Review of Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War by Roger Lowenstein

Consider the financial challenge involved. On the eve of the conflict, the annual federal budget was around $80 million. During the war, the US Treasury alone spent almost that amount on average each month. Four years of war cost the South $2 billion. The United States and the Confederacy each tried to increase their revenues through higher tariffs and new taxes. But most of the money had to be borrowed. And when the fight is existential – when a state’s existence is at stake, or when its future revenue-raising capacity is threatened – borrowing becomes a high-flying act.

Longtime writer Roger Lowenstein’s new book, “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War,” draws on several generations of scholarly literature to bring the vital but often overlooked history of the financial challenges of the Civil War to a wider audience. His account begins in the North, where Treasury Secretary Salmon Chase needed to raise more money, as Lowenstein notes, than had been spent since the beginning of the republic. The federal government had long relied on revenue from import duties. But secession reduced customs revenue by eliminating busy southern ports and launching a fleet of Confederate privateering ships on the seas. Nervous New York financiers demanded that Washington strike a deal with the breakaway states. Interest rates on the federal debt have doubled. President Abraham Lincoln observed that he had arrived in Washington only to find “an empty treasury and a great rebellion”.

To make matters worse, Chase was new to finance. As a Democrat from Ohio, he had been skeptical of federal economic authority. Like many Western politicians, he shared Andrew Jackson’s preference for a small federal government and decentralized economic power. But in Lowenstein’s account, Chase quickly came to realize that the hoard of horses and buggies he had inherited were ill-equipped for the age of modern warfare. The federal government in 1861 had no central bank. (Jackson had crushed the second largest bank in the United States three decades earlier.) There was no federal currency, and federal law prohibited the Treasury from borrowing state banknotes which were the de facto means exchange of the country. Chase remained heavily dependent on gold and silver loans from a small cohort of New York bankers.

Four decisive years of financial innovation followed in the North. Chase developed a close (sometimes too close) relationship with Philadelphia broker and future railroad financier Jay Cooke, who remade public finance for the modern age. Cooke broke the monopoly of New York bankers by offering the fundraising project to the American middle class. Cooke and his network of brokers sold American Civil War bonds everywhere through newspaper advertisements and door-to-door sales. By early 1862, Cooke was hawking the Federal debt as Chase’s exclusive agent, turning Union bond sales into a vast engine of war financing. Cooke alone would sell nearly half a billion dollars worth of war bonds.

Public debt alone was not enough. The war brought about the first federal income tax. And in February 1862, Congress took the momentous step of enacting the Legal Tender Act, establishing federal “green bills” (so called because their backs were printed in green ink), which were payable in settlement of all the debts. For the remainder of the war, the value of the greenback became an extremely sensitive barometer of the prospects for the Union’s war effort.

The war also produced a new banking system. A phalanx of federal banks replaced the pre-war hodgepodge of state banks, creating institutions that would not only fund the conflict, but also fund the post-war economy.

As Lowenstein effectively recounts, the South could not claim such a record of innovations. Chase’s counterpart, a South Carolina lawyer named Christopher Memminger, benefited from early windfalls. The Confederacy seized $6 million in gold from federal customs and another $15 million poured into Confederate coffers through bond sales to white patriots in the South affected by the enthusiasm of the early days of secession .

But those early nudges belied a grim reality. The industrial base of the South was one-fifth the size of that of the North. Memminger and Confederate President Jefferson Davis hoped that withholding cotton from the Manchester and Marseilles mills would pressure England and France into supporting the new Confederacy. But a bumper cotton crop in 1860 blunted any market pressure the South hoped to exert. Shortages of basic necessities soon emerged. Inflation, already a problem in 1861 and 1862, turned into hyperinflation in 1863 and 1864. The same gold dollar that bought $1.05 in Confederate notes in May 1861 was worth $100 in four-year Confederate notes later. The cost of flour in the South more than doubled between 1860 and early 1863; sugar has been multiplied by 14 over the same period. Between 1863 and 1864, the prices of wheat and bacon increased 20 times.

Memminger’s best hope was to incur debt secured by the promise of future cotton crops. The US Navy blockade, though often porous, even hampered this strategy. Meanwhile, the Confederacy proved unable to enact any law as legal tender. A cacophony of private promises circulated instead. States, railroads, small businesses, and cities all issued their own currency. In 1863, US greenbacks even began to seep into exchanges in the South – a sure sign that the Confederate state was in trouble. When the value of these greenbacks surged in March 1865, the market effectively heralded what Robert E. Lee’s formal surrender at Appomattox would confirm weeks later. The war was over.

Lowenstein quotes a Confederate veteran as saying, “The Yankees didn’t whip us out in the field. We got whipped at the Treasury Department.

Central to Lowenstein’s narrative is the claim that the North won because its relentlessly dynamic form of “modern finance capitalism” was more effective than the premodern “lordly wealth system” of the South in sustaining 19th-century warfare. The Southern “fixed capital” in slaves and land, he argues, was inferior to the “liquid capital” that fuels modern economies. In Lowenstein’s account, a new generation of stories of race and capitalism, culminating in The New York Times Magazine’s controversial 1619 Project, has missed this fundamental point. Capitalism and slavery, he insists, were fundamentally different.

Lowenstein is right when he says that treating Southern slavery and Northern capitalism alike makes it difficult to explain the Civil War. (Why did a conflict between the two produce a conflict that killed over 700,000 Americans?) But he is wrong about the sources of conflict between them.

As an outpouring of recent histories of slavery and capitalism showed, the Southern planter class had created a modern system of financial capitalism. on the backs of slaves. Slavery had existed for millennia in a way akin to medieval serfdom. But in North America, it has become a dynamic system of highly mobile and tradable assets in the form of human beings. Heavily mortgaged bonded properties connected extractive agriculture in the South to bankers and insurers in New York, London, and Paris, and industrialists on both sides of the Atlantic.

Slavery was a huge handicap for the South, not because it resisted the power of capital markets. Slavery fueled capital markets.

Slavery hampered the White South’s secession effort because it meant the Confederacy’s economy relied on the forced labor of people who eventually rose up and destroyed the system that oppressed them. Some 200,000 blacks served in Union uniform by the end of the war. Hundreds of thousands more left the cotton fields to follow the Union armies, robbing the Confederacy of their labor and shattering its social structure in the process. In the Emancipation Proclamation, Lincoln not only delivered a blow to justice. He also exploited the greater vulnerability of the White South.

For fiscal purposes, the main difficulty of the Confederacy was not slavery. Slavery and finance went too well together. The Confederacy problem was one that attaches to any potential separatist effort. The failure of the Southern War meant that his creditors were wiped out. The 14th Amendment to the US Constitution categorically prohibits the repayment of Confederate debts. The North certainly faced funding problems, but its creditors knew it would survive to collect taxes another day, regardless of the outcome in the South. This basic public finance proposition explains why separatist civil wars so rarely succeed against modern states, at least not without the support of outside powers.

Lowenstein’s book is a compelling account of how the United States acquired and harnessed the staggering power that the modern state offers.

Lincoln and his cabinet and the financing of the Civil War

Penguin Press. 432 pages. $30

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