Economic Change in the Civil War Era

David T. Gilchrist and W. David Lewis. Economic Change in the Civil War Era. Greenvile, Del.: Eleutherian-Mills-Hagley Foundation, 1965. 180 pages. Out of print, available from Amazon.com used.

God bless Amazon.com for making scholarly books available to a national market with little fuss or muss. Economic Change in the Civil War Era is a conference proceedings of a 1964 conference that the Eleutherian Mills-Hagley Foundation put together in 1964. Several of the leading historians of the late twentieth century, to include Alfred D. Chandler, Jr., Daniel J. Elazar, and Fritz Redlich were in attendance and/or presented papers.

Robert P. Sharkey's paper on commercial banking coupled with Fritz Redlich's response was fascinating. Louis Hartz's paper, "Government-Business Relations" is brilliant as is Alfred D. Chandler's paper on the transformation of the "Organization of Manufacturing" as was George Rogers Taylor's "National Economy Before and After the Civil War".

Taylor points out that the "extension of settlement in rural New England" in the pre-Civil War period was largely unprofitable because the lands being settled in northern New England and upstate New York were not so fertile as the land the first settlers occupied. Thus, "most of the hill towns of New England had reached their population peaks by 1830 or earlier." The railroads made it "easier to migrate to Illinois or Wisconsin" so that New England rural population began to decrease in the 1850s. The population of the Western states was growing, in part due to emigration from New England. Western settlers needed a market. Shipping to New Orleans via the Mississippi River was expensive and risky. Canals allowed eastward shipment of grain and by the 1840s eastward shipments equalled the the shipments to New Orleans, and the railroads enhanced this trend. Railroads were in part a response to westward migration. Thus, argues Taylor, eastern demand for western agricultural output plus immigration led to demand for railroads. New Englanders migrated from farms westward and to cities like Boston. "Eventually migrants to the frontier produced the food consumed by migrants to the cities" (p. 14). Immigrants from Europe provided an abundant labor supply and low labor costs in the ante-bellum period. But "trained workmen or skilled mechanics were often in short supply and had to be brought in from England or Scotland at considerable expense".

According to Robert P. Sharkey, who treated the subject of banking:

"In 1850 the banking network of the country consisted of some 824 state-chartered banks operating in all the thirty-one states except Texas, Arkansas and Iowa, which prohibited the chartering of banks altogether. The laws which governed banking varied from the extreme permissiveness of the statutes in Illinois, where "wildcatting" was in vogue, to the stringent provisions of the enactments in Louisiana, where reserve and lending practices were conservative in the extreme....Twenty-three years later, in 1873, this anarchic condition had totally disappeared. The number of banks had quadrupled to some 3,298, but of this number, 1,968 were national banks chartered under the National Banking Act of 1864. . Instead of hundreds of different kinds of currency, whose varying values were known only to the most avid readers of the Bank Note Reporter, there was now a national bank-note currency secured by the deposit of US bonds with the Treasurer of the United States and passing at par throughout the country. The state banks were showing a great renaissance at this time, their number having more than doubled from less than 600 in 1872 to more than 1,300 in 1873. Despite this resurgent vitality, state banks were no longer feared by most contemporaries, since their currency-issuing powers had been effectively curtailed by the punitive tax of 10 per cent on state bank issues levied by the act of Marc 3, 1865."

Among the important changes with respect to money and banking was the "ever growing volume of demand-deposit money...the growing volume of demand deposits which could be transferred by check mitigated to some extent the deflationary effects of the rapid currency contraction which followed the Civil War."

Private clearing houses, a kind of regional private central bank, were established in New York, Boston and Philadelphia between 1853 and 1858 (p. 25).

