The Politics and Economics of Reconstruction

Editor’s note: We are pleased to again welcome Philip Leigh, who brings us a long-form guest post on how the Reconstruction shaped the southern states.

Over the past fifty years, historians have reinterpreted Civil War Reconstruction. Shortly before the Centennial it was generally agreed that the chief aim of the Republican-dominated Congress was to ensure lasting Party control of the federal government by creating a reliable voting bloc in the South for which improved racial status among blacks was a paired, but secondary, objective. However, by the Sesquicentennial it had become the accepted view that Republicans were primarily motivated by an enlightened drive for racial equality uncorrupted by anything more than minor self interest. Due to the presently dominant race-centric focus on the era, analysis of the economic aspects of Reconstruction merit dedicated attention, as does a reexamination of Republican motives. Such is the purpose of this paper.¹

Contrary to popular belief Southern poverty has been a longer-lasting Civil War legacy than has Jim Crow or segregation. Prior to the war the South had a bimodal wealth distribution with concentrations at the poles. The classic planter with fifty or more slaves had a prosperous estate much like the fictional Tara in Gone With the Wind. However, there were only about 8,000 such families, which was less than one percent of the total. Partly because 1860 slave property values represented 48% of their wealth, seven of the ten states with the highest per capita wealth in the country soon joined the Confederacy.²

However, since nearly 70% of Southern families did not own slaves, the 1860 per capita income of the region was only slightly ahead of the north central states and well behind the average northeastern state, as indicated in the table below. Nearly a century after the war in 1960, eight of the ten states with the lowest per capita income were former Confederate states. Similarly, 150 years after the war started only one Southern state, Virginia, ranked within the top ten in per capita adjusted gross income as reported to the Internal Revenue Service whereas five of the bottom ten in 2011 were Confederate states. The classic example is Mississippi, which ranked number one in 1860 per capita wealth, but was dead last at fiftieth in 2011 per capita income. The depths of post Civil War Southern poverty and its duration were far greater, longer, and more multiracial than is commonly realized. It took eighty five years for the South’s per capita income to regain its below average 1860 percentile ranking.³

A month after Appomattox, US Lieutenant General Ulysses Grant wrote his wife, “The suffering that must exist in the South the next year…will be beyond conception. People who talk of further retaliation and punishment…do not conceive of the suffering endured already, or they are heartless.” Another Northern observer wrote, “Never was there greater nakedness and destitution in a civilized community.” The mayor of Columbia, South Carolina said that hundreds of people lived on loose grain picked up where army horses were fed. One federal official wrote, “It is common…[to see] women and children, most of whom were formerly in good circumstances, begging for bread from door to door…They must have immediate help or perish…Some are without homes of any description.”⁴

The war had destroyed two-thirds of Southern railroads and two-thirds of the region’s livestock was gone. Steamboats had nearly disappeared from the rivers. One hundred million dollars in insurance investments and twice that amount in bank assets had vanished. Excluding the total loss in the value of slaves resulting from emancipation, assessed property values at the end of the war were more than 40% lower than in 1860. Approximately a 300,000 Southern white males in the prime of adulthood died during the war and perhaps another 200,000 were incapacitated, which translated to about 18% of the region’s approximate 2.75 million white males in all age groups in 1860 and about 36% of those over age nineteen.⁵

During the war, Southern farms drifted back to nature. Since their protective levees had been destroyed, thousands of square miles of Mississippi delta cotton lands were overrun with briers and cane thickets. Returning Confederate soldiers often found their families existing in conditions of near, if not actual, starvation. The governor of the Union-loyal Arkansas state government, established in 1864 under Lincoln’s 1863 amnesty and reconstruction proclamation, reported many people living in the woods and begging for food. Within thirty miles of Atlanta an estimated 35,000 others were destitute and near starvation. In December 1865 an estimated half-million whites in three Gulf states alone were without life’s necessities, and some had starved to death.⁶

In her Memorials of a Southern Planter Susan Smedes wrote that when her 70-year-old father returned from the Confederate army to their ruined Mississippi plantation he promptly planted a vegetable garden to feed his family and sell his surplus in New Orleans. Thousands more like him rebuilt their burned homes and wrecked farms. Historian David L. Cohn adds:

When there was a shortage of work stock, the few surviving animals were passed from neighbor to neighbor. [When] there was no work stock [the men] hitched themselves to the plow. By ingenuity, backbreaking toil, and cruel self-denial thousands of Southern farmers survived reconstruction…They received no aid from any source, nor any sympathy outside the region.⁷

By 1870, Southern bank capital totaled only $17 million, compared to $61 million in 1860. Over the same period, the region’s currency in circulation dropped from $51 million to $15 million. In 1880, fifteen years after the war, the value of Southern farms was only two-thirds of the antebellum figure. Not until 1879 did cotton production return to pre-war levels despite a 47% population increase. So great was the devastation and anemic the rebound that by 1900 the South had barely recovered to the level of economic activity prior to the Civil War.⁸

