In Frank W. Taussig’s The Tariff History of the United States, he describes the mass of unprecedented financial legislation that took place, which likely would not have occurred absent the context of the war,
Probably no country has seen, in so short a time, so extraordinary a mass of financial legislation. A huge national debt was accumulated; the mischievous expedient of an inconvertible paper currency was resorted to; a national banking system unexpectedly arose from the confusion; an enormous system of internal taxation was created; the duties on imports were vastly increased and extended.
In his course The Economics of the Civil War, Dr. Thornton explains that this mass of legislation and burgeoning of governmental agencies was actually the “first New Deal.” It was not FDR who primarily gave us the “New Deal,” but Abraham Lincoln and the Civil War. In fact, it could be argued that Lincoln’s “New Deal” set the table for Roosevelt’s later New Deal in several important ways. Elaborating further, Thornton and Ekelund, in their book, Tariffs, Blockades, and Inflation: The Economics of the Civil War, argue (p. 99),
The flurry of new laws, regulations and bureaucracies created by President Lincoln and the Republican Party is reminiscent of Franklin Roosevelt’s New Deal in the 1930s, for the volume, scope, and questionable constitutionality of its legislative output. However, although Roosevelt followed Lincoln, it should not be too surprising to learn that the term “New Deal” was actually coined in March 1865 by a newspaper editor in Raleigh to characterize Lincoln and the Republicans and persuade North Carolina voters to rejoin the Union. The massive expansion of the federal government into the economy led Daniel Elazar to claim that “one could easily call Lincoln’s presidency the ‘New Deal’ of the 1860s.” (emphasis added)
The Civil War—especially absent most opposition in Congress—accomplished several of Lincoln’s goals and the goals of the big government Republican Party that otherwise could not be accomplished (or it at least would have met resistance and deliberation). Again, Thornton and Ekelund provide a list detailing the growth of the federal government during this period:
- Morrill Tariff (1861)
- Income Tax (1861)
- Expanded Postal Service (1861)
- Homestead Act (1862)
- Morrill Land-Grant College Act (1862)
- Department of Agriculture (1862)
- Bureau of Printing and Engraving (1862)
- Transcontinental Railroad land grants (1862, 1863, 1864)
- National Banking Acts (1863, 1864, 1865, 1866)
- Comptroller of the Currency (1863)
- Free urban mail delivery (1863)
- Yosemite nature reserve land grant (1864)
- Contract Labor Act (1864)
- Office of Immigration (1864)
- Railway mail service (1864)
- Money order system (1864)
This had long been the goal of Lincoln and the Whig-Republican Party, especially national banking, corporate welfare (“internal improvements,” especially to railroad companies in the forms of subsidies, land grants, etc.), and high protective tariffs. Lincoln himself said much earlier in his political career (March 1, 1832),
Fellow-Citizens: I presume you all know who I am. I am humble Abraham Lincoln. I have been solicited by many friends to become a candidate for the Legislature. My politics are short and sweet, like the old woman’s dance. I am in favor of a national bank. I am in favor of the internal improvement system, and a high protective tariff. These are my sentiments and political principles. (emphasis added)
The war was basically able to achieve and cement those aspects into the US system. As usual, war emergency and/or crisis provided an opportunity for the growth of the federal government (cf. War of 1812, WWI, Depression/WWII, etc.). In Lincoln’s “New Deal,” there were some key areas that developed during the Civil War and would have profound consequences for later American history, especially the growth of the state—inflation/national banking, national debt, income tax, tariffs, and corporate welfare for private companies. Only a few of these topics can be pursued here.
Inflation, National Banking Acts, & “Greenbacks”
The Civil War introduced government-issued paper money (“greenbacks”)—an irredeemable fiat currency which remained for two decades following the war—which brought about major price inflation and set the precedent for greater experiments in fiat money after 1933 and 1971. The massive inflation of money by the Treasury quickly led to the suspension of specie payments by the Treasury, then by the nation’s banks, by December 1861. Unsurprisingly, the money supply increased 92.5 percent from 1860 to 1863, from $745 million to $1.44 billion. As a result of the monetary inflation, price inflation followed. For example, wholesale prices rose from 100 in 1860, to 211 at the end of the war, a rise of 110.9 percent, or 22.2 percent per year. In The Case for Gold by Ron Paul and Lewis Lehrman, the authors detail the inflation of the money supply by the end of the war,
By the end of the war, the money supply, which now included national bank notes and deposits, totalled $1,773 billion, an increase in two years of 23.6 percent or 11.8 percent per year. Over the entire war, the money supply rose from $45.4 million to $1,773 billion, an increase of 137.9 percent, or 27.69 percent per annum [Historical Statistics, pp. 625, 648-649].