The National Banking Act was, in Sharkey's estimate, the result of the Civil War. "The Civil War created a great mass of government securities which the National Banking Act required national banks to buy as collateral for the national currency." New York Bankers did not like the monetary expansion. Sharkey quotes James Gallatin in 1868 (p. 26): "Not content with a large volume of government paper money, we made it the basis of another volume of auxiliary money in the form of bank issues. We built paper upon paper. Our paper house topples to its foundation, yet we are advised to build it higher, with more paper..." Sharkey adds (p. 27):

"For those who savor historical ironies, these divergent attitudes are not without their delights, for, as the National Banking System took shape after the War, it was apparent that human ingenuity would have had difficulty contriving a more perfect engine for class and sectional exploitation: creditors finally obtaining the upper hand as opposed to debtors, and the developed East holding the whip over the undeveloped West and South...The fundamental purposes of the National Banking Acts were to provide an adequate bank-note currency as well as a wartime market for government bonds...providing a bond-secured national bank currency...As the price for his support of the original act of 1863, John Sherman had insisted that the total volume of the national currency be limited to $300,000,000"

He adds (p. 28):

"The excesses of state banking as the existed prior to the Civil War have been widely condemned. Bray Hammond has performed a great service in demonstrating that the craze for easy money was no agrarian aberration but rather one peculiar to the enterprisers. Insofar as outright frauds were sometimes perpetrated by issuers of bank notes, these practices deserve the criticism that they have received. But what about the loans made by good and not-so-good banks to the 'enterprisers' who wanted to improve lands, develop mines, open factories, etc.?...To the extent that capital was purchased through the issue of depreciating bank notes which passed through the ands of inhabitants of the less developed regions, such depreciation was in essence a form of taxation...To the extent that such notes could be made to circulate the urban East, they constituted a kind of capital levy by the less developed upon the more developed regions...It is quite understandable that politicians of the Whig persuasion, such as Daniel Webster and William Seward, were concerned about the infiltration of doubtful bank notes and forcefully plead the case of the creditor section for what Seward called a 'sound, equal, uniform' currency."

"...The general thesis here is that the laissez faire conditions of enterprise in pre-Civil War America--in which the entrepreneur thrived and the position of the creditor was none too secure--gave way in the post-Civil War period to a new situation in which the creditor interest was dominant, large-scale instead of small-scale enterprise was favored and the East held the whip hand over the less developed regions of the country...The Civil War years...were in fact the culmination of the great age of free and unrestricted enterprise. On the great crest of inflation thousands of businesses saw the light of day and thrived. The entrepreneur flourished, but meanwhile the creditor interest languished as debts were repaid in money of constantly diminishing value. Between 1860 and 1864 the capital invested in New York banks actually fell, a good indication that banking was not very profitable under inflationary conditions. But meanwhile, the seeds of decay had been planted. The National Baning System, with its yet unsuspected exploitative potentialities, had been established..."

After the Civil War, "the stock of money was rapidly contracted. Prices fell steadily. Loans and discounts, the life blood of small enterprise, rose only $9,000,000 between 1860 and 1867 despite the great increase in population and production, while the banks' holdings of corporate and government securities rose from $70,000,000 to $536,000,000. What this meant was that access to the money market was becoming ever easier for the proprietors of the great corporations with their well-known issues, and increasingly difficult for the small enterprisers and farmers of the hinterland...New York became the great magnet for money. Even the reserves of the country banks found their way to Wall Street where they helped meet the insatiable demands of the call-money market. In place of the illiquid mortgage loans made in the hinterland before the Civil War, there was now the illiquidity of stock-secured loans in New York, further reducing the ability of country banks to serve their customers. Is it any wonder that the true advocates of free non-corporate enterprise such as Henry Carey screamed so unrestrainedly at what they called the 'money monopolies' of New York?..It was in this type of environment that the Vanderbilts, Carnegies, Rockefellers and Armours consolidated their gains, swallowing up their smaller competitors in time of crisis, moving ever forward to the nirvana of rationalization and oligopoly. The ground rules had been changed by many factors, but in this process banking and government finance played significant roles."

Fritz Redlich adds (p. 32):

"the problem was to create a market for government loans...Its solution led concomitantly to the creation of the National Banking System, which in the end revolutionized American commercial banking, although it was not devised to that end." The National Banking Act established "free banking" under general law rather than specific charter. "Free banking acts already in effect across the country had introduced into American practice the government-bond-backed bank note...this brought into existence, on a national scale, a market for government bonds."

There were sectional differences in inflation so that in the east there were frequent complaints of too much inflation in the post Civil War era, and in the south and west there were complaints of too little.

I am somewhat skeptical of Redlich's argument that small businessmen depended on bank loans because in our era banks have not been sources of capital to start ups.

