Money  /  Book Review

How the U.S. Paid for the Civil War

Lincoln's wartime governance had dire, and longstanding, economic consequences.

As Lowenstein unveils the government interventions that brought about what he calls a "staggering transformation," he delves into their political origins as deeply as their economic features. This permits him to highlight Abraham Lincoln's role more than most surveys do. Lincoln had been a member of the Whig Party, which traditionally looked askance at presidential intrusion into Congress' realm. But Lowenstein credits Lincoln with working behind the scenes to promote legislation that emerged during his presidency.

What did that legislation do? Prior to the war, the only sources of federal revenue were a low tariff and sale of public lands. By the end of the war, average tariff duties had risen to 47 percent, decisively moving the economy from free trade to protectionism. A vast array of internal taxes, including a graduated income tax, were imposed through a new revenue bureaucracy.

Western lands were opened to homesteading and granted to promote a transcontinental railroad. Additional land grants to the states for endowing colleges constituted the first federal aid to education. A Department of Agriculture was created to help farmers, and immigration was subsidized for employers. Congress also created the National Academy of Sciences to promote technological innovation, and it established such new agencies as the Government Printing Office and the Bureau of Engraving and Printing. (The Homestead Act is arguably better seen as a form of privatization than as an extension of government power, but Lowenstein is not alone in placing it under the latter heading.)

Increased government borrowing resulted, by Lowenstein's count, in the issue of "thirty-two varieties of notes, bonds, and other instruments." One reason for this array, not explicitly mentioned in the book, is that it wasn't until after World War I that the Treasury gained its current discretion to issue whatever debt is necessary to cover expenditures. Before then, practically every new loan to the government required a separate act, debatable in Congress. Lincoln's first treasury secretary—Salmon P. Chase, who had a sometimes uneasy relationship with the president—thus figures prominently in Ways and Means.

Some of these loans could be quite complex, and Lowenstein has to simplify things for readers unfamiliar with finance. Just to give an example, bonds issued in 1862 known as Five-Twenties paid an annual 6 percent interest semi-annually. They had a fixed maturity of 20 years, during which their market price could fluctuate, but could be unilaterally paid back at face value by the government after five years. In technical terms, they were a 20-year loan with an embedded call option after five years.