were numbered consecutively and making the register by taking the first and last numbers in a batch of securities and then basing the intervening numbers upon them, instead of matching the bonds with the numbers they recorded. 13 Despite these problems, few losses were experienced and no difficulties were encountered in managing the massive war debt.

Post Civil War Debt Level

It is estimated that the Civil War cost the nation $5.2 billion in direct expenditures (3.2 billion for the North and $2 billion for the South). In the North, the war was financed primarily by loans and paper money. Taxes contributed 22 percent of the cost of the war (a little over half a billion dollars), $450 million in greenbacks were issued. The balance was financed through debt, with a peak of about $2.8 billion borrowed. At the end of 1865 interest-bearing debt stood at $2.2 billion and the interest payments of $77.4 million in that year were higher than the total expenditures of the entire government in 1861. An enormous leap in the methods and amount of public financing had taken place, and the Union had been preserved. 14

13 Select Committee, Report, 1869, 95-98.

14 Studenski and Kroos, Financial History, U.S., 137-156.

Chapter Eight

THE POST CIVIL WAR ERA

The United States underwent an economic transformation following the Civil War. During the remaining 35 years of the Nineteenth Century, new agricultural areas opened up as the west was settled. Railroad construction created employment, and spawned steelmaking and machine-tool building industries. The railroads made traveling across the continent considerably easier. Advances in communications such as the invention of the telegraph and telephone, linked the country. The country underwent an industrial revolution, turning the great organizers of business into heroes and giving urban workers and rural homesteaders access to work as factory employees.

National Economic Development

The national government played a part in this economic transformation. It provided land grants and subsidies to the railroads and inexpensive land to farmers. This was a period when government intervention in the economy was unnecessary. The nation's political leaders were given a period of 40 years to adjust without pressure to the increased fiscal demands the Civil War had placed on the Treasury. To some extent they were helped by foreign credit. In 1866 the Secretary of the Treasury estimated that foreigners held about $350 million in bonds (13 percent of the Federal debt). Once the country had recovered from the effects of the war, United States Government securities were once again viewed as safe investments. The amount of government bonds held by foreigners in 1869 increased to about $1 billion (45 percent of the total). 1

Post Civil War Federal Expenditures

Immediately after the war, in 1866, Federal expenditures fell from $1.3 billion in 1865 to $520 million; they gradually declined over the next decade to about $250 million a year. They remained at this level for the rest of the century, and never rose to the amounts spent during the pre-war and war years. Interest on the debt alone accounted for nearly 40 percent of total expenditures, and it did not fall below $100 million a year until 1880.

During this time the Public Credit Act of March 1869 had been passed. Its main purpose was to restore faith in government credit by paying all interest bearing obligations in hard money. The Treasury needed to keep revenues high in order to attain debt relief and to reduce the interest payments. However, there was much opposition to the system of internal taxes that had been used during the war. Shortly after the war ended, in July 1866, Congress either repealed or reduced excise taxes on a variety of items. The income tax was also reduced and totally eliminated by 1872. The primary source of revenue continued to be the tariff on imported goods. Customs receipts were $177 million in 1866 and increased to an average of $200 million per year in the 1880's, as tariff rates remained high. This policy was maintained throughout this period and well into the Twentieth Century, helping our industrial giants to grow strong with a national policy of protectionism.

The Treasury managed to accumulate a total surplus of $1.3 billion from 1866 to 1885. This made possible the elimination of a large portion of the national debt, nearly half of which had been in short-term obligations due within 3 years. The first step in achieving a reduction of this large debt was to refund the short-term issues of securities. In addition, it was necessary to come up with a measure for redeeming the greenbacks, which accounted for nearly 15 percent of the total public debt.

The Funding Act of 1866

The Funding Act of April 12, 1866, gave Treasury Secretary Hugh McCulloch the authority to convert short-term notes into long-term bonds and to begin retiring greenbacks. However, this action was construed by the people as being a contraction of the money supply, and was blamed for the poor economic conditions that existed over the next 2 years. Due to widespread complaints, the Funding Act was repealed in 1868 and few greenbacks were returned.