Massive pressure was put on specie due to this monetary inflation and well-deserved lack of confidence in the banks, thus why the banks and the government quickly suspended specie payment, that is, refused to repay gold for paper money. Having legally freed themselves and the banks to honor their obligation to repay gold for paper notes, the US government took advantage of the inconvertible fiat money.
The Legal Tender Act was passed in February 1862 and Congress authorized the printing of $150 million in “United States Notes” (“greenbacks”) to pay the increasing deficits. As usual with the historical government employment of monetary inflation, Congress promised this would be the first and only time money would be printed for such purposes. However, a second $150 million was authorized in July, $150 million more in early 1863, totaling $415.1 million at their 1864 peak.
Further, the war brought about a permanent change in the banking system and “created a new, quasi-centralized, fractional reserve national banking system which paved the way for the return of outright central banking in the Federal Reserve System.” The Civil War helped permanently connect the federal government and the banking system. While the greenbacks would eventually be eliminated by resumption of specie payments in 1879, the effects of the national banking system remained.
Thus, a long-standing Whig-Republican dream was achieved—a permanent central banking system under the control of the federal government, which would allow for uniform monetary and credit inflation to the benefit of both the government, recipients of corporate welfare, and the banks. Through the National Banking Acts, there would now be “national banks, chartered directly by the federal government.” All this came with the typical policies that accompany government monetary inflation in league with key banks—suspension of specie payments, legal tender laws, compulsory par laws. (Gresham’s law—a law of economics instead of politics—also predictably came into effect, driving good money out of circulation).
By the end of the war, the government grew tired of trying to entice banks into its system, so it pursued another method to coerce banks or cause them to go out of existence. Congress placed a 10 percent prohibitive tax on all bank notes which virtually outlawed the note issue of state banks, thus, “From 1865 on, the national banks had a legal monopoly on the issue of bank notes.” In short, the Civil War ended the “separation of the federal government from banking, and brought the two institutions together in an increasingly close and permanent symbiosis.” Rothbard explains further,
National banking destroyed the previous decentralized and fairly successful state banking system, and substituted a new, centralized and far more inflationary banking system under the aegis of Washington and a handful of Wall Street banks.
This permanence was likely intentional, a product of design rather than an accident. Frank Taussig said that the national banking system, “from the first more clearly designed to be a permanent institution, was also retained, though with changes and vicissitudes not dreamed of at the time of its foundation.”
Taxes, Income Tax, & Tariffs
Taxes also increased massively during the war. Income tax was introduced for the first time in the US. Tax revenue increased from $52 million in 1862 to $333.7 million in 1865, from 10.7 of the budget to over 26 percent in 1864 and 1865. In the words of economist Frank Taussig, “Every thing was taxed, and taxed heavily.” This included tariffs and income taxes. Taussig writes further,
The Civil War revolutionized the financial methods of the United States. A new monetary system was created, and tax resources before undreamed of were resorted to, at first timorously, in the end with a rigor that hardly knew bounds. The tariff, which had long been the sole source of federal income, was supplemented by a series of extraordinary internal taxes, and was itself called on to yield more revenue and still more. The high duties which the war thus caused to be imposed, at first regarded as temporary, were retained, increased, and systematized, so developing gradually into a system of extreme protection.
These interventions—facilitated by the war—laid the groundwork for both the Progressive Era interventions, especially of 1913, and Lincoln’s “New Deal” prepared for Roosevelt’s New Deal. A few lessons to be derived are how government expansions of power (and the problems they cause) beget further interventions and how the nature of war so empowers the state that it tends to grow to a level never experienced and never shrink.
