The Economics of the Civil War

by

Morgan Reynolds

On January 7, 2019 I gave a talk to the Hot Springs Village Civil War Roundtable.  Here are my notes:

Economics is not everything in understanding warfare but it is important most observers likely will grant yet its importance, if anything, is underappreciated. Hence, power, profit and propaganda tend to be slighted relative to the oft-mentioned “noble” purposes of war by participants and suppliers. Merchants of Death, MIC.

Definition of war?
Clausewitz: “War is the continuation of politics by other means.”
Webster’s Third New International Dictionary: “a state of usually open and declared armed hostile conflict between political units (as states or nations)” [or, at least one party is a state which allows for civil war by a non-state combatant, or so-called armed revolution].
Ludwig von Mises: “Civilization is an achievement of the ‘bourgeois’ spirit, not of the spirit of conquest…The philosophy of protectionism is a philosophy of war.”
War is virtually the antithesis of economics. War is mass killing and destruction, capitalism is its opposite: peaceful production for commercial sale.

Ideas are key, e.g., J.M. Keynes: “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

Randolph Bourne: “War is the health of the State.”

Why did the South want to secede, have a genuine desire for self determination, for its independence?

Opening sentence of the Declaration of Independence, the ‘Unanimous Declaration of the thirteen united States of America; self rule only “natural.” “When in the Course of human events, it becomes necessary…”

Worn out by political ‘band aids’ (patch, patch, patch), North-South had grown culturally apart, slavery (T. Jefferson: ‘the rock upon which the old Union would split’), Lincoln’s election as purely regional candidate with patronage power, South saw no future within the Union, irremediable economic grievances (“rip offs” by the North). Gettysburg movie: Longstreet (?) “It’s not about the darkies, it’s about Washington telling us what to do.” As President Davis declared, “The object was to sustain a principle—the broad principle of constitutional liberty, the right of self-government.”

Why did Lincoln refuse to let the South go its own way? First inaugural address: “I hold that…the Union of these States is perpetual…The Union is unbroken, and to the extent of my ability I shall take care, as the Constitution itself expressly enjoins me, that the laws of the Union be faithfully executed in all the States.
There needs to be no bloodshed or violence, and there shall be none unless it be forced upon the national authority. The power confided to me will be used to hold, occupy, and possess the property and places belonging to the Government and to collect the duties and imposts; but beyond what may be necessary for these objects, there will be no invasion, no using of force against or among the people anywhere.”

Double talk?

Hummel: Lincoln’s determination received the hearty applause of powerful northern interests.
Westerners feared the closing of the lower Mississippi River, even though the Confederate government promised free navigation.
Eastern mfrs worried that they would lose southern markets to European competitors because of the Confederacy’s free-trade policy (crony capitalists).
Yankee merchants and ship builders faced an end to a monopoly on the South’s coastal trade that the government granted to United States vessels.
Holders of government securities were edgy about the Union’s loss of tariff revenue.
But in the final analysis, American nationalism proved to be the most compelling opponent of southern independence.
Republicans succeeded, not the abolitionists, because they had put the Union ahead of their opposition to slavery. Now that the Union was imperiled, the Republican Party had to take action or face political oblivion. The deep South’s refusal to abide by the outcome of a fair and legal election struck northern voters as a selfish betrayal of the nation’s unique mission. “Plainly the central idea of secession is the essence of anarchy,” argued Lincoln. Voluntary compact or not??? Other regions separate too? Nullification/interposition?

One South Carolina congressman enumerated some of the programs that redistributed income to the North:
Protective tariffs
mail subsidies
bounties to New England fishermen
improvements of rivers and harbors
land grants to railroads
shipping monopolies
“The law by which the coastwise trade is confined exclusively to American ships, the practical advantage of which law is confined to the northern States, a monopoly of building ships which sail under the American flag…[T]he law which gives codfish bounties to the people of Massachusetts…[T]he law which, under the form of the reciprocity treaty, exempts the people of the North along the Canadian frontier from paying duties.”

Jones Act: The Merchant Marine Act of 1920 is a United States federal statute that provides for the promotion and maintenance of the American merchant marine.[1] Among other purposes, the law regulates maritime commerce in U.S. waters and between U.S. ports. Section 27 of the Merchant Marine Act is known as the Jones Act and deals with cabotage (coastwise trade) and requires that all goods transported by water between U.S. ports be carried on U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents.[2] The act was introduced by Senator Wesley Jones. The law also defines certain seaman’s rights.

Constitution of the Confederate States, March 11, 1861
Sec. 8. The Congress shall have power-
To lay and collect taxes, duties, imposts, and excises for revenue, necessary to pay the debts, provide for the common defense, and carry on the Government of the Confederate States; but no bounties shall be granted from the Treasury; nor shall any duties or taxes on importations from foreign nations be laid to promote or foster any branch of industry; and all duties, imposts, and excises shall be uniform throughout the Confederate States.

