A Patriot's History of the United States: From Columbus's Great Discovery to the War on Terror (67 page)

Tennessee was opened in 1862. Meanhile, Beauregard could not hope to hold Corinth against the combined forces of Pope, Grant, and Buell and therefore conducted a secret withdrawal that opened up northern Mississippi. Just two months earlier, in April 1862, Commander David Farragut captured New Orleans, and Memphis, too, had fallen. Now only Vicksburg stood between the Union and complete control of the Mississippi. Vicksburg not only dominated the river, but it also linked the South to the western Confederacy by rail. There, the blockade had been more porous, allowing food and horses to resupply Rebel armies in the East.

The story in the West seemed grimly monotonous: the Confederates would mount an offensive (despite their supposedly defensive strategy), suffer proportionately greater losses, retreat, then escape as the Union commander dawdled. Union general William Rosecrans attacked Mufreesboro, Tennessee, in December 1862. Again the Confederates had to leave the field despite achieving a draw. Slowly but surely, the Confederates, who took one step forward and two back, yielded ground. They were about to give up the plum of the West: Vicksburg.

From May to June, in 1862, the Union failed to capture Vicksburg, which sat on a high bluff commanding a hairpin curve in the Mississippi River. Vicksburg’s geography held the key to the city’s nearly invulnerable position. The Mississippi River flowed to the city at a 45-degree downward-sloping angle before abruptly turning due north, then sharply angled due south again. Vicksburg sat on the eastern (Mississippi) side of the hairpin, while directly north of the hairpin lay the Chickasaw Bayou, wedged between the Mississippi River and the Yazoo River. This swamp was all but impenetrable for an army, as Sherman found out, calling the approach “hopeless.”
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A main road and rail line connected Vicksburg with Jackson, Mississippi.

Throughout the remainder of 1862, Grant’s army tried a number of novel approaches to defeat this geography, including diverting the river itself by constructing a canal and breaking a levee to create a channel from the Yazoo. Nothing worked. Using Memphis as a base, however, Grant now decided to take Vicksburg by preventing the two Rebel armies facing him (one under Joe Johnston, and one in Vicksburg under John Pemberton) from uniting.

Grant discarded traditional tactics and trudged southward along the Louisiana side of the river, through difficult bayous and lakes, to a point well below Vicksburg where he could recross into Mississippi. To do so, he needed the Union Navy, under Admiral David Porter, to make a critical run from above Vicksburg, past the powerful guns in the city, to the junction below, from where it could ferry Grant’s forces across. Porter sent dozens of supply boats past the city on the night of April 22, 1863. The Confederates had poured turpentine over bales of hay and set them afire to illuminate the river in order to bombard the passing vessels. Although most federal ships sustained damage, all but one survived the run. Grant’s army now crossed into Mississippi from below Vicksburg, inserting itself between Pemberton and Johnston. After he captured and torched Jackson, Mississippi, and blocked the railroad line, Vicksburg was totally isolated.

Then, from late May until July, the Union Army bombarded and closed the noose around the city from the east. Civilians living in Vicksburg, under constant fire, had run out of normal food. When Grant sealed off the city, the residents took to caves and bombproof shelters. They ate soup boiled from mule and horse ears and tails before finally consuming the remaining parts of the beasts. When the horses and mules were gone, they ate rats. Sickness and disease swept the inhabitants as well as the soldiers. At last, on the Fourth of July, 1863, Pemberton, unable to link up with Johnston outside the city, surrendered Vicksburg and its force of 30,000 starving soldiers, as well as 170 cannons, just one day after the crushing defeat of Lee’s army at Gettysburg. Grant said, “The fate of the Confederacy was sealed when Vicksburg fell.”
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Lincoln had, at last, found what he needed to defeat the Confederacy. With eerie prescience, Lincoln told his advisers just before news arrived from Vicksburg that if the general took the city, “Grant is my man, and I am his for the rest of the war.”
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Growing Government(s)

No accusation against Abraham Lincoln has more merit than that he presided over the most rapid expansion of federal power in American history. Most of the expansion can be justified by wartime demands, but too much was little more than political pork barreling and fulfillment of campaign promises.

