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Effect Of Civil War On American Economy Essay, Research Paper

The Economic Effects of the Civil War

The Economies of the North and South, 1861-1865

In 1861, a great war in American history began. It was a civil war between the north and south that was by no means civil. This war would have great repercussions upon the economy of this country and the states within it. The American Civil War began with secession, creating a divided union of sorts, and sparked an incredibly cataclysmic four years.

Although the actual war began with secession, this was not the only driving force. The economy of the Southern states, the Confederacy, greatly if not entirely depended on the institution of slavery. The Confederacy was heavily reliant on agriculture, and they used the profits made from the sale of such raw materials to purchase finished goods to use and enjoy. Their major export was cotton, which thrived on the warm river deltas and could easily be shipped to major ocean ports from towns on the Mississippi and numerous river cities. Slavery was a key part of this, as slaves were the ones who harvested and planted the cotton. Being such an enormous unpaid work force, the profits made were extraordinarily high and the price for the unfinished goods drastically low in comparison; especially since he invention of the cotton gin in 1793 which made the work all that much easier and quicker.

In contrast, the economical structure of the Northern states, the Union, was vastly dependent on industry. Slavery did not exist in most of the Union, as there was no demand for it due to the type of industrial development taking place. As the Union had a paid work force, the profits made were lower and the cost of the finished manufactured item higher. In turn, the Union used the profits and purchased raw materials to use. This cycle is referred to as interdependency.

By 1860, ninety-five percent of the United States manufacturing occurred in states north of the 36?30? line conceived for the Missouri Compromise. Many of these states were also non-slave states, and against slavery at that. Since the population in the Northern states was mostly free whites, and the population in the south mostly slaves, in the voting booths the South was greatly at a disadvantage. Also, to add to this, the Democrats who were mostly pro-slavery had split into two factions because they could not agree on a candidate. The Republican Party, formed only 4 years before the election of 1860, had Abraham Lincoln as candidate for president.

Because the Democratic Party was split, many southerners were unable to vote, and Lincoln was incredibly popular in the Northern states, the Republican Party candidate won. Now southerners were convinced that the North had put an abolitionist in the White House, and would proceed to abrogate slavery. This enraged the Southern states who proceeded to secede from the Union.

In Mississippi?s secession convention, they stated that, ?Our position is thoroughly identified with the institution of slavery… A blow at slavery is a blow at commerce and civilization? There was no choice left to us but submission to the mandates of abolition or dissolution of the Union.? This quote forces us to consider that if slavery had been immediately abolished the wreckage and destruction that would have been rendered to the Southern economy.

At the beginning of the war, to make France and Europe recognize the Confederacy as a separate power, no attempt was made to export cotton to them. Before long, no cotton could be exported because of the invading Northern troops that were seizing and or blocking the ports. These effective sieges decimated the foreign trade for the Confederacy.

Every aspect of the Southern economy was stimulated by the war, and domestic production especially because of the need to supply the army and replacing the goods that could no longer be imported. This was, however, offset by the invading Union troupes that destroyed many businesses.

The Civil War augmented the nation greatly, and one of these changes was the routine use of paper currency. In 1861, Congress issued Demand Notes to finance the civil war. It was the first paper money issued since Continentals, which were first issued in 1775. In 1862, Congress discontinued the issuance of Demand Notes and instead circulated Legal Tender notes. Confidence in these notes waned when the Treasury stopped redeeming them during the war to save gold and silver. People followed this example, as the need for money was great, hence coin-hoarding. This in turn led to the exchange of small change substitutes, everything from bills and tickets to postage stamps.

From 1862 to 1876, 368 million dollars in fractional currency was being distributed. This currency was often called ?paper coins?, or even ?shinplasters? as during the hardships of war troops were often forced to line their worn out boots with them.

Between 1861 and 1865, Confederate currency was being distributed to millions of Southerners on the assurance that the south would win and the bank notes would be redeemable. In an effort to debase this currency, the Union printed counterfeit money and circulated it in the South. Inflation became rampant in both the North and the South, yet it was far worse in the Confederacy. By the end of the war, Confederates lost complete confidence in this money, which became totally worthless. They then relied on bartering or black market greenbacks to sustain themselves. In more than a few cases, Southern troupes were even paid in Union money.

The North financed the war through printing money and borrowing also, yet they further increased funds by levying a direct tax, instituting the nation?s first income tax, and raising tariffs, which were taxes on imports. Still, the Union financed only 20% of the war through taxation. With the absence of 11 southern states, Democratic representation was greatly reduced, enabling the Republicans to raise tariffs to high protective levels.

In 1863 Congress established the National Banking System to facilitate borrowing. The way this functioned: how much money an independent bank could create was based directly on the amount of money they loaned the government. Also provided for was the elimination of the circulation of banknotes by state chartered banks. This was done by levying a prohibitively high tax on them based on the size of the note?s circulation.

Tax structure in the Union during the war also encouraged businesses to consolidate because taxes were levied at each stage of production. Furthermore, the government usually placed its orders with large firms, finding they provided better service. Consequently, this promoted organization of labor.

Producers of arms and munitions prospered and so did canneries and meat packers. The farm machine industry was also stimulated due to the loss of farmers to the army and the simultaneous demand for farm products. In the north, farm prices advanced during the war, and farmers did well. Afterwards, they declined sharply due to the newly cultivated land that came to be during the war. Subsequently, farmers had trouble paying off debts they incurred during the war to increase product outturn. They developed a deep distrust of paper money and lost much of their former independence.

The negative impact on the Northern textile mills was somewhat relieved by the fact that they held a large stock of cotton obtained from captured territory in the south, and some mills began producing woolen goods instead. Several bad crop years in Europe increased the demand for American wheat, and this took up some of the slack developed by the loss of the cotton trade. The only Northern industry to suffer greatly and permanently was the Merchant marines, which began their decline with the obsoletion of clipper ships.

In 1927, noted historians Charles and Mary Beard claimed that although it wiped out the assets of slave owners, this war assured the triumph of the business enterprise. They believed the huge profits amassed during the war by some Northerners were subsequently used to exploit the nation?s natural resources. Furthermore, they believed, the war changed political and social arrangements in a way that favored industrialization.

The Union experienced only a brief pause in economic growth, whereas the Confederacy suffered severe retrogression. The Confederacy financed the war through printing money and borrowing, and the combination of rising money supply and decreasing product supply ended in runaway inflation. The Civil war also destroyed the Confederacy?s banking system, and its recovery was handicapped by lack of funds.

The North also had a stable government and economy. Confederate President Davis not only had a war to fight but also a new government to run. One of the main reasons the South seceded from the Union was because they wanted to run their states as they saw fit without intervention from the Federal Government in Washington. When the Confederate States of America was formed, many of the states still wanted to run their states without intervention from the Confederate government in Richmond. This caused constant arguments and took a great deal of time away from running the war.

The Southern economy also eventually fell into ruin. There were bread riots in Richmond, and on one occasion President Davis went out to meet the angry people, and when he could not calm them, he reached into his pockets and threw whatever money he had to the angry crowd to try and appease them. Towards the end of the war, one stick of firewood cost $5.00, and it was almost impossible to buy food and clothing.


In doing this research paper I learned that the economy of a country and the people of that country are attached to each other as one and the same. After viewing the ups and downs, political views, personal battles, and tough decisions that people have had to make to uphold the delicate balance, I have gained a much more practical sense of how a country works.

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