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The Civil War’s financial battles

Treasury Secretary Salmon Chase, second from left, joins President Abraham Lincoln and other Cabinet members for a reading of the Emancipation Proclamation in this 1866 engraving. Chase faced enormous challenges in raising money to fund the Civil War. (Engraving by A.H. Ritchie from a painting by F.B. Carpenter /Library of Congress)

War costs a lot of money. Vladimir Putin is no doubt remembering the point today. And in U.S. history, this basic military-fiscal proposition is one reason it was a staggeringly risky strategy when 11 states concluded in the winter of 1860-1861 that they could successfully secede from the United States of America.

Consider the financial challenge involved. On the eve of the conflict, the annual federal budget was around $80 million. During the war, the U.S. Treasury alone spent nearly that amount on average every month. Four years of war cost the South $2 billion. The United States and the Confederacy each tried to raise revenue through higher tariffs and new taxes. But most of the money needed to be borrowed. And when combat is existential — when the existence of a state is at issue, or when its future revenue capacities are threatened — borrowing becomes a high-wire act.

Longtime business writer Roger Lowenstein’s new book, “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War,” draws on several generations of scholarly literature to bring the vital but oft-overlooked story of the Civil War’s financial challenges to a larger audience. His account starts in the North, where Treasury Secretary Salmon Chase needed to raise more money, as Lowenstein notes, than had been expended since the beginning of the republic. The federal government had long relied on revenue from import duties. But secession slashed tariff receipts by eliminating busy Southern ports and by launching a fleet of Confederate privateering vessels on the seas. Jittery New York financiers demanded that Washington strike a deal with the seceding states. Interest rates charged on federal debt doubled. President Abraham Lincoln observed that he had arrived in Washington only to find “an empty Treasury and a great rebellion.”

To make matters worse, Chase was a finance novice. As a Democrat from Ohio, he had been a skeptic of federal economic authority. Like many Western politicians, he shared Andrew Jackson’s preference for a small federal government and decentralized economic power. But in Lowenstein’s account, Chase quickly came to understand that the horse-and-buggy treasury he had inherited was ill-equipped for the age of modern warfare. The federal government in 1861 had no central bank. (Jackson had crushed the Second Bank of the United States three decades earlier.) There was no federal currency, and federal law barred the treasury from borrowing the state bank notes that were the nation’s de facto medium of exchange. Chase was left badly dependent on loans of gold and silver from a small cohort of New York bankers.

What followed in the North was four decisive years of financial innovation. Chase developed a close (sometimes too close) relationship with Philadelphia broker and future railroad financier Jay Cooke, who remade public finance for the modern era. Cooke broke the monopoly of the New York bankers by taking the fundraising project to the American middle class. Cooke and his network of brokers sold U.S. Civil War bonds far and wide through newspaper advertisements and door-to-door sales. By early 1862 Cooke was hawking federal debt as Chase’s exclusive agent, turning Union bond sales into a vast engine of war finance. Cooke alone would ultimately sell nearly half a billion dollars in war bonds.

Government debt alone was not enough. War occasioned the first federal income tax. And in February 1862, Congress took the momentous step of enacting the Legal Tender Act, establishing federal “greenbacks” (so called because their reverse side was printed in green ink), which were payable in fulfillment of all debts. For the rest of the war, the value of the greenback became an exquisitely sensitive barometer of the prospects of the Union war effort.

The war produced a new banking system, too. A phalanx of federal banks replaced the prewar hodgepodge of state banks, creating institutions that would not only finance the conflict but also fund the postwar economy.

As Lowenstein effectively recounts, the South could claim no such record of innovations. Chase’s counterpart, a South Carolina lawyer named Christopher Memminger, gained the benefit of early windfalls. The Confederacy seized $6 million in gold from federal customs houses, and $15 million more poured into Confederate coffers from bond sales to patriotic White Southerners touched with the enthusiasm of secession’s first days.

