UNION FINANCING OF THE

AMERICAN CIVIL WAR

Leo Stahl
 The Civil War revolutionized the financial methods of the United States. A new
monetary system was created, and tax resources before undreamed of were resorted to,
at first timorously, in the end with a rigor that hardly knew bounds.
F.W. Taussig, The Tariff History of the United States, 1909, p. 97

The Civil War represented a turning point in the history of American fiscal policy.

Embroiled in the largest western conflict of the 19th century, the Union faced the

necessity to develop new methods of increasing revenues to finance the Civil Wars

unprecedented costs. The three methods used to raise such revenue taxing, printing, and

borrowing were implemented by the Union throughout the war, sometimes stretching

the bounds of constitutionality, and ultimately setting a precedent for the monetary

system used today.

On March 4th, 1861, one month after the formation of the Confederate States of

America, Abraham Lincoln was inaugurated as the 16th President of the United States. At

the time, the country was effectively broke. The government had run a deficit every year

since 1857, and revenue from tariffs, the countrys principal source of income, had fallen

dramatically.1 Roughly $500,000 remained in the central depository in Washington, and

the national debt stood at $75 million, its highest level in forty years.2 In short, the

Lincoln Administration inherited a fiscal mess.

Prior to the Lincoln Administration, the usual way to generate federal revenue

was from tariffs. However, with the secession of southern ports Charleston and New

Orleans, the Union lost a significant amount of tariff revenue. To complicate matters, the

current tariff system in place was the pro-Southern Tariff of 1857. This tariff amended

1
Jane Flaherty, The Exhausted Condition of the Treasury on the Eve of the Civil War
252 (Vol. 66 2009).
2
Id.

2
the earlier Walker Tariff of 1846 by reducing tariff rates to roughly 17 percent a mid-

century low point.

In response to shrinking revenues, during President Buchannans final days in

office, on March 2, 1861, the Morrill Tariff was signed into law, named after

Representative Justin Smith Morrill of Vermont. The newly adopted tariff more than

doubled rates from 17 percent to 37.5 percent on average. The passage of the tariff was

possible because many tariff-averse Southerners had resigned from Congress after their

states declared their secession.

Unfortunately, the tariff did little to raise sufficient revenue. This came as no

surprise considering the Morrill Tariff was passed primarily as a protectionist measure for

northern businesses, rather than a revenue raiser.3 Eventually, income from tariffs would

finance only about 15 percent of war expenditures.4 After the inauguration of President

Lincoln, with the prospect of civil war looming, Lincolns options of financing a great

war were dim.

The man Lincoln appointed to head the U.S. Treasury Department was Salmon P.

Chase, former governor and senator from Ohio. This was a peculiar decision considering

Chase never had any governmental finance experience, although historians Larry

Schweikart and Michael Allen argue that Chaseproved to be the right man in the right

office at the right time.5 Chases economic philosophy was originally thought to be

along Jacksonian hard money lines; he was opposed to federally issued paper money and

3
F.W. Taussig, The Tariff History of the United States 98 (1909).
4
Id.
5
Larry Schweikart & Michael Allen, A Patriots History of the United States 325.

3
fiat money, and instead believed a dollar was defined as a certain weight of silver or gold.

Ultimately, his views would change as the war progressed.

After the fall of Fort Sumter, the countrys fiscal needs became paramount just as

war worries escalated its anxiety about the future. The only financing available for war

was through government borrowing. Unfortunately for Chase, the demand for

government bonds was low, primarily due to uncertainty of the nations finances. To

complicate matters, in July of 1861, the national debt stood at $90 million and the

Treasury had barely $2 million in reserve.6 Nevertheless, Chase believed the debt would

be manageable if, as most believed, it would be a short war.

By July, Secretary Chases estimate was that the war would cost $320 million.

His recommended war-financing proposal called for $240 million to come from loans,

$60 million from land sales and tariff increases, and the remaining $20 million from

various tax increases.

On Independence Day in 1861, Lincoln summoned legislators to a special session

in order to discuss the ramifications of a national loan. As the 44 assembled Senators

gathered (21 were absent), Lincoln set a special tone: Having been convened on an

extraordinary occasion, as authorized by the Constitution, your attention is not called to

any ordinary subject of legislation.7

Two weeks later, on July 17, 1861, Congress authorized a $250 million national

loan. This allowed the Treasury to offer $200 million in 3-year treasury notes at 7.30%

interest, and $50 million in non-interest bearing notes, otherwise known as Demand

6
John G. Nicolay & John Hay, Abraham Lincoln: A History 226 (Vol. 6 2007).
7
Roy P. Basler, The Collected Works of Abraham Lincoln 421 (Vol. 4 1953).

