Two thousand years ago, Cicero observed that the only way to win a war is to raise money, which he called the “sinews of war.” The means of financing a major war have not changed much over the centuries: governments can tax their people; they can borrow; or they can print currency, leading to inflation.
Today, with Russia’s war against Ukraine dominating the headlines, and with inflation in the United States at its highest level in four decades, is an apt time to revisit the financial side of the most important war in American history, the Civil War. A new book by Roger Lowenstein, Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War, provides an excellent introduction.
Slavery and the South
Although, as his title suggests, Lowenstein devotes more time to the North than the South, some of the most interesting sections of his book are about the South, both during and after the war.
Lowenstein disagrees with the claim of the 1619 Project that “American capitalism is an evolved form of slaveholding.” The antebellum southern economy, he argues, was the antithesis of dynamic, modern capitalism. In the South, wealth was largely tied up in fixed assets, above all land and slaves. According to Lowenstein, “Labor was locked in place, as surely as with medieval serfs, and given the difficulty of converting property to cash on any scale or with any dispatch, assets were practically immobile. The South’s inability to adapt, to shift capital to more vital industries . . . severely hurt its prospects.”
The South, far more than the North, relied on the printing press to finance the war, with the result that it suffered first from inflation and then from hyperinflation. Lowenstein provides a great description of how inflation destroyed the Confederate economy. There were bread riots in Richmond and elsewhere, as women demanded food for their families. The local government arrested some of the women, but as Lowenstein notes, “the sons of Virginia would not long fight for a government holding its women in a stockade.”
Lowenstein also has an interesting sketch of the South after the Civil War. He notes that, unlike the defeated nations of Germany and Japan, the southern part of the United States did not revive rapidly. Although he does not explore the reasons for this in any depth, he blames the South’s adherence to what he calls a “quasi-legal refinement of slavery,” the Jim Crow system. Even southern whites, however, lived quite differently than their northern counterparts. Lowenstein notes, for example, that most southern schools were open fewer than 100 days a year, while northern schools, even in rural states, were in session 130 to 190 days.
In the “northern” sections of the book, Lowenstein looks not just at financial but also social legislation. He discusses, for example, the Land Grant College Act, sponsored by Vermont senator Justin Morrill, that provided federal grants of land to the states to encourage the establishment of colleges to teach “agriculture and the mechanical arts.” He summarizes some of the complex history of the legislation to authorize and fund the construction of the transcontinental railroad. He touches on some less well-known measures, such as the formation of the Department of Agriculture and the Yosemite Valley Grant Act.
By the end of the Civil War, as Lowenstein notes, the national government was larger and stronger than it had ever been. He states, “The federal government, previously a collection of custom houses and postal carriers, was entrusted with vast new responsibilities. . . . Federal budgets in the 1870s hovered around $250 million, four times as large as those in the 1850s. By 1890, with the United States at peace and the frontier officially closed, the federal budget topped $350 million.” Lowenstein seemingly has no doubts that all this growth was a good thing.
Of course, as the title promises, Lowenstein also recounts how Lincoln and his principal secretary of the treasury, Salmon P. Chase, raised the money that enabled the North to win the Civil War. At this point some disclosure is necessary: I am the author of a recent biography of Chase, so I have researched and described many of the same issues and events as Lowenstein.
Lowenstein does not devote much time to the pre-war careers of Lincoln or Chase, so it is not surprising that he makes a few errors here. For example, he claims that Chase “started out as a Whig” and “early in his career, he flipped [and] joined the Democrats.” It would have been surprising indeed for Americans in 1860 to be told that Chase was a Democrat; they viewed him as an abolitionist or a Republican. For many Americans those terms were synonyms.
Chase indeed started political life as a Whig, but he did not “flip” to join the standard Democratic party. Instead, he joined in 1841 the tiny Liberty Party, essentially the abolitionists. He helped broaden and strengthen that party, then to form the larger Free Soil Party in 1848. He was chairman of the first Free Soil national convention and author of its famous platform. A few years later, Chase was a founding father of the Republican Party. Calling Chase a “Democrat,” as Lowenstein does more than once, hardly captures this essential part of his life story.
Financing the Union War Effort
The financial problems the federal government faced started before the first shots of the Civil War were fired at Fort Sumter, South Carolina, in April 1861. Lowenstein rightly notes that the federal government, under President James Buchanan “had lived well above its means, leading to a doubling of federal debt.” Indeed, the problems were so severe that Chase was inclined to decline Lincoln’s offer to make him Secretary. Chase had been elected for another six-year term in the Senate, and indeed served for one day, the first day of Lincoln’s presidency, before resigning to take over the Treasury.
