Polakiewicz+Economy

**﻿ ﻿ Wartime Economy:** toc

**Introduction:**
** The Civil War was as much an economical battle as it was a physical one. The victors **** of countless wars have been determined by their finances. Money has caused wars, and people have won and lost fortunes in them. The following articles explore the economical history of the civil war. **

**Antebellum North:**
The northern economy before 1857 was prospering rapidly. The national railroad mileage had tripled to 30,000 miles from 1850 to 1855 (most of it in the North) and thousands of new schools and churches were being built. The North had many industrial cities and was developing more and more of an industrial economy. Along with this economy came the rise of new banks, investors, and the all-famous Wall Street. This quick rise out of the panic of 1837 would not last.

 The gold rush in California, while making some rich, also increased bank reserves, and sparked inflation in the North. Constant shipments of gold raised prices 32 percent from 1848 to 1854. As the United Stated had no national banking system they had no control over the situation. The Crimean War (see Relations with Europe) though, saved the North from plummeting for a time. As European farmers went to war, they left Euroe to purchase goods from northern farmers. The future in America now seemed prosperous. Agricultural and railroad development flourished in the Great Lake states. Come the end of the Crimean War this interdependent economical state collapsed causing the Panic of 1857.

During the Crimean War, banks had given out loans easily, and invested in railroads. Now with the end of the war these debts were not being paid back. On August 14, 1857 the Ohio Life Insurance and Trust Company, a large bank, probably thought of as “too big to fail,” failed. This started a run on the banks (as illustrated to the right) as people tried to get their hands on specie before any banks collapsed. The Great Lake states were hit the hardest through depressed prices. Unemployment probably reached up to ten percent in 1858. On Oct ober 13, specie payment was suspended, and it worked: most banks kept from failing as the larger ones aided the smaller ones and the currency stayed somewhat stable. Other cures put forward by the republicans included lower land prices, the withdrawal of notes lower  than twenty dollars, and a higher tariff.

 In the end it was a short panic, a mild depression lasting until mid 1859 (Spring crop failures in Europe in 1860 helped bring the northern agricultural economy back). The liquidity crisis (the panic) was concentrated only on the North because European purchase of cotton stayed steady. The Republican Party benefited though, as many republicans were elected to government offices for their solutions to the crisis. Both of these results would play a part in giving the South the confidence and frustration to succeed.