4
Notes. These Demand Notes could be exchanged for coin, used as wages, or satisfy

public dues. The notes also were payable on demand in silver or gold specie. Usually

they were issued in denominations no more than $50 dollars and not less than $5 dollars.

Demand Notes became intended for wide spread circulation as payment for expenses

incurred during the war, including the salary of its workers and military personnel.

However, there was some uneasiness concerning their usage as the country was

not used to a federal currency in general circulation. In order to ease public skepticism,

Secretary Chase told the Union: These notes are intended to furnish a current medium of

payment, exchange, and remittance, being at all times convertible into coin at the option

of holder, at the place where made payable, and everywhere receivable for public dues.

They must be always equivalent to gold, and often and for many purposes more

convenient and valuable.8 According to Chase, the issuance of demand notes was

simply money backed by gold, although the issuance of unbacked paper money was not

far behind.

The $200 million worth of interest-bearing treasury notes comprised of a majority

of the newly enacted loan. Unfortunately for Chase, the bonds would not sell themselves,

and Chase would soon need the cooperation of northern banks. As historian Robert P.

Sharkey notes: The second phase of Civil War finance involved the government in

negotiations with the banks of New York, Boston, and Philadelphia.9

8
Appletons Annual Cyclopedia and Register of Important Events of the Year 1861
(1864).
9
Robert P. Sharkey, Money, Class and Party: An Economic Study of Civil War and
Reconstruction 21 (1959).

5
 Ultimately, during July of 1861, with a current debt of $90 million, Congress was

prepared to raise the debt to $340 million, which was an enormous amount at the time.

Historian Allan Nevins writes: The creation of a large public debt at the high interest

rate of 7 percent or more a year provoked astonishingly little debate for so portentous a

measure. The sum authorized exceeded any previous total of national indebtedness. But

Congress agreed with Chase that for a short war borrowing was a sound principle 10

Congress, Chase, and Lincoln would quickly learn that the war would not be as short as

everyone thought.

On July 21, 1861, the hope of a short war vanished in Northern Virginia at the

Battle of Bull Run. The Unions defeat shocked Lincoln and Chase, and the need to raise

revenue became more urgent.

For months, the banks warned Lincoln and Chase that reliance on borrowing

when the future was uncertain was risky and potentially inflationary. One such warning

was delivered to Chase when he traveled to New York for a private meeting on August

9th, 1861, with the barons of capitalism at the New York Customs House near Wall

Street, where financiers gathered from across the Northeast region.

Chase was there to convince the bankers to purchase new, 3-year government

bonds at 7 percent interest in order to raise $150 million. Chase had a basis for thinking

that the Unions credit was good. The Norths strengths in fighting the war derived from

a two-to-one advantage over the South in population, income and wealth. The Union side

10
Allan Nevins, The War for Union: The Improved War 196 (Vol. 1 1971).

6
also had a large advantage in railroad miles, and vast holdings of unoccupied public land,

including the gold-producing regions of the West. 11

However, in light of the defeat at Bull Run, the banks were rightfully skeptical of

a quick Union victory. The banks felt that the Treasury Department was looking on them

as some sort of bottomless reserve, while the banks` solvency was, in fact, very

precarious.12 Chase comprehended the banks situation at one level, but he also viewed

their reluctance to buy bonds as arrogant and unpatriotic. Chase famously said: I was

obliged to be very firm, and to say, Gentlemen, I am sure you wish to do all you can. I

hope you will find that you can take the loans required in terms, which can be admitted.

If not, I must go back to Washington and issue notes for circulation; for gentlemen, the

war must go on until this rebellion is put down, if we have to out paper until it takes

$1000 to buy a breakfast.13

Secretary Chase essentially threatened the banks with a hyperinflationary money-

printing scenario. The banks, aware of what inflation could do to their profits, acquiesced

to Chases demands and agreed to loan the Union $150 million of the 3-year bonds. The

loan was payable in gold and silver coin, comprised of three installments during August,

October, and December of 1861.

Historian Henrietta Larson sums up the specie problems Chase experienced

during 1861-1862: [Chases] inability to understand the problems of the banks and his

apparent unwillingness to adjust his demands to what was expedient from the point of

11
Steven R. Weisman, The Great Tax Wars (2002).
12
Id.
13
Robert Bruce Warden, An Account of the Private Life and Public Services of Salmon
Portland Chase 386 (1874).

7
view of sound finance did much to break the bankers loyalty to the Treasury at this time.

Chase meant well but often did not do well in his early efforts as Treasury [S]ecretary.