In Louis Hartz's essay "Government Business Relations" Hartz notes (p. 89):

"It is a matter of War producing an efflorescence of egalitarian thought in Whiggery, and now a strong corporate Whiggery was able to dip its ambitions...Freedom from state control went hand in hand with the religion of opportunity, which in the broadest sense democratized economic power and made it acceptable to the egalitarian ethos of a liberal society. Technically, of course, this correlation was not essential. One could have the Horatio Alger dream functioning in the context of the old Whig paternalism: Ragged Dick could dream of making his million in a business fostered by the federal government itself, and we cannot excuse Hamilton from his failure to grasp the Alger secret by referring to the state of the American economy. There was sheer blindness, sheer failure to understand America, in the Hamiltonian attitude. At the same time the capacity of Whiggery to dispense with the state, or at least with a portion of the state, did make certain things possible...."

Daniel J. Elazar discusses the implications of land grant programs to aid in the construction of the railroads; the expansion of federal technical assistance to the states and the emergence of large-scale federal domestic programs. "The largest land-grant program of the period was deigned to aid in the construction of railroads under state supervision and, after 1862, under direct federal supervision in the western territories. Federal technical assistance to the states and localities was oriented toward improving state and local programs that were, themselves, designed to encourage economic growth.l In the decades immediately preceding the War, this technical assistance was largely confined to such tasks as helping city officials plan harbor-improvement projects...After the war, technical assistance expanded into other fields, particularly those relating to agricultural improvements and the geological surveys designed to uncover new mineral wealth...All this government expansion was accomplished in the generation between 1847 and 1877...

"...With all the expansion of government programs between 1847 and 1877, the character of government efforts remained substantially the same-supportive of private enterprise and industrialization, through government subsidization for developmental purposes...Beginning with the mid 1870's, however, government began to assume an active regulatory role as well...

"The expansion of federal domestic programs, which began around the middle of the century, reached such a point during the War years that one could easily call Lincoln's presidency the "New Deal" of the 1860's (a term used, curiously enough, by a Raleigh, North Carolina editor in march 1865 as an argument to encourage his state to voluntarily rejoin the Union. In the space of four years, the President and Congress created a bundle of programs whose central effect was to reassert an American conception of the role of government in the economy in a manner consonant with the new industrialization.

"Among the measures enacted between 1861 and 1865were (1) the National Banking Act of 18643 (with amending acts in 1864, 1865 and 1866), which created a national banking system and a national currency; (2) the Morrill Land-Grant College Act of 1862, which by providing for the establishment of college specifically devoted to education n 'agriculture and the mechanic arts' was ultimately to play a major role in developing the pool of skilled personnel needed to man the institutions of the new economy; (3) the great transcontinental railroad land grants of 1862, 1863 and 1864, which were to bind the continent together and make possible the postwar conquest of the last of the land frontier and (4) the Homestead Act of 1862, which by providing virtually free land in the greater West for all takers, shaped the character of the last great agricultural frontier. An income tax was levied for the first time in 1861 and national paper currency was first issued that same year, setting the stage for reformer-conservative conflicts over national tax and fiscal policies for the next generation. In 1864 the Contract Labor Act was passed, providing for licensed recruitment of European laborers to man the nation's new industrial plant. That same year congress granted California the Yosemite lands for the express purpose of creating a public nature preserve..A number of new federal bureaus were created, among them the Department of Agriculture (1862), the Bureau of Printing and Engraving (1862), the Office of Comptroller of the Currency (1863) and the Office of Immigration (1864). In 1863 Congress created the National Academy of Sciences, initially to screen technological innovations to ascertain their usefulness for the war effort...The Morrill Tariff of 1861 restored the protectionist approach to tariff policy and inaugurated two generations of federal subsidy for domestic manufacturing via the high tariff...Though the bulk of the new federal programs were inaugurated during the War years, the last actions of this "New Deal" came in the postwar period. In 1866 the Mining Claims Act was passed, opening the public domain to mining claims."