**Antebellum South:**
<span style="font-family: 'Times New Roman',Times,serif; font-size: 140%; line-height: 19pt;">The South was also prospering rapidly before the civil war. Slavery could be extremely profitable for the individual; in 1860 alone the South grew $250 million worth of cotton, most of it going towards individuals. Huge wealth divisions in the South also helped the few earning this money to pay fewer taxes. Due to the high rates of personal debt (of the lower classes), taxation and government spending in the South was kept much lower than in the North. As a result education was sparse, with only twenty percent of southern whites being literate in 1850. By 1850, seventeen percent of farmers in the South owned two thirds of the rich cotton growing regions. These huge class divisions also caused the percent of whites owning slaves to decrease, from 1/3 in 1850 to ¼ in 1860.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 140%; line-height: 19pt;">Inventions such as a new type of cottonseed in the 1850s, and Eli Whitney’s cotton gin spurred the cotton industry to an even further extreme. Almost all of the South’s assets were invested in cotton. This lack of a diversified economy, similar to having an undiversified portfolio in today’s stock market, was risky. Soil exhaustion, and lack of technological innovation would later pose a threat to the South’s rapidly growing economy.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 140%; line-height: 19pt;">The all-agricultural economy also hindered the South’s development of any large commerce, finance, or industry centers. Richmond, the largest southern city, had only 15,274 citizens in 1850. The South’s full industrial workforce was also only about 1/12 the size of the North’s. This meant that any cotton produced in the South had to be processed elsewhere, either by the North, or by Britain. The small industrial workforce in the South also meant that any railroad systems and ports to transport this cotton were horribly underdeveloped.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 140%; line-height: 19pt;">This interdependent economy was not a problem at first. Europe’s perpetual demand for cotton kept the South in a stable economic state, even during the panic of 1857. The South could only survive though, with this continual income. The failure to diversify meant that the South had not developed any meaningful cash reserves. This would pose a threat come the war.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 18pt;">**Relations with Europe:**
<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; font-weight: normal; line-height: 19pt;">The southern relations with Europe were some of the deciding factors of the civil war. The Confederate strategy was mainly based in receiving assistance from countries like Britain and France, the world powers of the day. To be able to receive support though, the Confederacy had to be recognized as an independent state. If England and France recognized the Confederacy, a trade war could be started with the North. There was even a possibility of military intervention.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; font-weight: normal; line-height: 19pt;">There were many opposing arguments as to weather the confederacy should or should not be supported in both countries. As both England and France had abolished slavery, England in 1833 and France in 1844, there was moral opposition. Napoleon III also wanted the United States spit so he could conquer some of Mexico. Both monarchies were also afraid of supporting a rebellion against established rule as it might have challenged their authority. Members of the aristocracy however, felt that supporting the South may help preserve their lavish lifestyle both because of its similarity to the southern one, and because of trade with the South. In the end England and France declared themselves neutral in 1861.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; font-weight: normal; line-height: 19pt;">Convinced that their cotton trade was invaluable to Europe, the South stopped all trade with them. The Confederacy hoped that this would force England and France to bargain with the Union, and make them recognize the Confederacy. Ironically a great harvest the year before had enabled the South to sell stockpiles of cotton to Europe the year before. Patient and careful Europe had no cotton shortage for a year as they awaited the South’s reentry into the cotton market.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; font-weight: normal; line-height: 19pt;">The Confederacy, instead of having traded cotton for weapons and medicine that they desperately needed, had forced the South into a terrible state by halting trade with Europe. As previously mentioned in //Antebellum South//, the South’s undiversified economy had not allowed them to stockpile any meaningful cash reserves either. When in 1862 the South tried to reenter the market, the Union blockade of their ports had been fully established, and trade with Europe had therefore become almost impossible. Only blockade-runners could transport cotton to Europe now, and all opportunity to buy weapons was lost. The South’s error would not go unpunished as their economy slowly crumbled to dust.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">When the North dived into the civil war, they were still trying to recover from the aforementioned panic of 1857. This, as well as the huge burden of paying for the war were the incoming challenges for the North. Hindering its progress was an antiquated banking system, and, as always, politics. Understanding these issues the Union government took to quick action.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">The three options that were available to pay for the war were: taxation, bond issues, and printing currency, and innovation in the use of each. One of the first actions Congress took was to authorize a plethora of bonds. These bonds, unlike the usual ones, could be purchased by non-bankers too. This not only created a large income pool for the North, but it also increased popular interest in a northern victory, as it is estimated that about one out of every four northern families purchased these bonds.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">Taxation was also approached early. In March 1861 Congress passed the Morrill Tariff Act. This doubled the import taxes from twenty to forty-seven percent. Later, in August the same year, Congress passed the first income tax in American history. It consisted of a three percent tax on incomes over eight hundred dollars. This tax later expanded to five percent on incomes over six hundred dollars and continued to expand during the course of the war.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt;">One of the most controversial, but brilliant acts of the Union treasury during the war was the Legal Tender Act of 1862. Mostly inspired by Treasury Secretary Salmon P. Chase, the Legal Tender Act of 1862 authorized the printing of currency not backed by specie. 447 million dollars were printed in total during the war, but inflation was intelligently avoided by making the money legal tender. This meant that although it was not backed by specie, it //was// backed by government bonds, and it was legally required that businesses accept it. To both insure the success of the Legal Tender Act of 1862 and help upgrade the antiquated banking system the National Banking Act 1863 created a system of banks chartered by the government. These banks were allowed to print currency as long as government bonds backed it. This insured the selling of government bonds, gave the government more control over banks and the money supply, and gave it the power to also tax the printing of currency. Congress later used this power and issued a ten percent tax on money printed by state chartered banks. By 1865 1,294 national banks were chartered as opposed to the 349 remaining state banks, which had one-fifth the assets of the national ones. The banking system stayed in place during the full civil war as well as the reconstruction period.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt;">The North’s ability to strike a perfectly functioning balance between its options for financing the war was to their enormous benefit. By just 1862 the North had recovered from the panic of 1857, and eventually grew one of the best-supplied military forces in recent history. The North suffered from only eighty percent inflation during the war, and although some South dealing businesses collapsed, the northern agricultural sector doubled between 1861 and 1865 (a massive accomplishment considering that one third on the North’s workforce was in the army). The North’s well handled economy can be said to have won them the war in contrast with the poorly functioning southern economy.

