I'm reading Niall Ferguson's The Ascent of Money and I had a question about the economic difference between printing money vs. selling bonds to foreign entities.

At one point in the book, the author says that much of Southern Civil War effort (in the United States) was funded by issuing Cotton-backed bonds. I.e the south issued bonds that could be converted to Cotton.

The author then points out that the turning point in the war was when the Union army captured New Orleans and setup a naval blockade, which prevented European investors from collecting their cotton.

This ruined the South's ability to sell bonds, and forced them to print money to pay for war expenses, which led runaway inflation.

My question is as follows: In this case, how is issuing bonds better than printing money? Wouldn't foreign bond purchases also lead to inflation, since there would be an influx of money into the south purchasing more goods? Why did the South even bother with issuing bonds, and why couldn't they just print money in the first place.

  • $\begingroup$ Do you want a generic answer or are you interested in the cotton bond institutional details that make the situation unusual? $\endgroup$
    – BKay
    Aug 13, 2018 at 19:34
  • $\begingroup$ I think you mixed up with the causality and correlation. In fact, it make no different for bullion backed money compare to cotton backed bonds. The blockade simply ruin the economy because the south doesn't produce machinery and their goods are replaceable. $\endgroup$
    – mootmoot
    Dec 11, 2018 at 8:55

2 Answers 2


Bonds are backed by real resources. Money is backed by nothing.

Lets say I'm a British investor. The price of 1 kilo of cotton is 100 British pounds. If I buy a bond for 1 kilo of cotton redeemable in 1 year for 90 pounds then in one year when I redeem the bond and the 1 kilo of cotton is sent to me I can sell it for 100 pounds for a profit of 10 pounds or 10% (100 - 90). The number of pounds in the south has nothing to do with the value of the pound since no new pounds are being created. A southerner with payment in pounds can go to Britain and use the pounds and if anything the transfer of pounds from Britain to the South will cause deflation as the supply of pounds in Britain decreases since they are now in the South.

This is different from the South printing money which actually increases the money supply. If the south has 100K total confederate dollars in circulation which can be used to purchase 1000 arbitrary goods and services then each good can be purchased for 100 confederate dollars. If the south wants to purchase an additional 1000 arbitrary goods and tries to print an additional 100K this leads to inflation as now there are 200K total confederate dollars. The money supply in this instance has expanded whereas it has not in the bonds example.

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    $\begingroup$ Ah got it. So basically the crux of this is that when Britain buys bonds, they are buying it in British Pounds. So this allows the South to purchase more goods (by importing from Britain) without increasing their own money supply. $\endgroup$
    – bugsyb
    Aug 13, 2018 at 11:24
  • $\begingroup$ More or less. Bonds = cotton and the cotton can be sold for british currency which has value, unlike confederate dollars after the money supply has been heavily expanded. $\endgroup$ Aug 13, 2018 at 22:38

TheSaint321's answer barely touches on it: bonds are bought with existing money, and now that money can't be used for anything else.

We should already be familiar with the principle of how more currency in circulation can push prices up: there is more currency being spent, but not more goods or services being produced, so the equilibrium price of each good or service has to be higher to match the demand and supply.

If I have \$1, and you have \$1, and there are two apples, we can each pay \$1 for an apple. If Josh prints \$1 and wants to buy an apple, now price has to go up until only two of us want to buy an apple any more. Roughly speaking.

If I sell a bond to Josh, though, I'm lending him my money. Now he has \$1, you have \$1, and I have a bond. I can't spend the bond to buy an apple. There are still only 2 dollars and 2 apples. By buying the bond, I gave up my ability to compete for one of the apples and there is no shortage. Of course, in exchange for that, I expect him to pay me back \$1.05 or so.

Bonds can be money. If the apple seller wants my bond, I might offer to give him my bond in exchange for an apple, and the equilibrium price in either bonds or dollars has to increase until only two apples will be sold. Hopefully, that doesn't happen. When it does happen, we call it fractional-reserve banking.


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