[Global Financial History] For Lincoln, War Was an Opportunity to Make the United States a Modern Nation

As soon as Lincoln was inaugurated as president, the Civil War (1861?1864) began. War is essentially about money. However, when Congress convened in December 1860, the national finances were bankrupt, and everything was in short supply. The war, which broke out amid financial exhaustion, swallowed money like a hippo. Moreover, after the Jackson administration closed the Second National Bank, the American banking system was fragmented and chaotic. At that time, the federal government lacked even the most basic financial and fiscal systems. To fund the war, Lincoln had no choice but to start from scratch. Not only did Lincoln manage the enormous war expenses, but he also laid the foundation for the current American fiscal and financial system. Thanks to that financial system, the North secured the capacity to conduct the war and ultimately won. Grant’s war of attrition foreshadowed the success of the American system.

For Lincoln, the war was rather an opportunity. It allowed him to establish the banking system necessary for his dream of American industrial development. In fact, Lincoln, who had been advocating for ‘banking’ since the beginning of his political career, was a savior-like figure. In 1832, at the age of 23, Lincoln ran for the Illinois state legislature. In his first speech, he said, “I support a national bank, the construction of an internal (transportation) system, and high protective tariffs. This is my belief and political principle.”

Long before becoming president, Lincoln pondered how to manage the national economy. Having experienced recessions and economic turmoil caused by previous presidents, he believed monetary reform was necessary. President Jackson required that government-owned land sales be paid only in gold or silver. His successor, Van Buren, stored all government money in specie (gold or silver) to prevent inflation and limited currency issuance. In an 1839 speech, Lincoln criticized the problems of issuing currency linked to gold and silver. He said that if specie (gold and silver) was stored quietly in the Treasury’s vaults, it was just rusting away in iron boxes. Without hesitation, Lincoln reformed the fiscal and financial system, still valid today, to achieve victory in the war and industrial development.

The National Banking Acts enacted in 1863 and 1864 mark a significant moment in American banking history. Lincoln’s conviction was similar to Hamilton’s in the 1790s, who advocated for a national bank as the foundation of industrial development. The true meaning of bank currency is not ‘past savings’ but ‘expectations for the future.’ Therefore, banks should become nurseries of national wealth that convert money into ‘credit’ for businesses. Ultimately, Lincoln, a patented entrepreneur and railroad lawyer, established the national bank as part of a plan to increase the nation’s wealth.

Lincoln also created the framework of the fiscal system. At that time, federal taxes depended on import tariffs for 92% of total revenue. Lincoln sought to improve a government that lacked even the most basic tax collection procedures. Tax collection was necessary to fund the war and to demonstrate the government’s ability to repay bonds. Lincoln pushed forward tax reforms that included raising tariff and property tax rates and introducing income tax. The law took effect on August 5, 1861?105 days after the outbreak of the Civil War. The United States boldly imposed its first federal income tax in history. At that time, only about 3% of the population was subject to income tax. As the tax burden increased, income tax shifted from a flat rate to the first progressive tax. The new income tax law introduced the federal tax collector system to enforce tax payments. This became the foundation of today’s Internal Revenue Service. The Civil War was an opportunity for Lincoln to achieve the fiscal integration he desired.

The greatest revolution was the 1862 declaration of the dollar, called the Greenback, as legal tender. The Greenback was the first paper currency issued by the U.S. government. It was printed with green ink on the back, hence the name Greenback. Since photography was only black and white at the time, this was an anti-counterfeiting measure. The Greenback was a valid form of currency, just like coins. As Lincoln asserted, it was a standard currency usable throughout the entire federation. Initially, banks in New York and British banks distrusted the Greenback, predicting or hoping for economic collapse. Even Congress feared the collapse of the financial system. However, the Greenback, merely paper money, worked much better than expected. It could be used to pay taxes and purchase bonds. Creditors had to accept Greenbacks at face value. By increasing the circulating currency, the government lubricated the wheels of Northern commerce. Since state banks’ banknotes were taxed from 2% to 10%, by the end of the war, the numerous forms of currency previously in circulation disappeared. Now everyone could freely conduct business across state lines using the legal tender Greenback. Lincoln also issued $150 million in new legal tender to finance the war.

The war led to a revolution. Before the war, the federal government was limited to mail delivery and diplomacy. Real power was exercised by the ‘states’ and ‘regions.’ But the war changed everything. The Civil War greatly expanded national power, economic strength, and military capability. The federal government acquired unprecedented fiscal and financial capacity. Money no longer slept in vaults but circulated continuously as credit. The age of railroads arrived, and rapid economic development followed. New York’s Wall Street grew rapidly during the Civil War. As federal bonds were traded on Wall Street, New York grew into the world’s second-largest financial market after London. The war laid the foundation for America’s massive industries in the late 19th century. A newly empowered nation was finally born. The general framework and structure of the federal banking system, which lasted into the 20th century, were established. Lincoln advanced the exercise of federal power more than any before him and forever changed the relationship between the states and the federal government.

Baek Youngran, Director of History Bookstore