Civil War - Impact on Northern vs. Southern Economy
By: Zach Johnson

In the late antebellum years, there was a marked difference in the economies of the North and South. The North had a booming industrial sector due to the steady availability of immigrant labor as well as a strong network of family farms that relied on one another. The South was very differently culturally from the North and had an economy most closely resembling Europe as a place to both sell cotton and buy manufactures (Atack 355).

During this period in time, the North was economically dependent on the South, despite their varied cultures. This is due to the large output of cotton, which meant a lower price of raw material for the northern textile industry and better trade opportunities to sellers of manufactures. Future increases in value were dependent upon both the investment in slave property and price of cotton. Understandably, the threat of abolition was of considerable concern for slave-owners in the South and led to their eventual risk to secede (Atack 355-357).

The South suffered much of the capital losses from the Civil War, where the majority of the battles took place. A Senate report estimated the loss in property at $1.1 billion, which takes into consideration the decrease in property value and lowered expectations of future earnings. The damage to property was exacerbated by the policy of the Union army to deliberately destroy Confederate land and in turn, their economic ability to sustain the military (Atack 361).

Aside from the losses in physical capital, there were over a million people dead or wounded in course of the war. While morbid, we recognize that a life is valued at the discounted present value of expected future income over one’s anticipated working life. The impact of a disability or handicap is measured by reducing the earnings and life expectancy. Goldin and Lewis estimated the losses in human capital at nearly $2.3 million with a loss of $1.3 million by the North (Atack 362).

While it’s clear that the war caused significant economic damage to the South, it did not severely cripple the North. In fact, the North actually benefited. The personal income of southerners slipped from 26 percent on the eve of the war to 15 percent 20 years later. During the same period, the North and Midwest experienced a growth from 70 to 78 percent. In addition, there is some evidence to support a postwar acceleration. The northern per capita income had increased at a rate of 1.3 percent per year between 1840 and 1860. This increased to 1.75 percent per year between 1860 and 1879 and again to 1.9 percent between 1880 and 1900. Much of this income was dedicated to land improvements, factories, and buildings (Atack 364).

The war resulted in a withdrawal of nearly one-fifth of the labor force, which disrupted the normal supply channels and weakened foreign exchange earnings. This placed a great deal of stress on the thriving economy. Despite this, the wool textile industry doubled their output during the war. The labor productivity in Massachusetts rose by 12 percent, however failed to offset the 30 percent decline in cotton textile production (Atack 354-365).

Profits surged as wages lagged behind the price increases allowing for additional investments in manufactures. The cotton exports were stifled by the blockade, which forced the New England textile mills to import foreign cotton. The result was a significant balance of Union payment deficits and the reluctance of foreign interest to finance the deficit (Atack 365-366).

The war was financed primarily through the sale of interest bearing bonds with the balance from the collection of taxes. As a result, the national debt rose from less than $65 million ($2.06 per person) in 1860 to nearly $2.7 billion ($75.01 per person) by 1865. While the South experienced the brunt of the economic damage, the North’s industrialization progress was set back thereby slowing the rate of growth. The liberalized land policy and high crop prices allowed the North to dramatically increase their output in agricultural production. The values of agricultural and mining output (excluding the South) grew by more than 10 percent from $800 million each in 1860 to $1.25 million for agriculture and $1.09 million for mining by 1870. The South’s agricultural production fell by more than 25 percent from $639 million in 1860 to $477 million in 1870(Atack 368, 373).

The postwar South was faced with significant military trauma and a complete restructuring of economic relations, while the North only experienced a short pause in its long-term growth. Agriculture production in the South shifted from labor-intensive and land-extensive to land-intensive and labor-extensive. The principal asset that the South would have for many generations would be immovable land as a result of their reluctance to develop a more sound infrastructure beyond the minimum required to export its cotton. There was also little motivation to maintain or improve their land, as more productive land was available to the south and west. This changed seemingly overnight with a more direct focus on local development of small towns, roads, and railroads. In addition, there was an increased focus on farm improvement and soil conservation (Atack 376).

