War is, by far, the most expensive of all government operations. And both the Confederate and United States governments faced unprecedented financial stresses in funding the Civil War. How each of them met the challenge helped determine, in no small way, the outcome of the war.
Governments have only three ways to fund operations. They can tax, they can borrow, and they can print. Both governments did all three, but the particular mix was very different. The northern states had a much more advanced economy and a well-established financial system in place. As a result, the U. S. was able to throw much of the cost of the war onto the future. In 1860, the national debt had stood at $64 million. By 1866, it was at $2.7 billion, and about five percent of the North's population has invested in federal bonds. So the North was able to raise two-thirds of its revenues by borrowing. . . .
The South had to meet fully 50 percent of its revenue by printing money. State and City governments also printed money. And because the South lacked good paper mills and state-of-the-art printing facilities, counterfeiting flourished. Altogether, the South printed about $1.5 billion in that money, three times as much as the North, despite having only twelve percent of the circulating currency before the war and 21 percent of banking assets.
The result was catastrophic inflation. Prices rose 700 percent in the South in just the first two years of the war. As the war continued, the inflationary spiral deepened and the southern economy began to spin out of control. Living standards fell sharply while hoarding, shortages, and black markets spread, eroding popular support for the war.
-John Steele Gordon, from his essay Inflation in the United States
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