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Wartime Economy:
Antebellum North:
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national railroad mileage tripled between 1850 and 1855 to 30,000 miles
thousands of new schools and churches were founded
1850 adult illiteracy rate less 1%
antiquated banking system
Panic of 1857:
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North bubble burst in the summer of 1857: Ohio Life Insurance Company of Cincinnati closed
started run on banks: no money in them, Causes: state banks minimal oversight too low capital
reserves had given huge loans to railroad companies created interdependent economy, railroads
expanded too much unable to meet their costs, end of the Crimean War* in Europe- resurgence of
agriculture drop in prices paid crops Midwestern farmers, gold prices dropped b/c California gold,
lasted until Civil War (http://www.ohiohistorycentral.org/entry.php?rec=537)
*Crimean War- European farmers to military, more need US North crops, with end Ohio Life
Insurance Company of Cincinnati ceased operation investors lost funds, people pulled out invested
in businesses as business agriculture profits declined, depression, Ohio faired OK, Republican
seats there went to Democrats,
Economy rebounded in 1859 so OK, not like Panic of 1837
Antebellum South:
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Exporting more than 150 million
national railroad mileage tripled between 1850 and 1855 to 30,000 miles
thousands of new schools and churches were founded
Unaffected by 1857 Panic as cotton demand remained high
new cotton seeds, production doubled 1850s
1860 2 bill lbs.cotton $250 mill
"King Cotton" all money in land+slaves, no meaningful cash reserves
no industrial economy
Slavery neg. impact on Southern economy, only for individual profit: no industry/cities, high
debts, soil exhaustion, lack of technological innovation
Did not develop commerce finance or industry centers equal to North, Richmond pop. 15,274 in
1850 b/c no diversified economies
No ports as only to transport cotton
No transportation improvements so manufacturing + transportation industry 110,000 workers to
1.3 mill in North, 9/10 manufacturing from North
Ridiculous railroad system only for cotton to ports, then on Northern ships, North or Britain
processed their cotton,
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High personal debt so taxes + state spending very low
Worse public education, 1850 20% southern white adults illiterate
Huge wealth division- only very wealthy many slaves, middle class very small property
1850 17% of farmers had 2/3 of all land in rich cotton growing regions
slave owners would decline as very rich seized more land
1850-1860 1/3 of whites had slaves – ¼ having slaves
Relations with Europe:
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See Crimean War
Economy During War:
Postbellum North:
Postbellum South:
http://www.fofweb.com/NuHistory/default.asp?ItemID=WE52&NewItemID=True
http://www.shmoop.com/civil-war/economy.html
http://www.digitalhistory.uh.edu/database/article_display.cfm?HHID=654
http://www.ohiohistorycentral.org/entry.php?rec=537
economy, 1850–1878
From: Encyclopedia of American History: Civil War and Reconstruction, 1856 to 1869, Revised
Edition (Volume V).
In 1850 the economy of the United States was booming. The South was exporting
more than $150 million worth of agricultural products a year. The North's factories
were growing as the region industrialized. The nation's railroad mileage tripled
between 1850 and 1855 to 30,000 miles. Meanwhile, thousands of new schools
and churches were founded.
Panic 1857
The Panic of 1857 was a nation economic depression caused, principally, by Europe's declining purchase of
American agricultural products.
During the Crimean War in Europe, many European men left their lives as farmers to enlist in the military.
This resulted in many European countries depending upon American crops to feed their people. With the
end of the Crimean War, agricultural production in Europe increased dramatically, as former soldiers
returned to their lives as farmers.
With declining income from agriculture, many Americans became worried at news that an Ohio
corporation, Cincinnati's Ohio Life Insurance and Trust Company, had ceased operation. Thanks to the
telegraph, news quickly spread across the United States of this business failure. Investors in the Ohio Life
Insurance and Trust Company lost all of their funds invested in this company, leaving many people
destitute. Fearing that a similar situation might happen to them, investors in other companies, already
facing declining agricultural profits, withdrew their funds from these other businesses. Numerous
businesses failed as a result of the investors' actions, and thousands of workers became unemployed.
While the Ohio Life Insurance and Trust Company's failure triggered the Panic of 1857,
Ohioans weathered the depression relatively well. Numerous businesses failed, but most
banking institutions survived. The Republican Party, currently in control of the Ohio
legislature and governor's seat, lost some power to the Democratic Party. Governor
Salmon P. Chase won reelection in 1857, but the Democratic Party gained control of the
Ohio General Assembly. Fortunately for all American citizens, the United States'
economy rebounded during 1859, saving the nation from as serious a depression as
occurred during the Panic of 1837.