Although Southern poverty and cotton culture is commonly associated with blacks, by 1940 two-thirds of Southern tenant farmers were whites. Shortly after the Great Depression began, the president of General Motors (Alfred P. Sloan) voluntarily cut his annual salary from $500,000 to $340,000. His $160,000 cut was more than all the income taxes paid by the two million residents of Mississippi that year.⁹

Republican politics and federal economic policies after the Civil War advanced prosperity across the North while treating the South as an exploited internal colony. Among such factors were property confiscation, Republican Party self-interest, discriminatory federal budgets, protective tariffs, unfair banking regulations, and lax monopoly regulation.¹⁰

Cotton inventories were among the most valuable property confiscated. When Lee surrendered to Grant at Appomattox more than two million fungible cotton bales were scattered across the South. Given an average price of 43 cents per pound, each 400-pound bale was worth about $172. That put the value of the entire inventory at nearly $345 million, which was gigantic compared to the tiny amount of US currency then circulating in the South noted earlier. The cotton might have been an invaluable resource to prime the pump of Southern recovery but instead it was plundered.¹¹

Union soldiers, US treasury officials, and Northern businessmen stole most of it under the pretext of legitimate confiscation – such as the seizure of cotton owned by the Confederate government – or often no pretext at all. A dismayed US Treasury Secretary Hugh McCulloch remarked, “I am sure that I sent some honest cotton agents South, but it sometimes seems very doubtful that any of them remained honest very long.”¹²

But cotton was not all that was looted. Anything that could be sold for cash was targeted. Secretary McCulloch reported to Congress that there was “general plunder [involving] every species of intrigue…speculation and theft.” Whitelaw Reid, then traveling through the South for the New York Tribune and who later served under Presidents Benjamin Harrison and Theodore Roosevelt as ambassador to Britain and France, described observing “the general practice of regarding everything left in the country as the legitimate prize of the first officer who discovers it.”¹³

Southern lands were confiscated for non-payment of federal taxes. Soon after the war began the federal government imposed a “Direct Tax” tax on the private properties in each state with the object of raising $20 million to fight the war. Residents of Confederate states naturally ignored the tax but after territories were captured treasury agents selectively enforced it by seizing properties and selling them. Sometimes the agents bought the best properties themselves for the price of the unpaid taxes and quickly resold them at much higher market prices. After 1866 the federal government ceased trying to collect the tax and in 1872 permitted the previous owners to reclaim such properties still held by the government, but those that had been sold to private buyers remained the property of the new owners.¹⁴

Later, after Republicans set-up puppet regimes in the Southern state governments, many landowners lost their properties due to an inability to pay large state (as opposed to federal) property taxes. The war-devastated South endured some the highest property taxes in relation to wealth in the history of the United States. At one point 15% of Mississippi’s taxable land was up for sale due to tax defaults.¹⁵ Whites correctly suspected that a major objective of the elevated taxes was to force landowners to forfeit their properties through bankruptcy. One Republican state senator in South Carolina named Beverly Nash, who happened to be African-American and was an admitted bribe taker, explained:

[White Democrats] complain of taxes being too high. I tell you they are not high enough. I want them taxed until they put these lands back where they belong, into the hands of those who worked for them. You [ex-slaves] worked for them, you labored for them, and were sold to pay for them, and you ought to have them.¹⁶

Any useful analysis of Civil War Reconstruction should examine Republican Party motivations. When the Civil War ended, the Party was barely ten years old. It could be eclipsed, and possibly strangled in its cradle, if the re-admittance of Southern states into the Union failed to be managed in a manner that would prevent Southerners from allying with Northern Democrats to regain control of the federal government. With other things the same, the abolition of slavery would increase Southern congressional representation by fifteen members over the antebellum numbers due to the obsolescence of the constitutional provision that restricted the counting of slaves to three-fifths of their number for purposes of a state’s US congressional representation and electoral votes.¹⁷

The table below leaves small doubt concerning the anxiety Republicans must have felt about promptly re-admitting Southern states into the Union without controlling the manner of re-admission. If all former Confederate states were admitted to the 39^th Congress in December 1865 and each added member was a Democrat, the Republican majority in the Senate would drop from 40-to-10 to 40-to-32. Even more significantly, the Democrats would seize a 143-to-111 majority in the House of Representatives versus an extant Republican majority of 111-to-72.

It was obvious that the infant GOP’s solution would require that most re-admitted Southern senators and congressmen be Republicans. That meant that vassal governments needed to be established in the Southern states. However, since the Constitution required that states elect their own representatives, Republicans needed a way to limit the number of Southern Democratic voters while simultaneously increasing the number of Republican ones. Since there were few white Republicans in the region the Party needed to create a new constituency.

