I always thought of grey as a Britishism, along with colour and mum. I think one big reason you see that fall off in the late 19th century could be the tendency to refer to the confederacy as the grays. It could be that gray was preferred in one region over the other and when it became synonymous with the confederacy, that region's spelling became prevalent. Trouble is, I don't know who was more responsible for referring to "The Blue and the Gray."
I also don't know why people also called the confederate uniforms butternut. But I really liked the Dave Barry column where he was sent to the Hardware store to get some gray paint. His wife wanted something the color of Pierce Brosnan's eyes, but they wound up with Confederate dead.
