As finally adopted by Congress, the National Banking Act of 1863 chartered national banks which met certain requirements, made the notes of national banks legal tender for all public and private debts, and levied a tax of 2 percent on state bank notes, which gradually increased over time. By imposing a tax on state bank notes, the federal government forced state banks to join the federal system. By 1865, national banks had 83 percent of all bank assets in the United States. After 1870, interestingly, state banks made a comeback; they avoided the tax on their bank notes by issuing checks.


The Confederacy Begins to Collapse

By early 1863, the Civil War had begun to cause severe hardship on the southern home front. Not only was most of the fighting taking place in the South, but as the Union blockade grew more effective and the South's railroad system deteriorated, shortages grew increasingly common. In Richmond, food riots erupted in April 1863. A war department clerk wrote: "I have lost twenty pounds, and my wife and children are emaciated."

The Confederacy also suffered rampant inflation. Fearful of undermining support for the war effort, Confederate leaders refused to raise taxes to support the war. Instead, the Confederacy raised funds by selling bonds and simply printing money without gold or silver to back it. The predictable result was skyrocketing prices. In 1863, a pair of shoes cost $125 and a coat, $350. A chicken cost $15 and a barrel of flour $275.

Defeatism and a loss of will began to spread across the Confederacy. Military defeats suggested divine disfavor. Hardships on the home front generated discontent within the ranks.

In the South, the imposition of a military draft in April 1862 produced protests that this was "a rich man's war and a poor man's fight." Although the law made all able-bodied men ages 18 through 35 liable for three years' service, the draft law allowed draftees to pay a substitute to serve for him (the North adopted a similar draft law in March 1863). Further aggravating tension was enactment of the "Twenty Negro Law" in October 1862 which exempted one white man from the draft on every plantation with 20 or more slaves.


The New York City Draft Riots

As the war dragged on, enthusiasm faded and class tensions flared. In the North, the worst mob violence in American history took place in New York City in July 1863, two weeks after the Battle of Gettysburg. About 120 people were killed, mainly by police and soldiers. Irish Catholic immigrants and their children had been egged on by Democratic leaders who told them that Republicans wanted to free the slaves in order bring them north to replace Irish workers. During four days of rioting, mobs  lynched at least a dozen African American men, destroyed draft offices, burned and looted black neighborhoods and the homes of leading Republicans and abolitionists.


Blacks in Blue

By early 1863, voluntary enlistments in the Union army had fallen so sharply that the federal government instituted an unpopular military draft and decided to enroll black, as well as white, troops. Indeed, it seems likely that it was the availability of large numbers of African American soldiers that allowed President Lincoln to resist demands for a negotiated peace that might have including the retention of slavery in the United States. Altogether, 186,000 black soldiers served in the Union Army and another 29,000 served in the Navy, accounting for nearly 10 percent of all Union forces and 68,178 of the Union dead or missing.
Twenty-four African Americans received the Congressional Medal of Honor for extraordinary bravery in battle.

Three-fifths of all black troops were former slaves. The active participation of black troops in the fighting made it far less likely
that African Americans would remain in slavery after the Civil War.