By Gary W. Gallagher, Ph.D., University of Virginia
During the American Civil War, the financial landscape in the North was a little better than the South. The Union government had more available sources of income to fund the war. The economic structure, the way we know it today, was not present in the North. With more than 7,000 types of banknotes in the North, and each local and state bank issuing their own paper notes, valid only in a small area, there was a chaotic banking system in place.
Issuing and Selling Government Bonds
The first strategy to provide budgets for the war was selling bonds. The most common war bond was a so-called “5/20” bond with a six percent interest and redeemable in at least five years and at most 20 years. The innovative idea of the North, which was repeated in World War I and World War II in the U.S., was leading the people to buy the bonds, not the banks.
More than a million people in the North bought these government bonds, which tied them to the government. According to Alexander Hamilton, having people related to their government through financial interests was one way to ensure their loyalty.
The financial investment was more than people’s hope to win in the war or abolish slavery. It was tied to the government as well as the war effort through their financial interests. This system of loans shows a step toward a modernized capitalist system in the United States.
The bonds that the North sold during the last three years of the war amounted to 1.5 billion dollars. As a comparison, the budget of the United States government in 1860 was 63 million dollars. This comparison puts that amount of money into perspective.
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Printing Treasury Notes
Another way to fund the war was to issue treasury notes. In late 1861 and early 1862, since the United States government was running out of money, which was in the form of gold and silver, it couldn’t pay for all the supplies needed for the war. To solve the problem, they resorted to the same solution that the confederacy had already adopted: printing paper money.
The idea of paper money was not well-received by the people since they only trusted silver and gold as the primary forms of money. Paper money reminded them of the worthless bills printed by the Continental Congress during the Revolutionary War. For the Northerners, it was of no value.
Although it was a tough decision for the government, money was so tight that the Congress passed the Legal Tender Act on February 25, 1862. The Act authorized the issuance of treasury notes worth $150 million. The paper money was then called “greenbacks” and became the origin of today’s dollar bills.
The issuance of paper money didn’t have adverse consequences like it did in the South. The Northern paper money was made legal tender, receivable for all public and private debts, only with very few exceptions. Paying import duties and paying interest on the national debt were not possible through these bonds, which were the main exceptions.
Another source of strength for Northern paper money was the timing. The issuance happened when the Northern army was doing great in the west. It was winning in Tennessee, along with other places across the board. So, the paper money seemed like another successful measure that fortified the optimism that was everywhere.
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Taxing Goods and Products
The last measure to secure funding for the war was taxation. To avoid the inflationary consequences of issuing paper money, Congress levied taxes at the same time that it authorized the circulation of the greenbacks. The North issued almost half a million dollars’ worth of paper money. Like the South, the North had an income tax, which increased from 3 percent to 10 percent.
Excise taxes were also levied on a host of products like tobacco, liquor, and yachts. To protect the U.S. industries from new taxes, Congress put tariffs on goods. These taxes created an income of $600 million in the last three years of the war.
So, the North and South adopted the same approaches to increase their income, but the North was more effective in using those methods.
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Common Questions about the Financial Sources of the Union in the American Civil War
The Union used a mix of different strategies to pay for the Civil War. Levying taxes, issuing bonds, and printing paper money were Union’s ways of raising money.
The greenbacks didn’t lead to a remarkably high inflation in the North. They could be used in all states, and came at a perfect time when optimism about the future of the war was at its peak.
The government in the North issued bonds to raise money for the war. They were called 5/20, which meant they were redeemable in no less than five years and no more than 20 years.
The Union levied a tax on a wide variety of products like tobacco, liquor, and yachts. The union also increased the income tax from 3 percent to 10 percent.