Consequently, Republicans settled on two objectives. First was mandatory African-American suffrage in all former Confederate states. Republican politicians expected that such a mostly illiterate and inexperienced electorate could be manipulated to consistently support Republican interests out of gratitude for emancipation and black suffrage. Second was to disenfranchise the Southern white classes most likely to oppose Republican policies.¹⁸

Unfortunately for the Republicans, President Andrew Johnson’s Reconstruction plan included little that would perpetuate their Party’s control. Ultimately Johnson’s plan would be opposed by two schemes set forth by Congress: One by the a Radical leader in the House of Representatives, Thaddeus Stevens, and the other by Massachusetts Senator Charles Sumner. While both Stevens and Sumner ostensibly advocated black suffrage in the South on the simple principle of racial equality, some of their comments suggest political and economic motives as well. Stevens wrote that the former Confederates states “ought never be recognized…until the Constitution… [is]…amended…to secure the ascendency of the [Republican] party of the union.” Similarly Charles Sumner wrote, “Without [black suffrage in the South], Southerners will certainly unite…with Democrats of the North, and the long train of evils sure to follow their rule is fearful to contemplate…[including]…a great reduction of the tariff.”¹⁹

In May 1865 President Johnson submitted a Reconstruction plan for comment to his cabinet. All cabinet members were originally appointed by the recently martyred Abraham Lincoln and all approved of Johnson’s plan. It was modeled after Lincoln’s December 8, 1863 proclamation noted earlier. Johnson demanded that the previous Rebel states meet three requirements: (1) ratify the Thirteenth Amendment abolishing slavery, (2) repudiate Confederate debts, and (3) renounce the secession ordinances. Most residents of such states would be granted amnesty by swearing an oath to “henceforth” support the Constitution and laws of the United States, although selected classes such as wealthy landowners were required to petition directly to the president for a pardon.²⁰

Johnson’s terms wiped out $3 billion worth of slave property, which was the single biggest investment in the United States prior to the war, exceeding the value of all the nation’s railroads, factories, and banks combined. They rendered valueless all Confederate bonds and currency. Such penalties were substantial, particularly when layered on top of the devastation suffered by the South during the war. Within a matter of months all ex-Rebel states, except Texas, completed the process and had elected representatives for the first postwar congressional session to begin in December 1865. Since many of those elected were former Confederate leaders, the Republican-controlled Congress readily perceived the threat to their continued control and refused to seat the Southern representatives.²¹

Since the US Constitution stipulated that voter requirements were a matter of states’ rights Republicans concluded that Southern African-American suffrage could best be accomplished by adopting a new constitutional amendment. But there were two problems with the plan. First, was the requirement that three-fourths of the states ratify the amendment, which implied a legal contradiction. While Republicans would need at least some of the Southern states to ratify it, the March 1867 First Reconstruction Act specified that nearly all Southern states did not have lawful governments and were therefore not members of the Union. Second, many Northern states and Republicans objected to uniform black suffrage. Instead, they wanted mandatory adoption in the Southern states while permitting the issue to remain a states’ right elsewhere.²²

When the Civil War began, African-Americans were not permitted to vote in sixteen of the twenty-two Union-loyal states. In most of the remaining six they could only vote by meeting property and education tests that were more stringent than those applied to whites. Upon the war’s conclusion, only five New England states with tiny black populations permitted blacks to vote. Ohio, Pennsylvania, and Illinois did not. Even when Ulysses Grant was elected to succeed President Johnson in 1868, black suffrage was placed on the ballot in three Northern states and rejected by them all.²³

Eventually, Republicans settled on a strategy. The initial step materialized as the Fourteenth Amendment. First, states refusing suffrage to male citizens of any race would have their congressional representation cut by subtracting the number of members of the excluded race from the applicable state’s population for purposes of calculating its House representation and electoral votes. Thus, due to their tiny black populations, the provision was inconsequential in Northern states. In contrast, Southern states might lose considerable representation. Paragon examples were Mississippi and South Carolina, where blacks composed over 50 percent of the population, and Louisiana, where they were nearly half. Second, despite the fact that Congress considered their governments unlawful, all Southern states would be required to ratify the amendment before they could be readmitted into the Union.²⁴

New England states were especially concerned that reductions in representation be limited only to those states that regulated voters’ rights on the basis of race, as opposed to other factors. New Englanders wanted to continue curbing the voting rights of alien immigrants, particularly the Irish, who were settling in their region in large numbers. Even if such immigrants became citizens, Northern states were free to restrict the newcomers’ right to vote by imposing literacy and other tests not applied to others. In 1855 Connecticut was the first state to impose such tests as a means of minimizing the number of Irish Catholic voters. California was even more apprehensive. The Fourteenth Amendment’s penalties for racial discrimination in voter registration put it in direct opposition to the state’s restrictive policies toward Chinese immigrants. Consequently, not until 1959 did California ratify the Fourteenth Amendment.²⁵

