73-476 AMERICAN ECONOMIC HISTORY: TOPIC 7

XII. The Economic Costs of the Civil War

1. Dimensions of the War
   
   
   1. Largest Land Armies assembled in Human history -- by 1863 the North had 1,000,000 men under arms and the South 650,000.
      
   2. Battles involving over 100,000 men were commonplace and some reached 200,000.
      
   3. In one day, nearly 5,000 men were killed at Antietam and 20,000 wounded. It is still the most American soldiers killed in one day.
      
   4. Total Dead: 360,000 North + 258,000 South = 618,000 with at least 500,000 wounded.
      
      
2. Direct Costs of the War for North & South
   
   
   1. Direct Cost = All War Spending by Government + Destroyed Physical Capital + Destroyed Human Capital.
      
   2. Summary of Direct Costs (From Goldin and Lewis)
      

      
                                         NORTH               SOUTH
      
      Government                         2,292               1,011
      Draft                                 11(162,000 men)     20(300,000 men)
      Physical Capital Destruction         --                1,487
      Human Capital 
                Destruction: Killed        955                 684
                           : Wounded       365                 261
      Risk Premiums                       -256                -178
      
      TOTAL                             $3.367b             $3.285b
      GRAND TOTAL   $6,652,000,000
      

   3. Magnitude of Direct Costs: 4 times all government expenditures, 1789 to 1860; 17 times 1860 export earnings; could have purchased all the Slaves at prevailing market prices, given each family 40 acres and a mule, and still have $3.5 billion left over.
      
      
3. Indirect Costs: Hypothetical (consumption if no War) versus actual consumption over time discounted by prevailing interest rate. This shows that the costs for the North were $5.2b and the South $9.5b for a total of $14.7b.
   
   
4. How was the War Paid For
   
   
   1. Confiscation - Mostly by Southern Military
      
   2. Direct Taxation
      
      
      1. Tax Present Population Directly - Income taxes, excise taxes, tariffs In the North, about 20% of the cost of War was paid through direct taxes; about 12% in the South.
         
      2. Tax Future Population - Bonds and Greenbacks
         In the North, about $2.7b in interest bearing bonds were issued along with $450m in non-interest bearing notes -- the Greenbacks. In the South, about $2b in bonds were issued -- these were repudiated in the 14th Amendment.
         
         
   3. Tax Present Population Indirectly -- Inflation
      In the North the money supply went from $442m in 1860 to $1,180m in 1865 but inflation was less than the increase in the money supply (approximately 70%). In the South there was hyper-inflation. Confederate money was practically worthless.
      
      
   4. Paying off the Debt: After the War the North left in place the very high tariffs passed during the War. The government ran surpluses nearly every year into the 1890s and the debt quickly declined. Indeed, there were political problems with calling in the Greenbacks too fast because there was a persistent deflation from the end of the War into the mid-1890s and many favored inflation.
      
      
5. Why Didn't the South Recover From the Civil War
   
   
   1. The Devastation Theory
      
      
      1. The conventional wisdom was that the South was devastated by the War -- the great loss of human life, livestock, and physical destruction. But the South was not depopulated -- the skills and knowledge embodied in the survivors should have been sufficient (witness West Germany 1946-1954!).
         
      2. Southern Railroads were rebuilt by 1867.
         
      3. Southern manufacturing was rebuilt by 1870.
         
         
   2. Agriculture
      
      
      1. The agricultural output of the South was significantly lower after the War. About 97% of crop acreage in the South was devoted to cotton, corn, oats, sugar, and wheat. Using a per-capita crop index devised by Ransom and Sutch where 100 = 1859, the index stood at 39.7 in 1866, 44 in 1868, 64 in 1870, 70 in 1880, and 75 in 1900.
         
      2. Why this decline in agricultural output?
         
         
         1. The price of Cotton was high right after the War but then began to decline.
            However, it did not fall low enough to explain the decline in output.
            
         2. The key is the fall in the per acre output of Cotton.
            
            
   3. The Effect of Emancipation of the Slaves
      
      
      1. The amount of labor offered by each freedman and his family fell significantly after the War. Instead of being "driven", the freed slaves behaved rationally and consumed more leisure time.
         
      2. Given the limited technology, it was not easy to substitute capital for labor in the production of Cotton. Before the War, it is clear that the slaves were worked nearly to the limit of their economic capacity.
         
      3. This drop in labor input clearly accounts for part of the decline in per capita crop output after the War.
         
         
   4. The Effect of Disease -- Especially Hookworm
      
      
      1. Hookworm spread during the Civil War because the assembling of large armies mixed heretofore isolated (and non-infected) men with infected men thereby spreading the disease. Sanitation was very poor in the camps. The uneducated rural men relieved themselves wherever and whenever they felt the need as this was common practice in the rural South.
         
      2. In addition, there was a chronic and serious shortage of shoes throughout the Southern armies meaning many of the soldiers went barefoot. Being barefoot, they easily fell victim to hookworm infection.
         
      3. Hookworm produces an apathetic, "lazy", disposition in victims. Infected children do poorly on standard intelligence tests and may even appear to be mentally retarded. Hookworm causes people to be thinner and shorter.
         
      4. It is quite probable that Hookworm infection was as important as Emancipation in causing the decline in per-capita crop output.
         
         
6. The South as a Third-World Country
   
   
   1. In response to the drop in labor input after the War, the Sharecropping system arose. The plantations were split into smaller farms. The standard split was 50-50 of the crop. The owner supplied the farm, buildings, equipment, seed, and provisions, and the sharecropper furnished the labor.
      
   2. It was a poverty system very similar (but not exact) to the relationship between a slum-lord and an apartment tenant.
      
   3. The rapid development of the Railroads after the War, the sharecropping system, and the collapse of the Southern Banks and financial system, resulted in the "atomization" of the cotton crop.
      
   4. This "atomization" also encouraged the development of the "country store" system which the sharecroppers relied upon. These stores extended credit at usurious rates and only reinforced the prevailing poverty.
      
   5. The tremendous economic expansion that occurred from 1865-1914 which saw a tripling of per-capital real income in the U.S. largely bypassed the South.