The American Civil War was a long and wearing one that forced the two sides to take extreme measures to keep the ranks of their armies filled. In addition to relying on volunteers to serve in their armies, they needed large amounts of money to fund and maintain their military. The South had a more difficult job in raising money than the North.
The economy of the Confederacy made it difficult for them to secure funding for the war. The war was a modern technological one that couldn’t be financed with the capital invested in land and slaves. The economy was incapable of producing railroad tracks, engines, the rolling stock, and a host of other things required for a mid-nineteenth century war.
The South’s financial business was mostly in the North or Europe. With no economic infrastructure in place, Jefferson Davis and his advisors had three main solutions to the problem of finances.
This is a transcript from the video series The American Civil War. Watch it now, Wondrium.
The Most Obvious Source of Funding: Taxes
The first solution that comes to anyone is to levy taxes. According to Christopher Memminger, the Secretary of Treasury in the Confederacy, taxing was the only way to fund the war. But knowing it would be received with criticism, the Confederate Congress showed resistance and wasn’t willing to go with it.
The point is that direct taxes were not in place before the Civil War. The government financed the expenses with revenues from tariffs and selling western lands. That’s why people were not accustomed to paying taxes to the government, further complicating matters for the Confederates.
However, Congress was forced to go with it and passed a small property tax law in August 1861. A more comprehensive law replaced the original one as things got worse. According to the new tax law, income tax was on a scale of 1 percent to 15 percent. Consumer goods had an 8 percent sales tax, and wholesalers had to pay a 10 percent tax on profits.
These taxes turned out to be a far cry from covering the expenses of the war, making up only five percent of the whole budget needed for the war.
Still, the fact that people paid taxes showed that they would endure the decisions of the Confederate government, although they were contrary to the state rights and individual rights that seemed to be the motivation of the war in the first place.
Learn more about filling the ranks.
Issuing Floating Bonds
The second solution to the problem of money was to issue floating bonds. By selling bonds, the Confederacy could cover another portion of its expenses. The citizens would not resist it as it was not compulsory. By selling bonds, the Confederacy earned enough money to pay for 35 percent of the war expenses.
Learn more about wartime reconstruction.
A Decision with Detrimental Results: Printing Money
The third way, which had disastrous consequences, was to print money. Although it did cover the remaining 60 percent of the war costs, it led to a dramatic rise in inflation. At the same time, the Union blockade grew tighter, and goods became insufficient for the demand of people. Union armies penetrated the Confederacy and further disturbed the Confederate economy. They also destroyed the transportation network, which could transport goods in different regions of the Confederacy.
So the perfect recipe for disaster was large amounts of paper money and scarcity of goods. The resulting inflation led to a 46-fold increase in prices in 1864. So, if you could buy something for $1 in 1861, you would have to pay $46 for it in 1864. By the end of the war that $46 had increased to $92.
The combination of factors, mainly the blockade, the penetration of the Northern army, and the fact that Europe didn’t recognize the Confederacy, all contributed to a financial crisis in the South. Europe’s failure to recognize the Confederacy created many problems for the South that could have been avoided. For example, the Royal Navy could have helped the Confederacy to break the blockade, making more goods accessible to the South.
Although all these factors led to the South’s inability to finance the war, the most important reason was the nature of the Confederacy economy. It was completely reliant on agriculture and slavery. That kind of economy could not fund a war with that scale and length.
Common Questions about How the Confederacy Funded its Army During the Civil War
The economy of the South during the Civil War was primarily based on slavery and agriculture. It was not the kind of economy to be able to cover the expenses of a modern war. So the Confederacy had problems funding the war efforts.
The Confederacy adopted three strategies to raise money in the Civil War. The first option was levying taxes on the people of the South. The second solution was issuing bonds that people bought. The last option that had adverse consequences was printing money.
Inflation was high because the Confederacy decided to print money to cover the war expenses. Also, the southern economy was based on agriculture and slavery, which was not powerful enough to support such a war.
The Confederacy money lost its value primarily due to printing money to fund the war efforts. But a combination of other factors contributed to the Confederate money’s considerable value loss. They included the penetration of the Northern army into the Confederacy and scarcity of goods due to the blockade by the Union state.