(Very) Brief Financial History of The Civil War

There are many articles covering the financial history of the Civil War. Basically, the United States government was not in the business of printing paper currency until the second year of the Civil War.

Before the War

The ante-bellum economy operated on the barter system and a system of hard money. For most folks (not all), it was rare that they would ever have more than several dollars in their hands at one time. Think of it this way. How many of us today routinely carry over $1000 in cash around with us? We don't need it, because most of our purchases when conducting our normal business are relatively small. The barter system was helped along by limited issues of bank notes. Paper money in the form of bank notes was issued by private and state banks, and was also used as a medium of exchange. It had no intrinsic value, and was only redeemable for hard money at the place of issue, i.e. the bank that had it printed. So bank note paper money had a very limited distribution, and was mainly used locally. Exceptions to this rule would be money from trade centers such as New Orleans and some eastern cities. Some folks claim that the word Dixie, meaning the South, comes from New Orleans money.

Because of the large French/Creole population, New Orleans banks' paper money was bilingual. Supposedly, the ten dollar note was referred to as a Dixie, dix being printed on the bill and also the French word for 10. I cannot confirm or refute this story. Anyway, because of the far reaching trade on the Mississippi, New Orleans notes were practically national currency all along the Mississippi basin. So while it might be uncommon to see Boston bank notes or Philadelphia bank notes in Minnesota, it would not be that uncommon to see New Orleans notes there, and thus spreading the term Dixie up and down the river.

To put things in modern perspective, private bank notes were similar to modern bank checks. They were issued in good faith, and other banks would usually honor them, but normally they could only be exchanged for hard currency at the issue bank. Sometimes, even the bank would not issue specie for its notes. The value of the note might be expressed in other economic staples, such as cotton or corn (remember the "Corn Exchange" regiment?). Look at it this way: I am a cotton farmer in the South, or a corn farmer in the Midwest. I raise my crop, harvest it, and take it to the local brokerage house. I receive fair market value for my crop, but not in hard money. I get notes, the ones that look like money to us today. The notes come from a local bank, or possibly even from the brokerage house itself. Everyone in town knows that the local brokerage house or bank backs its notes, and if you really wanted to, you could go and get the cotton or corn or specie from them for the notes. But in the mean time, you can use the notes to go to the grocers and trade your notes for some of his items, or go to some other place. The notes become a medium or exchange, because they are backed by the faith that the local folk have in the brokerage house or bank. These notes are basically no good 100 miles from home, but what do the locals care about that? Most of them aren't going that far away to transact business anyway. If the local brokerage house or bank ever goes out of business, all the locals are in big trouble economically, but that's what happened anyway. The notes hold their value because everyone thinks that if everybody would all of a sudden get together and try to turn in their notes for hard money or a staple good (called a panic or a bank run), everyone will get the exact value of the amount printed on the bills. In fact this is not true, but few people care about this. Even in today's economy, we all think that if we decide to withdraw all of our money from a bank, there will be enough in the bank for all of us. Well, the fact is that banks, the last time I looked, only had to have in cash 17% (I think) of the total value of all deposits in the bank. Which is why the FDIC was created during the 1930's, but that is another topic.

If the brokerage house or bank would carelessly print notes without backing them with hard money or staples, then the perceived value of these notes would lessen, because everyone would know that you really couldn't get full value for the note. So instead of that item in the store costing you $1 in notes, it would cost you $2. this is called inflation, and while it can be caused by a number of factors in the modern world, the biggest cause of inflation in the 19th century was a surplus of paper currency. There was a great mistrust of paper currency which is why, with rare exception, it was not valuable outside the local economy. How could you tell if the bank issuing the notes was printing them like leaves, or issuing them out only for goods or specie actually received.

If I happen to conduct Mississippi river business, I might receive these notes from a New Orleans business concern at my destination. When I get back to Illinois, or Missouri, or Minnesota, I will still be able to use these notes as money because others will be making that trip also, and they know that when they get to New Orleans, the notes are good. So a local currency becomes a regional currency because of faith. And this is how "dixies" are spread around the region.

