Confederate Hyperinflation

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From October 1861 to March 1864 price increases averaged 10 percent per month in the states of the Confederacy, putting the Confederate price index when Lee surrendered at 92 times its prewar base. In the history of the United States only the hyperinflation of the American Revolution compares in intensity with the hyperinflation of the Confederacy.

Like the revolutionaries that spearheaded the American Revolution, the leaders of the Confederacy faced a populace that was in no mood to pay additional taxes. Southerners felt that the present generation bore the burden of a war that would primarily benefit future generations, and as much of the expense as possible should be passed to future generations. Union blockades of Confederate ports precluded any effort to implement a revenue tariff on imports, the main source of federal government tax revenue. The Confederate government enacted a property tax but lacked the machinery to collect it in the face of uncooperative state governments. By October 1864 tax revenue accounted for less than 5 percent of all revenue that found its way to the Confederate treasury.

The Confederacy met with slightly more success in trying to finance public expenditures with bonds. In May 1861 the Confederate Congress approved a $50 million bond issue. The bond issue faltered on a depressed cotton market that resulted from the use of cotton as a bargaining chip with European governments whose recognition the Confederacy needed, leaving angry planters unable or unwilling to subscribe to bonds on the scale needed. By October 1864 bond sales had raised less than 30 percent of all revenue that had entered the Confederate treasury.

The remaining source of revenue was Confederate money. On 9 March 1861 the Confederate Congress authorized printing notes in an amount not exceeding $1 million, but the Treasury Department over four years printed $15 million of notes. Treasury employees at the note-signing bureau rose from 72 in July 1862 to 262 in July 1863. As printers, paper, and engravings became scarce, the Confederate government granted credit for counterfeit bills, which were stamped valid and reissued. From 1 July 1861 to 1 October 1863 the paper money column of the Confederate Treasury ledger accounted for 68.6 percent of all government revenue.

Surprisingly, private banks in the Confederacy were restrained in the issuance of bank notes. The uncertainties of war encouraged private banks to hold large quantities of vault cash, which actually tempered the inflationary thrust of the excess paper money.

Much of the Confederate currency bore the option to buy interest-bearing Confederate bonds up to a certain date, after which that option expired. As inflation gathered force early in 1864 the Confederate Congress enacted a currency reform that brought a lull in the inflation rate. The reform provided that all currency in bills greater than $5 could be converted into 4 percent bonds, dollar for dollar. Currency not converted into bonds by 1 April 1864 had to be exchanged for new currency at a rate of three for two. Inflation subsided until December 1864 when the Confederate government again had to turn to the printing presses.

From the first quarter of 1861 until 1 January 1864 prices in the Confederacy rose 28-fold while the money supply rose only 11-fold. Prices rose even faster than the money supply because of wartime disruptions in the supply of goods, and the phenomenon of velocity. Velocity is the average number of times per year that a dollar is spent, and in a hyperinflationary environment, recipients of money rush to spend it before it loses its value. An increase in the velocity of money has the same effect on the economy as an increase in the money supply.

The experience of the Confederacy shows what happens when the supply of money exceeds what is demanded by the normal transactions of business and the desire for liquidity. When the supply of money exceeds the demand, the value of money falls, meaning it buys less because of price increases.