History

The Economic Impact of Civil War

Richmond, VA, 1865.

I The Effects of the War

· Civil War’s economic impact has been a point of much debate. Historians have traditionally seen the war as a major economic “watershed,” which served as a “take-off point” for America’s final transformation from an agricultural to an industrial nation. Later, a new group of historians argued that Civil War actually slowed down the economic growth and America’s transformation.

· So, again: one group says Civil War created a surge in economic growth and industrialization, while the other group says the opposite, arguing that Civil War interrupted long term economic trends and actually impeded industrialization.

· So, who is right? Let’s study both schools of thought, starting with the people who argued for Civil War’s economic boost-effect:

1. Beard-Hacker thesis

· Historians Charles and Mary Beard, in their Rise of American Civilization (1927), called Civil War “the Second American Revolution,” a “social war” which rearranged “classes and...the accumulation and distribution of wealth.” It was “a social cataclysm in which the capitalists, laborers, and farmers of the North and West drove from power in the national government the planting aristocracy of the South.”

· According to the Beards, war marked the dividing line between agricultural and industrial eras in American history. In essence, Civil War was the struggle of classes and economic systems; it was a sectional dispute only by the “accidents of climate, soil, and geography.”

· The Beards were later supported and supplemented by Louis Hacker, who in his book Triumph of American Capitalism (1940), said that Civil War gave the industrial-capitalist class “the instrumentalities of political power,” which the capitalists used to pass legislation, which enabled “the triumph of American capitalism.”

· Proof for Beard-Hacker include largely the war’s short-term and direct effects, such as:

a) Demand for war materials, such as guns other weapons, uniforms, saddles, wagons, et cetera.

b) The need to mechanize grows, as factories have hard time finding man power (draft), while the demand for war materials simultaneously grows substantially.

c) The war triggers a need to use labor force more efficiently: women, free African Americans and immigrants move into the mines, fields, and factories.

d) Income gets redistributed into the hands of rising capitalist class. During the war, U.S. suffered from substantial inflation (70 percent between 1860-1864), as the government largely funded the war with deficit spending and printing more money. This transferred income from workers to those who could raise prices rapidly: entrepreneurs, capitalists, manufacturers, etc. This gives them a larger slice of the pie and helped to finance the postwar economic expansion. Many of the later industrial giants (Andrew Carnegie, Philip Armour, Clement Studebaker, John D. Rockefeller, etc.) partook in the industrial activity and business during Civil War.

e) War funding helps to create more sophisticated financial services and investment apparatuses, because the war was largely funded on a deficit basis, using also bonds. After the war, changes in U.S. financial policies led to return to emphasis on hard currency, and these bonds were paid in gold. Again, this helped to create a class of investors to fund the post-Civil War industrial investments.

f) Civil War led to institutional changes in American economy – most notably to the Republican ascendancy. During the war, but a few southerners remain in U.S. Congress. Northern Republicans took up Alexander Hamilton’s arguments favoring strong state promotion of economic enterprise. The Republican wartime agenda pushed through several large economic improvement programs that the southerners had blocked prior to the war. These programs included:

· High protective tariffs for American manufacturers.

· Homestead Act, granting virtually free land in the West for potential farmers.

· Creation of Land Grant Colleges, leading to a growing public university system, especially in the Midwest.

· Promotion of national banking system and centralized currency.

· Passing transcontinental railroad bills and land grants for railroads.

· Creating the first federal income tax.

· Creation of National Academy of Science to promote the improvement of technology.

· Creation of the Department of Agriculture, Bureau of Printing and Engraving, Office of Comptroller of Currency, and Office of Immigration.

Greater government leadership in economic affairs help push for a new political economic thinking, with more active government involvement accepted and even taken for granted.

· Beard-Hacker thesis’ supporters say that if Midwestern Republicans and Northern Democrats had remained politically dominant, the outcome might have been different, but pro-industrial wing of the GOP dominates the Congress and the White House. Therefore, the war helped to transform the American political economy from an agricultural nation into a modern industrial one.

· However, these changes are not always sustained. After the war, federal government receded (except for high tariffs of 40-50 percent). Only in response to developments of post-Civil War period does U.S. definitely resemble a new corporate-capitalist state.

Charles Beard.

2. Cochran-Engerman thesis

· This thesis is based on two hugely influential journal articles: Thomas C. Cochran, “Did the Civil War Retard Industrialization?,” Mississippi Valley Historical Review XLVIII (September 1961), 197-210; Stanley Engerman, “The Economic Impact of the Civil War,” Explorations in Entrepreneurial History, Second Series III (Spring-Summer 1966), 176-99.

· Using census data by focusing on long-term trends of 19th century economic development, they argued that Civil War retarded industrialization and impeded America’s economic growth. In essence, they used quantification to challenge the Beards’ qualitative arguments.