His personal theories did not mesh with the new realities of the Civil War. 14

However, before pledging their allegiance to Chase, the banks wanted assurance

that the U.S. Government would be able to pay the interest on the new loans. Chase had

anticipated this request. He warned Congress in early July: Public credit can only be

supported by public faithand by the prompt and punctual fulfillment of every public

obligation.15 In order for the interest on the debt to be repaid, the public would have to

meet its obligation- this meant the burden of higher taxes.

During its special session in July of 1861, Congress began to determine how to

raise taxes in order to provide the revenue suggested by Secretary Chase. Congress was

limited by the Constitution on how and what they could tax. Article 1, Section 8, Clause

1 of the United States Constitution states The Congress shall have Power To lay and

collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common

Defense and general Welfare of the United States; but all Duties, Imposts and Excises

shall be uniform throughout the United States16

In an attempt to raise additional revenue for the war effort, on July 19th, 1861, a

bill passed both houses of Congress to raise import taxes on numerous items, such as

coffee, tea, sugar, and liquor. The majority of items were taxed on a per unit basis while

certain imports, often those with more volatile pricing such as hides, citrus fruit, silk, and

14
Henrieta Larson, Jay Cooke, Private Banker 112 (1968).
15
Jacob William Schuckers, The Life and Public Services of Salmon Portland Chase 331
(1874).
16
U.S. Const. art. I, 8, cl. 1.

8
gunpowder, were taxed ad valorem, with rates ranging from 10% on hides and rubber to

50% on wines. The provisions included in the import tariff expanded upon the

protectionist measures in the Morrill Tariff of 1861.

On July 24, 1861, Congressman Thaddeus Stevens introduced a $20 million

federal national land tax. This tax was found to be largely unpopular because it was

considered a direct tax on the individual, in contravention of Article I, Section 2 of the

U.S. Constitution.17

There were also internal problems associated with a national property tax- some

opponents argued that there would be different per capita tax rates among states, and

sparsely populated states, with small tax bases, would be particularly hurt by this tax.

Opponents also pointed to the fact that wealthy individuals, who held their money

primarily in stocks, would be exempt from the burden of a national land tax.

The collection method of the land tax also raised concerns as many saw it as

unjust. The method provided for federal collectors of the tax, which formally established

a system of tax districts, assessors, and collectors, laying the groundwork for the eventual

formation of the Internal Revenue Service. In opposition, Congressman Roscoe Conkling

argued: One of the most obnoxious, perhaps the most obnoxious, of all it features is that

which creates an army of officers whose business it is to collect this tax. It provides

machinery cumbrous and unnecessarily expensive. It provides oppressive modes of

assessment and collection. Conkling concluded that it would create a system more

17
U.S. Const. art. I, 2, cl. 3.; Direct Taxes shall be apportioned among the several
States which may be included within this Union, according to their respective Numbers.

9
unendurable than the tax itself. 18 Congressman and future Vice President Schuyler

Colfax added: The most odious tax of all we can levy is going to be the tax upon the

land of this country. I cannot go home and tell my constituents that I voted for a bill that

would allow a man, a millionaire, who has put his entire property into stock, to be exempt

from taxation, while a farmer who lives by his side must pay a tax.19

Congressman Thaddeus Stevens used the risk of a Confederate victory to his

advantage and responded: This bill is a most unpleasant one. But we perceive no way in

which we can avoid it and sustain the government. The rebels, who are now destroying or

attempting to destroy this Government, have thrust upon the country many disagreeable

things.20 In order to continue the war, the Union was ready to resort to tactics that many

saw as unjust.

Despite objections from Colfax and others, on August 5th, Congress passed the

national property tax as part of the Revenue Act of 1861. That would be the last time a

federal property tax would be passed in the United States.

Additional sources of federal revenue were still needed, and in an attempt to

distribute the required new taxes more equitably, several legislators drafted a bill to tax

personal income for the first time in the nations history. Akin to the land tax, opponents

questioned the constitutionality of such a bill as it was considered a direct tax on

individuals. Congressman Thomas Edwards argued: Why should we stickle about

terms? Why should we not impose the burden which are to fall upon the people of this

18
Congressional Globe (37/1) 247.
19
Steven R. Weisman, supra.
20
Thaddeus Stevens, The Selected Papers of Thaddeus Stevens 215 (1998).

10
country equally, in proportion to their ability to bear them?21 Another supporter of the

tax, Representative Justin Morrill, suggested that an income tax "would be the most

just, and undoubtedly the most popular, if any tax can be popular."

The expediency of raising income for the war was of paramount concern

compared to the constitutional authority of such a bill. As a result, the bill passed and the

resulting statute imposed a 3 percent tax on annual incomes over $800 for the year 1861.