(3) To regulate commerce with foreign nations, and among the several States, and with the Indian tribes; but neither this, nor any other clause contained in the Constitution, shall ever be construed to delegate the power to Congress to appropriate money for any internal improvement intended to facilitate commerce; except for the purpose of furnishing lights, beacons, and buoys, and other aids to navigation upon the coasts, and the improvement of harbors and the removing of obstructions in river navigation; in all which cases such duties shall be laid on the navigation facilitated thereby as may be necessary to pay the costs and expenses thereof.

U.S. Constitution, Article I, sec. 8 The Congress shall have Power to lay and collect Taxes…to…provide for the common Defense and general Welfare of the United States…

Tariff of Abominations (1828) highest rates prior to the Civil War, South Carolina legislature denounced as “unconstitutional, oppressive, and unjust.” Correct economics: raised prices especially for southerners, hampered growth, protected uncompetitive northern mfrs, risked retaliation against US exporters (half of which was southern output), lowered earnings of foreign producers and thereby demand for US exports.
Nullification dispute. Compromise Tariff of 1833 gradually lowered.

Republican example of protectionism emulated elsewhere, e.g., fragile ascendancy of international free trade, Prussian corporate state, then an inspiring model for American progressives. Smoot-Hawley etc.

Wars are expensive. How finance?

Conventional taxation
Borrowing/Debt
Money Printing/Inflation (seignorage)
Conscription/impressment/draft (in-kind taxation) 13th amendment ratified December 6, 1865: Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

Union Finance—until recently governments usually spent more on war than all other things combined.
Salmon P. Chase sec’y treasury, hard money man
National gov’t spent less than 2% of economy’s total output and S&L gov’ts probably less than 2X so only 5.5% of output, today 33%+
Could no longer collect tariffs on southern commerce
1858 $74 million, cost of Civil War reached nearly $2 million/day

Raised 20% of cost via new tax measures
1861 $20 million on real estate, administered through state gov’ts, first internal tax in 40 years
One year later Internal Revenue Act passed Congress James G. Blaine, a Maine Republican: “One of the most searching, thorough, comprehensive systems of taxation ever devised by any Government.” Liquor and tobacco excises, virtually every mfr, every profession except clergy, bankers, peddlers, etc., etc.” sales, licenses, stamp taxes, an inheritance tax
Then a national income tax August 1861 covering all incomes above $600 per year (approx. $16,000 today) at graduated rates from 5 to 10%, including withholding where feasible. At war’s close highest taxation per capita in world.
Only legally recognized money at outset was specie (gold or silver coins) and “currency” consisted solely of bank notes redeemable in specie on demand. Thus private competition regulated the circulation of paper money.
Gov’t authorized suspension of specie payments in December 1861, so soon issued $100 million in irredeemable notes, all depreciating at different rates. Gov’t drafted National Currency Acts of 1863 and 1864. + taxed 10% on state bank notes in 1865 to insure nationally chartered banks had a currency monopoly.
Legal Tender Act in early 1862 with Chase issuing ‘Greenbacks.’ Unbacked, made legal tender for all payments, public and private, except tariff duties and interest on the Treasury’s debt.
Senator Charles Sumner: “…the unquestionable evils of inconvertible paper…a stain upon our national faith…a seeming repudiation…to teach debtors everywhere that contracts may be varied by the will of the stronger…” he endorsed the Legal Tender Act though “we must all be against paper money…except as a temporary expedient

Result? Union’s money supply doubled by 1863, Greenback dollars fell to 35 cents worth of gold by July 1864.
Also rise in counterfeiting led to Secret Service; banning of private minting for first time, Americans would no longer enjoy choice of coins issued by foreign governments or privately owned domestic mints.

Confederate Finance

Conventional military strategy implied staggering wartime expenditures.
Taxation only about 7% of war costs
Tariffs, yes, yet blockade and cotton embargo meant limited revenue, imposed duties on exports (prohibited by US Constitution).
CSA imposed a comprehensive revenue measure including a graduated income tax, an excess profits tax, license taxes, excise taxes, and a 10% tax in kind. Direct surrender of ag products. High-handed tax collectors who enforced it sparked widespread resistance, esp. in NC.

Banks suspended specie payments, purchased much of the first Confederate loan of $15, million. State gov’ts helped by receiving CSA non-interest-bearing notes (paper money).