Lincoln persuaded Chase to take the job, and for the first few months, as Lowenstein capably relates, Chase relied primarily on bank loans to finance the federal government. In part because of the threat of war with Great Britain and in part because of Chase’s insistence that the banks lend to the government in the form of gold, the banks “suspended specie payments” in December 1861. The banks were still open for business, but they would no longer honor requests for specie—for gold and silver coins.
The government would have to pay its debts with some form of paper, but there was a vigorous debate in early 1862, described well by Lowenstein, about whether the government’s notes should be “legal tender.” Chase was reluctant to take this step, but he was persuaded by members of Congress, who said that without this they could not pass the bill through Congress, and that the notes would not be accepted in the market.
The government also needed to persuade the people to invest in the war effort. Lowenstein recounts Chase’s first tentative efforts at what he called a “national loan,” followed by the far more successful efforts of Jay Cooke, the young Philadelphia financier who was hired by Chase to market federal bonds. With articles in the newspapers, with sub-agents in every city and town, Cooke sold hundreds of millions of dollars of federal bonds to the northern public.
Notes and bonds without taxes, of course, lead to inflation. At first, Chase was reluctant to propose tax increases to Congress, because like almost everyone else, on both sides, he expected that the war would be short. As the war continued, however, Chase pressed Congress to increase tariffs and impose other taxes, and Congress responded by creating the first national income tax and imposing other taxes. There was inflation in the North—Lowenstein’s estimate is that it was about 80% over the five-year course of the war—but this was nothing like the hyperinflation in the South—which he estimates at something like 1700% or even 2500%.
Chase was proud of his work in financing the war, but even more proud of his work creating a national banking system and single national currency. Lowenstein describes well how Chase pushed this legislation through Congress, facing some Republican as well as Democratic opposition. Late in his life, when asked about his main accomplishments, Chase mentioned two: helping to end American slavery, and helping to create a single national currency.
The main weakness of Lowenstein’s book is that he relies too often on secondary sources and memoirs written years after the event—with the result that he makes some questionable claims.
For example, at the end of one chapter, Lowenstein writes that Lincoln went to Chase’s house one evening and, “draping one lanky arm on [Chase’s] shoulder,” handed back a resignation letter to Chase, calling it “a paper I want nothing to do with.” Lowenstein’s source for this episode and quote is a memoir by Maunsell Field, published after the death of both Lincoln and Chase. Field was of course not present for the conversation between Lincoln and Chase; he claimed that Lincoln had related the events to him a year later, in the summer of 1864, during a long discussion with Lincoln about Chase.
Don and Virginia Fehrenbacher, in their great book, Recollected Words of Lincoln, assign grades to various Lincoln quotes, based on their reliability. They grade this Field quote as a “D” and note that “it seems unlikely that Lincoln would have confided so elaborately to Field, a Chase favorite.” They might have added that it seems unlikely that Lincoln would drape an arm around Chase; that is just not the kind of intimacy that he would have attempted with his stiff secretary. In short, the incident and the quote are probably fiction.
In another section, Lowenstein quotes Lincoln as telling Chase, at a point when the federal government did not have funds to pay the soldiers, that he should “give your paper mill another turn,” in other words, that he should print more government notes. The source for this quote is a comment that one of the president’s private secretaries, John Nicolay, made to his daughter thirty years after Lincoln’s death. Again, the Fehrenbachers assign this quote a grade of D; it is probably apocryphal.
Lowenstein relies rather uncritically upon the first biography of Cooke, written right after his death, and upon Cooke’s own unpublished memoir. In one passage, Lowenstein accepts Cooke’s claim that he pressed Lincoln, in a conversation at Lincoln’s summer home, to fire the leading Union general, George McClellan. In a part of the memoir that Lowenstein does not quote, Cooke claims that he started this conversation by reminding Lincoln that he (Cooke) was responsible for raising the “vast sums” to finance the war. But Cooke did not start raising funds (at first on a modest scale) until November 1862—the month in which Lincoln fired McClellan. So this incident, too, probably did not happen.
It would be a mistake, however, to conclude this review on a negative note. Lowenstein has provided an interesting, insightful, readable account of Civil War finances, both northern and southern. It is a book that reminds us that the financial and political choices that leaders make during wars have consequences—not just on which side wins the war, but on the lives and liberties of their people long after the war.