Since roughly 3 percent of the population earned more than $800 per year, most citizens

were exempt from the new tax. In the end, this particular tax was never levied, however,

because Congress was preparing a more comprehensive measure to go into effect in

1862.

In sum, on August 5th, 1861, Congress passed the Revenue Act of 1861.22 The act

increased tariff and tax rates on numerous items, created a $20 million direct national

land tax, and assessed a 3 percent income tax on incomes over $800.

The Unions situation suddenly worsened in November 1861 when an American

war ship seized two Confederate diplomats from a British ship, the Trent. For the next

two months, Anglo-American relations soured. Robert P. Sharkey wrote: The Trent

affair had destroyed any possibility that the banks might sell the 6 per cent bonds in

England.23 Coupled with Union losses at Wilsons Creek and Balls Bluff, this caused a

substantial decline in demand for Union bonds. Without this demand, the banks were in

trouble.

21
Steven R. Weisman, supra, at 33.
22
Revenue Act of 1861, 49, 12 Stat. 292, 309 (1861).
23
Robert P. Sharkey, Money, Class and Party 26 (1960).

11
 By December 1861, federal funds were failing. Eventually, the federal

government and large banks ceased making payments in gold or silver specie because

demand for bond sales were falling, and the war was costing nearly $2 million per day.

The federal government needed more money in a credit-friendly environment as opposed

to the strict monetary policies in place during 1861.

Chase grossly underestimated the costs of the first year of the war. In July of

1861, he estimated that the entire war would cost $320 million. In his report to Congress

on December 9th, 1861, his new estimate was that the first year alone would cost $530

million. Historian William Marvel summed up the Unions financial position in 1861:

The war was costing $1.5 million per day and more; by the end of February, contractors

were clamoring for payment of nearly $27 million in outstanding requisitions. Soldiers,

who could afford it less than most, had to bear much of the treasury deficit in the form of

unconscionably tardy paymasters. Chaseestimated that the government faced about $45

million in floating debt at that time, incurred mainly by the War Department.24

The Union needed money, but it also needed a uniform convertible currency one

which, unlike the existing state bank notes, was not easily counterfeited and whose value

was reliable. Historian Jane Flaherty noted: In 1860, approximately $180 million in state

bank notes circulated, most of this money [was] controlled by a relatively large number

of incorporated banks operated in the interests of their owners. The Treasury estimated

that over 7,000 various forms of legitimate bills circulated in 1860.25 Historian Allan

Nevins added: It seemed to many that the only feasible course was to have the

24
William Marvel, Lincolns Darkest Year: The War in 1862 27 (2008).
25
Jane Flaherty, The Revenue Imperative: Union Financial Policy During the Civil War
58 (2009).

12
government take bold control, issue its own circulating medium, and give it credit by

pronouncing it legal tender for debts. 26

On January 7th, 1862, the Legal Tender Bill was introduced to the House of

Representatives. The main feature of the bill called for the printing of $150 million in

non-interest bearing treasury notes, often referred to as Greenbacks. These notes would

be secured by the credit of the United States government. In essence, they were a fiat

currency, unbacked by gold or silver specie. The notes would also be mandated as a legal

tender for all debts within the United States. If passed, it would allow the U.S.

Government to generate $150 million simply by printing it.

Three weeks later, on January 28th, the bill opened for debate. During the

beginning of arguments, the question of the bills constitutionality became the center

focus. Article 1, Section 8, Clause 5, of the United States Constitution states that: The

Congress shall have Power Tocoin Money, regulate the Value thereof, and of foreign

coin 27 Prior to the Civil War, this clause was interpreted as saying that only the

federal government had the authority to print coin to be used as money. The strict reading

of the clause lead many to believe that Coin meant either gold or silver, and not paper

currency.

Congressman Elbridge G. Spaulding, the founder of the proposed bill, said this in

response to challenges of the bill: This bill is a necessary means of carrying into

execution the powers granted in the Constitution to raise and support armies and to

26
Alan Nevins, The War for the Union 212 (1959).
27
U.S. Const. art. I. 8, cl. 5.

13
provide and maintain a navy.28 Further, Spaulding said: The Constitution provides that

all the laws necessary and proper for carrying into execution the foregoing powers may

be passed by Congress. Spauldings underlying assumption was that printing currency

was a necessary and proper means to funding the army and navy. He then clarified his

argument: The government of the United States is not prohibited by the Constitution

from issuing treasury notes on demand, and making them a legal tenderThe

Constitution (Article 1, Section 10) prohibits the States from making anything but gold or

silver coin a legal tenderbut this does not at all restrict the sovereign power of the

United States.29 Spaulding inferred that since the power to print currency was explicitly

denied to the states, it was therefore impliedly granted to the federal government.