Unsurprisingly, the Southern states initially declined to ratify the amendment. Perhaps the Florida legislature spoke for the entire South by proclaiming, “Beyond the Post Office, our people derive no benefit from our existence as a State in the Union. We are denied representation…[and] at the same time subject to the most onerous taxation [and] the civil law of [our] State is only enforced when it meets the approval of the local [military] commanders.”²⁶

In response to the initial refusal by Southern states to ratify the 14th Amendment, congressional Republicans enacted four reconstruction bills in 1867 and 1868 to establish Republican puppet regimes throughout the South. The first, as noted, officially declared there were no legal state governments then existent in the South and divided the territory into five military districts. The second required each military occupation commander to compile a roster of voters based upon standards within the act that disenfranchised many whites. Upon completion, about 1.3 million persons were declared legal voters. Blacks outnumbered whites by 703,000 to 627,000 (53%-to-47%) although blacks represented only about one-third of the population of the former Confederate states. The third act provided for liberal interpretation of the first two acts.²⁷

Despite Republican-controlled voter qualifications in the South, the Fourteenth Amendment still failed to be ratified because the second act required that it be accepted by a majority of a state’s registered voters, as opposed to the majority of votes cast. Despite manipulative voter registration standards some states, such as Alabama, could not herd enough affirmative votes to exceed fifty percent of total registered voters. Consequently, congressional Republicans enacted a fourth bill to move the goal posts by repealing the fifty-percent-of-registered-voters requirement.

They were anxious to get Southern states re-admitted as vassal states quickly because of the approaching presidential election. The fourth act enabled the Fourteenth Amendment to be approved by enough Republican dummy regimes in the South for it to be dubiously ratified in July 1868 thereby assuring a large bloc of Southern electoral votes for the Party’s presidential candidate, Ulysses Grant.²⁸

Notwithstanding public acclamation for winning the Civil War, Grant’s 1868 popular vote of 3.0 million was surprisingly close to the 2.7 million for his Democratic opponent, former New York Governor Horatio Seymour. Furthermore, it’s estimated that Grant won 450,000 African-American votes as compared to only 50,000 for Seymour. As a result, without the African-American vote in the Southern states Grant would probably have received fewer popular votes than Seymour, although the general would still have won a majority of the electoral votes. Nonetheless, the close popular vote underscores the value to the Republican Party of its political manipulations involving the Fourteenth Amendment. In his analysis of the 1868 election historian Charles H. Coleman concluded, “the Republican popular majority in 1868 was dependent upon Negro suffrage.”²⁹

Harvard’s Pulitzer Prize winning David Donald wrote of the Fourteenth Amendment with his co-author in The Civil War and Reconstruction:

In reality Congress…was not merely submitting an amendment to the states. It was creating fabricated governments in the South, to which there was given not an untrammeled opportunity of voting Yes or No…but only the opportunity of voting Yes or being denied recognition as states…As a matter of…law the method of amending the Constitution does not lie within the legislative power of Congress…It is for Congress to choose between [a] convention and ratification, but not to create new…conditions as part of the amending process…[By] maintaining that the Southern states were not in the Union until redeemed by Congress, the Radicals were driven to the absurd conclusion that the states could not qualify as members of the Union until after they performed a function that only [Union] members can perform…³⁰

Since six of the readmitted Southern states voted for Grant in 1868 and only two voted for Seymour, it soon became apparent that a second amendment granting black men the vote in every state could be quickly approved. As a result, the Fifteenth Amendment was ratified by three-fourths of the states in 1870, less than a year after Grant took office.³¹

Historian Matthew Josephson aptly described the Janus-faced leaders of the Republican Party during Reconstruction:

[T]hey were Jekylls and Hydes. As Dr. Jekyll…they emancipated Negro slaves, [and] swept away the feudal, landed order of the South; as Mr. Hyde, they deliberately delayed the recovery and restoration of the conquered States…and established…Carpetbag local governments which were subject to the central Republican Party Organization at Washington and paid tribute to the same. As Dr. Jekyll, they stirred the masses…to their support by use of humane…ideology…[A]s Mr. Hyde, they…deliberately invoked turbulent electoral struggles and parliamentary storms…[T]hey worked to implant…safeguards to property and capital which might hold against all future assaults.³²

Discriminatory federal budgets during Reconstruction required Southerners to pay their share of federal taxes for sizable items that if funded by an independent defeated foe would have constituted reparations.