· So, how did the war retard economic growth? The thesis identifies causes:

a) Misallocation of demand. Wartime-induced demand is not new demand, and therefore real growth, but just shifting the demand to war materials. A shift toward industrial manufacturing after the war was merely a continuation of changes that had already begun before the conflict.

b) War lowered long-term growth rates. If you look at the growth rates between 1840 and 1860, they indicate a faster and more substantial economic growth than during the war or even years 1870-1900. Commodity output grew at 4.6 percent average rate in 1840-1860, 2.0 rate during the 1860s (the war decade), and 4.4 percent in 1870-1900.

c) In the large picture, the wartime redistribution of income was minor, negating the argument about war spurring a new investor class.

d) The war spawned very few technological or organizational advances. It largely utilized gains that had already been achieved in the antebellum period in machine tools, railroads, telegraphs, or factory production.

e) Financing through securities market also was established in the antebellum era, so the war did not lead to a new creativity in the financial sector.

· In sum, the direct impact of the war was limited. According to Cochran-Engerman thesis, the war did not produce grand shifts or transformations in economic activity.

II Regional effects

· Effects of the war on the South and the North were quite different, as one can imagine. Here we will see how the regions experienced the war economically:

1. The North

· Northern economy grew during the war, although at a slower pace than before.

· Unlike the South, the North emerged almost unscathed as far as destruction of property is concerned.

· Additionally, Civil War and the absence of southern congressmen gave the North political opportunities to penetrate southern and western periphery at a fast pace.

· Northern capital, in the aftermath of the war, can treat the South as a colony for raw materials. Northern investors purchase up to 85 percent of public land in Louisiana and Mississippi.

2. The South

· We should be vary of generalizations. The South covers a very large area, and not all regions were equally affected by the war. Some cities, like Richmond and Atlanta, were destroyed, while places like New Orleans and Savannah survived with relatively little damage. Also, some parts of the South rebounded from the war faster than others.

· However, the destruction of lives and property was massive. Up to 40 percent of antebellum wealth in the South was gone. The South had four million slaves before the war, worth four billion dollars (roughly 125 billion in today’s dollars). With slaves now free, planters lost most of their wealth. Southerners had traditionally invested their money in slaves, and now the single most valuable asset they had was gone.

· Additionally, southern livestock had plummeted during the war. Restocking of southern agriculture to 1860 levels was not complete until year 1900.

· Southern labor resources were demolished, with roughly 260,000 men of the best working age dead and hundreds of thousands more wounded – many permanently. In 1866, half of the state budget of Mississippi was spent on artificial limbs for war amputees.

· The South lost much of their cotton markets. During the war, as the Union blockaded the Confederate ports, the Great Britain’s textile mills had to find other producers of cotton. A huge cotton boom emerged in Egypt and India, resulting to a glut on world market, driving down prices and incomes. Matters become worse as the South dramatically increases its cotton production in the postwar years.

· Much of the wealth moved to the North, in different taxes, tariffs, and pensions. The capital flow moved away from the region, helping to fund the northern industrial expansion and America’s continued push to the western frontier. The South’s own banking system also was a victim of the war, so now the southerners with money had to use northern banks, which expatriated the profits.

· The war had a few positive economic effects on the South as well:

· It contributed to the more varied urbanization and the growth of cities such as Richmond, Mobile, Augusta, Columbus, Nashville, and Atlanta. Some of these cities were destroyed, but they were largely rebuilt in a number of years after the war.

· The war and its aftermath also fed the railroad boom. Previously isolated areas saw growth, resulting to more town-building, boosterism, and revitalized commercial life.

· The South experienced industrial growth. During the war, the South had to industrialize rapidly to keep its armies supplied. After the war, the South witnessed rapid building of textile mills, saw mills, agricultural processing plants. Southern planters move rapidly into industries.

III The costs of the war

· The war’s cost in economic terms is hard to measure. The costs include not just adding up expenditures on war effort and the value of destroyed physical and human capital, but costs of instability, commercial stoppage and other economic factors. Claudia Goldin and Frank Lewis, in Journal of Economic History 35 (1975), made the best effort to calculate the actual monetary costs of the war.

USA $3B direct costs $5B; indirect costs $2B

CSA $4B direct costs $8B; indirect costs $4B

Direct cost of the war were $7B (in 1860 dollars)

Indirect costs were $13B

Indirect – direct = $6B

· Direct financial cost includes all war-related expenditures and human and physical capital and property destroyed in military actions. (Calculating the human costs can be difficult. Roughly 600,000 lives were lost in the war (two times more than American casualties in World War II, 11 times more than in Vietnam). To factor human lives into an economic equation, we must consider “human capital” –approach; i.e., a summation of both the foregone earnings of those who died and the difference between actual and hypothetic earnings of those who were wounded.)

· Indirect costs are equally hard to evaluate and calculate. Economists created a hypothetical model, with a fictional North and South, which did not fight a war between 1861-1865. This number represents a “warless economy” that continued the prewar growth rates, estimating what American economy would have produced if there was no war.

· To put these numbers into perspective, five billion dollars would have been enough to purchase freedom for every slave and provide them 40 acres and a mule. The remaining billion dollars could have given $250 for seed and fertilizer for each of the four million freed slaves.

· However, these monetary figures are enormous for the 1860s. Five billion dollars is four times the entire federal budget from 1789 to 1861.