for more than half of its wartime expenses. This caused a virulent inflation that had reached 9,000 percent by war’s end. The collapse of the South’s economy under this kind of financial pressure would be no small factor in its defeat.

The third method is to borrow. This the federal government proceeded to do, and on a scale no sovereign power before had ever contemplated. The national debt, $64.8 million in 1860, had by 1865 reached $2.677 billion, an increase by a factor of over 40. Total annual government expenses before the war had never exceeded $74 million. By 1865 interest expense alone was almost twice that amount.

This huge growth in the national debt had two great economic consequences. Before the war, far fewer than 1 percent of all Americans owned securities of any kind. But during the war, the government sold bonds to about 5 percent of the population of the North. Thus the war enlarged what Karl Marx—who in its penultimate year helped found the “First International”—would have called the “capitalist class.” For the first time, a large number of middleclass people became investors.

Second, this vast influx of bonds, and bondholders, into the country’s financial markets, transformed Wall Street almost overnight. Although the stock market had plunged at the outbreak of war—as stock markets almost always do—investors began to realize that the conflict would be a long one and not only would there be a vast increase in the amount of securities to be traded but much of the money that the government was spending would go to firms such as railroads, iron mills, textile manufacturers, and munitions companies, whose profits would be invested in, and capital needs met by, Wall Street.

The biggest boom the Street had ever known was soon under way. In just a year, this patch of Lower Manhattan went from being a relatively provincial place to being the second-largest market on earth. Only London, the financial capital of the world, exceeded it. But although now a very large market, it was not a well-regulated one. In fact, it wasn’t regulated at all. For a few brief years, Wall Street saw capitalism red in tooth and claw. This was exciting, to be sure, but no capital market can operate wholly untrammeled for long and survive. Customers will seek safer places to do business.

Fortunately, Wall Street began to regulate itself. When the New York Stock Exchange, the oldest and most prestigious exchange, and the Open Board of Stock Brokers, which was at various points in the war years the largest exchange in volume, merged in 1869, the new organization was powerful enough to impose order on the Street and enforce rules that made it a far safer place to invest.

The American money supply had also become safer. In 1863 Congress had established nationally chartered banks, which had to meet stringent auditing requirements and were allowed to issue bank notes only

within carefully prescribed limits and even to a uniform design. The thousands of statechartered banks were driven out of the bank-note business by a stiff tax on their issuance.

After the war, the country began to move back toward the gold standard, which was fully instated in 1879. By preventing excess money creation, the gold standard makes inflationary government policies impossible. But the gold standard, which was popular in the Northeast, where the large banks and a good deal of the nation’s wealth were concentrated, was deeply resented in much of the rest of a country that was still dominated by agriculture. Farmers are chronic debtors, and debtors like inflation because it allows them to pay their debts in cheaper money.

So while the political interests of the industrialists and bankers, increasingly identified at this time by the rubric “Wall Street,” were addressed by the return to the gold standard, those of the debtors were met by the free coinage of silver. Great silver strikes were made in the West in the 187Os. Just as the country was about to return fully to the gold standard, Congress passed the Bland-Allison Act in 1878. It required the Treasury to purchase between two and four million dollars’ worth of silver every month and to mint it as coins valued at the ratio of 16 to 1 with gold.

At first that was about the free-market price of silver compared with gold. But as silver continued to pour out of Western mines, its price sank to about 20 to 1. In 1890 Congress required the Treasury to buy 4.5 million ounces of silver a month—not far from the total output—and mint it, still at the ratio of 16 to 1. This was a sure recipe for disaster, as people spent the silver and kept the gold. The yellow metal began to trickle out of the Treasury. When the terrible depression of 1893 began, Congress hastily repealed these laws. But their appeal to debtors continued, and this inflationary policy would propel the 36-year-old William Jennings Bryan to the 1896 Democratic nomination for President when he electrified the convention with his “Cross of Gold” speech.

There had been two serious economic casualties of the Civil War, however. One was the American merchant marine. In 1860, 66.5 percent of American foreign trade was carried in American ships. But Confederate commerce raiders forced Northern shipowners to transfer their vessels to British registry. Most of them never returned. By the end of the war, only 27.7 percent of the country’s trade was carried in American bottoms. By 1912 it would be less than 10 percent.

The other casualty was the devastated American South. Always short of capital, the region had seen its holdings be obliterated by the war and by the freeing of the slaves. With the withdrawal of the last federal troops after the election of 1876, the old landowning class reasserted its control and a system of sharecropping evolved. The

South would remain impoverished for generations. The poorest of all, the descendants of the freed slaves, began to migrate north to major cities after World War I, in search of both opportunity and greater freedom than could be found in the Jim Crow South.

But except for the South and the merchant marine, the American economy was far larger and stronger than it had been before the war. Its development over the next four decades would be one of the wonders of the world.