The civil war would shape the future of the galaxy in unprecedented ways.
Course of the war
The Federation Civil War started on 31 May 2694 when the Rebellion, a human supremacist group, attacked the Federation port of New Hampshire. The Rebels, Led by Admiral Aegis followed up their victory by starting the Aegis Offensive, and the Federation was unable to prevent them from taking control of a third of federation territory.
The Rebels in the initiative
After massive opening victories, The Federation was unable to prevent Aegis from fulfilling his life-long dream of besieging New Earth, which he viewed as symbolizing the degeneracy of the Federation. In the ensuing Siege of New Earth, the planet lost 75% of its population.
A few weeks after the start of the Siege of New Earth, The Federation launched an abortive counterattack, Operation Peridot, which ended up disintegrating due to major intelligence failures by Commander Gregor.
Admiral Aegis, believing the Federation to have exhausted its offensive capabilities in the Operation Peridot, Convinced Commander Terest to launch an offensive, The Terest Offensive, To try and "mop up whatever forces the Federation still has left outside of New Earth".
The Terest Offensive, While initially successful against The Federation Fleet (who were still recovering from earlier Rebel victories), soon bogged as each victory cost the Rebels more ships and deaths. Soon after, the Federation regrouped, and launched the Tully Offensive which drove them within striking distance of New Earth. With this newfound advantage, the Federation command devised Operation Salamander, which would break through weak spots in the Rebel lines. However, this plan leaked to the Rebels, who reinforced the weak spots and were thus able to incur heavy causalities upon the Federation and repel the offensive.
Operation Salamander was a disaster for the Federation. Such a disaster was it, that Admiral Tully believed that the Federation would disintegrate within a year. However, the Rebels proved unable to follow up on their victory, as they had exhausted 90% of their fuel in their defense. In order to renew the war effort, The Rebels needed to capture the rich oil fields of New Earth. In the ensuing 3-month long Battle of the Catalaunian Gas Field, the Rebellion aquired the resources needed to continue the war effort.
Renewed Rebel advance
After acquiring the necessary resources, The Rebellion drove the Federation to the brink of collapse in the Great Offensive of 2696. It drove the Federation back to a single sector, The Last Stand, and the withdrawal of forces to defend it left hundreds of sectors unoccupied. This caused many sectors to form militias to protect themselves from the Rebellion, and those Militias still survive today, albeit merged under one banner as the Local Defence Militiamen. The Zoltan, fearful that the Rebellion would treat their race worse than the Rocks had during their crusade, closed off their borders and strictly monitored any and all ships near their sectors' borders in an effort to keep the Rebellion. To discourage the Rebellion further, the Zoltan exited the Federation and declared their neutrality.
Last stand and Fall of the Flagship
The war ended with the Galaxy's seven races uniting together to fight the Rebellion in a climactic battle in the Orion system- otherwise known as The Last Stand. The Hero of the Federation, captaining an old kestrel, marshaled the races into fighting with the Federation against a bloodthirsty Rebellion, hell-bent on exterminating aliens in a mass genocide in all of known space. In the ensuing events, known to Rebels as the Fall of the Flagship and to the Federation as the Miracle of 13 March, the Rebel command collapsed, the Rebel fleet disintegrated and Admiral Terest barely escaped after fighting a fierce rearguard battle, the Battle of Node 17.
The Federation was left with most of its leadership killed off or dead, and the new senate, formed in the Orion system (the new Capitol), was mostly businessmen, their puppets, or incompetent buffoons. Those who were competent were normally outspoken due to their comparatively small numbers. Corruption was, and still is, rife throughout the Federation. The Rebellion's aggressive takeover of beacons has resulted in billions of citizens being homeless or jobless. On some worlds the Federation is hard-pressed to provide even basic public services, and is struggling to recover. However, worlds in sectors that were hit relatively less enjoy the same or similar standards of living compared to pre-war standards. It also has resulted in a massive power gap forming. Corporations have taken over multiple sectors meant to be controlled by the Federation, and are the de-facto leaders. Some unoccupied sectors are the site of conflict between the newly militant and expansionist Zoltan, the Federation, and the Coalition, in a massive three-way conflict. The Rebellion was driven back to its strongholds and sectors they controlled- where they dug in and waged a defensive war, all the while building up forces to make another push. It could be said they're in a stronger position now than they were during the rebellion- a tough nut holding the Federation back, biding their time.
This war created an industrial boom, with more jobs due to increased orders for ships, materiel etc. for the Federation’s war economy. As usual with industrial booms, some people benefitted and others did not. The number of unemployed decreased, but the minimum wage did not change at all. The big companies of the era, such as Ares Weapons Industries, Cygnus Security Solutions, or as it was known then Cygnus Energy Weapons, Tandili StarDrive and the Rhea Mining Company, benefitted from the war and eventually developed monopolies on their exports. However, the war did not benefit parts of the economy not necessary for the war effort. The war raised prices on materials like aluminium and iron for ‘non-essential industries’ which were primarily for civilians, limiting economic growth outside of the defence, agriculture and mining industries. The Federation also had to tax its citizens more in order to fund the war, and eventually ended up borrowing from banks in order to pay for the war. The Federation, at the war's conclusion, was left in massive debt, with limited economic growth and with more economic disparity.