The scale and scope of the Civil War created unprecedented financial demands on both the Union and the Confederacy, whose governments spent a combined total of more than $3.4 billion for the war effort. These expenditures dwarfed those of the antebellum period: The federal government never spent more than $75 million per year in the 1850s. Each side faced a fundamental question: How would it pay the staggering sums needed to raise, equip, and supply its armed forces? Each had three basic options: extracting resources through taxes, tariffs, or outright confiscation; borrowing money by issuing bonds, interest-bearing notes, and other financial instruments; and inflating the money supply with fiat currency.

The Union used all three options but borrowed most of the money it needed. Borrowing did not alleviate the financial hardships of war—Northerners paid extraordinarily high taxes, and a general increase in prices resulted in...