How the U.S. Paid for the Civil War
Lincoln's wartime governance had dire, and longstanding, economic consequences.
Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War, by Roger Lowenstein, Penguin Press, 448 pages, $30
With Ways and Means, Roger Lowenstein, the author of several popular books on finance, has tackled the Civil War. The book's subtitle—Lincoln and His Cabinet and the Financing of the Civil War—is misleadingly incomplete, because Lowenstein covers far more than Union finance. He aims to demonstrate how the Republicans "vastly enlarged the government." He not only describes the war's expansion of state power across many dimensions; he celebrates this outcome as "an agenda for industry and growth, and to foster opportunity, especially for those at the bottom."
Lowenstein is an engaging, readable author, and he has consulted a wide range of primary sources and secondary literature. But he goes too far when he claims that this Republican "revolution" has been "largely overlooked." Really? Certainly not among historians. Lowenstein's endnotes even cite some works making the same point, including Richard Franklin Bensel's Yankee Leviathan (1990) and James M. McPherson's Battle Cry of Freedom (1988). Among the myriad other histories that have likewise done so are Richard White's The Republic for Which It Stands (2017), Steven Hahn's A Nation Without Borders (2016), and my own Emancipating Slaves, Enslaving Free Men (1996). And certainly many nonhistorians who have read widely about the Civil War are aware of its impact on the central government's powers.
As Lowenstein unveils the government interventions that brought about what he calls a "staggering transformation," he delves into their political origins as deeply as their economic features. This permits him to highlight Abraham Lincoln's role more than most surveys do. Lincoln had been a member of the Whig Party, which traditionally looked askance at presidential intrusion into Congress' realm. But Lowenstein credits Lincoln with working behind the scenes to promote legislation that emerged during his presidency.
What did that legislation do? Prior to the war, the only sources of federal revenue were a low tariff and sale of public lands. By the end of the war, average tariff duties had risen to 47 percent, decisively moving the economy from free trade to protectionism. A vast array of internal taxes, including a graduated income tax, were imposed through a new revenue bureaucracy.
Western lands were opened to homesteading and granted to promote a transcontinental railroad. Additional land grants to the states for endowing colleges constituted the first federal aid to education. A Department of Agriculture was created to help farmers, and immigration was subsidized for employers. Congress also created the National Academy of Sciences to promote technological innovation, and it established such new agencies as the Government Printing Office and the Bureau of Engraving and Printing. (The Homestead Act is arguably better seen as a form of privatization than as an extension of government power, but Lowenstein is not alone in placing it under the latter heading.)
Increased government borrowing resulted, by Lowenstein's count, in the issue of "thirty-two varieties of notes, bonds, and other instruments." One reason for this array, not explicitly mentioned in the book, is that it wasn't until after World War I that the Treasury gained its current discretion to issue whatever debt is necessary to cover expenditures. Before then, practically every new loan to the government required a separate act, debatable in Congress. Lincoln's first treasury secretary—Salmon P. Chase, who had a sometimes uneasy relationship with the president—thus figures prominently in Ways and Means.
Some of these loans could be quite complex, and Lowenstein has to simplify things for readers unfamiliar with finance. Just to give an example, bonds issued in 1862 known as Five-Twenties paid an annual 6 percent interest semi-annually. They had a fixed maturity of 20 years, during which their market price could fluctuate, but could be unilaterally paid back at face value by the government after five years. In technical terms, they were a 20-year loan with an embedded call option after five years.
Prior to the war, the U.S. government had generally run surpluses, and the national debt stood at a miniscule $65 million (equivalent to about $2 billion in 2022 dollars). By the end of the war, the debt had risen to $1.3 billion, with interest alone constituting, as Lowenstein notes, "more than the entire prewar budget." Yet that was not sufficient to cover the war's cost. So Chase, previously a hard-money Democrat, reluctantly resorted to fiat money—greenbacks—generating inflation that ultimately increased the price level by nearly 80 percent. Lowenstein considers this "hardly all bad" and bemoans postwar efforts to reestablish a gold standard.
