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A House Divided
Posted at 04:20 PM ET, 10/08/2011

Untold Civil War stories: Goodbye, gold standard

Our panel of Civil War experts returns to A House Divided to mull more questions during the war’s 150th anniversary. Our latest question: What is the most important but overlooked story of the Civil War?


One under-appreciated story concerns something very familiar to Americans today: the national debt. By December 1861, the Union faced a financial crisis that could have hurt its ability to prosecute the war. Finding solutions for the problem led to a revolutionary change in the nation’s monetary structure and eventually to the establishment of the Internal Revenue Service.

Very early in the conflict, the Union faced the need for a then-staggering amount of resources. The United States in 1860 had a gross public debt of $64.8 million; by December 1861 it had ballooned to $270 million. Without a national paper currency, the government funded the war to that point primarily through bonds and Treasury notes.

The disaster at Ball’s Bluff and friction with Great Britain over the United States seizing the British ship Trent helped erode public confidence and, coupled with financial insecurity, eventually sparked a run on the banks. In response, the banks of New York on Dec. 30 suspended the payment of the gold and silver that backed various financial vehicles.

One solution to the crisis involved taking the country off the gold standard and creating a national paper currency. The Legal Tender Act of Feb. 25, 1862, put into circulation what became known as greenbacks — fiat money that was considered as good as gold. Republicans who had doubts about the constitutionality of the measure realized that the alternative of an empty treasury was far worse.

This was not the only strategy adopted to stabilize the finances of the country. In August 1861, the Republican-dominated Congress enacted an income tax. It was progressive in that it exempted people with lower incomes. However, it became clear that neither this policy nor the new paper currency would offset the ever-increasing debt load of the North. On July 1, 1862, lawmakers passed the Internal Revenue Act, which also launched the IRS. The law allowed for taxes on a range of items such as liquor, tobacco, playing cards, billiard tables, jewelry, newspaper advertisements and even licenses on professions. The policies fed discontent in the Democratic Party, which at that time advocated small government and fiscal conservatism. All told, the debt expanded from about $90 million to $2.68 billion during the four years of the conflict.

Most general works focus on these acts and the bond drives by the government, but the concern over the national debt outlasted the war. It became an important political issue in Reconstruction. Vigorous debate occurred over whether to repudiate the obligation — essentially, to default on the loans — or to honor the arrangement. In the end, the government paid up, and it became a point of national pride that the United States could carry and retire its war debt, providing a symbol that the country was ready to take a more expansive role on the international stage. By the late 19th century, the government was running a surplus.

William Blair is director of the George and Ann Richards Civil War Era Center at Pennsylvania State University.

Read more from The Washington Post’s Civil War special section

By William Blair  |  04:20 PM ET, 10/08/2011

 
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