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Before any installments were paid up, the panic that attended the election had affected credit, and many bids were withdrawn.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.
With New Orleans already the gateway to the Midwest, and with Charleston having a newly dredged harbor, Lincoln and his supporters realized that direct trade with Europe would now be possible for Southern business interests. This would supplant the shipping, banking, insurance, and freight companies that flourished with the movement of Southern goods through northern ports into the overseas trade. Northern ports, supplying the mid west would also be damaged by the trade that would move back through New Orleans, Galveston, and Mobile.
After the tariff rates were announced, newspapers, politicians, businessmen, and industrialists called on Lincoln to take action to obviate the Southern competition. Since essentially the Southern states were forming their own cotton, rice, and tobacco world exchange, he had to halt it.
His options were not plentiful. He could not sabotage the Confederate market without initiating a blockade, and because that would be an all out unilateral act of war that no one in his cabinet would support. He could use the United States Army and Navy to materially force the Confederacy back into the Union, however he knew that the citizens of the country and world opinion would be against him. He could not risk his new administration by being an obvious aggressor to the new Confederacy.
He could not underwrite a change in government, or ‘coup d’etat’ since the Confederate government had just been formed with essentially the same Constitution as that to which he had just pledged to support. Again, he would be seen as the aggressor against a country with the same laws to which he and his party swore loyalty.