The Money War: An Interpretation of Democracy, Depreciation, and Taxes in the U.S. Civil War

40 Pages Posted: 18 Aug 2021 Last revised: 21 Aug 2021

See all articles by Ariel Ron

Ariel Ron

Southern Methodist University

Sofia Valeonti

The American University of Paris

Date Written: August 16, 2021

Abstract

Both sides in the U.S. Civil War financed military spending by issuing new fiat currencies. The Union “greenback” underwent moderate inflation (by wartime standards), but the Confederate “grayback” suffered hyperinflation. Existing explanations for these price movements typically treat only one of the two cases and adopt either a quantity-theory or rational-expectations approach. We compare Union and Confederate policies directly and highlight the importance of taxation for assuring the value of inconvertible money. Combining monetary and fiscal history literatures, we find that tax policies were determined by long-term development of democratic governing institutions. Higher levels of democracy in the North, as compared to the slaveholding South, meant greater tax policy legitimacy and administrative competence. The Union drew on this legacy to back its money effectively, while the Confederacy failed to do so. We contrib-ute to the theory of chartalist money by drawing attention to the political determinants of effective fiscal policy.

Keywords: inflation, hyperinflation, taxation, fiat currency, Confederate States of America, U.S. Civil War, chartalism

JEL Classification: B15, B52, E12, E31, E41, E63, H1, H2, N11, N21, N41, P44, P16, P50

Suggested Citation

Ron, Ariel and Valeonti, Sofia, The Money War: An Interpretation of Democracy, Depreciation, and Taxes in the U.S. Civil War (August 16, 2021). Available at SSRN: https://ssrn.com/abstract=3906049 or http://dx.doi.org/10.2139/ssrn.3906049

Ariel Ron (Contact Author)

Southern Methodist University ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Sofia Valeonti

The American University of Paris

5 Boulevard de la Tour-Maubourg
PARIS, 75007
France

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