The unexpected collapse of one of the nation's most prominent businesses started a
run on banks across the country and sent the nation into a depression that would
last into the Civil War. The panic of 1857 had a number of root causes: First, state
banks, operating with only minimal oversight, had failed to keep their capital
reserves at a high enough level. Second, railroads had expanded too much and
were unable to meet their costs. Third, the end of the Crimean War in Europe led
to a resurgence of agriculture on that continent, with a resulting drop in the prices
being paid for the crops of Midwestern farmers. Finally, gold prices had dropped
due to an influx of gold from California.
Panic 1857 in South
The South was largely unaffected by the panic of 1857, since European demand
for cotton remained high. At the same time, the South took advantage of new
forms of transportation and new kinds of cotton seeds. As a result, cotton
production doubled during the 1850s. In 1860 alone, the South grew 2 billion
pounds of cotton with a value of $250 million. The incredible profitability of
"King Cotton" encouraged Southerners to invest nearly all of their money in more
land and more slaves. As a result, the region failed to develop industrially and
failed to build up meaningful cash reserves.
Paying for the War
When the Civil War broke out, then, neither the Northern nor the Southern
economies were ready for the financial demands of a war. The North was still
suffering the effects of the panic of 1857 and was also handicapped by an
antiquated banking system. The South had very little capital or credit and very
little industrial capacity. Ultimately, the Union was able to overcome the
economic obstacles it faced, and this success played an important part in the
Northern victory. The Confederacy, on the other hand, made very little progress in
addressing its economic challenges, and this failure played a major role in the
South's defeat.
During the Civil War, the main economic issue that both the Union and
Confederate governments faced, naturally, was paying for the war. There were
three main options available for raising funds to pay the government's bills:
taxation, bond issues, and printing currency. Northern authorities used all of these
tools in an effective fashion. Early in the war, the Northern Congress authorized
several bond issues. A bond is an agreement between the government and private
businesses or citizens; money is loaned to the government with the promise that it
will be repaid with interest at some agreed-upon point in the future. Before the
Civil War, bonds had been sold only to bankers, but Treasury Secretary Salmon P.
Chase decided to open up bond purchases to the general public. This was a stroke
of genius for two reasons: First, it gave the government access to a vastly larger
pool of money. Second, it gave the citizenry a vested interest in the success of the
Northern war effort and the Northern economy. The public responded slowly at
first, but eventually talented bond salesmen, most notably Jay Cooke, succeeded in
winning the people over. One family in four purchased at least one bond during
the war, adding $1.5 billion to the Union government's coffers.
The Congress also moved to increase taxation fairly early in the war. In March
1861, before the war had even begun, Congress passed the Morrill Tariff Act. The
Morrill Act more than doubled the rates on goods coming into the country, raising
them from 20 percent to 47 percent. In August 1861, Congress levied a tax of 3
percent on incomes more than $800, the first income tax in American history. A
succession of bills eventually expanded the tax to 5 percent on incomes more than
$600 up to 10 percent on incomes more than $10,000. Income taxes and the high
tariff helped keep inflation down in the North while adding $600 million to the
Union government's balance sheet.
The most controversial step the Northern Congress took in order to finance the
war was the passage of the Legal Tender Act of 1862. Prior to the Civil War,
currency was almost invariably backed by a quantity of silver or gold, known as
specie, being held in a bank vault. At any time, paper money could be exchanged
at the institution that had issued it for specie of equal value. By 1862, however,
there was not enough specie in the North to keep this system viable. As such, the
Legal Tender Act provided for the printing of $150 million worth of what is
known as fiat currency, which is backed not by specie but instead by the good
credit of the government. The act also specified that this fiat currency would be
legal tender, which meant that people and businesses were legally required to
accept it as payment for debts.
There were a number of objections to the printing of fiat currency. Some
congressmen argued that Congress was not empowered to print money that was
not backed by gold or silver. Others felt that it was immoral to force Americans to
accept this money. Still others argued that fiat currency would create runaway
inflation. These fears proved to be unfounded. Most Northern citizens proved
willing to acceptgreenbacks as a medium of exchange, and inflation was kept
within reasonable limits. In total, the printing of greenbacks provided $447 million
for the Union war effort.
