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.James Bryce, Viscount BryceThe American Commonwealth, 1894The rich only select from the heap what is most precious and agree-able.They consume little more than the poor, and in spite of theirnatural selfishness and rapacity.they divide with the poor theproduce of all their improvements.They are led by an invisible handto make nearly the same distribution of the necessaries of life whichwould have been made, had the earth been divided into equal por-tions among all its inhabitants.Adam SmithThe Theory of Moral Sentiments, 1759 T r a n s i t i o nTH E C I VI L WA RHE AM E RICAN CIVI L WAR was the largest war fought in theT Western world in the century between the Battle of Waterloo,fought on June 18, 1815, and the outbreak of World War I on August 1,1914.Spread across half a continent, the troops moved by railroads andcommanded by telegraph, the people informed by large-circulationnewspapers, it was also the first great conflict of the industrial era.The carnage was without precedent.In the single day of Septem-ber 17, 1862, at the Battle of Antietam, the Union Army had casualties of2,108 killed and 9,549 wounded.That was more casualties than theUnited States Army had sustained in the entire Mexican War, which hadlasted two years.The total military deaths in the war on both sides offi-cially 498,333 exceeded 3 percent of the American male population in1860, four and a half times our percentage losses in World War II.Because the Civil War was far more like the great conflicts of thetwentieth century than such earlier struggles as the Napoleonic Wars,both sides faced demands on their government finances and the eco-nomies that supported them that no nation had faced before.The factthat the North, with a far larger economy and a government fiscal system 192 AN E M P I R E O F WEAL THalready in place, was better able to meet these demands played no smallpart in the war s eventual outcome.Because of the depression that had started in 1857, the federal govern-ment had been operating in deficit since that time.In 1860 the nationaldebt stood at $64,844,000 and the Treasury was nearly depleted.InDecember of that year, as the Deep South states began to secede one byone, there was at one point not even enough money on hand to meet thepayroll.Abraham Lincoln appointed Salmon P.Chase as secretary of the trea-sury.Chase, a man of great intellect if no sense of humor, and a formerOhio senator and governor, knew that he faced unprecedented prob-lems.At the outbreak of the war, on April 15, 1861, the federal govern-ment had been spending around $172,000 a day in all departments.Three months later, at the time of the first Battle of Bull Run, the WarDepartment alone was spending a million dollars a day.By the end of theyear, spending would be up to $1.5 million a day.How could such expenses be met? Governments have only threeways to raise money to pay their bills.They can tax, they can borrow,and they can print.The federal and Confederate governments bothresorted to all three.The particular mix of the three means that was usedby North and South, however, turned out to be crucial.Since the demise of the Second Bank of the United States, the federalgovernment had financed deficits mostly by borrowing, often short-term, from banks.The banks would then hold the bonds in theirreserves or sell them to their largest customers.Because it lacked a cen-tral bank, the government had no means of its own in place to borrowmoney or transfer sums from one area of the country to another.By July 1, 1861, three weeks before the first Battle of Bull Run, thedebt had risen to $91 million.Immediately afterward, when the battlehad shown that the war was likely to be a protracted one, Chase raised$50 million from Wall Street bankers in anticipation of federal bondsthat came to be known as seven-thirties because they paid an interest rate The Civil War193of 7.30 percent.(The rate was apparently chosen because it meant thatthe bonds would pay 2 cents a day for every hundred dollars invested).Fifty million was a huge underwriting for Wall Street at that time, andChase estimated that a year later the national debt would stand at $517million, a figure quite without precedent in American history.The secre-tary realized that the fiscal demands of modern warfare could not be metin the old way.Fortunately for Chase (and the country), he was acquainted with ayoung Philadelphia banker named Jay Cooke, whose father had been anOhio congressman.Cooke was made the agent of the federal govern-ment to sell a new issue of bonds called five-twenties (so-called becausethey could be redeemed in no less than five years nor more than twentyand, meanwhile, would pay 6 percent interest, in gold).Cooke bypassed the banks and went directly to the people.He adver-tised heavily in newspapers and passed out handbills.He arranged forthe Treasury to issue the bonds in denominations as small as $50, andallowed customers to pay on the installment plan.Thus he deliberatelytried to involve the average citizen in buying government securities.Inthe words of Senator John Sherman of Ohio (the older brother of Gen-eral William Tecumseh Sherman), Cooke made the virtues of theseinvestments stare in the face of the people in every household fromMaine to California. Cooke thereby invented the bond drive, an impor-tant part of every major war since.This had a profound effect on how Americans handled their assets.In the 1860s only a small percentage of the population had bankaccounts and less than 1 percent owned securities of any sort.Most fam-ilies kept whatever surplus cash they had under the mattress.By the endof the war, however, Cooke had sold bonds to about 5 percent of thepopulation of the loyal states, turning them into mini-capitalists.Equallyimportant, the dead capital hidden in their mattresses had been liberatedfor productive purposes.Cooke s bond drive was so successful that byMay 1864 the government was actually raising money as fast as the 194 AN E M P I R E O F WEAL THNavy and War departments could spend it, about $2 million a day at thatpoint.Largely thanks to Cooke, the North was able to throw much of thecost of the war onto the future, raising fully two-thirds of its revenues inthe war years by selling bonds.The Confederacy, with a far smaller mid-dle class, few large banks, and little financial expertise, was able to raiseonly about 40 percent of its revenues through borrowing.The situationfor the South was made worse by the fact that the South had an economynotoriously lacking in liquidity.Thus the South s wealth could not beeasily translated into money and spent on war matériel
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