Confederate war finance
Encyclopedia
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
and monetary
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
, through which the Confederate States of America
Confederate States of America
The Confederate States of America was a government set up from 1861 to 1865 by 11 Southern slave states of the United States of America that had declared their secession from the U.S...
financed their war effort during the American Civil War
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
. As the war lasted for virtually the entire existence of the nation, it dominated national finance.
Early on in the war, the Confederacy relied mostly on tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s on import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
s and tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es on export
Export
The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer"...
s. However, with the imposition of a voluntary self-embargo
Embargo
An embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is...
in 1861 (intended to "starve" Europe of cotton
Cotton
Cotton is a soft, fluffy staple fiber that grows in a boll, or protective capsule, around the seeds of cotton plants of the genus Gossypium. The fiber is almost pure cellulose. The botanical purpose of cotton fiber is to aid in seed dispersal....
and force diplomatic recognition
Diplomatic recognition
Diplomatic recognition in international law is a unilateral political act with domestic and international legal consequences, whereby a state acknowledges an act or status of another state or government in control of a state...
of the Confederacy), as well as the blockade of Southern ports
Union blockade
The Union Blockade, or the Blockade of the South, took place between 1861 and 1865, during the American Civil War, when the Union Navy maintained a strenuous effort on the Atlantic and Gulf Coast of the Confederate States of America designed to prevent the passage of trade goods, supplies, and arms...
enforced by the Union Navy
Union Navy
The Union Navy is the label applied to the United States Navy during the American Civil War, to contrast it from its direct opponent, the Confederate States Navy...
, the revenue from taxes on international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
became smaller and smaller. Likewise, the financing obtained through early voluntary donations of coins and bullion from private individuals in support of the Confederate cause, which early on were quite substantial, dried up by the end of 1861. As a result, the Confederate government was forced to resort to other means of financing its military operations. A "war-tax" was enacted but proved difficult to collect. Likewise, the appropriation of Union
Union (American Civil War)
During the American Civil War, the Union was a name used to refer to the federal government of the United States, which was supported by the twenty free states and five border slave states. It was opposed by 11 southern slave states that had declared a secession to join together to form the...
property in the South and the forced repudiation of debts owned by Southerners to Northerners failed to raise substantial revenue. The subsequent issuance of government debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
and substantial printing of the Confederate dollars
Confederate States of America dollar
The Confederate States of America dollar was first issued into circulation in April 1861, when the Confederacy was only two months old, and on the eve of the outbreak of the Civil War....
contributed to high inflation which plagued the Confederacy until the end of the war, although the military setbacks in the field also played a role by causing loss of confidence and fueling inflationary expectations.
At the beginning of the war, the Confederate dollar cost 90¢ worth of gold (Union) dollars. By the war's end, its price had dropped to only .017¢. Overall, the price level in the south increased by 9000% during the war. The Secretary of the Treasury of the Confederate States, Christopher Memminger
Christopher Memminger
Christopher Gustavus Memminger was a prominent political leader and the first Secretary of the Treasury for the Confederate States of America.-Early life and career:...
, was keenly aware of the economic problems posed by inflation and loss of confidence. However, political considerations limited internal taxation ability, and as long as the voluntary embargo and the Union blockade were in place, it was impossible to find adequate alternative sources of finance.
Tax finance
Direct tax
The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.-General meaning:In the general sense, a direct tax is one paid directly to the government by the persons on whom it is imposed...
es than the North. The share of direct taxes in total revenue for the North was about 20%, while for the South the same share was only about 8%. A major part of the reason for why tax revenue did not play as large a role for the Confederacy as it did for the Union was the individual states' opposition to a strong central government and the belief in states' rights
States' rights
States' rights in U.S. politics refers to political powers reserved for the U.S. state governments rather than the federal government. It is often considered a loaded term because of its use in opposition to federally mandated racial desegregation...
which precluded giving too much taxing power to the government in Richmond
Richmond, Virginia
Richmond is the capital of the Commonwealth of Virginia, in the United States. It is an independent city and not part of any county. Richmond is the center of the Richmond Metropolitan Statistical Area and the Greater Richmond area...
. Another factor for not extending the tax system more broadly was the belief, present in both the North and the South, that the war would be of limited duration, and hence there was no compelling reason to increase the tax burden.
However, the realities of the prolonged war, the necessity of paying interest on existing debt, and the drop in revenues from other sources, eventually forced both the central Confederate government and the individual states to agree to an imposition of a "War Tax" by the middle of 1861. The law itself was passed on August 15, 1861 and covered property of more than $500 (Confederate) in value and several luxury items. The tax was also levied on ownership of slaves. However, the tax proved very difficult to collect—in 1862, only 5% of total revenue came from these direct taxes, and it was not until 1864 that this amount reached the still-low level of 10%.
