in the north
Annual expenditure in the Union reached a staggering 16 times the pre-war budget. Despite the need for funds, there was great fear in Congress about raising taxes because of Americans’ well-known antipathy to taxes.
But Salmon P. Chase, the fiscally conservative Secretary of the Treasury, was terrified of inflation. He acknowledged that without revenue, the government would have to resort to the printing press. After the southern states seceded, interest rates on the country’s debt rose and foreigners refused to lend.
Thaddeus Stevens, the chairman of the House Ways and Means Committee, went further than Mr. Chase had imagined by inventing an entirely new tax law. Previously, the Union had financed itself with tariffs on foreign trade, which it raised several times. In addition, it created a system of “internal taxes” on everything from personal income to leaf tobacco, liquor, pig carcasses and auctioneers’ fees. Congress also created a new tax collection agency, a forerunner to the Internal Revenue Service, underscoring its commitment to generating revenue in this way.
Mr. Stevens had no idea how much revenue the taxes would bring, or if people would even pay them. (“Everything on Earth and below the earth must be taxed,” one Ohioan grumbled.) But by 1865, the Treasury was earning $300 million in customs and domestic taxes—six times its antebellum tax revenue.
That revenue helped moderate inflation caused by the issuance of “greenbacks,” notes that circulated as money to pay for the war. The country’s creditworthiness improved and Mr. Chase was able to borrow huge amounts of money. Ultimately, inflation in the Union was no greater than during the two world wars of the following century.
In the south
The Confederacy faced similar financial challenges. Christopher Memminger, the German-born finance minister, warned that banknote printing was “the most dangerous of all methods of raising money.” But the South was ideologically opposed to taxation, especially by the central government.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
The South approved a very modest tax (half a percent on real estate), but collecting it was left to the states and few tried to collect it. When cotton shipments to Europe were hampered by the Union blockade, Memminger soon found he had little choice but to print banknotes to cover the costs of the war. These have blown up at a catastrophic pace.