The South’s per capita commodity output in 1860 was slightly higher than that of the North due to the cotton agriculture. As the Civil War progressed, the South’s output slipped by 39 percent. Output in the manufacturing sector, while small, began producing about 5 percent more in 1870 than they had in 1860. Between 1866 and 1895, the demand slowed to 1.3 percent per year. The price of cotton remained high until the 1870s when it began to return to the prewar levels (Atack 376-378, 380).

In the post-emancipation period, freed slaves had few marketable resources to offer beyond their labor. Despite this, the income of black Americans grew at a quicker rate than that of whites with an average of almost 2.7 percent a year. In addition, they also accumulated wealth, which included real estate, more quickly in the late nineteenth and early twentieth centuries (Atack 388, 391-392).

Merchants in local markets began to establish a monopoly in the sale of food, clothing, and agricultural inputs to farmers who leveraged their crops as security. They were able to do this because of their proximity to the farms as well as the high market entry and contract enforcement costs. It also meant that the merchants had to know their credit customers well. There was opportunity for rapid entry into the business and few barriers other than the number of potential customers. The South went from a net exporter of food to a net importer as the output per person decreased. Following the war, economic necessity dictated the crop choice (Atack 392-394).

Due to stringent white political control there was limited access to education and restrictive voting laws, which handicapped a large majority of the population. The true failure of the southern economic system was its lack of flexibility. Production of staple goods dictated the use of land and labor despite the need for diversification to ensure per capita economic growth (Atack 399-400).

Prior to the Civil War, the production output of agriculture in the North was valued at $853 million compared to $821 million for manufacturing and mining. A shift occurred by 1880 with $1.861 million accounting for agricultural output and $2.015 million in manufacturing and mining. The agricultural output increased at an annual rate of 2.5 percent between 1869 and 1909 with the expansion of farmland and gross farm input. Of this figure, corn production grew by 3.1 percent per year and wheat production by 2.2 percent per year. This growth was more extensive than intensive. The improvements in transportation and federal land policy opened up a greater segment of the continent to farming and settlement. However, much of this new land was ecologically fragile and ill suited for farming (Atack 402-403).

The demand for land was inelastic and would-be farmers were required to spend more of their income on land given the higher prices. In many cases they were forced to either farm smaller areas or become tenants if they could not afford the purchase price or were unable to obtain credit. Farmers frequently became overwhelmed despite the decline of average mortgage debt relative to equity over the years that followed (Atack 407-408).

While on the surface the Civil War appeared to have disrupted the market integration, there is some evidence to support a decrease in price differentials and synchronization of the fluctuations between markets. The gradual increase between producing and consuming regions as a result of higher transportation costs would typically impact the price to consumers, however the gap actually narrowed and was nearly eliminated by 1890. Much of this is explained by the reduction in shipping and handling charges, which arose as a result of improvements and increased efficiencies in transportation including the spread of rail into areas formerly served by wagon (Atack 413-416).

Agricultural prices in the late nineteenth century fell as a result of shifts in a highly elastic supply curve and a price inelastic demand, which changed only modestly due to population growth and higher incomes. Supply increases remained marginally constant as the farmers planted more wheat on existing land or expanded onto new land. The price margin between the farm and market narrowed with most of the savings going to consumers in terms of lower prices. There was an increasing price-elastic foreign demand for American wheat, which helped to fuel the economic growth and development in the Midwest. In the decade following the Civil War, shifts in demand played a significant role in determining the price of wheat, while shifts in supply had a greater impact later on (Atack 416-419).

In the postwar period, the combination of improvements in industrial productivity and declining transportation costs led to a period of reduced wholesale and consumer prices. For example, while a bushel of corn in the early 1870s was valued around 70 cents, it was down to only 30 to 40 cents in the late 1880’s. During the same period wheat prices went from $1 to 70 cents and the price of cotton dropped 20 to 30 percent. The railroad freight rates declined at the same rate as farm prices until 1890 when they fell more rapidly (Atack 420, 422).

Source:
Atack, Jeremy, & Passell, Peter. (1994). A New Economic View of American History.
New York: W.W. Norton & Company, Inc.