Civil War Finance

The Civil War and Finance? Come on, you knew there was a 100% probability I was going to post this one!

Financing the Civil War: The Confederacy's Financial Strategy by Rose Razaghian

The North and South Used vastly different ways of financing their war efforts. For instance the North borrowed heavily and raised taxes at the Federal Level. The South, on the other hand, for the early years of the war was quite haphazard in their financing methods and relied quite heavily on printing money (i.e. "Inflation financing"). Why? There are many reasons, but Razaghian suggests that the reluctance of the South to create a powerful central government.

Some of the high points:

"...the difference in their strategies presents a puzzle. Were confederate decision-makers irrational? Did they expect that the war would end quickly?
Were they fruitlessly anticipating England's interference? Was the Confederacy constrained in their financial choices because of a smaller resource base?

I argue that the key to understanding the Confederacy's financial policies is to take into account the political incentives underpinning their financial strategy as well as the endogenous relationship between financial choices and the success or failure of military engagements. Southerners' long-standing defense of states' rights and slavery motivated the initial set of financial policies."

The Civil War obviously changed the shape of the US government as well:

"...the weak status of the American state was significantly altered when the Civil War
unleashed the expansion of the central state. One of the crucial aspects of central state expansion was the significant increase in the capacity of state finance. In fact, Bensel argued that "the only sector to feel the full force of central state authority was the financial system." This expansion of state capacity was embodied in three policies: replacement of the gold standard with paper currency, creation of a national banking system that nationalized the currency, and the placement of the national debt with finance capitalists."

Inflation in the Confederacy was rampant after the summer/fall of 1863:

"...between 1863 and early 1865, the price of wheat increased by almost 1,700%, bacon by 2,500%, and flour by almost 2,800%. By the end of the war, prices for shoes rose to $600 per pair in some counties and a simple wool overcoat could cost as much as $1,500.34 In fact, the volume of currency was so large that some printers had to use old and used paper to satisfy the demands of the Treasury. Some printers even supplemented their paper supply with lining papers and wallpapers to continue printing notes."

"The first significant decline in the Confederacy's currency seems to have taken place in the Summer of 1863, with a threefold depreciation from $5 in March to $14 in October for one gold dollar; at no other point did the value of the currency decline at this rate in the span of seven months."

The financial markets seems quite efficient at forecasting the ultimate victor:

"As the money supply flooded the economy, capital markets dried up. In addition, militarysetbacks, especially the news of Gettysburg and Vicksburg in early July 1863, led to a sharp decline in Erlanger bonds. By the fall of 1863 McRae (the Confederate agent abroad) had decided that it would be impossible to raise a large amount of money on good terms unless the Confederates began to have better success in war."

A very interesting history! I know I learned quite a bit of both history and finance.

Suggested Citation: Razaghian, Rose, "Financing the Civil War: The Confederacy's Financial Strategy" (November 2004). Yale ICF Working Paper No. 04-45. http://ssrn.com/abstract=621761