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Wars are fought with silver bullets. While individual battles are decided by tactics, fire-power, courage, and, of course, luck, victory in the long haul of war has almost always gone to the side better able to turn the national wealth to military purposes.

As it happened, the American Civil War was the first great conflict of the industrial era. It was fought on a scale previously unimagined and foreshadowed the desperate global struggles of the early 20th century. As a result, both sides confronted wholly new fiscal demands and had to invent new ways to meet them. The fact that the North succeeded in coping with expenses of this magnitude, and the South did not, played no small part in the outcome.

At first, both sides confronted desperate financial problems. Thanks to an economic depression, the government in Washington had been operating in the red for nearly four years, borrowing mostly short-term to make up the deficit. In December 1860, as the Deep South voted for secession, there was not even enough money in the federal treasury to pay the salaries of congressmen, let alone fund a great war.

To our jaded 20th-century ears, the actual sums involved sound trivial. But in mid-19th-century, America $1,000 was a skilled worker’s annual wage, and the entire gross national product was well under $10 billion. At the outbreak of the war, federal spending in all departments was running at only $172,000 a day, raised almost entirely from tariffs. Three months later war expenses alone were eating up $1,000,000 a day. By the end of 1861, the War Department’s daily spending was up to $1,500,000.

How could these expenses be met? In both peace and war a government generally has only three ways to raise money: it can tax, borrow, and print.

Both sides quickly resorted to the printing press. In December 1861, Northern banks had to stop paying their debts in gold, and the federal government was forced to follow suit a few days later. The country had gone off the gold standard, and Wall Street panicked. “The bottom is out of the tub,” Lincoln lamented. “What shall I do?” Soon, the Treasury was authorized to issue greenbacks, as the new paper money was called, and by 1865 there was $447,000,000 in circulation.

The consequences of issuing large quantities of fiat money—money that is money only because the government says it is money—are inevitable, and they were as well known then as they are now. First, Gresham’s law (“Bad money drives out good”) comes into play, and gold and silver disappear into mattresses. Second, inflation takes off.

The $447,000,000 in paper money was about 13 percent of total government expenses during the war, and these greenbacks contributed substantially to the steep wartime inflation in the North. But that inflation was nothing compared with what the South suffered as a result of paying more than half of its bills with paper money. As early as

May 1861, the Confederacy was issuing treasury notes that would only be redeemable in gold and silver two years after independence was achieved. During the war the Confederate government issued more than $1,500,000,000 of these notes, and the effect of this flood on the Southern economy was catastrophic. In the first two years alone prices rose more than 700 percent. To make matters worse, the government in Richmond was not the only one printing money; state and city governments also issued notes. Because the South lacked good paper mills and printing facilities, counterfeiting was easy and widespread. By the end of 1863 the Southern economy had spun out of control. Hoarding, shortages, and black markets spread relentlessly, while support for the war eroded as living standards fell.

The South issued so much paper money because its ability both to tax the population and to sell bonds was severely limited. The North had an established treasury and revenue-gathering system, with a bureaucracy and procedures already in place. The South had to start from scratch. Worse, the South suffered from an economy notoriously lacking in liquidity. Wealth, in other words, could not be easily translated into money and spent on military power. While the South had 30 percent of the country’s total assets in 1861, it had only 12 percent of the circulating currency and 21 percent of the banking assets. The word land-poor was not invented until Reconstruction days, but it perfectly described the Southern economy. In the four years of the war, the Confederate government was able to meet only 5 to 6 percent of its expenses with tax revenues.

The federal government, in contrast, raised fully 21 percent of its total revenues by taxation. The first federal income tax was enacted as early as August 1861, and the Internal Revenue Act, which taxed nearly everything, followed in 1862. The Bureau of Internal Revenue, the ancestor of today’s Internal Revenue Service, is by no means the least of the country’s enduring legacies from the Civil War.

Loans, the third means of raising revenue, also worked to the advantage of the North, thanks to its large banks and to one banker in particular, Jay Cooke of Philadelphia. Cooke was born in what would later be called Sandusky, Ohio, in 1821, the son of a lawyer and congressman. He went to work as a clerk when he was fourteen and soon ended up in Philadelphia, where he opened his own bank just as the war began.