But such early boosts belied a grim reality. The South’s industrial base was one-fifth the size of the North’s. Memminger and Confederate President Jefferson Davis hoped that withholding cotton from the mills of Manchester and Marseille would pressure England and France to throw their support to the new Confederacy. But a bumper cotton crop in 1860 blunted whatever market pressure the South hoped to exert. Shortages of basic goods quickly arose. Inflation, already a problem in 1861 and 1862, turned into hyperinflation in 1863 and 1864. The same dollar in gold that bought $1.05 worth of Confederate notes in May 1861 was worth $100 in Confederate notes four years later. The cost of flour in the South more than doubled between 1860 and early 1863; sugar increased by a factor of 14 over the same period. Between 1863 and 1864 prices of wheat and bacon shot up 20-fold.

Memminger’s best hope was to take on debt secured by the promise of future cotton crops. The blockade by the U.S. Navy, porous though it often was, hindered even that strategy. Meanwhile, the Confederacy proved unable to enact a legal tender law. A cacophony of private promises circulated as currency instead. States, railroad companies, small firms and cities all issued money of their own. By 1863, U.S. greenbacks even began to seep into exchange in the South — a sure giveaway that the Confederate state was struggling. When the value of those greenbacks surged in March 1865, the market was effectively announcing what Robert E. Lee’s formal surrender at Appomattox would confirm weeks later. The war was over.

Lowenstein quotes a Confederate veteran as saying: “The Yankees did not whip us in the field. We were whipped in the Treasury Department.”

The heart of Lowenstein’s account is the claim that the North won because its relentlessly dynamic form of “modern financial capitalism” was more effective than the South’s premodern “system of seigneurial wealth” at supporting 19th-century warfare. The South’s “fixed capital” in enslaved people and land, he contends, was inferior to the “liquid capital” that powers modern economies. In Lowenstein’s telling, a new generation of histories of race and capitalism, culminating in the New York Times Magazine’s controversial 1619 Project, has missed this fundamental point. Capitalism and slavery, he insists, were fundamentally different.

Lowenstein is right when he says that treating Southern slavery and Northern capitalism as the same makes it difficult to explain the Civil War. (Why did conflict between the two produce a conflict that killed more than 700,000 Americans?) But he is mistaken about the sources of conflict between them.

As an outpouring of recent histories of slavery and capitalism has shown, the Southern planter class had created a modern system of finance capitalism on the backs of enslaved people. Slavery had existed for millennia in ways akin to medieval serfdom. But in North America, it became a dynamic system of highly mobile and tradable assets in the form of human beings. Heavily mortgaged enslaved property connected the extractive agriculture of the South to bankers and insurers in New York, London and Paris, and to industrialists on both sides of the Atlantic.

Slavery was a huge liability for the South not because it resisted the power of capital markets. Slavery fueled capital markets.

Slavery hampered the White South’s secession effort because it meant that the economy of the Confederacy rested on the forced labor of people who ultimately rose up and destroyed the system that oppressed them. Some 200,000 Black people served in Union uniform by the end of the war. Hundreds of thousands more left the cotton fields to follow behind Union armies, depriving the Confederacy of their labor and smashing its social structure in the process. In the Emancipation Proclamation, Lincoln not only struck a blow for justice. He also exploited the White South’s greatest vulnerability.

For public finance purposes, the chief difficulty for the Confederacy was not slavery. Enslavement and finance went together all too well. The Confederacy’s problem was one that attaches to any would-be separatist effort. The failure of the South’s war meant that its creditors were wiped out. The 14th Amendment to the U.S. Constitution flatly prohibited repayment of Confederate debts. The North faced financing challenges, to be sure, but its creditors knew that it would survive to collect taxes another day, no matter what the outcome in the South. This basic proposition of public finance explains why separatist civil wars so rarely succeed against modern states, at least not without the support of outside powers.

Lowenstein’s book is a compelling account of how the United States acquired and exploited the stunning power that modern statehood delivers.

John Fabian Witt teaches law and history at Yale and is the author, most recently, of “American Contagions: Epidemics and the Law From Smallpox to Covid-19.” He won the Bancroft Prize for “Lincoln’s Code: The Laws of War in American History.”

Ways and Means

Lincoln and His Cabinet and the Financing of the Civil War

By Roger Lowenstein

Penguin Press. 432 pp. $30