As it worked to finance the war, the Union government also took steps to shore up
the foundations of its financial system. The National Banking Act of 1863 created
a system of banks chartered by the federal government. These banks were allowed
to print currency, as long as the currency was backed by government bonds. This
created a market for government bonds and strengthened the Union's greenback
currency by tying it to those bonds. It also gave the Union government more
control over banks and the nation's money supply. The Congress went even further
in this direction in 1864 when it passed a law establishing a 10 percent tax on
money printed by state-chartered banks. This action effectively took these banks
out of the business of printing money. By the end of 1865, a total of 1,294 national
banks had been chartered, and they had more than five times the assets of the 349
state banks still in existence. This banking system would remain in place
throughout the Civil War andReconstruction.
Northern leaders, then, struck a balance between taxation, bond issues, and the
printing of currency while taking steps to rectify problems within their financial
system. Confederate authorities had the same options available to them, but under
the leadership of Treasury Secretary Christopher Memminger, they proved far less
able to maintain an effective balance. The results were devastating for the
Confederate economy.
Early in the war, the Confederate Congress considered the possibility of taxing its
citizens. There was widespread opposition to the idea, however. Some
congressmen opposed taxation because of their dislike of a strong central
government. Others felt that such a step would undermine support for the war.
Still others saw a tax as unnecessary, believing the war would end quickly. In
August 1861, proponents of taxation finally persuaded the Congress to exact a
nominal property tax, but it ended up adding very little money to the Confederate
bottom line. In 1863 the poor state of the Confederateeconomy allowed for the
passage of a more comprehensive tax, but it also did little to help the Confederate
cause. The bill taxed incomes at rates from 1 percent to 15 percent and established
a "tax-in-kind" for farmers that required them to turn over 10 percent of their crops
to the government. Due to evasion and poor enforcement, these taxes provided less
than $150 million for the war effort, most of it in depreciated currency late in the
war.
Among Confederate officials, the preferred means for financing thewar was bond
issues. An initial offering of $15 million in 1861 was quickly purchased by
patriotic Southerners. After that, however, bonds became increasingly difficult to
sell as the available money in the South dried up. The Confederate Congress then
authorized a "produce loan" of $100 million, wherein farmers would be allowed to
pledge a portion of their crops in exchange for bonds. Although an innovative
idea, the produce loan failed to produce the desired results. Farmers were reluctant
to take advantage of the program, preferring instead to hoard their crops or sell
them to the Union soldiers. And when pledges were made, the Confederate
government often had difficulty collecting the crops that were due. By the end of
the war, the produce loan had generated only $34 million.
Given how little money was being raised through taxes and bonds, the
Confederate government had little choice but to begin printing fiat currency. The
Congress authorized the printing of $119 million worth of "bluebacks" in 1861
and $400 million worth in 1862. This money quickly lost value, for a variety of
reasons. The Confederate government was not nearly as stable as the Union
government, thus Confederate fiat currency was far less trustworthy than Union
fiat currency. Beyond that, there was far too much currency in circulation. By the
end of 1862 the Confederate government had printed almost as much money as the
Union government would print over the course of the entire war. The glut of paper
money was made even worse by the fact that state and local governments were
also compelled to print money to meet their obligations. Yet another problem was
that the Confederate government chose not to make Confederate currency legal
tender; Southern citizens and businesses were not legally required to accept it as
payment for goods and services. The purpose of this decision was to inspire
confidence in Confederate paper money, but in the end it had the opposite effect.
Southerners avoided Confederate money whenever possible, relying mostly on
barter, on specie when it was available, and sometimes on Union currency.
In addition to establishing a poor balance between sources of money, the
Confederate government also took steps that undermined its financial system. At
the start of the war, the South had a system of branch banks that was much more
stable and much more modern than the decentralized banking system of the North.
Early in the war, the Confederate Congress required Southern banks to provide
loans to the government, exchanging specie and bank notes for bonds. As the
government's bonds declined in value, the banks were effectively drained of
capital. The government continued to exacerbate the situation throughout the war
through excessive taxation on banks and additional forced loans. Union armies
also contributed to the banks' woes. A large portion of the assets of Southern
banks was invested in land and slaves, and these assets were lost as the Union
armymarched across the South. By the end of the war, the Southern banking
system had effectively collapsed.
The failure of the Confederate government's economic policies was evident on
both the war front and the homefront. Confederate soldiers were notoriously
undersupplied, often going without proper uniforms, modern weapons, sufficient
ammunition, or adequate rations. In desperation, they took whatever steps
possible—stealing, utilizing captured goods, even trading with the enemy—to
obtain the needed supplies.
