It did not take long after Fort Sumter for Northern war expenditures to reach staggering proportions. James Randall in his “Civil War and Reconstruction” (1937, DC Heath) wrote: “With the treasury nearly empty, financial markets shaken, foreign bankers unsympathetic, taxation inadequate, and loans unmarketable except at a discount, the door of escape by way of paper money seemed most tempting.” Lincoln resorted to the printing press to create money.
Bernhard Thuersam, www.Circa1865.com
Lincoln’s Inflationary Finances
“The classic study of Union inflation was Wesley Clair Mitchell century-old “History of the Greenbacks.” Initially the war was to be financed with the use of government bonds, tax revenues would be used to pay the normal expenditures of government, and the gold standard would be retained. However, this system quickly collapsed in late 1861 and the first of three legal tender acts was passed in February 1862 with a total of $450 million in greenbacks authorized for issue.
When an economy has two types of money, such as gold and paper, and they are both defined in the same units, such as dollars, Gresham’s Law states that bad money will drive good money out of circulation. And in accordance with Gresham’s Law, greenback dollars quickly displaced gold dollars as the circulating medium of exchange.
The value of greenbacks quickly depreciated in terms of gold and fell to a low point of only 35 cents worth of gold on July 11, 1864. Amazingly, the Union currency had depreciated as much in three short years as the dollar has in the thirty years since the United States went off the gold standard. The prices of goods appreciated in terms of greenbacks from an index value of 100 in 1860 to a maximum of 216.8 in 1865.
Citizens tended to blame higher prices on business, speculators, and foreigners. Some government officials believed that speculators in the gold market were somehow causing the value of greenbacks to fall, but the real culprit for inflation was the government itself.
In addition to an ever-increasing supply of greenbacks, Mitchell showed that the value of greenbacks in terms of gold would change on the basis of expectations that in turn were based on peoples’ estimated probability that the greenbacks would be redeemed for gold after the war. Battlefield losses were associated with declines in value while victories meant higher values for the greenback.
Higher prices also meant that the Union government would have to issue more greenbacks in order to purchase war supplies and pay its soldiers [and pay enlistment bounties]. Because the Union government would eventually have to pay its war debts and redeem the greenbacks in gold, Mitchell . . . calculated that greenbacks had increased the real cost of the war to the government itself by $528 million. Of course, the politicians who borrowed and spent the money during the war were not necessarily the same ones who had to pay off the debt and redeem the greenbacks after the war.
Mitchell also found that the switch from gold to paper . . . [created] an illusory increase in property values, an increase in extravagance and the purchase of luxury goods, a crippling of economic efficiency, and a decrease in real wages for farmers, laborers, professionals, teachers and soldiers. As expected, the Union’s inflationary finances created an illusion of general prosperity that greatly upset the ability of entrepreneurs, workers, consumers, and bureaucrats to make accurate economic calculations.”
(Tariffs, Blockades and Inflation: The Economics of the Civil War; Mark Thornton and Robert Ekelund, Jr., Scholarly Resources Books, excerpts, pp. 68-69)