Confederate vs Union Approach to Paper Money

gem

2nd Lieutenant
Joined
Oct 26, 2012
article from taxhistory.org

The primary difference between the US and CS approach to paper money is that the U.S. was able to tax effectively to finance the war effort. The Confederate States of America (CSA) was not. The CS printed obscene amounts of paper with little revenue to back the future obligations, resulting in hyper inflation. Such inflation is itself a hidden tax...in this case an enormous one for anyone receiving payment in CS paper. By Jan. 1 1865 the Confederate dollar was worth about 1/60th or 1.6% of its value in 1861.

The Civil War represented a watershed moment in the history of American taxation. The quick, limited engagement both sides confidently predicted soon proved a chimera. Instead, the exigencies of protracted, destructive warfare engulfing private property and civilian populations as well as commissioned combatants demanded innovations in government financing. While the outcome of the conflict may be attributed to any number of contingent factors, the varying fiscal strategies undertaken by the Union and Confederate governments undoubtedly influenced the capacity of both societies to sustain the war effort. North and South employed markedly different approaches. The North's proved more efficacious in the long run.

Confederate War Financing

The antebellum south enjoyed one of the lightest tax burdens of all contemporary civilized societies. Local or state governments assessed all obligations. By contrast, the hastily assembled Confederate government lacked the bureaucratic infrastructure to levy or collect internal taxes. Its citizens possessed neither a tradition of compliance nor a means to remit payment. Land and slaves comprised the bulk of southern capital; liquid forms of wealth like specie or paper currency were hard to come by in a predominantly agrarian region.

Efforts to raise war revenue through various methods of taxation proved ineffective. The Confederate Congress enacted a minor tariff in 1861, but it contributed only $3.5 million in four years. That same year, Congress implemented a small direct tax (0.5 percent) on real and personal property. But the government in Richmond was forced to rely on the individual states to collect the levy. Reprising the scenario played out during the Revolutionary War, most states did not collect the tax at all, preferring to meet their quota by borrowing money or printing state notes to cover it.

The Davis (President CSA) administration turned to loans to finance the initial bulk of war debts. Riding a wave of patriotic enthusiasm in 1861, the Treasury earned $15 million selling out their first bond issue. The second issue, however, consisting of $100 million in 8 percent yield bonds, sold slowly. Few southerners had the cash to purchase them, but in addition the year-end 12 percent inflation rate threatened to negate any promise of real financial return. It fell to investors to buy up the remainder of the 8 percent bonds, which they purchased with newly minted Confederate Treasury notes.

By necessity rather than choice, the South turned to the printing press to pay most of its bills. In its first year, the Confederate government derived 75 percent of its total revenue from Treasury notes, less than 25 percent from bonds (purchased, of course, with the notes), and under 2 percent from taxes. While the proportion of the latter two would increase slightly in later years, the foundation of Confederate war financing consisted of over $1.5 billion in paper dollars that began depreciating before the ink had a chance to dry. By refusing to establish the notes as compulsory legal tender, Treasury officials hoped to avoid undermining confidence in the currency. They preferred that the currency be backed by public confidence in the Confederacy’s survival (notes were to be redeemable in specie at face value within two years of the end of the war).

This being the case, various state, county, and city notes also circulated widely, diluting the medium further; the fact that these poorly printed bills were easily counterfeited did not help matters. Ironically, the Confederate decision to turn to paper money in lieu of a system of internal taxation abetted the most odious, regressive form of de facto taxation southern society endured: runaway inflation, appearing in the wake of military reversals in 1862, and topping 9,000 percent by war’s end.

By the spring of 1863, the crushing burden of inflation motivated Richmond to come up with an alternative to fiat money. In April, they followed the Union’s lead and enacted comprehensive legislation that included a progressive income tax, an 8 percent levy on certain goods held for sale, excise, and license duties, and a 10 percent profits tax on wholesalers. These provisions also included a 10 percent tax-in-kind on agricultural products. The latter burdened yeoman more than the progressive income tax encumbered urban salaried workers, since laborers could remit depreciated currency to meet their obligations. Adding to the inequity, the law exempted some of the most lucrative property owned by wealthy planters their slaves from assessment. Lawmakers considered a tax on slaves to be a direct tax, constitutionally permissible only after an apportionment on the basis of population. Since the war precluded any opportunity to count heads, they concluded that no direct tax was possible. Accumulating war debts and heightened condemnation of a "rich man’s war, poor man’s fight" led to revision of the tax law in February 1864, which suspended the requirement for a census-based apportionment of direct taxes and imposed a 5 percent levy on land and slaves. These changes came too late, however, to have any sustained impact on the Confederate war effort.

