Paying for the War

After Bull Run, this policy was exactly right. By the fall of 1861 a real army was taking shape along the Potomac: disciplined, confident, adequately supplied. Northern shops and factories were producing guns, ammunition, wagons, uniforms, shoes, and the countless other supplies needed to fight a great war. Most manufacturers operated on a small scale, but with the armed forces soon wearing out 3 million pairs of shoes and 1.5 million uniforms a year and with men leaving their jobs by the hundreds of thousands to fight, the tendency of industry to mechanize and to increase the size of the average manufacturing unit became ever more pronounced.

At the beginning of the war Secretary of the Treasury Salmon P. Chase underestimated how much it would cost. He learned quickly. In August 1861 Congress passed an income tax law (3 percent on incomes over $800, which effectively exempted ordinary wage earners) and assessed a direct tax on the states. Loans amounting to $140 million were authorized. As the war dragged on and expenses mounted, new excise taxes on every imaginable product and service were passed, and still further borrowing was necessary. In 1863 the banking system was overhauled.

During the war the federal government borrowed a total of $2.2 billion and collected $667 million in taxes, slightly over 20 percent of its total expenditures. These unprecedented large sums proved inadequate. Some debts were repaid by printing paper money unredeemable in coin. About $431 million in greenbacks— the term distinguished this fiat money from the redeemable yellowback bills—were issued during the conflict. Public confidence in all paper money vacillated with each change in the fortunes of the Union armies, but by the end of the war the cost of living in the North had doubled.

On balance, the heavy emphasis on borrowing and currency inflation was expensive but not irresponsible. In a country still chiefly agricultural, people had relatively low cash incomes and therefore could not easily bear a heavy tax load. Many Americans considered it reasonable to expect future generations to pay part of the dollar cost of saving the Union when theirs was contributing so heavily in labor and blood.