CSA issued over $1billion in currency, more than twice the issue of Greenbacks, + $45 million by states and local gov’ts and private companies. Confederate dollar worth 82.7 cents in 1862, 29 cents in 1863 and 1.7 cents in 1865 (implies 59-fold price inflation). Price level approx. doubled in North and 27-fold in South. Only southern banks exercised any restraint with no central bank or national banking system to underwrite hell-for-leather expansion. Bank notes circulated at a premium as war dragged on, despite being immediately redeemable only in Confederate paper.

Currency reform attempted in February 1864 akin to Maduro’s Venezuelan reform. George Cary Eggleston a noncom in Confederate army: “In the winter of 1863-64 Congress became aware of the fact that prices were higher than they should be under sound currency…it was decided that the very best way to enhance the value of the currency was to depreciate it still further by a declaratory statute, and then to issue a good deal more of it.”

“Skyrocketing inflation worked a great hardship on the southern people…Real wages fell by almost two-thirds. Food riots…State governments blocked debt collection with “stay laws” and prevent “speculative hoarding.” Millions for relief.

Rebel government never made its paper money legal tender. Yet a lot of impressment in the field at artificially low prices (officially fixed prices). Shortages rampant.

Impressments made Southerners suffer almost as much from the proximity of their own armies as from the invading Union armies.

Economic Mobilization in the North

Jacked up tariffs, partially justified by internal taxes since domestic industry would otherwise face “unfair” foreign competition. By war’s end average duties were 47% and the free list (reciprocity treaty with Canada permitting free trade) had been cut in half.

Full embrace of Whig policy of federally funded internal improvements, including “efficient aid” to construct “a Railroad to the Pacific Ocean.”

To buy farmers, a new cabinet-level Dept. Ag. in 1862.
Morrill Act of 1862 huge tracts of the public domain to loyal state gov’ts to endow colleges that offer ag, mechanical and military instruction.

Start of national parks, in 1864 Congress granted the Yosemite lands to California as a nature preserve.

GPO and Bureau of Engraving and Printing initiated. National Academy of Sciences to seek out technological innovations useful for the war effort in 1863.

Biggest deal was war contracts, encouraging corporate concentration (vertical integration). Carnegie, Morgan and Rockefeller all started their fortunes during the war. For example, War Dept. paid $117 per horse when market price was $60; out of one lot of 250 horses only 27 were fit (otherwise diseased, maimed or unfit)…created an intimacy between the military and industry a’ la 17th century mercantilism.

Real wages fell by one-third; federal; troops employed against strikers, seized the Philadelphia and Reading RR against striking engineers.

Economic Mobilization in the South

Republican neo-mercantilism in the North but full-blown State socialism.

Little native industry so CSA moved immediately and directly into its own war production (Stalinesque forced industrialization’s a’la five-year plans).

General Josiah Gorgas PA-born Chief of Confederate Ordnance (bottom of p. 235).

State governments also operated arsenals, powder mills, textile mills, flour mills, saltworks, and a variety of other enterprises.

When purchasing from private firms, dictated prices and profits. Loaned up to one-half the start-up capital to businesses, which in turn had to sell 2/3 of production to the gov’t. Soaring inflation and rigid regulation forced one after another owner to turn over factories to public officials. Toward the end, Davis took possession of southern RRs, steamboats, and telegraph lines outright, adding their employees to the military.

Central gov’t bureaucracy grew from nothing to 70,000 civilians in 1863. Not confined to mfg and transp., imposed acreage limits on cotton and tobacco and prohibited the distillation of liquor.

Gov’t collected cotton, collateral for the foreign Erlanger loan, socialized the cotton market, nationalized its foreign commerce. Debow’s Review, a secessionist southern journal, wrote in 1862: “Every man should feel that he has an interest in the State…that all private interests are sacrificed to the public good. The State becomes everything, and the individual nothing.”

Benito Mussolini: “All within the state, nothing outside the state, nothing against the state.”

Upshot: Drift away from liberty, hard-money, economic freedom/capitalism, small gov’t, decentralized polity toward their opposites: empire, big gov’t, the unitary state, regulation, bureaucracy, redistribution, funny money, etc. The Triumph of Republican neo-mercantilism.

Robert Fogel book proves what is almost economically obvious: that gov’t promotion of the transcontinental was an inefficient diversion of resources.

The collapse of Rebel morale at the war’s end: “Collect more taxes, install more bureaucrats, draft more hillbillies, print more money, seize more crops, shoot more deserters, suspend more habeas corpus, declare more martial law, override the Governors, and stretch the Constitution, this is supposed to have been the road to victory,” Joseph Stromberg. Hummel: “The despotic centralization of Jefferson Davis and his West Point cabal alienated the southern people from the cause of independence.” p. 289.

Reference: Jeffrey Rogers Hummel, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War, Chicago: Open Court, 1996,

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