Publication Date



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 ‘greyback’ 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 contribute to credit theories of money by drawing attention to the political determinants of effective fiscal policy.

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Cambridge Journal of Economics

Available for download on Friday, March 28, 2025