Financing the Civil War: The Confederacy's Financial Strategy

The onset of the American Civil War forced both the Confederate and Union governments to swiftly develop strategies to fund their military efforts. Focusing on the Confederacy's financial policies, I take up the following puzzle: Why did the Confederacy rely almost exclusively on inflation financing, waiting to enact any significant tax legislation until the Winter of 1863, while the Union embarked on a successful financial strategy effectively combining loans, notes, and taxes? From the confident vantage point of twenty-twenty hindsight, the south's choices may seem to have been irrational in a war against a more resourceful and asset rich state. I argue that southerners were not irrational, nor were northerners exceptionally shrewd. Rather the ideological predispositions developed over the antebellum period were carried over into Civil War politics. Generally, the northern Republicans' support of a national banking system, a large national debt, and taxes turned out to be vital to finance the war. While the southern Democrats' opposition to national financial institutions, a large public debt, as well as taxes to protect their most valued assets, slaves, led to financial policies that proved to be disastrous. Despite their predispositions, not all southerners were blindly committed to their policy choices. Once the war turned significantly against the Confederacy in the Summer and Fall of 1863, legislators updated their beliefs about the probability of success and began to reevaluate their preferences for financial policies. I find that legislators from states with large slave assets were more likely to oppose tax legislation throughout the war, while representatives from states that would face the largest political and social turmoil after emancipation were more likely to support tax policies after the Fall of 1863. To evaluate the relat