The need to pay for the war produced dramatic changes in financial policy. To raise money, the government increased the tariff to unprecedented heights (thus promoting the further growth of northern industry), imposed new taxes on the production and consumption of goods, and enacted the nation’s first income tax. It also borrowed more than $2 billion by selling interest-bearing bonds, thus creating an immense national debt. And it printed more than $400 million worth of paper money, called “greenbacks,” declared to be legal tender—that is, money that must be accepted for nearly all public and private payments and debts. To rationalize the banking system, Congress established a system of nationally chartered banks, which were required to purchase government bonds and were given the right to issue bank notes as currency. A heavy tax drove money issued by state banks out of existence. Thus, the United States, whose money supply before the war was a chaotic mixture of paper notes issued by state and local banks, now had essentially two kinds of national paper currency—greenbacks printed directly by the federal government, and notes issued by the new national banks.
Along with profitable contracts to supply goods for the military effort, wartime economic policies greatly benefited northern manufacturers, railroad men, and financiers. Numerous Americans who would take the lead in reshaping the nation’s postwar economy created or consolidated their fortunes during the Civil War, among them iron and steel entrepreneur Andrew Carnegie, oil magnate John D. Rockefeller, financiers Jay Gould and J.P. Morgan, and Philip D. Armour, who earned millions supplying beef to the Union army. These and other “captains of industry” managed to escape military service, sometimes by purchasing exemptions or hiring substitutes, as allowed by the draft law.
Filling Cartridges at the U. S. Arsenal of Watertown, Massachusetts, an engraving from Harper’s Weekly, September 21, 1861. Both men and women were drawn to work in the booming war-related industries of the North.
Taken together, the Union’s economic policies vastly increased the power and size of the federal government. The federal budget for 1865 exceeded $1 billion—nearly twenty times that of 1860. With its new army of clerks, tax collectors, and other officials, the government became the nation’s largest employer. And while much of this expansion proved temporary, the government would never return to its weak and fragmented condition of the prewar period.