On the home front, the situation was arguably even worse. Inflation was out of
control in the Confederacy— 9,000 percent over the course of the war. By 1865
flour cost as much as $500 a barrel, and a suit of clothes cost $2,500. The Union's
naval blockade contributed to the Confederacy's economic problems by curtailing
the amount of goods flowing into the South while denying Southerners the
opportunity to sell their cotton. Although the South had an agricultural economy,
many Southerners starved over the course of the war. Railroads were in a state of
disrepair, and food rotted in storage because it could not be transported to the
locations where it was needed. The privations felt by the Southern people created
disease and epidemics and even resulted in occasional rioting. The largest riot
occurred in Richmond, Virginia, on April 2, 1863, when several hundred women
marched through the streets smashing store windows and chanting "Bread or
Blood!" Jefferson Davis himself had to speak to the mob and convince them to
disperse.
The failures of the Southern economy stood in stark contrast to the successes of
the Northern economy. By 1862 the North had entirely recovered from the panic
of 1857, and its economy was thriving. While the Confederate army struggled to
survive, the Union army was the best-supplied military force in history. Inflation
in the North was kept in check as much as was possible in a wartime economy,
only 80 percent compared with the South's rate of inflation, which exceeded 9,000
percent over the course of the war. A few Northern industries struggled due to the
loss of Southern raw materials and customers, but others prospered. The
agricultural sector performed especially well, with Northern farmers producing
more wheat and corn in both 1862 and 1863 than the entire nation had produced in
1859. Between 1861 and 1865, American agricultural exports doubled, a
remarkable accomplishment given that one-third of the workforce was in the army.
The successes of the Northern economy and the failures of the Southern economy
had a clear impact on the outcome of the war. The Union government was able to
put an extremely well-equipped army into the field throughout the course of the
war while still satisfying the needs of civilians on the homefront. Meanwhile, the
Confederacy was increasingly unable to provide for the needs of its soldiers and
itscivilians. This drained an already outnumbered Southern army of manpower as
some soldiers succumbed to disease or starvation and others deserted to take care
of needy family members. Meanwhile, suffering on the homefront deprived the
Confederacy of valuable labor and undermined support for the war.
The long-term economic effects of the Civil War are harder to nail down. Some
historians argue that the Civil War started the United States on the path to
industrialization; others suggest that the CivilWar simply hastened trends already
in progress. What is certain is that the Civil War caused a major redistribution of
wealth from the South to the North. In 1860 the South's share of national wealth
had been 30 percent; by 1870 it was 12 percent. This disparity would endure for
decades after the Civil War creating an almost constant state of economic
deprivation in the South throughout the Reconstruction period and extending into
the late 19th and early 20th centuries.
While the Southern economy struggled in the years immediately after the Civil
War, the Northern economy prospered. Industrialization continued, and the
national banking system established during theCivil War kept currency stable. A
number of measures adopted by the Republican Congress during the war,
particularly the Pacific Railroad Act, pumped government money into the
economy. Meanwhile, Northern farmers continued to fetch high prices for their
crops as Europe suffered through a series of poor harvests.
In 1873 a financial panic once again undermined Northern prosperity. The panic
of 1873 began with the closure of Jay Cooke and Company and resulted in a
lengthy depression. Overextension of the railroadsonce again played a part, as did
the collapse of several European economies and the damage done by the great
Chicago Fire of 1871. Ultimately, the panic of 1873 left 3 million people
unemployed while causing the failure of businesses valued at $500 million. The
economywould not recover until 1878, when industrialization would once again
begin to drive the economy forward at a breathtaking pace.
Southern Economy Before War
Although slavery was highly profitable, it had a negative impact on the southern economy. It impeded the
development of industry and cities and contributed to high debts, soil exhaustion, and a lack of
technological innovation.
