The War Between the States commenced by Lincoln immediately presented he and his administration with the problem of a conflict the United States could not afford. In April 1861, federal spending was only about $172,000 a day, raised by tariffs and land sales. By the end of July 1861, Lincoln had caused this to increase to $1 million, and by the end of December it was up to $1.5 million per day. Also in December 1861 Northern banks had to stop paying their debts in gold, with the federal government doing the same shortly after and resorting to printing money. The country had gone off the gold standard, Wall Street was in a panic, and Lincoln would lament, "The bottom is out of the tub, what shall I do?"
Bernhard Thuersam, Chairman
North Carolina War Between the States Sesquicentennial Commission
"Unsurpassed Valor, Courage and Devotion to Liberty"
"The Official Website of the North Carolina WBTS Sesquicentennial"
War for Protective Tariffs, Income Taxes and Astonishing Profits
"By May 1864 [financier Jay] Cooke was selling [Northern] war bonds so successfully that he was actually raising money as fast as the War Department could spend it, no mean feat for that was about $2 million a day at this point. Altogether, the North raised fully two-thirds of its revenues by selling bonds. If Abraham Lincoln must always be given the credit for saving the Union, there is also no doubt that the national debt was one of the most powerful tools at his disposal for forging victory.
Although the [Northern] people were willing to endure very high taxes during the war, peacetime was another matter altogether. Immediately after the war the cry for repeal of the wartime taxes became insistent. With military expenses quickly dropping, the problem, was what taxes to cut. American industrialists, who had prospered greatly thanks to wartime demand and wartime high tariffs, naturally did not want the tariffs cut. Because the Civil War had broken the political power of the South, the center of opposition to the tariff, they got their way.
The tariff was kept at rates far above the government's need for revenue as the North industrialized at a furious pace in the last three decades of the nineteenth century and became the greatest – and most efficient – industrial power in the world. Of course, no matter how large, efficient, and mature these industries became, they continued to demand [tariff] protection, and, thanks to their wealth and political power, get it.
As Professor William Graham Sumner of Yale explained as early as 1885, "The longer they live, the bigger babies they are." It was only after the bitter dispute between Andrew Carnegie and Henry Clay Frick caused the astonishing profits of the privately held – and highly protected – Carnegie Steel Company to become public knowledge, in 1899, that the political coalition behind high tariffs began to crack.
Before the Civil War there had been little advocacy of an income tax in this country, at least at the federal level, although by the war six States had implemented such taxes for their own revenue purposes. But once a federal income tax was in place, thanks to the Civil War, it quickly acquired advocates, as political programs always do.
These advocates pushed the idea relentlessly . . . Republican Senator John Sherman….said during a debate on renewing the income tax in 1872, that "here we have in New York Mr. Astor with an income of millions derived from real estate . . . and we have along side of him a poor man receiving $1000 a year. [The law] is altogether against the poor man….yet we are afraid to tax Mr. Astor. Is there any justice in it? Why, sir, the income tax is the only one that tends to equalize these burdens between the rich and the poor."
(Hamilton's Blessing, John Steele Gordon, Penguin Books, 1997, pp. 79-83)