**<span style="font-family: 'Times New Roman',Times,serif; font-size: 24px; line-height: 25px;">Southern Economy During War: **
<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">The South began the Civil War with a large amount of confidence but very little capital or credit and almost no industrial capacity. When it comes down to it the South had the same tools as the North: taxation, bond issues, and printing currency. The government however, did not operate with as much wisdom given these tools as the northern one did.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">The South stayed clear of taxation at first because of widespread opposition. The majority of influential southerners feared that this would create a “big government” and underdetermine support for the war. It was also widespread belief that the war would not last. In August 1861 when finally it was realized that the war would not be a short one a small property tax was put in place. This did not amount to anything significant and in 1863 a bill was passed that taxed incomes. It went from one to fifteen percent and also offered a “tax in kind” which required that farmers turn in about ten percent of their crops to the government. Due to evasion and poor enforcement this tax provided less than 150 million dollars during the course of the war and mostly depreciated the currency afterwards.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">The South also looked to bonds to raise money. Enthusiastic southerners bought fifteen million dollars worth of bonds in 1861, but sales later decreased as the South’s money began to run out. To combat this the South authorized for one hundred million dollars in “produce loans” so that farmers could trade in crops for government bonds. This generated only thirty-four million dollars.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">Having failed in both the use of taxation and the use of bonds the South resorted to printing currency. In 1861 the South printed 119 million dollars in “blue backs.” Another 400 million dollars were printed in 1862. As the Confederate government grew less stable, and there came to be more and more blue backs in circulation, inflation rose to new heights. In two years the Confederate government had printed as much money as the Union government would print in the whole war. The Confederate dollar also was not considered legal tender so businesses did not have to accept it. The Confederate currency had also managed to fail miserably.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt;">The South had in fact started the war with a better banking system than the North. As the South required banks to trade money <span style="font-family: 'Times New Roman',Times,serif; font-size: 19px;">and specie for government bonds, and the government began to fail, the banks followed suit. The South’s loss of land to the North was also the loss of valuable bank assets. By the end of the war almost all of the southern banks had collapsed.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">In the end the southern government had greatly contributed to nine thousand percent inflation (see graph). In 1862 a flour barrel in the South was five hundred dollars and an n average suit of clothes cost up to 2,500 dollars. There was widespread starvation, poor military supplies, deteriorating railroads, and food rotting before it could be transported. Riots ensued as the South sank at its economic defeat.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 21px; font-weight: normal; line-height: 32px;">**<span style="background-clip: initial; background-origin: initial; background-position: 100% 50%; cursor: pointer; padding-right: 10px;">[|The Consumer Price Index During the Civil War] **

<span style="font-family: 'Times New Roman',Times,serif; font-size: 140%; line-height: 19pt;">5 years after the Civil War ended the South’s share of the country’s wealth had diminished by eighteen percent, from thirty percent in 1860 to 12 percent in 1870. As the South struggled to recover from the damaging effects of the war, the North prospered. Industrialization advanced at a rapid pace and the national bank system put in place during the war kept the currency stable. All the taxes and measures discussed in the “Northern Economy During War” section also fed money into the government. Bad harvests in Europe also kept the northern agricultural sector growing. After another panic in 1872, which left three million people unemployed, the economy took off.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 19pt;">It is not altogether clear whether the Civil War turned the United States toward industrialization, or if the United States would have headed the same way regardless of the war. Regardless of which is closer to the truth the Civil War certainly played a huge role in defining the United States and its economy.

<span style="font-family: 'Times New Roman',Times,serif; font-size: 14pt; line-height: 200%; margin-left: 0.5in; text-indent: -0.5in;">Bibliography

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