Cooke’s younger brother, Henry, had close political connections with Salmon P. Chase, the Ohio senator and governor and Lincoln’s first Secretary of the Treasury. The younger Cooke saw to it that his brother got to handle a $2,000,000 bond issue for Chase.

After the disastrous First Battle of Bull Run in the summer of 1861, Jay Cooke, according to his biographer Ellis P. Oberholtzer, “put on his hat, left his office, and visiting the bankers of Philadelphia, in a few hours

collected over $2,000,000 on the security of three-year treasury notes.” A few days later, Cooke accompanied Secretary Chase to New York and helped him raise an additional $50,000,000 from bankers there, pending the issuance of government bonds paying 7.30 percent interest. (The interest rate of these bonds, the so-called seven-thirties, was chosen, apparently by Chase, for no better reason than that they would pay two cents a day in interest for every hundred dollars in face value.)

The sum of $50,000,000 was a huge underwriting for the banks of those days, but a drop in the bucket compared with what Chase realized would be needed. The national debt had stood at $64,000,000 on July 1, 1860, and a year later had risen to nearly $91,000,000. Chase estimated that by July 1, 1862, it would stand at $517,000,000.

Until then, the government had handled its debt by quietly placing bonds with the major bankers and brokers, who either held them in their reserves or sold them to their largest customers. Clearly a new system was needed, and Jay Cooke devised it.

Cooke was made the agent of the federal government to sell five-twenty bonds (so called because they could be redeemed in not less than five years or more than twenty; meanwhile, they paid 6 percent interest, in gold). He advertised the bonds widely in newspapers and handbills. He had the Treasury offer the bonds in denominations as low as fifty dollars, and he accepted payment on the installment plan. He deliberately tried to involve the little guy. Thus, Jay Cooke invented the bond drive, a major feature of every great war since.

By 1864, Cooke was selling bonds so successfully that he was actually raising money as fast as the Union could spend it.

Before the Civil War, far less than 1 percent of the population had owned any securities whatever. Cooke sold government bonds to about 5 percent of the Northern population. John Sherman, an influential senator from Ohio, said Cooke made the virtues of these bonds stare “in the face of the people in every household from Maine to California.”

Not content with advertising, Cooke planted stories in newspapers. “Here is a letter from a lady in Camden who orders $300,” ran one called “A Day at the Agency for the Five-Twenty Loan.” “There is one from St. Paul, Minn, for $12,500. … Near one of the desks is a nursery maid who wants a bond for $50 and just behind her placidly waiting his turn is a portly gentleman, one of the ‘solid men’ of Philadelphia … He wants $25,000.”

In May 1864, Cooke was selling war bonds so successfully that he was actually raising money as fast as the War Department could spend it, about $2,000,000 a day at this point. Altogether, the North raised fully two-thirds of its revenues by selling bonds. The South, with few large banks and little financial expertise, could raise less than 40 percent by this

means.

Cooke’s successful bond drive caused a breathtaking rise in the United States’s national debt. In 1857, before the onset of the depression, the debt had stood at a minuscule 93 cents per person. Eight years later, it had grown by a factor of eighty and stood at $75 per person, a height it did not reach again until World War I. But, because the North could throw so much of the cost of the war onto the future, as the South could not, its economy remained intact, able to churn out the war matériel that finally overwhelmed the rebellion.

Confederate paper money and bonds, of course, died with the Confederacy, but the greenbacks and the national debt went on and on. Whether and when to return to the gold standard was, second only to Reconstruction, the leading issue in national politics after the war. Debtors wanted more, not less, paper money for its inflationary effects, while creditors, naturally, wanted “sound money.” The latter eventually prevailed, and greenbacks became redeemable in gold in 1879. But they wouldn’t be fully legal tender until 1933, and there was a Greenback party candidate for president as late as 1944, at which point the government was spending money at the rate of $260,000,000 a day.

Paying for the War

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