To be sure, reparations are not a rare form of a victor’s compensation, but it should not be assumed that the Southern states avoided equivalent penalties merely because they were readmitted to the Union. In more recent times, Germany and Japan paid reparations after World War II ended in 1945. Although Japan continued to pay some Asian countries for years thereafter, both stopped paying the United States and Western European countries in 1949. Instead, the victors focused on rebuilding the economies of their erstwhile enemies with economic aid such as the Marshall Plan. In contrast the federal government provided little economic assistance to the former Confederate states during Reconstruction.³³

The table below summarizes federal tax revenues and spending for a quarter century following the Civil War. As may be observed, more than half of federal tax revenues were applied to three items: (1) interest on the federal debt, (2) budget surpluses, and (3) Union veterans benefits. Although compelled to pay their share of taxes to fund them, ex-Confederates derived no benefit from the allocations.

The discriminatory federal budgets were mostly funded by tariffs, which were doubly unfair to Southerners. Post-war surpluses were mostly used to retire the federal debt, which was held almost entirely by Northerners. Nearly all the bonds were sold during the Civil War when the federal debt jumped more than forty-fold from $65 million to nearly $2.7 billion. Many – probably most – were purchased with paper greenbacks or national bank notes that traded at discounts to specie of as much as 60%. By 1869 the remaining debt was $2.5 billion when the Public Credit Act gave bondholders a windfall by requiring that bonds be repaid at par in specie. The 1875 Resumption Act also stipulated that by 1879 greenbacks could likewise be exchanged for specie at face value. The post-war specie redemption of bonds and paper money at face value was an extra burden on taxpayers who did not hold such financial instruments, which included nearly all Southerners at the end of the war.³⁴

The windfall of bond redemption in gold is best understood by illustration. Wartime investors holding $1,000 in gold at a time when a single gold dollar could be exchanged for two greenbacks could therefore buy $2,000 in greenbacks. The greenbacks could be invested in US War Bonds and be redeemed for $2,000 in gold at maturity, which was typically twenty years. Thus, the $1,000 gold investment would return $2,000 in gold at maturity. During the holding period, bond investors would collect interest payments in gold on the $2,000 face amount of the bonds held opposed to the $1,000 of gold invested, thereby also effectively doubling the earned interest rate.³⁵

The budget surpluses caused by protective tariffs generated more income than necessary to operate the federal government. As the table below documents dutiable items were taxed at about 45% until after President Woodrow Wilson was inaugurated in 1913. Moreover, following a dip during the Wilson Administration they remained generally high until after World War II.

The purpose of such tariffs was to restrict competition for domestic producers, almost none of which were in the South. It was a form of corporate welfare that remained in place for three-quarters of a century. The South’s was primarily an export economy. Even as late as the 1930s, 60% of its cotton was sold overseas. But foreign buyers could not pay for Southern cotton unless they could generate exchange credits by selling manufactured goods to Americans, which protective tariffs sharply curtailed.³⁶

Additionally, high tariffs motivated Europeans to buy cotton from India, Brazil, and Egypt where they could more competitively export their own manufactured goods to pay for the fiber. Such diversion of European buyers – away from America and to other countries – was detrimental to Southern cotton growers, white and black.³⁷

One annoyed victim of Reconstruction-era US tariffs was Georges Clemenceau who became France’s Prime Minister during World War I. While working as a correspondent for a French newspaper in New York he wrote, “Protectionism is rampant in [America]…People have been made to pay ridiculous prices for articles of primary necessity.” Perhaps by observing that Southerners were forced to abide punitive federal budgetary and taxing policies, he later erroneously concluded that France could extract sizeable reparations from Germany after World War I, without consequence. If so, he failed to anticipate that the German reparations would cause the Weimar Republic to collapse, which would lead to the rise of the Nazi Party and a renewal of the war twenty years after the Versailles Treaty.³⁸

By the 1880s it was evident that tariffs were causing a surplus of riches in the US treasury, but Republicans defeated every attempt to reduce them. Although preferring a tariff reduction, Southern Democrats alternately proposed to utilize the surplus as a source of lending capital in states where banking institutions were scarce. They proposed that the US treasury open branches (sub-treasuries) in every county in the nation that produced at least $500,000 in farm goods annually. Each sub-treasury would include facilities for storing non-perishable goods such a cotton, wheat, sugar and corn. Local farmers would be allowed to store products at the sub-treasury for a year and receive a loan of 80% of its market value.

The loans would enable farmers to avoid the need to sell at harvest time when prices were apt to be lowest. Sub-treasuries would charge storage costs and interest, but the fees would be lower than those of conventional sources such as Eastern bankers or local monopolies like commercial grain elevators. Finally, the sub-treasury notes would inject additional currency into regions with little money in circulation thereby stimulating the local economies.