Shortly after the call had gone out for troops, the government possessed no proven method of raising large sums of money quickly. Lincoln’s secretary of the treasury, Salmon P. Chase, proved to be the right man in the right office at the right time. Chase came from a New Hampshire family, where he learned politics from his state representative father. As a young man, Chase had also worked with his father at running a tavern and a glass factory, and when both failed, he was shipped off to an Ohio relative. After studying for the bar in Ohio, Chase practiced on behalf of the Cincinnati branch of the Bank of the United States, achieving some degree of financial success. Aloof, plodding, and occasionally without tact, Chase had been drawn to the antislavery cause following rioting in Cincinnati against a local abolitionist paper run by James G. Birney. Politically, Chase moved from the Whig Party to the Liberty Party, then adopted the label free Democrat.
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He had won a Senate seat as a Democrat from Ohio, but continued to push the free-soil cause before running for governor in Ohio under a fusion Republican ticket in 1855. Winning the governor’s seat, Chase and the legislature attempted to expand the state’s free banking laws, providing a harbinger of his financial expertise as treasury secretary. Like Seward, he was disappointed to lose the Republican presidential nomination in 1860, and even though he was offered another U.S. Senate seat by the Ohio legislature, he never took it. Instead, he reluctantly accepted Lincoln’s offer of the Treasury post.

Chase confronted a daunting task. In 1850 the federal government’s budget averaged 2 percent of gross national product (GNP) but by the end of the Civil War, it had soared to more than 15 percent. Merely
running
the Treasury in such circumstances constituted a challenge: the number of clerks in the department increased from 383 in 1861 to more than 2,000 in 1864. To fill the necessary positions, Chase unwisely appointed many party hacks who often could be relied upon for little else but their partisan loyalty.

Raising the necessary funds to run the war demanded that Chase not only develop systems for generating lots of revenue, but also for bringing it into the Treasury fairly quickly. At the same time, he did not want to sacrifice long-term stability for short-term gains. Copying Alexander Hamilton, Chase examined a menu of options to serve both short-and long-term needs. Taxes, for example, had to be passed by Congress, then collected, meaning that it would be 1862 or later before tax revenues provided much help to the cause. So while Chase immediately asked Congress for a new direct tax on incomes over $300, he simultaneously requested new tariffs and expanded land sales that would generate quicker revenues. Even when the taxes came in, at the end of 1863, the $2 million they produced was inadequate to the Union’s needs, which by the end of 1861 ran $2 million
per day.
Meanwhile, in addition to other shorter-term bond issues, Congress authorized Chase to raise $250 million through sales of twenty-year bonds paying 7 percent interest.

Banks hesitated to buy bonds if they had to pay for them in gold, and in December 1861 the Northern banks suspended specie payments on all notes. (The Confederacy’s banks had gone off the gold standard almost immediately after Fort Sumter.) Concerned that soldiers would go unpaid, Chase advanced a paper money concept to Congress that would allow the Treasury to issue $100 million in notes that would circulate as “lawful money, and a legal tender of all debts, public and private.”
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Enacted as the Legal Tender Act of February 1862, the proposal authorized the issue of more than Chase requested—$450 million of the new green-colored bills, called greenbacks.

The temporary money gave the nation a wartime circulating medium and also enabled the government to pay its bills. Congress also authorized Chase to borrow an additional $500 million. Nevertheless, the “five-twenty” bonds (redeemable after five years, maturing to full value after twenty-five, and paying 6 percent interest) did not sell as fast as Chase hoped. He relied on a personal friend, Philadelphia banker Jay Cooke, to sell the bonds through a special (though not exclusive) contract. Cooke received a nice commission, but more important, he held a virtual monopoly on the bond sales. In the hands of other men, that might have been a problem, but not with the motivated Cooke, who placed ads in newspapers and aggressively targeted the middle class as well as traditional silk-tie investors. Conceiving the first true “war bond,” Cooke appealed to Northerners’ patriotism, and oversubscribed every issue. He sold $400 million worth by the end of 1863 alone, netting himself $1 million in commissions and making him the Civil War equivalent of Robert Morris.
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Meanwhile, Chase came up with yet another menu option to accelerate the revenue stream. Using as a model the free-banking laws popular in the North prior to the war—wherein banks would purchase bonds that they would keep on deposit with the secretary of state as security against overissue of notes—in his December 1861 report to Congress, Chase argued for a national banking system in which the banks would receive their charters after purchasing government bonds. Congress passed the National Banking Act of February 1863, which provided for $300 million in national banknotes to be issued by the new network of national banks (who would, in turn, themselves purchase bonds as their “entry permit” into the business). Nevertheless, the law offered no incentive for people to hold national banknotes over private banknotes. By December 1863, fewer than 150 national banks operated, and only in 1864 did Congress fix the loophole by placing a 10 percent tax on money issued by state banks.