On January 29th, Secretary Chase wrote a letter to Spaulding that summarized his

views on the legislation: The condition of the treasury certainly needs immediate action

on the subject of affording provision for the expenditures of the government, both

expedient and necessary. The general provisions of the bill submitted to me seem to me

well adapted to the end proposed.30

Debate over the constitutionality of the Legal Tender Bill eventually ended in a

stalemate. Historian Wesley Clair Mitchell summed up the debate: While a few declared

that constitutional scruples would prevent them from voting for the bill, the more general

28
U.S. Const. art. I, 8, cl. 12, 13; The Congress shall have PowerTo raise and
support ArmiesTo provide and maintain a Navy.
29
Id.
30
E.G. Spaulding, A Resource of War The Credit of the Government Made Immediately
Available 45 (1869).

14
feeling was that it would be unreasonable to decide a question of such importance upon a

doubtful technicality which could be settled only by the courts.31

After the constitutional arguments for the bill yielded no consensus, the debate

shifted to the fiscal dangers of fiat currency. Opponents of the bill argued that history had

proved fiat currency to be fraught with problems. Several members argued that during the

Revolutionary War, excessive printing of Continental dollars caused their value to drop

significantly. Representative Frederick A. Pike responded that: It was only when the

issue of paper bore an enormous disproportion to the means of payment that it

depreciated. In other words, Continental dollars were not the problem; there were simply

too many printed. Nevertheless, opponents of the bill continued to argue the provisions of

the legislation.

It seemed that the one argument that made many reluctant members of Congress

vote for the bill was that of necessity. Senator James Doolittle of Wisconsin said: I shall

support the bill as an issue of war necessity with more misgivingthan of any other

measure for which I have given my vote in this body.32 Pennsylvanias Thaddeus

Stevens was a powerful voice of support in the House, arguing at the end of debate that:

this bill is a measure of necessity, not of choice. No one would willingly issue paper

currency not redeemable on demand and make it a legal tender. It is never desirable to

depart from that circulating medium which, by the common consent of civilized nations,

31
Wesley Clair Mitchell, A History of the Greenbacks 55 (1903).
32
Id. at 61.

15
forms the standard of value. But it is not a fearful measure; and when rendered necessary

by exigencies, it ought to produce no alarm.33

Eventually, the bill would pass both the House and Senate. On February 25, 1862,

President Lincoln signed the Legal Tender Act into law, authorizing the issuance of $150

million dollars in greenbacks.34 Years later, Congressman James G. Blaine said: it was

the most momentous financial step ever taken by Congress.35

Three main factors explain the success of the Legal Tender Act: First, the

underlying strength of the northern economy. Second, the fortuitous timing of the law; it

went into effect during the months of Union military success in the spring of 1862,

floating the greenbacks on a buoyant mood of confidence in victory. The third reason was

the enactment of a comprehensive tax law during the summer of 1862, which soaked up

much of the inflationary pressure produced by the greenbacks.36

The government issued additional greenbacks in July 1862 and March 1863, both

times for $150 million. Historian Walter A. McDougall wrote: The Union war effort as a

whole seemed an improvised potlatch. But the Treasurys issue of unbacked greenbacks

to the ultimate sum of $431 million was a gamble that paid off because funny money

covered just 16.5 percent of the Union budget compared with 61.7 percent of the

Confederate budget.37

As expected, inflation did result from passage of the greenback legislation but it

was only one among several causes of inflation during the Civil War. It was also less than

33
Thaddeus Stevens, The Selected Papers of Thaddeus Stevens 254 (Vol. 1 1862).
34
U.S. Congress. 37th Cong., 2nd sess., 25 February 1862.
35
James G. Blaine, Twenty Years of Congress 407 (1884).
36
James M. McPherson, Battle Cry of Freedom: The Civil War Era 447 (1988).
37
Walter A. McDougall, Throes of Democracy: The American Civil War Era 456 (2008).

16
had been predicted by the bills opponents. Almost immediately the value of greenbacks

went to two percent discount. Before the close of 1862, their value had fallen by one-

fourth.

During the spring of 1862, Congress was also preparing for a complete tax

legislation overhaul to generate much needed revenue for the war effort. With the Union's

debt growing at the rate of $2 million daily it was clear the Federal government would

need additional revenues. Several months before the first payments from the Revenue Act

of 1861 were due, on June 30, 1862, Congress acquiesced to Chases recommendation

and postponed enforcement of the statute while they considered something more

comprehensive.

