Financing the Confederacy's War Effort

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Background information:

Both the North and the South faced a struggle in financing the Civil War, but the North fared much better for a variety of reasons. The North continued their tariff raising capacity and enjoyed some revenue from that. For example, the Morrill Tariff enacted just before the war began raised import duties to 47%. In contrast, the South struggled to import goods against the North’s blockade after 1863. Christopher Memminger, the Confederacy’s Secretary of the Treasury, enthusiastically attempted to raise revenue, initially through taxes. Memminger asked states to use their own tax system to raise a certain figure to contribute to the Confederacy’s war effort. States contributed some money to Memminger’s fund but generated it by printing more money rather than actually raising revenue or increasing production. His plan was quite unsuccessful only generating less than 2% of the Confederacy’s Treasury. States were reluctant to take from their citizens, particularly when it came as an order from the national level. This type of action was precisely the reason they had resented Lincoln’s government so. Central policy demands directly contradicted the purpose of the Confederacy.

The North had a great deal of success raising money through bonds whereby individuals voluntarily bought bonds to support the effort and hopefully made some money in the long term for themselves. Salmon P. Chase, Secretary of the Treasury in the North, and Jay Cooke, a Philadelphia merchant, spearheaded this effort. Cooke’s firm door to door campaign was extremely successful at selling bonds. Bonds were available in some low denominations that people paid for in 10 installments over a 5 month period earning a penny a day of interest on a $50 note. Others were available in higher denominations paying 7% interest (Palludan 1996, 109). Given the nascent financial market born with railroad bonds, a relatively prosperous economy, an urban society, and a considerable number of middle and upper middle class citizens who could afford bonds, this idea boomed creating great profits for investors, for Cooke, and for the North. Without much of a financial infrastructure, being an agrarian society, and lacking large numbers of middle class citizens with money to invest, bonds did not take off in the South. Memminger did try to use bonds, but with such rapid inflation, they lost value almost instantly. Anyone who invested in them did so as a gift to the Confederacy rather than as a real investment.

Impressment and confiscation are generally not successful policies due to the immense disincentives they create for productivity. During the Civil War, once farmers realized their crops would be confiscated, they had little reason to produce more. Furthermore, it intensified resentment for the government and further destroyed morale. Both sides avoided these policies.

Unfortunately, without many alternative sources of revenue, the South’s only solution was to print more paper money. Intially, this was coupled with a decrease in output due to men leaving the work force to become soldiers. Later, production stayed low due to disruptive invading armies and the Northern blockade. Inflation tends to breed inflation as people realize that their money is losing value every minute they hold onto it. Inflation can be thought of as a tax on holding onto money. A consumer is penalized for holding onto money since it is losing value over time. Thus, consumers try to spend money as quickly as possible and the cycle intensifies itself. With no incentive to save, consumers spend. Southerners started to see that the only way to avoid inflation was to reduce cash holdings. They began to resort to bartering and using more stable currencies like greenbacks or durable goods, such as metals and land, in exchanges. Prices rose faster than wages, and southern businessmen made profits while wage earners and those on fixed incomes suffered most. These folks could not pass on higher costs to anyone; they could not raise prices or pressure the government to protect them. They suffered particularly due to inflation.

Most southerners believed that inflation was caused by speculators or government impressment agents so much anger was directed at these individuals. "Southerners confused the forces that actually instigated inflation – the increase in the stock of money and the decrease in real output – with the process through which these forces operated" (Lerner 1955, 37). Some Southerners wanted speculators hung while others wanted them to join the army and live off raw, stinking beef and black bread (Wilmington Journal, July 6, 1862 and November 20, 1862). These same sentiments are seen in some of the primary documents students read in this lesson.

"The people of the South did not focus their attention on the basic cause of the rise in prices that plagued their country. ...They attempted to correct only the abuses of high prices. Had Southerners attacked the most basic cause – the increase in the stock of money per unit of real income – with more vigor and understanding they might have mitigated some of their hardships" (Lerner 1955, 40). Instead, they South suffered a case so extreme that it can be called hyperinflation with a Confederate dollar worth 1% of its original value at war’s end. The Confederate government was unable to constrain states from printing excessive amounts of paper money resulting in the worst experience of inflation on American soil.