Download Epoch is a particular period in time marked by distinctive

Jami Mann
Article #9
ECON 467
Jeffrey Williamson authored the article, “Watersheds and Turning Points:
Conjectures on the Long-Term Impact of Civil War financing.” In the article,
Williamson seeks to explain the behavior of the savings rate and the relative price of
capital goods and the role that Civil War financing seemed to have played in this episodic
movement during the period of the 1850’s to the 1870’s. Williams successfully sheds
light on a part of the Civil War subject which is usually given little attention. The issues
of how the national debt was dealt with and the information around the war tariff are
given special attention to explain the unique behavior of the savings rate and the relative
price of capital goods. While the savings rate rises dramatically between the 1850’s and
1870’s the price of capital goods declines significantly.
Assuredly, Williamson makes use of several sources and data to stress the
enormity of the national debt from the time of the Civil War to the late 1870’s. In 1859,
the national debt (put into modern money terms) was $4.17 billion and rose during 18791888 to $11.2 billion. Also, he mentions that if debt were put into GNP terms while the
federal surplus was almost two percent of Northern GNP in 1882, the federal deficit in
1865 was some thirty percent of Northern GNP, meaning that the debt was far greater
than what the government was producing in surpluses. All in all, it is fair to say that the
national debt acquired during the Civil War was a large burden on the economy.
Government debt suppresses capital formation and consumption. It also results in
lower growth rates. Funds that the federal government ties up in government bonds
cannot be used by private investors to do other things. The presence of government debt
implies lower levels of private capital stock and lower levels of future GNP. Williamson
notes that the growth rate from 1860 to 1870 reaches its lowest point in the 19th century at
two percent per annum. Furthermore, manufacturing grew only one percentage point
during the same time period. The costs of the war were expensive in capital stock
production, foregone investment, and human lives. This effect was especially amplified
by the fact that the United States was fighting on both sides.
Moreover, in 1865, the retiring of greenbacks began because the budget surpluses
allowed the government to do so. From 1865 to 1866, non-interest-bearing debt declined
by almost $30 million; however, with Congress’ decision to back off the active greenback
retirement policy the Treasury could then focus on the interest bearing debt. Due to this
focus, the federal net debt decreased at an accelerating rate until the Panic of 1866.
According to the article, the policy of reducing the interest-bearing debt was pursued
diligently until 1893 when the federal government ran into the production of an annual
deficit.
Additionally, Williamson takes the stance that the mere fact of retiring debt can
induce higher capital formation rates because the money can then be used by private
investors. His idea emphasizes that private securities are productive, but public securities
represent claims on tax revenue, which is not as productive. He recognizes that while
investors do get an extremely safe but fair return on government bonds, the foregone
investment that could have gone into private securities suppresses economic growth in
the form of capital formation and consumption. While the work to retire the debt was
being completed at home, a growing share of the outstanding debt was being exported
abroad. This further proves the point that accelerated economic growth is directly tied to
the availability of funds to private investors.
Clearly, experts at the time did recognize the slow growth; Williamson quotes a
source from 1868 that expresses the sentiments that experts were arguing at that point in
time. Paper currency, unequal and heavy taxation, and a limited supply of skilled labor
were all listed as contributing to the slow economic growth that America was
experiencing. The national debt is left out of the list though it is a huge financial burden
on the whole of society.
Meanwhile, the second episodic change was the supremely low price of capital
goods. In fact, the price of capital goods in the 1870’s was far below that of the 1850’s.
The decline in capital good prices continues until the turn of the 19th century. One
explanation offered by Williamson is the war tariffs, which were protective by any man’s
standard. The war tariffs were not removed after the war despite their original intention
to serve as a revenue generator for the North for the war period. Tariffs helped lower the
price of producer durables, not only relative to manufactured consumer goods but also
relative to new construction. When Williamson uses a model to analyze the effect of the
tariff on what he thinks captures the northern economy during the Civil War decade, the
relative price of farm products decline, and this further aggravated currently discontented
farmers (who were suffering from the effects of deflation). The rate of return on
industrial capital rises at a higher rate than that of the tariff itself. Williamson concludes
that the most significant long term impact of Civil War financing was directly related to
the tariff structure.
Moreover, the real wage rate for laborers did not recover until 1869 due to the fact
that the system was not truly in place until 1864, and it took time to dismantle the
burdensome tax system. Therefore, real wages were extremely low. In addition,
machines, tools, and factories prices were low because the tariff structure focused more
on ‘final’ product han on intermediate products and/or capital goods. Therefore,
manufacturers could gain from paying low real wages, and purchasing inexpensive
capital goods. All of this was relative to the consumer prices that were much higher due
to the tariff’s focus on final products versus the unprotected intermediate products, which
were produce for a lower cost by the manufacturers.
In conclusion, Williamson stresses that the watershed effect on American
Economic history is real and can be explained. He doesn’t spend time proving that the
1850’s to 1870’s were a watershed; instead, he jumps into explaining the unique behavior
of the savings rate increase and the capital goods decrease. Although his explanations for
the watershed effect are those that most historians do not devote much time to, he
explains their contribution to the behavior of the economy following the Civil War and
into the twentieth century. He suggests that historians begin focusing on two issues: how
the national debt was dealt in a long term sense and the tariff policy relative to the price
of consumer goods.