The United States, on the verge of civil war, contained two distinct economies. While the majority of Americans in every part of the country lived and worked on farms, their economic lives differed fundamentally from each other. In the South, life revolved around unfree labor and staple crops. The North contained a greater diversity of industry, finance, and commerce resting on the “free labor” of wage earners and small proprietors. The war years would alter this picture, leaving the South in shambles and clearing the way for the continued growth of the northern economy. In 1859 and 1860, southern planters were flush with prosperity after producing record cotton crops–America’s most valuable export at the time. Southern prosperity relied on over 4 million African American slaves to grow cotton, along with a number of other staple crops across the region. Cotton fed the textile mills of America and Europe and brought great wealth to the region. On the eve of war, the American South enjoyed more per capita wealth than any other slave economy in the New Word. To their masters, slaves constituted their most valuable assets, worth roughly three billon dollars. Yet this wealth obscured the gains in infrastructure, industrial production, and financial markets occurring north of the Mason-Dixon line, a fact that the war would unmask for all to see.
In contrast to the slave South, northerners praised their region as a land of free labor, populated by farmers, merchants, and wage-laborers. It was also home to a robust market economy. By 1860, northerners could buy clothing made in a New-England factory, or light their homes with kerosene oil from Pennsylvania. The Midwest produced seas of grain that fed the country, with enough left over for export to Europe. Farther west, mining and agriculture were the mainstays of life. Along with the textile mills, shoe factories and iron foundries, firms like the McCormick Harvesting Machine Company, or the Colt Company displayed the technical advances of northern manufacturers. These goods crisscrossed the country on the North’s growing railroad network. Underlying production was an extensive network of banks and financial markets that helped aggregate capital that could be reinvested into further growth.
The Civil War, like all wars, interrupted the rhythms of commercial life by destroying lives and property. This was especially true in the Confederacy. From 1861 onwards, the Confederate government struggled to find the guns, food, and supplies needed to field an army. Southerners did make astonishing gains in industrial production during this time, but it was never enough. The Union’s blockade of the Atlantic prevented the Confederacy from financing the war with cotton sales to Europe. To pay their troops and keep the economy alive, the Confederate Congress turned to printing paper money–which quickly sank in value and lead to rapid inflation. In many cases, Confederate officials dispensed with taxes paid in cash and simply impressed the food and materials needed from their citizens. Perhaps most striking of all, in the vast agricultural wealth of the South, many southerners struggled to find enough to eat.
The war also pushed the US government to take unprecedented steps. Congress raised tariffs, and passed the first national income tax in 1862. After the suspension of specie payments in late 1861, Congress created the US’s first fiat currency called “greenbacks.” At first, the expansion of the currency and the rapid rise in government spending translated into an uptick in business in 1862-1863. As the war dragged on, inflation also hit the North. Workers demanded higher wages to pay rents and buy necessities, while the business community groaned under their growing tax burden. The United States, however, never embarked on a policy of impressment for food and supplies. The factories and farms of the North successfully supplied Union troops, while the federal government, with some adjustments, found the means to pay for war. None of this is to suggest that the North’s superior ability to supply its war machine made the outcome of the war inevitable. Any account of how the war progressed must take account of the tangled web of politics, battles, and economics that occurred between 1861 and 1865.The aftermath of the war left portions of the Confederacy in ruins, and with little or no money to rebuild. State governments were mired in debt, and white planters, who had most of their capital tied up in slaves, lost most of their wealth. Cotton remained the most significant crop, but the war changed how it was grown and sold. Planters broke up large farms into smaller plots tended to by single families in exchange for a portion of the crop, called sharecropping. Once cotton production resumed, Americans found that their cotton now competed with new cotton plantations around the world.
Emancipation was the single most important economic, social and political outcome of the war. Freedom empowered African Americans in the South to rebuild families, make contracts, hold property and move freely for the first time. During Reconstruction, Republican policy in the South attempted to transform the region into a free-labor economy like the North. Yet the transition from slave labor to free labor was never so clear. Well into the 20th century, white southerners used a combination of legal force and extra-legal violence to keep a degree of control of over African American labor. Peonage and vagrancy laws attempted to keep African Americans bound to their white employers. In the later nineteenth-century, poor whites would form mobs and go “white-capping” to scare away blacks from jobs. Lacking the means to buy their own farms, black famers often turned to sharecropping. Sharecropping often led to cycles of debt that kept families bound to the land. For the South as a whole, the war and Reconstruction marked the start of a period of deep poverty that would last until at least the New Deal of the 1930s.Victory did not translate into a quick economic boom for the United States. The North would not regain its prewar pace of industrial and commodity output until the 1870s. The war did prove beneficial to northern farmers, who responded to wartime labor shortages with greater use of mechanical reapers, which boosted yields. The most significant change for the North was the increased presence of the federal government in the economy. Republican Congresses during the Civil War passed a series of laws that restructured the relationship between the government and the market and set the stage for the Gilded Age. New tariff laws sheltered northern industry from European competition. The Morrill Land Grant helped create colleges such as the University of California, Illinois, and Wisconsin. With the creation of the National Banking System and the greenbacks, Congress replaced hundreds of state bank notes with a system of federal currency that accelerated trade and exchange between regions of the country. This was not to say that Republican policy worked perfectly. The Homestead Act, meant to open the West to small farmers was often frustrated by the actions of Railroad corporations and speculators. The Transcontinental Railroad, also created during the war, failed to produce any economic gains until decades after its creation. The war years also forged a close relationship between government and the business elite, a relationship that sometimes resulted in corruption and catastrophe as it did when markets crashed on Black Friday September 24, 1869. This new relationship created a political backlash, especially in the West and South against Washington’s perceived eastern and industrial bias. In other words, the end of the slavery issue during the Civil War gave way to long political conflict over the direction of American economic development that would mark politics for the rest of the century.