Of all the Civil War legislation—aside, obviously, from emancipation—this act had the most far-reaching consequences, most of them bad. Although Congress increased the number of national banks in operation (1,650 by December 1865), the destruction of the competitive-money/private-note issue system led to a string of financial upheavals, occurring like clockwork every twenty years until 1913. Competition in money had not only given the United States the most rapidly growing economy in the world, but it had also produced numerous innovations at the state level, the most important of which, branch banking, was
prohibited
for national banks. Thus, not only did the National Bank and Currency Acts establish a government monopoly over money, but they also excluded the most efficient and stable form of banking yet to emerge (although that mistake would be partially corrected in the 1920s). Critics of Lincoln’s big-government policies are on firm ground when they assail the banking policy of the Civil War.

In contrast, however, the North’s financial strategy far surpassed that of the Confederacy under its Treasury secretary, Christopher G. Memminger, a South Carolina lawyer. Memminger, like Chase, at one time was a hard-money man, and like Chase he also acceded to wartime requirements of quick revenues. He embraced taxation, borrowing, and fiat money. Although the Confederate Constitution forbade tariffs, the CSA’s congress almost immediately imposed a range of duties, and with no supreme court to overrule it, the acts stuck. And in sharp contrast to the U.S. Constitution’s prohibition against export tariffs, the CSA also imposed export taxes.
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By 1863 the Confederacy had adopted a wide range of taxes, including direct income taxes and taxes on gold. Possessing a smaller and less industrial economy on which to draw, the South found it more difficult to borrow money through bond issues, raising one third of its wartime revenue needs through borrowing, compared to two thirds in the North.
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Worse, when the Confederate congress authorized a second $100 million loan in August 1861, planters were allowed to pay for it in cotton, not gold. The Confederacy, thanks to its short-sighted embargo, was already drowning in cotton, and now more of it stacked up as “patriotic” planters subscribed to bonds with more of the worthless fiber. A small foreign loan of $14.5 million in France negotiated by Emile Erlanger brought in only $8.5 million.
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Thus Memminger copied Chase, far surpassing him in the introduction of fiat money when the Confederate congress began issuing Confederate notes in 1861. Starting slowly with only $1 million, wartime necessity soon drove the CSA to issue more than
$1 billion
in Confederate paper money, or more than double the number of greenbacks issued to a much larger population in the North. Before long, Confederate money attained a reputation for worthlessness previously seen only in the Revolutionary-era continentals and not seen again until the Weimar Republic’s disastrous hyperinflation in the 1920s.
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A Confederate dollar worth eighty-two cents in gold or silver in 1862 had plummeted to only $.017 in 1865.

Memminger never dreamed in 1862 that within a few years the Confederacy’s needs for goods and services would become so desperate that the government would resort to outright confiscation—theft of private property. Already, however, the warning signs had appeared, heralding a type of war socialism. While the North skimmed off the top of private enterprise, the South, lacking an entrepreneurial base to match, was forced to put the ownership and control of war production in the hands of government. The Confederacy reached levels of government involvement unmatched until the totalitarian states of the twentieth century: seven eighths of all freight moved on the Virginia Central Railroad was for the government’s account; government work done in Augusta, Georgia, by the main private company, the Augusta Textile Factory, accounted for 92 percent of its total; and the Confederate government created its own powder works, the second largest in the world.
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By the end of the war, all pretense to a free market—which Southern plantation slavery never was—had disappeared as President Jefferson Davis confiscated all railroads, steam vessels, telegraph lines, and other operations, impressing their employees for government or military work. Swarms of Confederate officials soon resembled King George’s agents that Jefferson had warned about in the Declaration. As one North Carolinian recalled, government officials were “thick as locusts in Egypt,” and he “could not walk without being elbowed off the street by them.”
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Government bureaucrats not only confiscated food and other items, “paying” with the worthless money, but also forced both white and black workers onto construction projects for the Confederacy.
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The Confederacy died of big government.”
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