The beginning of the Civil War put tremendous pressure on the United States economic system. Goods and services were needed at rates never seen before, and there was no method in place for paying for them. In the South, a brand new government had no Treasury deposits to speak of, and needed to quickly get a system in place to handle and produce currency.

The Confederate Economy (or lack thereof)

In the Confederacy, the government needed to establish the trust and faith on a national level that had been the backbone of the state/bank system. The Confederate Treasury Department tried to do this in two ways, by issuing bonds and hoarding cotton. In the short run the government could build up cash reserves by borrowing from the citizens, thus bonds were issued. To handle long term currency needs, the government would base its currency on cotton. The government figured that if the Confederate currency was fixed to the price of cotton, and it could get the price to rise by hoarding, then the Confederate currency would be in good shape. Also, by issuing bonds, the government would obtain enough hard money to jump-start the faith in the notes.

The hoarding principle is based on the most fundamental law of economics, supply and demand. Every year, there is always one Christmas present that everyone seems to really want to buy for their children. It could be a certain type of doll, a computer game, or just about anything. There is only so many of this "must buy item", and lots of people want it. So demand grows tremendously. Parents are willing to go anywhere and pay any price to get that must have item for Christmas morning. People that can't get what they want will pay more for it when it's finally offered. So if I can't make more people want something (increase demand), the only way I can get the price to go up is to cut down or decrease the supply.

Bonds are promises to pay. Essentially, when a government issues a bond, they are borrowing money from you. They need the cash now, and will pay you (interest) for lending it to them. Those Confederate bonds you might have seen are all promises to pay "three years after a successful ratification of a treaty of peace between the governments of the Confederate States and the United States". That's the fine print. Of course, since there never was a "successful ratification of a treaty of peace", the bonds became worthless.

The cotton issue was another factor. The government tried to raise the world price of cotton by not selling it. The Confederate government figured that by saying "No, we're not selling cotton.", the European governments, especially England and France, would worry about the collapse of their respective textile industries and would beg to buy cotton at any price, not only economically but also including political factors like allying themselves to the Confederacy. The Confederate government bought up tremendous amounts of cotton and warehoused it. They embargoed (made it illegal to export) the rest. This hoarding did not have the effect the government anticipated. First, the textile industries in Europe had enough cotton to continue to produce goods in the short run, so there was no desperation for cotton. For the long run, a cotton producing industry sprang up in the British colony of India among other places, and the Confederate cotton was by-passed. The cotton in the warehouses became as world prices fell, and the notes issued that were backed by this cotton became less and less valuable.

The best economic approach would have been to threaten to embargo cotton and then sell everything as fast as possible. The fact is that when word spread that the government was going to embargo cotton there was a mini-panic in the world market, and cotton prices actually rose in the first half of 1861. But the price of a commodity like cotton is fleeting, and can change quickly. When the government refused to sell the cotton, second looks were taken at existing stockpiles of cotton and the price began to fall. By the end of 1861 it was too late, and the government was stuck with its cotton.

Not only did the Confederate national economy suffer by this wooden-headed approach to economics, but the local economy did also. By placing an embargo on the cotton they didn't own the government collapsed local economies, meaning most of those brokerage houses that I spoke about in the first part of this paper. This had the effect of collapsing many of the local economies. The brokerage houses issued notes based on the assumption that they would be able to turn around and sell the cotton to other markets, such as Northern or European textile manufacturers. If they couldn't get the cotton to the manufacturers, they didn't need any more, so they stopped buying from local farmers. No sales, no money, no exchange of goods and services, economy stops. The Northern blockade took care of the rest. By closing ports, the North stopped trade. No trade could occur, and thus banks and other brokerage houses began to fail. This snowballing caused ever increasing inflation in the Confederacy, and the devaluation of Confederate currency grew greater and greater as the war progressed.

