How to fight inflation by taking lessons from history?

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How to fight inflation by taking lessons from history?

Annual spending in the Union reached a staggering 16 times its pre-war budget. Despite the need for money, there was a great fear of increasing taxes in Congress because of the Americans’ well-known aversion to taxation.

But Salmon P. Chase, the financially conservative Treasury Secretary, was mortally afraid of inflation. He believed that without revenue the government would have to resort to the printing press. After the separation of the southern states, interest rates on the country’s debt soared and foreigners refused to lend.

Thaddeus Stevens, chairman of the House Ways and Means Committee, went beyond Mr. Chase’s imagination by inventing an entirely new tax code. Prior to this, the union had funded itself with tariffs on foreign trade, which it increased several times. In addition, it created a system of “internal taxes” on everything from personal income to duties on leaf tobacco, alcohol, slaughter and auctions. Congress also created a new bureau to collect taxes, the precursor to the Internal Revenue Service, outlining its commitment to increasing revenue in this way.

Mr. Stevens did not know how much revenue the taxes would generate, or if people would even pay them. (“Everything else on earth under Earth is to be taxed,” said one Ohio.) But by 1865, the Treasury earned $300 million from customs duties and internal taxes—six times its pre-tax revenue.

That revenue helped reduce inflation resulting from the issuance of “greenbacks”, notes that circulated as money to pay for war. The country’s credit improved and Mr Chase was able to borrow huge sums of money. Ultimately, inflation in the Union was no higher than during the two world wars in the following century.

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The union faced similar financial challenges. Its German-born Treasury Secretary Christopher Meminger warned that note printing is “the most dangerous of all methods of raising money.” But the South was ideologically opposed to taxation, especially by the central government.

The South approved a very modest tax (half a percent on real estate), but the collection was left to the states and some tried to collect it. With cotton shipments to Europe closed due to the Union blockade, Mr. Meminger soon found that he had no choice but to print notes to cover the cost of the war. These inflated at a frightening rate.

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