A series of financial measures had been enacted to fund the war, which was costing $2 million daily. Under the direction of the Treasury Department, and with the administrative guidance of thePhiladelphiabanker Jay Cooke, the government had issued war bonds (which, over the course of the war, would raise about $3 billion for theUnion, or 65 percent of its revenue). Needing an unrestricted currency supply to fuel the bond program, Congress passed the Legal Tender Act in 1862, which authorized the production and distribution of paper money, known popularly as greenbacks.

More significantly, the Internal Revenue Act of 1861, the first federal income tax in American history, assured the financial community that the government would have a reliable source of income to pay the interest on war bonds. Subsequent Revenue Acts of 1862 and 1864 created moderately progressive tax brackets and set rates at 5, 7.5, and 10 percent. By the end of the war nearly one in ten American house holds (mostly in the affluent states in the industrial Northeast, the section of the country that held most of the wealth) paid an income tax.

Also enacted was an excise tax system that imposed taxes on almost everything: liquor, professional licenses, carriages, yachts, medicines, corporations, stamps, and the like. The Morrill Tariff Acts of 1860 and 1861 doubled the amounts of taxes collected on dutiable items brought into the United States, while at the same time protecting the steel, iron, mineral, beef, and fishing industries, among many others. Congress also enacted the National Banking Acts of 1863 and 1864, which established a system of national charters for banks and encouraged the implementation of a national currency. They also mandated that one- third of a new bank’s notes had to be backed by federal bonds, thus assisting the war effort. When state banks balked at the new regulation, a provision of the 1864 Act imposed a 10 percent tax on state bank notes; state banks then had to choose to comply or go out of business. Overall, the tax system quickly grew so large that the Bureau of Internal Revenue was created to administer it.

Abraham Lincoln by George McGovern.Excerpted from Abraham Lincoln by George McGovern.  

Copyright © 2009 by George McGovern.

Reprinted with permission from Times Books, an imprint of Henry Holt and Company, LLC.

Read the content of the Internal Revenue Act of 1861 via the Library of Congress.