Paper money has no value in and of itself. It's just a piece of paper with some ink on it. The three basic economic needs are food, shelter, and clothing. You can't eat money, you can't wear it, and you can't use it to make shelter. It only has value if it can be exchanged for goods and services. If the person who holds the goods and services thinks that the money is not as good as it used to be (lack of faith and trust), then he will demand more of it for his goods or services (inflation). If he thinks that it is no good anymore, he will refuse to part with his goods and services unless you can give him something of equal value in return. If you don't have anything to offer in return, you cannot buy goods. Think of the Richmond bread riots, 1863.

The Northern Economy and the Rise of a National Currency

In the North, a huge demand was put on the economic system by the war effort. Currency practically dried up, because there just wasn't enough to pay for all of the economic activity going on. The government desperately needed to inject more currency into the present system to continue economic growth. By the way, adding more currency in this manner is also inflation, but the true cause of inflation here was increased demand for war goods and limited supply of those goods, (like that "must have" Christmas present) not a lack of faith in the currency.

The government found that it had no real way to increase the availability of money. State banks and brokerage houses did not want to issue more of their notes, because that would deflate the value of their currency. The war economy was beginning to slow down, because there wasn't enough money to pay for it. So in 1862 the government passed a national currency act, which basically gave the United States the right to print money, for the first time in its history. This money was not backed by any particular financial reserves, just by the full faith and credit of the Federal government. Because of the colors used in the printing of the money, and the fact that most currency of the time was only printed on one side, the  notes were called Greenbacks because of the green printing on the back. For smaller denominations, the government used its existing stocks of postage stamp dies and printed what it called Postage Currency. These were notes that looked like blocks of stamps glued together, and were worth the face value of the combined stamps.

The government also passed an excise tax law, which meant that there was a government charge for conducting normal business. You paid the excise tax by purchasing stamps that were placed on certain documents such as bank checks, express bills, and playing cards, among other things. The amazing thing about this tax is that almost exactly 100 years before, the British did the exact same thing to the then colonies (The Stamp Act) and it caused a tremendous public outcry. Then the Stamp Act was enacted to help pay for the cost of conducting the war against the French and the Indians, from 1755-1763.

To complete the supply of currency, the government also issued fractional currency, which was miniature versions of the national notes for values less than one dollar. The fractional currency is not the same as the postage currency, but was issued in the same denominations. I believe that the fractional currency was issued to replace the postage currency, as the postage currency was really a temporary fix to the currency shortage anyway. The fractional notes in my collection date from 1864, while the postage currency is dated earlier.

At the conclusion of the war, the Federal government stopped printing money to try to control inflation. There was so much of it in circulation anyway that it continued on its own momentum. The advent of a national medium of exchange, good anywhere in the country, was new and unique. People really liked the idea of being able to use these notes anywhere. Soldiers stationed all over the country (and coming home) could use the currency anywhere they traveled. Remember, it was a new thing in 1865 that the people in Boston and Philadelphia used the same paper currency as the people in St. Louis and Chicago. It made the transacting of business so much easier that a national currency was immensely popular. Bank and Brokerage notes dried up quickly, and passed out of existence shortly after the war. The national currency system was here to stay.

Re-enacting and Money

For the Federal re-enactor, you would have been paid in national notes starting in 1862. I have no sources here now that would tell me what the Federal government used to pay its troops in 1861. I suppose that it would have been hard currency.

The Confederate re-enactor would have been paid in first issue Confederate notes in 1861, and later issues later in the war.

I currently print my own currency following the express instructions of the United State Secret Service because there is a fine line between good reproductions and counterfeiting. It is a Federal offense to reproduce any United States national medium of exchange that has been minted or printed since 1797, the date of the creation of the United States Mint. You must make certain changes to the note, and most high-quality reproductions fail to comply with the changes necessary. By the way, according to the letter of the law, simply putting the word COPY on the bill is not enough. I finally got the OK in writing from the senior legal council to the Postal Inspector's office to produce postage stamps.

There is no corresponding law against counterfeiting other mediums of exchange, including Confederate notes and state bank notes.

Another good article on the history of United States banking can be found here.