While empires such as the British and French taxed other nation-states, the fledgling United States, which had emerged from the status of subject-state via the American Revolution, did not have access to other nation states to generate revenue. This hegemonic-subservient relationship did not appeal to the new American consciousness, as displayed in its Constitution, and with liberty in mind, it also did not choose to direct tax its own citizens.
Instead, the new United States government chose to institute a system of taxation on foreign trade by using tariffs on imported goods. American production was not taxed as it left the country, but goods bought overseas and delivered to American ports were taxed, with the revenue going directly to the U.S. Treasury.
Many in government in the developing United States, who saw the necessity of achieving economic self-sufficiency, wanted to protect the nascent new industries that would produce goods to be exported. Often, infrastructure improvements that would either provide low cost transportation, or improve market access were underwritten by the government. In the case of domestic manufactured goods for sale within the country, tariff rates would be raised over the going rates elsewhere in order to encourage the United States citizens to purchase American made goods.
Thriving agriculture was carefully encouraged. Domestic production not only would preclude imports of food, but serve as exports that became the currency to buy overseas finished goods instead of bullion being transferred. Farmers also provided a base for taxation because of their demand for implements and finished goods.
As the 1850s drew to a close, there arose in Congress those that championed the goal of regulated commerce that could produce a planned and regulated favorable balance of trade. In general, tariffs should be high on imported manufactured goods and low on imported raw material. They essentially realized that the Southern states and its vast market were captive markets for manufactured goods while being primary sources of raw material for Northern consumption or export.
In essence, the domestic production of the South eliminated the need for the United States to export valuable metals to obtain goods. Since cotton, tobacco, rice, sugar, and flax were used to obtain the English goods, the production of the South was the currency of the trade of the country.
By the 1850s, over 95% of the total revenue collected by the Treasury department was from tariff revenues. The expenses of the government, including operations, the military, and internal projects, were essentially totally financed by tariff revenue. When the Southern Confederacy was formed, not only was the revenue stream of the US Treasury broken, but the government would need to borrow.
The finances of the Federal Government had been in a very disordered condition due to business downturns resulting from the political disturbances, and which by reducing the imports of overseas goods, had reduced the customs income, the chief source of revenue for the Treasury.
In June, 1860, a loan of twenty million dollars had been authorized by Congress. Of this amount, ten million was offered in October in a five per cent stock, and it had been taken by investors at a small premium.
Before any installments were paid up, the panic that attended the election had affected credit, and many bids were withdrawn.
This so seriously affected the Treasury Department, that as the New Year approached, it seemed likely there would be no funds with which to meet the interest on the National debt.
By the Act of December 17th, 1860, an issue of ten million dollars, in treasury notes, was authorized, to bear such a rate of interest as might be offered by the lowest bidders, but so shaken was credit, few bids were made, and some of them at a rate of thirty six per cent interest per annum.
The capitalists interested in the Government credit finally took one million five hundred thousand dollars of one year treasury notes, at twelve per cent per annum (the amount was subsequently raised to five million dollars), on condition that the money should be applied to paying the interest on the national debt.
This was certainly a dark day in the Capitol, when the Federal Government, which had earned the honor of being the only nation that had ever paid its debts in full—principal and interest—and which in 1856, with an overflowing treasury, had paid twenty-two per cent premium for its own stock, was now reduced to give twelve per cent interest, for a few millions, and to engage to protect its credit with the money.
This, combined with the specter that as soon as the primary cotton and tobacco producing states seceded with the subsequent massive loss in exportable products, that the US Treasury was in great jeopardy.