On July 1, 1862, President Lincoln signed the Revenue Act of 1862 into law.38

The newly created income tax imposed a tax of three percent on the annual gains, profits

or incomes above $600 of any person residing in the United states, whether derived

from any kind of property, rents, interest, dividends, salaries, or from any profession,

trade, employment, or vocation carried on in the United states or elsewhere, or from any

source whatever. 39 The statute provided that the tax applied to the salary of every

person in the civil, military, naval, or other employment of the United states. 40

To collect the revenue from these new taxes (in particular, the income tax), the

Revenue Act of 1862 formally established the Office of the Commissioner of Internal

Revenue as a bureau in the Department of Treasury. The agency was charged with

collecting taxes within 185 collection districts, each with one assessor and one collector.

38
Revenue Act of 1862, 119, 12 Stat. at 432.
39
Revenue Act of 1862, 90, 12 Stat. at 473.
40
Revenue Act of 1862, 86, 12 Stat. at 472.

17
 George S. Boutwell of Massachusetts was recommended by Treasury Secretary

Chase and appointed by Lincoln as the first Commissioner of Internal Revenue. Boutwell

noted: I was assigned to a small room on the first floor of the Treasury building, on the

right of the lower door fronting on Pennsylvania Avenue. First, I read the statute and

formed for myself an idea of the process by which the machine was to be set in motion.

The statute was a remarkable exhibition of legislative wisdom under the circumstances,

but it was incomplete in parts rather than imperfect in plan. In the course of two or three

days Mr. Chase assigned to me three clerks from other offices in the Treasury, and all of

them very competent assistants...41

For the next two years, the income tax made a modest but welcome contribution to

the Treasury, which still relied largely on public borrowing to finance the Union war

effort, as well as Greenbacks to facilitate the payment of the salaries of soldiers by the

government and taxes to the government.

Clearly, such tax legislation was an important expansion of federal taxing power.

Jane Flaherty noted: In erecting this new revenue system for the nation, the Republicans

did not impose a regressive internal revenue system on citizens. Instead, the duties on

manufacturers emerged as the primary source of wartime internal taxes. Because

manufacturers bore the initial burden of these taxes, they successfully lobbied Congress

for increased protection from foreign competition. 42 Historian Allan Nevins continued:

every manufacturing interest, every branch of commerce, and every profession save the

ministry felt the weight of the new enactment. Liquor and tobacco were of course taxed;

41
George C. Boutwell, Reminiscences of Sixty Years in Public Affairs 310 (1902).
42
Jane Flaherty, The Revenue Imperative: Union Financial Policy During the Civil War
2 (2009).

18
so were such luxuries as carriages, billiard tables, yachts, gold and silver...43 Historian

James M. McPherson added that the income tax grew from a need to assure the financial

community that sufficient revenue would be raised to pay interest on bonds.44

Ultimately, while the South obtained only 5 or 6 percent of its funds by actual taxation,

Civil War historian John Gordon estimates: The federal governmentraised fully 21

percent of its total revenues by taxation in this manner, netting about $750 million by this

means. Obviously the old tax system that had relied on the tariff for revenue would not

suffice.45

Having dealt with the nations bonds, currency, and taxes, the Administration and

Congress finally confronted the need to reform the banking system in 1863. Phillip Shaw

Paludan wrote: Chases 1861 proposal had linked the national banking system with a

national currency, and that idea promised a more secure currency. But by late 1862, these

needs and promises, along with the success of prior national economic measures, led to a

push by the administration for a national banking system.46

The immediate object of a proposed national bank act was to provide a currency

to expedite the transactions of the government, and to shrink and eventually eliminate the

hodge-podge of state banks. While the government possessed at that time a uniform

national currency in irredeemable paper, it was clear to all that national honor demanded

a sounder medium of exchange and credit.

43
Allan Nevins, The War for the Union 213 (Vol. 1 1959).
44
James M. McPherson, Battle Cry of Freedom: The Civil War Era 443 (2003).
45
John Steele Gordon, Hamiltons Blessing: The Extraordinary Life and Times of Our
National Debt 79 (1998).
46
Phillip Shaw Paludan, A Peoples Contest: The Union and Civil War, 1861-1865 122
(2d ed. 1996).

19
 The chief advocate for the banking bill was Senator John Sherman, a strong fiscal

conservative who long had believed in limiting government expenditure. Sherman and

others put forward two chief arguments: first, that the bill was to be a war measure; and

secondly, that the proposed banking system should become a permanent institution.

