Confederate war finance

The Confederate States of America financed its war effort during the American Civil War through various means, fiscal and monetary. As the war lasted for nearly the entire existence of the Confederacy, military considerations dominated national finance.

Early in the war the Confederacy relied mostly on tariffs on imports and on taxes on exports to raise revenues. However, with the imposition of a voluntary self-embargo in 1861 (intended to "starve" Europe of cotton and force diplomatic recognition of the Confederacy), as well as the blockade of Southern ports, declared in April 1861 and enforced by the Union Navy, the revenue from taxes on international trade declined. Likewise, the financing obtained through early voluntary donations of coins and bullion from private individuals in support of the Confederate cause, which early on proved quite substantial, dried up by the end of 1861. As a result, the Confederate government had to resort to other means of financing its military operations. A "war-tax" was enacted but proved difficult to collect. Likewise, the appropriation of Union property in the South and the forced repudiation of debts owed by Southerners to Northerners failed to raise substantial revenue. The subsequent issuance of government debt and substantial printing of the Confederate dollars contributed to high inflation, which plagued the Confederacy until the end of the war. Military setbacks in the field also played a role by causing loss of confidence and by fueling inflationary expectations.

At the beginning of the war, the Confederate dollar cost 90 cents in gold dollars. By the war's end, its price had dropped to 1.7 cents. Overall, prices in the South increased by more than 9000% during the war, averaging about 26% a month. The Secretary of the Treasury of the Confederate States, Christopher Memminger (in office 1861–1864), was keenly aware of the economic problems posed by inflation and loss of confidence. However, political considerations limited internal taxation ability, and as long as the voluntary embargo and the Union blockade remained in place, it was impossible to find adequate alternative sources of finance.

The South financed a much lower proportion of its expenditures through direct taxes than the North. The share of direct taxes in total revenue for the North was about 20%, while for the South the same share was only about 8%. Much of the reason that tax revenue did not play as large a role for the Confederacy was the individual states' opposition to a strong central government and the belief in states' rights, which precluded giving too much taxing power to the government in Richmond. Historically the states had invested little money in infrastructure or public goods. Another factor for not extending the tax system more broadly was the belief, which was present in both the North and the South, that the war would be of limited duration and so there was no compelling reason to increase the tax burden.

However, the realities of the prolonged war, the necessity of paying interest on existing debt, and the drop in revenues from other sources, forced both the central Confederate government and the individual states to agree by the middle of 1861 to an imposition of a "War Tax." Passed on August 15, 1861, the law covered property of more than $500 (Confederate) in value and several luxury items. The tax was also levied on ownership of slaves. However, the tax proved very difficult to collect. In 1862, only 5% of total revenue came from direct taxes, and it was not until 1864 that the amount reached the still-low level of 10%.

Taking account of difficulty of collection, the Confederate Congress passed a tax in kind in April 1863, which was set at one tenth of all agricultural product by state. The tax was directly tied to the provisioning of the Confederate Army, and although it also ran into some collection problems, it was mostly successful. After its implementation, it accounted for about half of total revenue if it was converted into currency equivalent.

The financing of war expenditures by the means of currency issues (printing money) was by far the major avenue resorted to by the Confederate government. Between 1862 and 1865, more than 60% of total revenue was created in this way. While the North doubled its money supply during the war, the money supply in the South increased twenty times over.

The extensive reliance on the money-printing press to finance the war contributed significantly to the high inflation the South experienced over the course of the war, although fiscal matters and negative war news also played a role. Estimates of the extent of inflation vary by source, method used, estimation technique, and definition of the aggregate price level. According to a classic study by Eugene Lerner in 1956, a standard price index of commodities rose from 100 at the beginning of the war to more than 9200 by the war's de facto end in April 1865. By October 1864, the price index was at 2800, which implies that a very large portion of the rise in prices occurred in the last six months of the war. This drop in the demand for money, the corresponding increase in "velocity of money" (see next paragraph) and the resulting rapid increase in the price level has been attributed to the loss of confidence in Southern military victory or the success of the South's bid for independence.