The main international bankers in Europe were reluctant to finance the Confederacy, so it turned to smaller houses and speculators who bought $15,000,000 in Confederate bonds with gold. The gold was used to buy warships and supplies to be brought in by blockade runners. By highlighting Britain's economic links to the Northern states and pointing to the potential dangers of meddling in the conflict, financiers in the City of London provided Parliament with a powerful economic justification for the policy of neutrality.
MoneyBad money drives out good, and supplies of gold and silver were hoarded, driven out of circulation by the rising flood of paper money. The first notes were issued in March 1861, and bore interest. They were soon followed by others, bearing no interest and payable in two years, others payable six months after peace. New issues were continually provided, so that from an initial $1,000,000 in circulation in July 1861, the amount rose to $30 million before December 1861; to $100 million by March 1862; to $200 million by August 1862; to perhaps $450 million by December 1862; to $700 million by the autumn of 1863; and to a much larger figure before the end of the war.
Corporations and other business concerns tried to meet the rising tide of prices with the issue of their individual promissory notes intended to circulate from hand to hand.
As a result of this redundancy of the currency, its value collapsed. Gold was quoted at a premium in Confederate notes in April 1861. By the end of that year, a paper dollar was quoted at 90 cents in gold; during 1862 that figure fell to 40 cents; during 1863, to 6 cents; and still lower during the last two years of the war. The downward course of this figure, with occasional recoveries, reflects the popular estimate of the Confederacy's chance of winning independence.
The oversupply of currency drove the price of commodities to exorbitant heights, and disarranged all business. Savings in nominal dollars lost 90 percent or more of their value. It affected different classes of commodities differently. Imports like coffee became very expensive, and ersatz substitutes were found. (Massey 1952) Confederate asset price stabilization policies appear to have increased the velocity of circulation, and counterproductively channeled inflationary pressures into other areas of the economy.
Between January 1861 and April 1865, the Lerner Commodity Price Index of leading cities in the Eastern Confederacy increased from 100 to over 9000. Price inflation in the South during the Civil War ranks second only to the American Revolution in U.S. history.
Lerner Price Index (Jan-Mar 1861 = 100)
More>> Economy of the Confederate States of America
Confederate War Finance
Money and Finance in the Confederate States of America