Sherman saw the banking legislation as vital to the preservation of the Union, telling the

Senate: The establishment of a national currency, and of this system, as the best that has

been yet devised, appears to me all important. It is more important than the loss of a

battle. In comparison with this, the fate of three million negroes held as slaves in the

southern States is utterly insignificant.47 On the 25th of February 1863, Senator Sherman

introduced the bill that would eventually become law the National Bank Act of 1863.

Historian David Brion Davis wrote As finally adopted by Congress, the National

Bank Act of 1863 chartered national banks that met certain requirements, made the notes

of national banks legal tender for all public and private debts, and levied a tax of 2

percent on state bank notes, which rate gradually increased over time. By imposing a tax

on state bank notes, the federal government forced state banks to join the federal system.

By 1865 national banks had 83 percent of all bank assets in the United States.48 Bray

Hammond wrote: The new act was a free-banking measure, derived from the original

free-banking law enacted in New York in 1838 but modified by the variations thereof in

other states. Its virtues were encompassed in its main purpose to make banking a

federal responsibility and did not extend far into its specific provisions, which, as in the

states, permitted good banking in favorable circumstances but did not require or insure it.

47
Marc Egnal, Leader of the Second American Revolution 108 (Vol. 14 2007).
48
David Brion Davis, The Boisterous Sea of Liberty: A History of America from
Discovery through the Civil War 527 (2000).

20
The expectation was that existing banks would surrender their state chartered and re-

incorporate under the terms of the new law with national charters.49

The new national banking system did not take complete form during the war since

most state banks were slow to convert to national ones. Historian John Steele Gordon

noted that few state banks immediately converted to national charters: In March 1865

Congress narrowly passed a bill authorizing a 20 percent tax on the face value of

banknotes issued by state-chartered banks. This had the effect of both driving the state

banks to take national charters (there were only two hundred state banks remaining in

1866) and finally ending wildcat banking and a money supply consisting of thousands of

different issues. By the end of the Civil War there were only two forms of paper money

in the country, national banknotes backed by bank reserves, and greenbacks.50 Economic

historian Margaret G. Myers wrote: The new law provided a uniform paper currency and

made possible the elimination of the motley array of state bank paper which had so long

plagued the economy. This was eliminated gradually, not by the Act, but by taxation.51

The banking bill was the beginning of needed bank reform to create a truly

national system. Historian Marc Egnal noted: For Sherman, passage of the Act was only

the first step; completing this reform required that state bank notes be eliminated. He

argued that two systems of circulating notes could not coexist. I think the national

banking system has been a grand and great success, he remarked, and I would stake my

reputation upon it; but it cannot undergo this system in competition with State banks that

49
Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War
728 (1991).
50
John Steele Gordon, An Empire of Wealth: The Epic History of American Economic
Power 197 (2005).
51
Margaret G. Myers, A Financial History of the United States 163 (1970).

21
are now increasing their issue. 52 Through Shermans efforts, a prohibitive tax on state

notes effectively nationalized the American currency.

In 1864, the war was growing costly and difficult to finance. The governments

ability to borrow fluctuated with battlefield fortunes. Inevitable administrative problems

ultimately reduced the expected receipts from income and excise tax collection.

In June of 1864, Congress expanded on the provisions of the Revenue Act of

1862 and approved the Revenue Act of 186453 to bolster the nations finances. This

newly legislated revenue act sought to increase tax rates and expand the progressivity of

income taxation. New tax brackets were created and tax rates were increased from the

earlier revenue acts in order to collect additional revenue.54 In addition to raising income

tax rates, the Act established stamp taxes on items such as matches and photographs.

Unfortunately, in June of 1864, the nations finances would not be the only problem that

Lincoln would face.

From the beginning, it had been an unlikely partnership for Chase and Lincoln. In

1860, Chases presidential ambitions were second to none. A widower three times over,

Chase had few friends, lived a life governed by strict routine, eagerly sought moral

perfection and had no apparent sense of humor. Those close to him said, unlike Lincoln,

he knew little of human nature and was profoundly ignorant of men. Salmon Chase,

in short, was Abraham Lincolns polar opposite.

52
Marc Egnal, Leader of the Second American Revolution 113 (Vol. 14 2007).
53
Revenue Act of 1864, 13 Stat. 223 116 (1864).
54
Id.

22
 In late June 1864, after Lincoln had twice previously denied Chases resignation

for separate disagreements between the two leaders, Chase again sought to go against the

advice of Lincoln and replace a well-respected assistant treasurer in New York with a

clearly unqualified candidate of suspected political loyalty. Lincoln, fearing an open

revolt among Republicans, urged Chase to select from among three alternative

candidates.55 Of course, Chase rejected the recommendations.