Union War Financing

In addition to its developed industrial base, the North entered the war with several apparent institutional advantages, including an established Treasury and tariff structure. With the exodus of southern representatives, the Republican-dominated Congress ratcheted up tariff rates throughout the war, beginning in 1862 with the Morill Tariff Act, which reversed the downward trend instituted by the Democrats between 1846 and 1857. Subsequent tariff legislation, especially the 1864 act, raised rates further. Protective tariffs were politically popular among manufacturers, northern laborers, and even some commercial farmers. But Customs duties amounted to about $75 million annually, only nominally more, after adjusting for inflation, than the value of duties collected during the 1850s. Still, the high rate structure established in the Civil War would remain a hallmark of the post-war political economy of the Republican party.

Ideological reservations tempered some of the Treasury’s supposed institutional advantages. Secretary of the Treasury Salmon Chase, like many northern policymakers, generally distrusted any form of exchange other than specie. They preferred to pay government debts by physically moving gold out of the Treasury instead of transferring funds from demand deposits via check. They also refused to utilize established private banks in New York, Boston, and Philadelphia as repositories for federal funds, further complicating financial transactions. Chase hoped to follow Albert Gallatin’s model of financing the War of 1812, which (initially) emphasized borrowing over taxation. Ultimately, however, mounting debts, a shortage of specie, and the threat of inflation led the Union to adopt innovative plans for both borrowing and internal taxation.

In contrast to the Confederacy, which relied on loans for about 35 percent of its war finances, the Union raised over 65 percent of its revenue this way. Having little personal experience, Chase turned to Philadelphia Banker Jay Cooke to administer the sale of war bonds. Although he expected banks and wealthy citizens to purchase most of them, Cooke employed a sophisticated propaganda campaign to market the bonds to the middling classes as well. Patriotic newspaper advertisements and an army of 2,500 agents persuaded almost one million northerners (about 25 percent of ordinary families) to invest in the war effort; bond sales topped $3 billion. In this way, Cooke previewed the techniques with which governments in the 20thcentury would fund modern wars.

In order for the bond program to be successful, the North needed an unrestricted currency supply for citizens to pay for them and a source of income to guarantee the interest. The Legal Tender Act filled the first requirement. Passed in February 1862, the act authorized the issue of $150 million in Treasury notes, known as Greenbacks. In contrast to Confederate paper, however, Congress required citizens, banks, and governments to accept Greenbacks as legal tender for public and private debts, except for interest on federal bonds and customs duties. This policy allowed buyers to purchase bonds with greenbacks while the interest accrued to them was paid in gold (funded, in part, by specie payments of customs duties). Investors enjoyed a bountiful windfall, since government securities purchased with depreciated currency were redeemed with gold valued at the prewar level. Taxpayers essentially made up the difference. Because most bonds were acquired by the wealthy or by financial institutions, the program concentrated investment capital in the hands of those likely to use it, much as Alexander Hamilton’s debt plan had sought to do.


The Union government’s decision to implement a broad system of internal taxation not only insured a valuable source of income, but shielded the northern economy from the sort of ruinous inflation experienced by the South. Despite another $150 million Greenback issue, the overall northern inflation rate reached only 80 percent, comparable with the domestic rates during World Wars I and II. The Internal Revenue Act of 1862, enacted by Congress in July, 1862, soaked up much of the inflationary pressure produced by Greenbacks. It did so because the Act placed excise taxes on just about everything, including sin and luxury items like liquor, tobacco, playing cards, carriages, yachts, billiard tables, and jewelry. It taxed patent medicines and newspaper advertisements. It imposed license taxes on practically every profession or service except the clergy. It instituted stamp taxes, value added taxes on manufactured goods and processed meats, inheritance taxes, taxes on the gross receipts of corporations, banks, and insurance companies, as well as taxes on dividends or interest they paid to investors. To administer these excise taxes, along with the tariff system, the Internal Revenue Act also created a Bureau of Internal Revenue, whose first commissioner, George Boutwell, described it as "the largest Government department ever organized."
 
Nice post.

Question: Did you write it or copy and paste it? If the latter, watch for copyrights; and give credit to the writer. If the former, nice post.
 
A nice find. My post was a reminder to all that the board has to watch out for copyright violations. If a work is copyrighted, it is best to introduce it and provide the link. In this case, I saw nothing claiming copyright, which makes it fair game.
 
Another New York company that initially printed bonds for the Confederacy was the American Bank Note Co. which had a branch office in New Orleans. When the Confederate government formed in February 1861, ABNCo agreed to print bonds for the new government under the company's belief that secession would be peaceful. Following Lincoln's April 1861 blockade proclamation, ABNCo's president ordered the New Orleans branch manager to close the branch. Samuel Schmidt, the branch manager, refused to shut down and instead changed the name of the New Orleans branch to the Southern Bank Note Co. In early May 1861, Schmidt signed two contracts with the Confederate Treasury to print and deliver four orders of interest bearing notes by July 1861. His first three orders were up to five months late while he never completed the fouth order. When Confederate Treasury Secretary Christopher Memminger had learned that the reason for the delays and nondelivery of the fourth order was due to SBNCO using its material and time to print notes for some local New Orleans banks, Memminger ordered the company to be seized as property of an alien enemy.
 
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