Although the federal government had often intervened to promote other targeted economic interests with protective tariffs for manufacturers, land grants to railroads, investments in harbors and canals, and direct subsidies in the form of bounties, the sub-treasury plan was too innovative for Congress. It was easily defeated as too progressive. Furthermore it was strongly opposed by such Republican constituencies as Eastern bankers, intermediary interests like warehouse operators, and prosperous Northern farmers that produced non-storable perishables and accounted for most of the country’s farm wealth.³⁹

On the strength of Republican Benjamin Harrison’s election as president, Congressman William McKinley in 1890 successfully promoted a bill that became known as the McKinley Tariff, which raised rates to nearly 50%. Four years later rates were modestly reduced under Democrat President Grover Cleveland but many more items were added to the dutiable list. After McKinley was elected President in 1896, rates were raised to an average of 52% with the Dingley Tariff in 1897. Tariffs were temporarily reduced under President Woodrow Wilson but high rates returned with the election of Republican presidents in the 1920s.⁴⁰

The highest post Civil War rates came with the 1930 Smoot-Hawley Tariff. It began as a pledge by President Herbert Hoover to “help” farmers after predecessor Calvin Coolidge vetoed farm subsidies. But American farmers didn’t need tariff protection because most faced little import competition, especially in the South. Cotton farmers could readily underprice foreign competitors in the domestic market without a tariff. Instead, as explained earlier, they needed a policy that would enable foreign buyers to earn the exchange credits required to pay for the Southern cotton. Such a policy could be promoted by lowering tariffs so that other countries wanting to buy American cotton could sell manufactured goods into our country thereby earning the necessary exchange credits.

As the bill worked through Congress hundreds of items were added to the duty list and in the end Smoot-Hawley was nearly as much a tariff for manufacturers as for farmers. In any event, it was a disaster that provoked reciprocal hikes from Global trading partners, inducing a long-term reduction in multilateral trade. Since Smoot-Hawley gradually awaked most Americans to the consequences of excessive tariffs, our country began to reduce tariffs in the middle third of the twentieth century. However, the USA did not become a free-trade proponent until after World War II when the Northern states had no international competitors for manufactured goods due to the destruction wrought in Europe and Asia by the war.⁴¹

Former Confederates derived no benefit from federal spending on Union veteran pensions. Such expenditures were another unfair unbalanced budget item to Southerners. Ex-Rebel soldiers could only collect much smaller pensions from their respective states. Although Southern states quickly enacted programs to aid disabled Rebel soldiers following Appomattox, the harsh reality was that few had much money for such purposes for years thereafter and the federal government made no contributions.⁴²

One method Republicans chose to reduce budget surpluses in order to avoid cutting tariffs was to spend extravagantly on constituencies that would provide political support. A prime example was the Grand Army of the Republic (GAR), a Union veterans organization, which was a prime lobbyist Union veterans pensions.

Pensions were originally paid only to veterans who sustained disabling injuries during military service. In 1878 the military-connected disability requirement was waived for widows. The following year veterans who had not earlier applied for a pension were given an initial sum of $954, which was more than double the $400 average non-farm worker’s annual income. In 1890 pensions were available to all disabled veterans even if the disabilities resulted from post war civilian activities. A 1904 executive order by President Theodore Roosevelt declared that any Union veteran over age 62 was considered disabled and entitled to a pension annuity. In 1876 Union veterans pensions represented 10% of the federal budget but the fraction climbed to 25% in 1886 and went still higher later.⁴³

Beth Linker, who analyzed the pension situation in War’s Waste, writes:

By 1915, the aggregate cost of the 50-year old pension system exceeded $3 billion…Most Americans assumed that the cost…would plunge by the early twentieth century…But the opposite happened. With each passing year…more and more went into the pension system. By 1915 it had exceeded the cost of the entire Civil War itself.⁴⁴

Historian Larry Schweikart adds:

Between 1865 and 1888 the GAR emerged as the largest nonbusiness special interest group in America, padding its rolls with thousands of “veterans,” many of whom never served in combat; it pleaded for those who received war wounds to receive restitution. Yet, many never served, more still never fought, and still more were never wounded. Its ranks swelled beyond all imagination – when given the age and physical health of war survivors, the numbers should have declined.⁴⁵

But pensions were not the only benefits Republicans showered upon Union veterans. The ex-soldiers were also given federal job preferences. Even a reformer such as Theodore Roosevelt admitted that the GAR could “make politicians dance like peas on a hot shovel.” The organization was such a one-sided lobby that the initials were sometimes factiously cited as representing “generally always Republican.”⁴⁶

Southern Democrats were powerless to stop such excesses. While the South could not share in the largess it was required to help pay for the pension indulgences with taxes, including tariffs, which were harmful the region’s export economy.

