Interview with Kraig McNutt about financing the Civil War

CWG: When did the Federal income tax on personal income begin?

The Federal income tax on personal income began during the Civil War in 1861
during Abraham Lincoln’s administration. It violated the Constitution
and was struck down at war’s end.

CWG: What percent in Federal tax revenue did Confederate states account for
just prior to the outbreak of the Civil War (circa 1860)?

The Confederate states made up 87% of the tax revenue of the Federal treasury
in 1860.

CWG: What was the primary form Federal taxes assumed just prior to the Civil

Before the War broke out Federal taxes were mostly in the form of excise taxes
and tariffs (import taxes). Tariffs provided most of the Federal revenue in
the form of taxes.

CWG: Why did Northern states use import taxes during the Civil War?

Northern states used import taxes as a way to protect their own manufacturers
against Great Britain and other overseas competition. Northern imports brought
in very little taxes for the government.

CWG: How did import taxes impact the South during the Civil War?

Unlike the North, the Southern states’ primary staple was King Cotton.
The South depended heavily upon exporting cotton to overseas markets. Unlike
the North, the South was an export-oriented economy. Thus import taxes on Southern
cotton contributed greatly to the Federal tax revenue.

CWG: Since the North could not depend on revenues brought in from exported
goods (i.e., cotton), how did the North generate revenue internally?

The North resorted to taxing it’s citizenry on such items as tobacco,
alcohol, clothing, food stuffs, stamps, tools and even entertainment. The newly
created Department of Internal Revenue (DIR) collected the taxes. Personal evasion
of taxes was a common problem for the DIR.

CWG: What percent did taxes cover for the Civil War expenses of the North?

Taxes paid for roughly one-fifth of the North’s daily war efforts.

CWG: Where did the rest (i.e., four-fifths) of the money come from for the

It came from such forms as the creation of paper money, bonds and borrowing,
This led to rampant inflation for the Northern economy due to an excessive proliferation
of money.

CWG: How much did inflation affect the North from 1861-1865?

During the Civil War the cost of goods and services increased by 80% for the
Northern states.

CWG: How much did inflation affect the South from 1861-1865?

During the Civil War the cost of goods and services increased by 60-70 times
for the Southern states.

CWG: How much did it cost the North to wage Civil War on a daily basis?

About $1.75 million dollars was needed every day by the North to conduct its
affairs on the military front, according to Anderson. Stevens says it was costing
the North $2.5 million a day by the spring of 1863 (p. 106).

CWG: Prior to the changes in 1863 in bank charters, what kind of money or currency
was in circulation in the United States?

There were many different forms of money in circulation prior to 1863, including
private bank notes, government-minted gold and silver coins, Spanish dollars,
and even private coins. There were as many as 1,500 different institutions issuing
private bank notes. Private notes undermined the value of the Federal currency.
They were printed in a variety of sizes, styles and denominations, thus making
even simple transaction difficult to execute.

CWG: What did the Legal Tender Act of 1862 accomplish?

The Legal Tender Act of 1862 effectively outlawed privately minted gold and
silver coins, and authorized the Federal Government to issue paper currency.
It was printed with green ink on the back and thus became known as greenbacks.
They were unbacked by gold and silver.

The government issued $500 million worth of bank notes during the war. By the
end of the war, inflation having taken its toll, these same bank notes decreased
in value by 61%.

CWG: How did the government use bonds to finance the Civil War?

At the beginning of 1863 the government relied heavily upon the sale of “five
twenties” (six percent bonds, callable in five years and maturing in twenty).
However, the demand for war bonds was unpredictable. They would rise and fall
based on the military successes of failures of the North.

The government issued five kinds of paper currency during the war. For more
information on the kinds of paper currency the North printed during the war

CWG: What were the first coins minted with the motto “In God we Trust”
on them?

The Union 2-Cent pieces were the first U.S. coins minted with the motto, In
God we Trust. These coins were bronze and were available from 1864-1865 during
the war and actually up to 1873 after the war. They depict images of a shield,
and eagle and a laurel sprig.

CWG: How were stamps used as “currency” during the Civil War?

Due to short supply of coins in the North, the government issued un-gummed
stamps that could also be used as coinage.

CWG: Why did the Federal government stop minting coins after the Civil War

Facing a probable long war, the North decided to stop issuing coins and turned
too printing paper money (i.e., greenbacks). As a result, many northerners panicked
and started hoarding coins. Before long, most coins were no longer in circulation.

CWG: How did the Government respond to the crisis of coins being hoarded?

In response to the crisis, the Federal government issued fractional paper currency
in denominations of 3, 5, 10, 15, 25, and 50 cents. These became known as shinplasters.
People did eventually accept them as substitutes for metal coinage. The government
stopped issuing fraction currency in 1876. By then $368 million worth of it
made it into the private sector.

CWG: Did the South use similar means, as the North to finance the war effort
(e.g., bonds, taxes and loans)?

In contrast with the North, the South primarily depended on paper currency
to finance the war. As a result, inflation impacted the South even more since
this currency was not backed by silver or gold. Currency was printed from 1861-1864.
In 1861, when Confederate currency was first printed, it was worth 95 cents
on the U.S. dollar. By 1863 they were trading at just 33 cents on the dollar.
By April 9, 1965, at the war’s end, a Confederate dollar traded at just
1.6 cents on the dollar. On May 1, 1865 Confederate dollar bills were sold in
bales of 1,200 notes for just $1 U.S. dollar.

CWG: How much currency was printed by the Southern government?

More than $1 billion was in circulation during the Civil War. Unfortunately,
as much as $1.5 billion was printed in counterfeit Confederate currency. The
North encouraged and promoted the counterfeiting of Confederate currency since
it devalued the value of it.

CWG: What are some examples of paper denominational amounts that were printed
by the South?

Confederate banknotes were printed in blue-gray color and became known as bluebacks.
They were available in the following denominations: 5 cent note, 10 cent note,
15 cent note, 25 cent note, 50 cent note, $1 note, $1.75 note, $2 note, $3 note,
$5 note, $10 note, $20 note, $50 note and $100 notes. $10 notes were the most
widely printed note.

CWG: Were coins minted by the Confederacy?

Yes, coins were minted by the Confederacy but they were very rare, Experimental
pennies (copper or silver, 1861) and half-dollars (silver, 1861) were minted
by the South. Examples: .1 cent coin, .50 cent coin, $5 dollar coin.

CWG: What are some examples of paper denomination amounts that were printed
by the Federal Government?

3 cent note, 5 cent note, 10 cent note, 25 cent note, $1 dollar note, $1, $2
dollar note, $5 dollar note, $10 dollar note, $50 dollar note

CWG: What kind of scenes did the South depict slaves on their printed currency?

Among the myriad of scenes depicting slave labor we find the following categories
of images on printed currency: Individuals With Cotton Individuals With Assorted
Tasks, Field Scenes Stylistic Scenes, Post Civil War Scenes, Sugar Plantations
and Transportation. For more information see “Beyond Face Value”
on the Web.

On The Web: