will bring it back again and with a power hitherto unfelt among us.”
The fact that the war had been financed internally, and with such vast sums, brought home just how rich and powerful the nation had become. America is “to-day the most powerful nation on the face of the globe,” Congressman Godlove S. Orth told an audience in Lafayette, Indiana, in 1864. “This war has been the means of developing resources and capabilities such as you never before dreamed that you possessed.”
The people knew they possessed them now, and with the end of the Civil War, as the country’s military forces shrank quickly to insignificance, they would, in the next three decades, use those new resources and capabilities to astonish the world.