Taking account of difficulty of collection, the Confederate Congress passed a "Tax in Kind" in April of 1863, which was to amount to one tenth of all agricultural product by state. This tax was directly tied to the provisioning of the Confederate Army and, despite the fact that it also ran into some collection problems, was mostly successful as after its implementation it accounted for about half of total revenue, if converted into currency equivalent.
Monetary finance and inflation
The financing of war expenditures by the means of currency issues (printing money) was by far the major avenue resorted to by the Confederate government. Between 1862 and 1865, more than 60% of total revenue was created in this way. While the North doubled its money supplyMoney supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
during the war, the money supply in the South increased twenty times over.
The extensive reliance on the money-printing press to finance the war contributed significantly to the high inflation the South experienced over the course of the war, although fiscal matters and negative war news also played a role. Estimates of the extent of inflation vary by source, method used, estimation technique, and definition of the aggregate price level. According to a classic study by Eugene Lerner in 1956, a standard price index of commodities rose from 100 at the beginning of the war to more than 9200 by the war's de facto end in April of 1865. By October 1864, the price index was at 2800, which implies that a very large portion of the rise in prices occurred in the last six months of the war. This drop in the demand for money, the corresponding increase in "velocity of money" (see next paragraph) and the resulting rapid increase in the price level has been attributed the loss of confidence in Southern military victory or the success of the South's bid for independence.
Lerner used the quantity theory of money
Quantity theory of money
In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level....
to decompose the inflation in the Confederacy during the war into that resulting from increases in money supply, changes in the velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....
, and the change in real output
Real GDP
Real Gross Domestic Product is a macroeconomic measure of the value of output economy adjusted for price changes . The adjustment transforms the money-value measure, called nominal GDP, into an index for quantity of total output...
of the Southern economy. According to the equation of exchange
Equation of exchange
In economics, the equation of exchange is the relation:M\cdot V = P\cdot Qwhere, for a given period,M\, is the total nominal amount of money in circulation on average in an economy.V\, is the velocity of money, that is the average frequency with which a unit of money is spent.P\, is the price...
,
, where M is the money supply, V is the velocity of money (related to people's demand for money), P is the price level and Y is real output. If it is assumed that real incomes remained constant in the South during the war (Lerner actually concluded that they fell by about 40%) then the equation implies that for the price level to increase 92 times in the presence of a 20 times increase in money supply, the velocity of money must have increased 4.6 times over (92/20=4.6), reflecting a very significant drop in the demand for money.The problems of money-caused inflation were acerbated by the influx of counterfeit bills
Counterfeit money
Counterfeit money is currency that is produced without the legal sanction of the state or government to resemble some official form of currency closely enough that it may be confused for genuine currency. Producing or using counterfeit money is a form of fraud or forgery. Counterfeiting is probably...
from the North. These were plentiful because Southern "Greybacks" were fairly crude and easy to copy because the Confederacy lacked modern printing equipment. One of the largest and most famous of the Northern counterfeiters was Samuel C. Upham
Samuel C. Upham
Samuel Curtis Upham was an American journalist, lyricist, merchant, and counterfeiter during the later part of the 19th century, sometimes known as "Honest Sam Upham".-Early life:...
from Philadelphia. By one calculation Upham's notes made up between 1 and 2.5 percent of all of the Confederate money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
between June 1862 and August 1863. The President of the Confederacy, Jefferson Davis
Jefferson Davis
Jefferson Finis Davis , also known as Jeff Davis, was an American statesman and leader of the Confederacy during the American Civil War, serving as President for its entire history. He was born in Kentucky to Samuel and Jane Davis...
, placed a $10,000 bounty on Upham, though the "Yankee Scoundrel", as he was known in the South, evaded capture by Southern agents. Counterfeiting was a problem for the North as well, and the United States Secret Service
United States Secret Service
The United States Secret Service is a United States federal law enforcement agency that is part of the United States Department of Homeland Security. The sworn members are divided among the Special Agents and the Uniformed Division. Until March 1, 2003, the Service was part of the United States...
was formed to deal with this problem.
On April 1, 1864, the Currency Reform Act of 1864 went into effect. This decreased the Southern money supply by one-third. However because of Union control of the Mississippi River
Mississippi River
The Mississippi River is the largest river system in North America. Flowing entirely in the United States, this river rises in western Minnesota and meanders slowly southwards for to the Mississippi River Delta at the Gulf of Mexico. With its many tributaries, the Mississippi's watershed drains...
, until January 1865 the law was effective only east of the Mississippi.