Much like debt retirements, interest payments on the federal debt were of no benefit to Southerners because they did not hold such debt. Although Washington debated until 1869 before deciding that federal bonds would be redeemed in specie, there was never any question about interest payments. Interest on all federal bonds was required to be paid in specie from the beginning. Therefore, the amount of taxes paid in paper currency to meet the interest obligation was a larger sum than the interest paid in specie. The differential was an extra cost to the taxpayer, but a bonus to the bondholder. Since, as noted, the great bulk of federal debt was issued during the Civil War, such interest payments were made almost entirely to Northerners, although all taxpayers had to pay for them.⁴⁷

The interest burden was particularly heavy shortly after the war but declined steadily as budget surpluses were used to retire debt. In fiscal 1867 interest amounted to 38% of total federal spending but was only 9% in fiscal 1890.⁴⁸

While some of the federal budgets items outside the three highlighted in the “Federal Tax Revenue and Spending” table above benefitted Southerners, except for the Post Office they were either vanishingly small or funded by Southerners themselves. In a typical year like fiscal 1872 over 81% of federal tax revenues were applied to (a) interest on debt, (b) surplus, (c) defense, (d) veterans benefits, and (e) the Post Office. Except for the currency circulated by occupation troops, Southerners gained little from the defense expenditures.⁴⁹

Federally funded internal improvements that could have significantly aided the South were embarrassingly small, particularly in contrast to the economic aid provided to Japan and Germany after World War II. The South got no “Marshall Plan.”

From 1865 – 1873 the federal government spent $103 million on public works, but less than 10% went to the former Confederate states. New York and Massachusetts alone got more than twice as much as the entire South. Even Democratic President Cleveland – who shared the Southerner’s desire to reduce tariffs – turned a cold shoulder to the South in 1887 with his veto of a modest $10,000 Texas Seed bill explaining: “Though the people support the Government, the Government should not support the people. Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character.”⁵⁰

Instead the federal government taxed cotton. As prices dropped after the war the levy represented about one-fifth of a cotton bale’s market value. It raised $68 million, which was about seven times the amount of public works spending in the South from 1865 to 1873. Although the US Constitution required that tax burdens be uniformly shared, there were no similar taxes on products specific to states outside the South. To the contrary, New England fishermen were paid subsidies. Additionally, the cotton levy was a de-facto export tax, also outlawed by the Constitution. Finally, the tax could not be passed along to buyers since most cotton was sold on the export market where prices were competitive to the n^th degree. London buyers, for example, would not pay extra for American cotton when they could get the same commodity from countries such as India, Brazil and Egypt that did not tax cotton production.

Partly because Southern African-Americans – including an Alabama congressman – complained that the tax was as injurious to them as it was to Southern whites, it was repealed after a few years. Republicans did not want to lose African-American political support while they needed it. But while the tax lasted, Northern textile mills were allowed a drawback on exported cloth, although the drawback did not apply to raw cotton.⁵¹

While the Bureau of Refugees, Freedmen, and Abandoned Lands, commonly known as the Freedmen’s Bureau, provided moderate economic assistance, about 80% of the aid was to ex-slaves. Moreover, the cotton tax alone amounted to nearly three times the federal spending on the Bureau during the Bureau’s entire five-year existence.⁵²

Finally it bears clarifying that some of the progressive policies historians routinely credit Republicans with introducing into the South from Washington were paid for by the Southerners themselves. A prime example is public education, which was not pervasive in the South before the war. However, Washington didn’t provide money for the schools, which were instead funded by the states themselves. Even though property values in 1870 were less than half the antebellum level, state property tax payments in the South were four times higher than before the war, despite universal poverty.⁵³

To clarify how post Civil War banking regulations retarded Southern economic recovery it is necessary to explain banking theory, beginning with the gold standard.

In English speaking countries banking evolved among merchants in the mid-seventeenth century. Shopkeepers normally stored their surplus gold in the king’s mint for safekeeping until Charles I needed money shortly before the English Civil War in 1638. The king confiscated much of the merchants’ gold, calling it a loan. Although the loan was eventually repaid, merchants thereafter preferred to deposit their gold with private goldsmiths who issued warehouse receipts to each depositor. Such receipts essentially became paper money and were preferred in many transactions in place of bulky coins.⁵⁴

Soon goldsmiths realized that most such receipts would remain in circulation and rarely be presented for redemption. Therefore, they could lend money in the form of newly issued receipts maintaining a gold inventory equal to only a fraction of the face value of receipts outstanding. Theoretically, once such loans were repaid the amount of receipts remaining in circulation would equal the gold inventory and the smith would have earned interest income on the loan. Pragmatically speaking, however, new loans were constantly created as old ones were paid off. As long as the receipts presented for redemption never exceeded the smith’s gold inventory, there was no harm. But if ever a holder presented a receipt that could not be redeemed in gold, public confidence in the smith’s warehouse receipts would vanish and the paper would no longer be accepted in transactions, except perhaps at a discount to face value.⁵⁵

