ECON102: Principles of Macroeconomics (2021.A.01)

The Union and the Confederacy financed their respective efforts during the Civil War largely through the issue of paper money. The Union roughly doubled its money supply through this process, and the Confederacy printed enough "Confederates" to increase the money supply in the South 20-fold from 1861 to 1865. That huge increase in the money supply boosted the price level in the Confederacy dramatically. It rose from an index of 100 in 1861 to 9,200 in 1865.

Estimates of real GDP in the South during the Civil War are unavailable, but it could hardly have increased very much. Although production undoubtedly rose early in the period, the South lost considerable capital and an appalling number of men killed in battle. Let us suppose that real GDP over the entire period remained constant. For the price level to rise 92-fold with a 20-fold increase in the money supply, there must have been a 4.6-fold increase in velocity. People in the South must have reduced their demand for Confederates.

An account of an exchange for eggs in 1864 from the diary of Mary Chestnut illustrates how eager people in the South were to part with their Confederate money. It also suggests that other commodities had assumed much greater relative value:

"She asked me 20 dollars for five dozen eggs and then said she would take it in "Confederate". Then I would have given her 100 dollars as easily. But if she had taken my offer of yarn! I haggle in yarn for the millionth part of a thread! … When they ask for Confederate money, I never stop to chafer [bargain or argue]. I give them 20 or 50 dollars cheerfully for anything".