When Chase sought a meeting with the President, Lincoln was rebuffed because

the difficulty does not, in the main part, lie within the range of a conversation between

you and me.56 Along with political campaign pamphlets urging the presidential

nomination of Salmon Chase that were often severely critical of Lincoln, Chases clashes

with Lincoln over patronage in New York meanwhile came to a climax. An exchange of

notes on June 28 and June 29 concluded with Chases resignation. Lincoln accepted the

resignation on June 30.57

When Treasury official Lucius Chittenden protested to Lincoln that the impact of

Chases departure might prove worse than another Bull Run defeat, Lincoln responded

that Chase had two bad habits a feeling of indispensability and a mania for the

55
The Abraham Lincoln Association, Collected Works of Abraham Lincoln 414 (Vol. 7).
56
Id.; On June 28th, 1864, to Chase, Lincoln writes: When I received your note this
[afternoon] suggesting a verbal conversation in relation to the appointment of a successor
to Mr. Cisco, I hesitated because the difficulty does not, in the main part, lie within the
range of a conversation between you and me. As the proverb goes, no man knows so well
where the shoe pinches as he who wears it. I do not think Mr. Field a very proper man for
the place, but I would trust your judgment, and forego this, were the greater difficulty out
of the way.
57
The Abraham Lincoln Association, at 419; Lincolns letter to Chase writes: Your
resignation of the office of Secretary of the Treasury, sent me yesterday, is accepted. Of
all I have said in commendation of your ability and fidelity, I have nothing to unsay; and
yet you and I have reached a point of mutual embarrassment in our official relation
which it seems can not be overcome, or longer sustained, consistently with the public
service.

23
presidency. Lincoln told Chittenden that Chase is, as you say, an able

financier...Ordinarily he discharges a public trust, the duties of a public office, with great

ability with greater ability than any man I know. Mind, I say ordinarily, for these bad

habits seem to have spoiled him. They have made him irritable, uncomfortable, so that he

is never perfectly happy unless he is thoroughly miserable and able to make everybody

else just as uncomfortable as he is himself.58 Two Pennsylvania congressmen also tried

to get the president to reverse his decision. They had attempted to induce him to send for

me with a view to my return to the Department; but he would not consent to this. He

thought we could not agree and it was without use; and in this he was I think right,

reported Chase in his Diary.59

Chases downfall would be short-lived. In 1864, President Lincoln appointed

Chase as Chief Justice of the U.S. Supreme Court in part to assure that Lincolns

administrative policies were upheld. In the appointment of Mr. Chase, all holders of

government securities in America and Europe felt assured that the financial policies of

the government would be sustained by its highest judicial tribunal. In sustaining that

policy, Judge Chase would only be sustaining himself, for he was the author of it,

reported the Baltimore American and Commercial Advertiser in December.60 Although

he never lived to see the day, Lincolns assumption was wrong Chase did not sustain

himself and indeed eventually reversed himself in the Legal Tender cases. 61

58
Lucius Chittenden, Personal Reminiscences, 1840-1890 379 (1894).
59
David Donald, Inside Lincolns Cabinet: the Civil War Diaries of Salmon P. Chase
226 (1864).
60
Don E. & Virginia Fehrenbacher, Recollected Words of Abraham Lincoln 15 (1864).
61
See Hepburn v. Griswold, 75 U.S. 603 (1869).

24
 Regardless of intent and the end result that followed, this act portrayed the type of

leadership embodied in Lincoln. His secretary, John Nicolay, wrote that no other man

than Lincoln would have had the degree of magnanimity to thus forgive and exalt a

rival who had so deeply and unjustifiably intrigued against him. It is, he continued,

only another illustration of the greatness of the President, in this age of little men.

In the end, the Civil War tied together the North, which proved much more

resilient in dealing with the economics of war than did the South. In his Thanksgiving

Day proclamation of 1863 shortly issued six weeks before the Gettysburg Address,

President Lincoln said: Needful diversions of wealth and of strength from the fields of

peaceful industry to the national defense, have not arrested the plough, the shuttle or the

ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron

and coal as of the precious metals, have yielded even more abundantly than heretofore.

Population has steadily increased, notwithstanding the waste that has been made in the

camp, the siege and the battle-field; and the country, rejoicing in the consciousness of

augmented strength and vigor, is permitted to expect continuance of years with large

increase of freedom. No human counsel hath devised nor hath any mortal hand worked

out these great things. They are the gracious gifts of the Most High God, who, while

dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed

to me fit and proper that they should be solemnly, reverently and gratefully

acknowledged as with one heart and one voice by the whole American People.62

62
Collected Works of Abraham Lincoln 496 (Vol. 6 1863).

25