CIVIL WAR FINANCING: THE FIRST MISTAKES
In order to finance the Civil War, it was necessary for the Federal government to reorganize its entire fiscal and monetary structure. Naturally, many mistakes were made. The government had never been called upon, not even in any of its previous wars, for an all-out effort of the type required by this war. Without the benefit of past experience to guide them, few among those in authority recognized the magnitude of the task involved. Fortunate as this was from a psychological point of view, it was equally unfortunate from the viewpoint of efficient financial management.
Everyone agreed that the war could not last more than a few months. As far as economic resources were concerned, the North's confidence in a short conflict seemed well founded. It had two-thirds of the population, the national wealth, and the national income. It was economically diversified, while the South had few heavy industries and was almost completely dependent on cotton. But the South was equally confident, placing its faith in the superior morale of its population and the economic power of "King Cotton."
Even if there had been a realistic appraisal of the future, no tools were available which could be used efficiently in financing the war. The American economy was overwhelmingly agricultural. The national income was low (estimated at $4.3 billion, or $140 per capita), and savings were not available in large enough quantities to make it easy for the government to obtain large funds. Moreover, the revenue system, being based on customs, sales of public land, and miscellaneous sources, lacked the elasticity required for overnight expansion. Excise taxes had not been levied for a generation, and the income tax was unknown. The methods of borrowing were not much more efficient. The minutest details of each loan--the amount, interest rates, and terms of sale--required Congressional authorization, thus tying the hands of the Secretary and making it impossible for him to adjust the forms and terms of borrowing to the continually changing conditions of the money market.
Neither side possessed a strong banking or currency system. The Federal government had no central bank which could act as its fiscal agent, and not having had any contact with banks for nearly twenty years, it did not know how to deal with them in placing loans. The banking business was conducted by 1,600 state banks, each going its own merry way; 7,000