Similar predilections are apparent in Lowenstein's discussion of another Chase initiative, the national banking system, which came to fruition only after Chase's resignation as treasury secretary. Lowenstein unfairly characterizes the prewar monetary system as "chaotic," ignoring the copious scholarship that finds antebellum "free banking," although far from perfect, to have been at least as serviceable as most subsequent U.S. monetary regimes. Moreover, Lowenstein's praise for national banking hardly accords with his description, in his book on the Federal Reserve, of the national banking system as plagued by panics. Toward the end of Ways and Means, he even backtracks slightly, admitting that the new system gave too much dominance to Wall Street. But he never realizes that the two most serious defects were nearly identical for both prewar and postwar banking: legal limits on branch banking and requirements that banks hold government bonds (state-issued before the war and Treasury-issued afterward).
Lowenstein is also inconsistent in his appraisal of government-subsidized transcontinental railroads. Although he calls them a "striking success," he concedes that they were "a tempting vehicle for corruption," manifested in the Crédit Mobilier scandal. Yet he is blind to the fact that government subsidies made corruption almost inevitable. Nor does he seem aware of the extent to which the transcontinentals were built ahead of demand, contributing to shoddy construction, bankruptcies, premature settlement, overexpansion of agriculture, subsequent agricultural economic distress, and environmental damage.
Lowenstein also treats, although less extensively, the parallel expansion of government within the Confederacy. His account really shines when describing how harshly the Confederate hyperinflation affected the Southern population, which by the end of the war was on the verge of starvation. He also points out a factor not usually mentioned: The Confederacy's steady loss of territory and population aggravated the inflation.
Lowenstein does miss one crucial aspect of Confederate mobilization when he asserts that the South was "too late to build factories." In reality, the wartime Southern economy underwent forced industrialization through government-owned facilities. Gen. Josiah Gorgas, chief of Confederate ordnance, could brag in his diary that "large arsenals have been organized at Richmond, Augusta, Charleston, Columbus, Macon, Atlanta, and Selma," along with powder mills, cannon foundries, rifle and pistol factories, and more. "Where three years ago we were not making a gun, pistol nor a saber," he concluded, "we now make all of these."
The book stands out for its lengthy treatment of the cotton trade, particularly trade between the lines. No general account that I'm aware of has given this topic as much attention. Permitting the purchase of Southern cotton was a source of tension within the Union leadership. Lincoln and Chase pushed for a limited and regulated opening of this trade through licensed dealers, in the hope that increased cotton exports would bring more gold into the Northern economy. But military leaders such as Ulysses S. Grant and William Tecumseh Sherman were adamantly opposed to—and sometimes thwarted—the administration's efforts, believing cotton trading would help the South prolong the war. In any case, an illicit trade persisted and was often facilitated by bribery.
Lowenstein emphasizes, rightly, that Lincoln went to war to preserve the Union and that ending slavery was an initially unintended consequence. He also provides a good summary of the effort, falling under Chase's purview, to grant former slaves land, with limited success, in the South Carolina sea islands, which were occupied early by the Union military. Because he otherwise pays little attention to military events, except as they impinged on finance, his treatment of them is limited and occasionally simplistic.
Lowenstein has dated views on the alleged inefficiency of the prewar Southern slave economy and buys into the long discredited Beard-Hacker thesis that the Civil War promoted subsequent economic growth and industrialization, with his version of the thesis emphasizing government activism. In fact, the U.S. had already been experiencing healthy sustained growth for three decades prior to the war. Moreover, some of the new policies Lowenstein admires contributed to postwar poverty in the South—particularly the national banking system, which throttled sources of credit in that region.
In short, Ways and Means is a good introduction to the politics of Civil War finance, exposing facets not usually covered in popular works. But the author's interventionist bias often leads his economic conclusions astray.
This article originally appeared in print under the headline "How To Pay for a Civil War."