A fairly peculiar economic phenomenon occurred during the war in that the Confederate government issued both regular money notes and interest-bearing money. The circulation of the interest-bearing money and the convertibility of one kind of money into the other was enforced by fiat
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
and Southern banks were threatened with a return to the gold standard if they did not cooperate. Because of the amount of Southern debt held by foreigners, to ease currency convertibility, in 1863 the Confederate Congress
Congress of the Confederate States
The Congress of the Confederate States was the legislative body of the Confederate States of America, existing during the American Civil War between 1861 and 1865...
decided to adopt the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, although actual convertibility was not to come into effect until 1879 (hence the law never went into effect, being supplanted by the Coinage Act of 1873 and the end of the Confederacy).
Debt finance
Issued loans accounted for roughly 21% of the finance of Confederate war expenditure. In fact, initially the South was more successful in selling debt than the North, partially because New Orleans was a major financial center, whose financiers bought up two-fifths of a 15 million dollar loan in early 1861.The two main types of loans issued by the South during the war were "Cotton Bonds", denominated in pounds sterling and sold in London, and high risk unbacked loans sold in the Netherlands. The Cotton Bonds were also convertible directly into bales of cotton, with a caveat, included as a means of political pressure on European countries to recognize the Confederacy, that any such shipments needed to be picked up by the bondholder in one of the blockaded Southern ports (mostly New Orleans). Cotton Bonds initially were very popular and in high demand among the British; William Ewart Gladstone
William Ewart Gladstone
William Ewart Gladstone FRS FSS was a British Liberal statesman. In a career lasting over sixty years, he served as Prime Minister four separate times , more than any other person. Gladstone was also Britain's oldest Prime Minister, 84 years old when he resigned for the last time...
, who at the time was the Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
, was supposedly one of their purchasers. The Confederate government managed to honor the Cotton Bonds throughout the war, and in fact their price rose steeply until the fall of Atlanta
Atlanta Campaign
The Atlanta Campaign was a series of battles fought in the Western Theater of the American Civil War throughout northwest Georgia and the area around Atlanta during the summer of 1864. Union Maj. Gen. William T. Sherman invaded Georgia from the vicinity of Chattanooga, Tennessee, beginning in May...
to Sherman
William Tecumseh Sherman
William Tecumseh Sherman was an American soldier, businessman, educator and author. He served as a General in the Union Army during the American Civil War , for which he received recognition for his outstanding command of military strategy as well as criticism for the harshness of the "scorched...
, reflecting the increase in the underlying cotton prices and perhaps the possibility that George B. McClellan
George B. McClellan
George Brinton McClellan was a major general during the American Civil War. He organized the famous Army of the Potomac and served briefly as the general-in-chief of the Union Army. Early in the war, McClellan played an important role in raising a well-trained and organized army for the Union...
might get elected as US President on a peace platform. In contrast, the price of the Dutch-issued high risk loans fell throughout the war, and the South selectively defaulted on servicing these obligations.
Revenue from international trade
Tariff of 1857
The Tariff of 1857 was a major tax reduction in the United States, creating a mid-century lowpoint for tariffs. It amended the Walker Tariff of 1846 by lowering rates to around 17% on average....
. Between February 17 and May 1 of 1861, 65% of all government revenue was raised from the import tariff. However, revenue from the tariffs all but disappeared after the Union imposed its blockade of Southern coasts. By November of 1861 the proportion of government revenue coming from custom duties had dropped to one-half of one percent. Secretary of Treasure Memminger had expected that the tariff would bring in about 25 million dollars in revenue in the first year alone. In fact, the total revenue raised in this way during the entire war was only about $3.4 million.
A similar source of funds was to be the tax on exports of cotton. However, in addition to the difficulties associated with the blockade, the self-imposed embargo on cotton meant that for all practical purposes the tax was completely ineffective as a fund raiser. Initial optimistic estimates of revenue to be collected through this tax ran as high as 20 million dollars, but in the end only $30 thousand was collected.
Other sources of revenue
Another potential source of finance could be found in the property and physical capital
Physical capital
In economics, physical capital or just 'capital' refers to any already-manufactured asset that is applied in production, such as machinery, buildings, or vehicles. In economic theory, physical capital is one of the three primary factors of production, also known as inputs in the production function...
owned by Northerners in the South, and the debts owed by individuals in a parallel manner. The Sequestration Act of 1861 provided for confiscation of all Union "lands, tenements, goods and chattels, right and credits" and the transfer of debt obligation on the part of Confederate citizens from Northern creditors directly to the Confederate government. However, many Southerners proved unwilling to transfer their debt obligations. Furthermore, what exactly constituted "Northern property" proved hard to define in practice. As a result the share of this source of revenue in government funding never exceeded one-third of one percent (.003) and contributed only one-fourth of one percent (.0025) to the overall financial war effort.