Wallace was studying law at the start of the Mexican-American War in 1846. He raised a company of militia and was elected a second lieutenant in the 1st Indiana Infantry regiment. He rose to the position of regimental adjutant and the rank of first lieutenant, serving in the army of Zachary Taylor, although he personally did not participate in combat. After hostilities he was mustered out of the volunteer service on June 15, 1847. He was admitted to the bar in 1849. In 1851 he was elected prosecuting attorney of the First Congressional District.
On May 6, 1852, Wallace married Susan Arnold Elston by whom he had one son, Henry Lane Wallace (born February 17, 1853). In 1856, he was elected to the State Senate after moving his residence to Crawfordsville.
Wallace was displeased to have been left behind so he had his troops ready to move out at a moment's notice. The order came on February 14 and when Wallace arrived along the Cumberland River he was placed in charge of organizing a division of reinforcements arriving on transports. He was able to organize two full brigades and a third incomplete, and took up position in the center of Grant's lines besieging Fort Donelson. During the fierce Confederate assault on February 15, Wallace coolly acted on his own initiative to send a brigade to reinforce the beleaguered division of Brig. Gen. John A. McClernand, despite orders from Grant to avoid a general engagement. This action was key in stabilizing the Union defensive line. After this Confederate assault had been checked, Wallace led a counter attack which retook the ground that was lost. Wallace was promoted to major general to rank from March 21.
Here, the controversy begins. Wallace claimed that Grant's orders were unsigned, hastily written, and overly vague. There were two paths by which Wallace could move his unit to the front, and Grant (according to Wallace) did not specify which one he should take. Wallace chose to take the upper path, which was much less used and in considerably better condition, and which would lead him to the right side of Sherman's last known position. Grant later claimed that he had specified that Wallace take the lower path, though circumstantial evidence seems to suggest that Grant had forgotten that more than one path even existed.
Whatever the case, Wallace arrived at the end of his march only to find that Sherman had been forced back, and was no longer where Wallace thought he was. Moreover, he had been pushed back so far that Wallace now found himself in the rear of the advancing Southern troops. Nevertheless, a messenger from Grant arrived with word that Grant was wondering where Wallace was and why he had not arrived at Pittsburg Landing, where the Union was making its stand. Wallace was confused. He felt sure he could viably launch an attack from where he was and hit the Rebels in the rear. Nevertheless, he decided to turn his troops around and march back to Stoney Lonesome. For some reason, rather than realigning his troops so that the rear guard would be in the front, Wallace chose to countermarch his column; he argued that his artillery would have been greatly out of position to support the infantry when it would arrive on the field.
Wallace marched back to Stoney Lonesome, and arrived at 11 a.m. It had now taken him five hours of marching to return to where he started, with somewhat less rested troops. He then proceeded to march over the lower road to Pittsburg Landing, but the road had been left in terrible conditions by recent rainstorms and previous Union marches, so the going was extremely slow. Wallace finally arrived at Grant's position at about 7 p.m., at a time when the fighting was practically over. Grant was not pleased. Nevertheless, the Union came back to win the battle the following day. Wallace's division held the extreme right of the Union line and was the first to attack on April 7.
At first, there was little fallout from this. Wallace was the youngest general of his rank in the army and was something of a "golden boy." Soon, however, civilians in the North began to hear the news of the horrible casualties at Shiloh, and the Army needed explanations. Both Grant and his superior, Halleck, placed the blame squarely on Wallace, saying that his incompetence in moving up the reserves had nearly cost them the battle. Sherman, for his part, remained mute on the issue. Wallace was removed from his command in June and reassigned to the much less glamorous duty commanding the defense of Cincinnati in the Department of the Ohio during Braxton Bragg's incursion into Kentucky.
General Grant's memoirs assessed Wallace's delaying tactics at Monocacy:
Personally, Wallace was devastated by the loss of his reputation as a result of Shiloh. He worked desperately all his life to change public opinion about his role in the battle, going so far as to literally beg Grant to "set things right" in Grant's memoirs. Grant, however, like many of the others Wallace importuned, refused to change his opinion.
Wallace held a number of important political posts during the 1870s and 1880s. He served as governor of New Mexico Territory from 1878 to 1881, and as U.S. Minister to the Ottoman Empire from 1881 to 1885. As governor, he offered amnesty to many men involved in the Lincoln County War; in the process he met with Billy the Kid (Henry McCarty). On 17 March, 1879, the pair arranged that Kid would act as an informant and testify against others involved in the Lincoln County War, and, in return, Kid would be "scot free with a pardon in [his] pocket for all [his] misdeeds." But the Kid returned to his outlaw ways and Governor Wallace withdrew his offer. While serving as governor, Wallace completed the novel that made him famous: Ben-Hur: A Tale of the Christ (1880). It grew to be the best-selling American novel of the 19th century. The book has never been out of print and has been filmed four times.
Recently, historian Victor Davis Hanson has argued that the novel was based heavily on Wallace's own life, particularly his experiences at Shiloh and the damage it did to his reputation. There are some striking similarities: the book's main character, Judah Ben-Hur accidentally causes injury to a high-ranking commander, for which he and his family suffer no end of tribulations and calumny.
Wallace died, likely from cancer, in Crawfordsville, Indiana, and is buried there in Oak Hill Cemetery. A marble statue of him dressed in a military uniform by sculptor Andrew O'Connor was placed in the National Statuary Hall Collection by the state of Indiana in 1910 and is currently located in the west side of the National Statuary Hall.