The philosopher and poet Ralph Waldo Emerson said that “slavery is no
scholar, no improver; it does not love the whistle of the railroad; it does not
love the newspaper, the mail-bag, a college, a book or a preacher who has the
absurd whim of saying what he thinks; it does not increase the white
population; it does not improve the soil; everything goes to decay.” There
appears to be a large element of truth in Emerson’s observation.The South, like
other slave societies, did not develop urban centers for commerce, finance, and
industry on a scale equal to those found in the North. Virginia’s largest city,
Richmond, had a population of just 15,274 in 1850. That same year,
Wilmington, North Carolina’s largest city, had only 7,264 inhabitants, while
Natchez and Vicksburg, the two largest cities in Mississippi, had fewer than
3,000 white inhabitants.Southern cities were small because they failed to
develop diversified economies. Unlike the cities of the North, southern cities
rarely became processing or finishing centers and southern ports rarely engaged
in international trade. Their primary functions were to market and transport
cotton or other agricultural crops, supply local planters and farmers with such
necessities as agricultural implements, and produce the small number of
manufactured goods, such as cotton gins, needed by farmers.An overemphasis
on slave-based agriculture led Southerners to neglect industry and
transportation improvements. As a result, manufacturing and transportation
lagged far behind in comparison to the North. In 1860 the North had
approximately 1.3 million industrial workers, whereas the South had 110,000,
and northern factories manufactured nine-tenths of the industrial goods
produced in the United States.The South’s transportation network was primitive
by northern standards. Traveling the 1,460 overland miles from Baltimore to
New Orleans in 1850 meant riding five different railroads, two stagecoaches,
and two steamboats. Most southern railroads served primarily to transport
cotton to southern ports, where the crop could be shipped on northern vessels to
northern or British factories for processing.Because of high rates of personal
debt, Southern states kept taxation and government spending at much lower
levels than did the states in the North. As a result, Southerners lagged far
behind Northerners in their support for public education. Illiteracy was
widespread. In 1850, 20 percent of all southern white adults could not read or
write, while the illiteracy rate in New England was less than half of 1
percent.Because large slaveholders owned most of the region’s slaves, wealth
was more stratified than in the North. In the Deep South, the middle class held
a relatively small proportion of the region’s property, while wealthy planters
owned a very significant portion of the productive lands and slave labor. In
1850, 17 percent of the farming population held two-thirds of all acres in the
rich cotton-growing regions of the South.
There are indications that during the last decade before the Civil War slave ownership became increasingly
concentrated in fewer and fewer hands. As soil erosion and exhaustion diminished the availability of cotton
land, scarcity and heavy demand forced the price of land and slaves to rise beyond the reach of most, and in
newer cotton-growing regions, yeomen farmers were pushed off the land as planters expanded their
holdings. In Louisiana, for example, nearly half of all rural white families owned no land. During the
1850s, the percentage of the total white population owning slaves declined significantly. By 1860, the
proportion of whites holding slaves had fallen from about one-third to one-fourth. As slave and land
ownership grew more concentrated, a growing number of whites were forced by economic pressure to
leave the land and move to urban centers.
Douglas D. Ball, Financial Failure and Confederate Defeat (Urbana: University of Illinois Press,
1991);
Stuart Weems Bruchey, The Wealth of the Nation: An Economic History of the United States
(New York: Harper & Row, 1988);
J. Matthew Gallman, The North Fights the Civil War: The Home Front (Chicago: I. R. Dee,
1994);
Paul W. Gates, Agriculture and the Civil War (New York: Knopf, 1965).
Text Citation:
Bates, Christopher. "economy, 1850–1878." In Waugh, John, and Gary B. Nash, eds.
Encyclopedia of American History: Civil War and Reconstruction, 1856 to 1869, Revised Edition
(Volume V). New York: Facts On File, Inc., 2010. American History Online. Facts On File, Inc.
http://www.fofweb.com/activelink2.asp?
ItemID=WE52&iPin=EAHV093&SingleRecord=True (accessed May 2, 2011).
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http://www.fofweb.com/activelink2.asp?ItemID=WE52&iPin=EAHV093&SingleRecord=True
Bibliography
Bates, Christopher. "economy, 1850–1878." In Waugh, John, and Gary B.
Nash, eds. Encyclopedia of American History: Civil War and
Reconstruction, 1856 to 1869, Revised Edition (Volume V). New
York: Facts On File, Inc., 2010. American History Online. Facts On
File, Inc. http://www.fofweb.com/activelink2.asp?
ItemID=WE52&iPin=EAHV093&SingleRecord=True (accessed
May 4, 2011).
Panic of 1857.1 July 2005. Ohio History Central. 4 May 2011.
http://www.ohiohistorycentral.org/entry.php?rec=537
Mintz, S. The South’s Economy. 2007. Digital History,4 May 2011.
<http://www.digitalhistory.uh.edu/database/article_display.cfm
?HHID=654>