Collection of the Museum of American Finance
Justice of the Supreme Court , where he would later preside over the impeachment trial of Andrew Johnson , who sought to block reconstruction efforts after Lincoln ’ s death . What Chase accomplished at Lincoln ’ s bidding in his few years in the cabinet , however , was nothing less than essential and groundbreaking , which justified Lincoln ’ s faith in the Ohio lawyer .
Lincoln needed Chase to solve a daunting financial problem . While he wasn ’ t asked to manage surly , sheepish generals or manage the expanding tableau of the war , Chase was charged with raising tens of millions of dollars to fund the federal Army , which stretched from Arkansas to the shores of the Potomac . At the time , the federal government had little revenue beyond the tariff system that had largely been put in place generations ago to protect domestic production , one of the pillars of Henry Clay ’ s American System . The Union , of course , was cut off from that income from the Southern states , so Lincoln and his cabinet needed to be creative . Lincoln was literally building and expanding one of the largest armies in the world at the time , so he needed capital to pay for everything from cannons to camp tents .
Chase quickly got to work , realizing that the Union — and the country in general — would need its own paper currency . And those greenbacks , issued by the US government , would need something to back them up , which eventually became the debt or “ full faith and credit ” of Washington . Throughout the 19th century , it was mostly up to the states to issue their own currency , run chartered banks and fund infrastructure projects . It made sense for a while when the country was small and didn ’ t have much population beyond the Appalachians . As the country expanded ,
$ 5 “ greenback ” note , 1863 .
the need arose for a national banking system along the lines of what Alexander Hamilton had proposed in the early days of the republic . Such a system would need to issue credit and settle debts . Capital was needed to build everything from bridges and turnpikes to canals and railroads .
The growing country , particularly west of the Appalachians and in the South , had little faith in a banking system based in Washington . When populist Western politicians in the 1830s like Andrew Jackson savaged the idea of a national banking system , he stirred up populist sentiments : Jacksonians justifiably revolted against the idea of a powerful , unfettered central bank , seeing that cronyism and corruption often determined who got credit , often denying it to those in the Western and Southern states . The idea of national banking and currency languished until the 1860s , when Lincoln needed a uniform way of printing and raising money . Establishing greenbacks and helping create the National Banking Act , Chase was instrumental in crafting a revised system of national finance . The notes issued by Washington ensured that the Union Army would have the capital it needed .
First Income Tax Created
Chase also played a key role in establishing the nation ’ s first federal income tax , which provided a steady and sustainable source of capital . While the political landscape favored all of Lincoln ’ s financial innovations since Republicans controlled Congress and the White House , it was a hallmark in government financing . No longer would tariffs be a prime source of federal income . Individual earnings would be taxed , signaling that every working citizen would have a stake in financing government operations , which in this case was fighting a horrendous war to upend an immoral economic system .
Signed on August , 5 , 1861 , the law creating the income tax imposed a flat 3 % levy on earnings . After farmers protested that it placed an unfair burden on them , Congress revised the law about a year later to make it graduated with wide income brackets : The 3 % rate would apply to incomes between $ 600 and $ 10,000 , and 5 % for earnings above that range . Although many at the time thought the tax itself was outrageous — it impacted most of the working population — it was an innovation for the time . As a progressive tax , it had an underlying principle of fairness based on one ’ s ability to pay . If you made more , you paid more . Although the tax would be later struck down in a Supreme Court decision in 1872 , it became a template for 20th century taxation , creating a financial staple for funding government ( or not ). Moreover , it would later provide the Treasury with a pool of money that could later be used to build the country . Harold Holzer highlighted the political significance , which was hardly lost on Lincoln during the worst years of the conflict :
Over time , Lincoln had learned the efficacy and inherent fairness of the graduated tax system … Lincoln understood that the public needs to believe that America operates on the moral principle of fairness . Americans must view their government as pursuing policies that are fair to all citizens .
While the doctrine of fairness in taxation has been severely challenged and revised in recent years , the idea of how taxes are applied — and to whom — is still a dynamic part of our national dialogue .
John F . Wasik is the author of 19 books and has spoken all across North America . As a journalist , he ’ s written for The New York Times , Forbes , The Wall Street Journal , AARP , Barron ’ s , Fortune . com , Money , Reader ’ s Digest and Washington Monthly , and he has been a columnist for Bloomberg News , Reuters and other national publications . In 2018 , Wasik was named an Illinois Road Scholar for the Illinois Humanities Council . This article is excerpted from his latest book , Lincolnomics : How President Lincoln Constructed the Great American Economy ( Diversion , 2021 ).
22 FINANCIAL HISTORY | Spring 2021 | www . MoAF . org