Lincoln’s Public Finance during the Civil War and Lessons for Today’s Lawmakers

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Stephen R. Rolandi
February 29, 2024

“I can make more generals, but horses cost money.” – Abraham Lincoln

During the month of February, we mark many milestones and celebrations, such as Ground Hog Day, Lunar New Year, Valentine’s Day, Super Bowl Sunday, Black History Month and Presidents’ Day. In a previous article appearing in the PA Times, I discussed the presidential administration of our 16^th President and his contributions to American public administration.

We learn in school at an early age about Lincoln’s tenure and achievements during the bloodiest war in American history (1861-1865); most remarkably, that he was able to prevent the United States from splintering into two nations, and freeing the African-American slaves with the issuance of the Emancipation Proclamation. What most Americans probably do not know was that Lincoln also had to grapple with a severe financial crisis upon his election as President in 1860, which is the subject of this month’s article.

On the eve of the Civil War, the United States basically had no national currency (i.e. there were no gold reserves backing paper money and notes), national bank nor Federal income tax. Government operations relied heavily on customs duties and tariffs imposed on imports from other nations. The Federal budget for 1860 was about $78 million; the accumulated national debt stood at $65 million (which is interesting, as the national debt was whittled down to $35,000 during Andrew Jackson’s second term, and then steadily increased during the 1840s and 1850s). Worse still, the nation had not fully recovered from the economic crisis of 1857 when these other fiscal problems—and the imminent threat of secession by several Southern states—escalated by the fall of 1860. Lincoln is believed to have commented when he arrived in Washington, D.C. to prepare for his administration that he had found “an empty Treasury and a great rebellion.”

In short, Mr. Lincoln had inherited a fiscal mess on top of an impending Civil War. Borrowing was a very risky proposition, not only for the Union side, but also for the newly created Confederacy.

How did he approach this crisis?

First, Lincoln appointed a new Secretary of the Treasury, Salmon P. Chase (1808-1873), who had served as Governor of Ohio and U.S. Senator (and later as Chief Justice of the U.S. Supreme Court). Chase had also sought the Republican Party’s Presidential nomination at the convention which ultimately went to Lincoln. Originally a Democrat from Ohio, Chase believed in the fiscal policies of Andrew Jackson and was skeptical of Federal authority. However, he soon realized that the impending Civil War and the rise of modern warfare required a new approach to fiscal and economic policy. Although not trained as a financier nor merchant, Chase had a solid reputation for rectitude and reform, and a quick learner.

Second, Lincoln, to his credit, had the ability to sit back and analyze the state of affairs so that he could formulate a more global approach to pressing public policy issues. This harnessed his ability to work with Chase to develop viable financing solutions. As historians Larry Schweikart (University of Dayton) and Michael J. Allen (Northwestern University) have argued that “Chase…proved to be the right man in the right office at the right time.”  

Third, while Lincoln’s relationship with Chase was rocky from time to time, he delegated many responsibilities of running the Treasury Department to Chase and his subordinates, some of whom were quite capable such as John J. Cisco (1806-1884), who was Assistant Treasury Secretary responsible for dealing with New York’s financial markets (Wall Street). Cisco was very prescient in convincing Chase that the Civil War was going to be a protracted conflict requiring a policy of floating more (long term) bonds and “strong” taxation. 

Some of the initial fiscal policies of the Lincoln administration included managing the sale of $500 million (equivalent to $ 12billion today) in government war bonds, as well as borrowing. When the administration realized that bonds would not be enough to finance the war effort, they instituted the first Federal income tax when Congress passed the Revenue Act of 1862 (later supplemented by the 1864 Revenue Act) which provided  for:

• Creation of the Office of the Commissioner of Internal Revenue (forerunner of today’s IRS), an agency whose duty was to collect the collection of taxes*
• The levying of excise taxes on many everyday goods and services, and
• An adjustment to the income tax that was created under the 1861 Revenue Act. This tax was based taxpayers’ ability to pay by separating citizens into multiple categories and taxing appropriately. For example, if one’s income was more than $600 and less than $10,000, equivalent to 3 percent of total income was taxed.

*Note: legislation that created this agency was sunset in 1872; IRS as we know it did not re-emerge until after passage of the 16^th Amendment to the Constitution in 1913.

These policies were needed as the Civil War dragged on. The war effort is estimated to have cost about $5.2 billion, and the national debt grew to $2.7 billion. At war’s end, the Treasury Department was spending about $80 million per month. The Federal government financed about 67 percent of the war effort with bonds, supplemented with tax revenues and other sources (it should be noted that subsequent Presidential administrations were able to retire some of this war-era public debt).

Lincoln was flexible in dealing with the Union’s changing fortunes during the course of the war, and his steadfastness paid off. So too, it can be said of his success in managing the war’s finances. As a result, the purposes of public finance and government were elevated in the minds of Americans. They now looked to government to solve the nation’s problems. Success in winning, and financing the war had demonstrated the potential of the Federal government. This perception could now be applied to other issues, such as transportation, racial equality and education.

We can learn a lot from Lincoln’s success in dealing with the existential threats that confronted our nation nearly 150 years ago. My hope is that our current elected officials can learn those lessons as well.

Postscript:

For further reading on Lincoln’s financial management during the Civil War, I would recommend:

• Philip Shaw Paludan, “The Presidency of Abraham Lincoln,” University Press of Kansas, 1994
• Steve Inskeep, “Differ We Must: How Lincoln Succeeded in a Divided America,” Penguin Press, 2023
• Roger Lowenstein, “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War,” Penguin Press, 2022

Lowenstein’s work, in my view, is the most comprehensive work to date on public finance during the Civil War, and is highly readable.

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Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past Senior National Council Representative. He has  served  on many  association boards, and is a frequent guest commentator on  public affairs and political issues affecting the nation and New York State. You can reach him at: [email protected] or [email protected] or  914.441.3399 or 212.237.8000.

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