State government also expanded in the Civil War era. "Construction of the transcontinental railroads also began in earnest after the War in conjunction with redoubled state efforts to build connecting lines both in the Mississippi Valley and on the West Coast, utilizing other Federal land grants couple with local bond issues to accomplish the task. The federal-state partnership in railroad construction had developed in the 1850's in Michigan, Illinois, Alabama and points west, but it was not until the postwar period that this partnership was to bear its greatest fruit. Though new land grants were made by Congress after 1871, the implementation of the program inaugurated by the grants made between 1850 and that year occupied the next thirty years

"(D)uring this period...several of the larger northeastern states began to experiment in new areas of government economic regulation. Again let me cite some random examples. In 1867 New York enacted the first of several tenement house laws designed to ameliorate the terrible living conditions in parts of New York City. These laws, ineffectual as they turned out to be, represented the first effort in the nation to come to grips with the problem of urban housing. That city, two years earlier, had established the nation's first professional fire department...

"In 1869 Massachusetts created the nation's first state board of health and first bureau of labor. During the 1860s the Bay State was in the vanguard of regulation pioneers, experimenting with government intervention in the fields of insurance, banking and railroads. These three fields also attracted the attention of states in other parts of the country and were the first to be regulated on anything like a nationwide basis...

"The increase in the over-all scope of local activity is nowhere better illustrated than in the great rise in municipal debt between 1866 and 1876...In 1866 the total debt of the nation's 130 largest cities was $221,300,000. Ten years later it was $644,400,000...

"It is likely that the Civil War was most helpful in adjusting American public opinion to government expenditure of large sums of money. Teaching the American people that government could legitimately spend on a grand scale..was extremely important in the short run and in the long run...the changes that took place in the Civil War generation did not so much lead to an increase in the role of the federal government as they did to an increase in the role of all levels of government in the nation's economy..."

Louis Hartz, however, took issue with Elazar's argument (p. 109): "Are you to extract form this evidence the conclusion that in fact the concept and the experience of state action in the economic sphere expanded in and through and after the Civil War as compared to the pre-Civil War period? I would reject that proposition even in the face of your evidence...The period before the Civil War, the period of the 1820s and the 1830s, took it as an accepted fact that most states could regulate working conditions on a broad scale. The Colonial period, under mercantilist regulations, took it for granted that an invasion of the sphere of economic enterprise by the state was legitimate, and indeed the state did implement such an invasion. Now after the Civil War, as a result of certain judicial decisions, this was held to be illegitimate, and much regulation which had been accepted before was dodged...

Elazar responds to Hartz: "I was confirming your point that there was almost a derogration of government activity at this time, although in fact government was actually increasing. However, it was supportive activity rather than regulatory activity...It was not until after the Civil War generation--after Justice Waite, for example left the Court in the late 1880s--that the notions of the Fourteenth Amendment emobided in the Slaughterhouse Cases were adjusted by the new majority on the Court so as to write the new corporation-endorsed doctrine of laissez faire nto consitutional law. Up until this period, of course, it was still assumed that regulation was permissible...

The final article in this fine book that I will discuss is Alfrd D. Chandler's "Organziation of Manufacturing and Transportation". Chandler argues that "the simulataneous adoption of three methods of communication in the dozen or so years before the Civil War did make an enormous difference and so become an initiator of important institutional changes. I would like to substantiate this thesis--that is, of the signficance of the transportation revolution in the dozen or so years before the Civil War--by focusing on the coming ot two important institutional forms: one, the use of the factory for the mass production of durable goods, and the other, the use of the corporation as an administrative device for the managing and controlling of large amounts of men, money and materials."

The transportation revolution involved the widespread adoption of the railroad, telegraph and steamship, which expanded the market between 1847 and 1854. "Beside increasing the volume and regularity of transportation, adding to the national income and beocming a brand new market for American industry, they created new patterns of economic an dbusiness action and new institutional forms...The massive financial requirements of the railroads caused the centralizing and institutionalizing of the nation's investment market in New York City...sudden demand for a large number of new railroads in the 1850s, rather than the financial needs of the Civil War created modern Wall Street, with its national stock exchange, its international investment-banking houses, its brokers' offices and its speculative techniques."

Chandler's arguments are excellent and parallel those he makes elsewhere, as in his book Visible Hand.

Overall, the conference concluded that the Civil War itself did not change the economy much. Rather, it was the population, technological, banking, monetary and other shifts that were occurring independently of the War that made the nineteenth century one of rapid change.