At the start of the American Civil War about 1,600 banks operated in the above manner. There were no federal minimum reserve requirements. Regulations regarding reserve ratios, interest rates, and loan activities were imposed by the states individually. For fifteen years prior to the war the US government was even prohibited from issuing paper currency. While the US Mint coined money, the coins were normally struck in gold or silver. Taxes and other funds due the federal government were paid to the treasury, either in specie or treasury notes, which were short-term treasury debt securities.⁵⁶

On the eve of the Civil War the nation’s total currency was about $450 million of which only $250 million was in specie. The remaining $200 million was composed of private paper issues. The wheels of commerce required the circulation of specie, or banknotes typically of a nearby bank with a reliable reputation.⁵⁷

The enormous Civil War financing needs impelled changes in the monetary system. The first was the 1862 Legal Tender Act. It authorized a fiat currency termed greenbacks. Although greenbacks could not be redeemed for gold they were acceptable for payment of all debts except tariffs and interest payments on federal bonds, which needed to by paid in specie. While the restrictions caused greenbacks to trade at a (fluctuating) discount to specie, the currency could be deposited in a bank and used to purchase federal bonds. Many such bonds were issued to finance the war.

Greenbacks paved the way for a second big change in the monetary system, which occurred with the 1863 National Bank Act. The act required that one-third of each national bank’s equity capital be invested in federal bonds and placed on deposit with the comptroller of the currency. In return each bank was permitted to issue “national bank notes” equal to 90% of the value of the bonds.

In order to motivate state chartered banks to convert to national charters the banknotes of state banks were taxed. An initial 2% tax in 1863 was raised to 10% in 1865. As a result, independent banknotes were driven out of the market and the country’s post Civil War currency was dominated by greenbacks, national banknotes, and specie. Even today our paper currency is uniform and colored green much like the original greenbacks and national banknotes.⁵⁸

Although the post Civil War South badly needed rebuilding capital it was almost impossible for investors in the region to organize suitable banks.

First, capital requirements for national banks were beyond the means of impoverished Southerners. Equity of $50,000 was needed to form such a bank in communities with less than 3,000 in population while banks in towns with 6,000 to 50,000 inhabitants required $100,000. New Orleans was the only former Confederate city to have more than 50,000 residents where a national bank would require $200,000 in equity. Not until 1900 were the capital requirements in towns of population 3,000 or less be dropped to $25,000, which was still high in the still impoverished south.

Second, national banks could not make mortgage loans even though such loans were essential to the agrarian South.

Third, with rare exceptions, national banks were not permitted to operate more than a single branch. The prohibition was particularly hard on the South where small towns were more prevalent because the proscription meant that no national banking facilities could be available in such towns without meeting the large start-up capital requirements for a separate bank. For example, investors who might open a national bank in Atlanta could not open a branch in nearby Athens. Instead they would have to create an entirely new bank for Athens and meet the steep capital stipulations a second time.

Fourth, even though state chartered banks might offer mortgages and/or require less start-up capital, Southerners could not operate them because the 10% federal tax on the notes of independent banks made such banks uneconomical. Eventually, however, state banks learned to minimize the independent banknote penalty by emphasizing checking accounts.

As a consequence of the four above factors, even as late as 1900 only about 7% of the country’s national banks and capital were located in former Confederate states. For decades after the war the region’s economy was dependent upon its own nearly non-existent financial resources. The shortage increased the South’s cost of borrowing and impeded efforts to industrialize. In 1910 Southern manufacturing employed less than 10% of the area’s working people.⁵⁹

Consequently, industrial diversification initially developed in sectors with the least capital requirements and biggest cost advantages. Cotton textile manufacturing, historically centered in New England behind a moat of protective tariffs, is a case in point. The small textile plants of the nineteenth century required little capital to set up. Local merchants, bankers, professionals, and successful farmers might pool sufficient funds to establish them.

Relative to the North, Southern textile firms enjoyed a 7% – 8% materials cost advantage and a 25% labor cost advantage. In 1900 the Census Bureau reported: “upon the whole the return upon the investment in Southern cotton mills greatly exceeded that upon the factories of the North.” Initially the Southern mills succeeded only in the coarse goods but by 1920 they became leaders in fine goods as well. Northern mills never recovered.⁶⁰

In sum, the slow rate of Southern economic diversification and industrial development resulted more from a lack of capital, partially caused by discriminatory banking laws, than from a lack of ability or will.

Since few manufacturing facilities were located in the South, lax monopoly regulation was particularly unfair to the region. Although the currently popular Reconstruction narrative characterizes Southern Democrats as conservative, if not reactionary, the label is often erroneous when issues of race are excluded. In truth, Southern elected representatives were among the most progressive on economic and non-racial matters. When Republicans lost control of the Presidency from 1913 to 1921 to Democrat Woodrow Wilson, the former Southerner pushed through a wave of progressive legislation.

Although the Sixteenth (Income Tax) Amendment was initiated under President Taft, it was ratified in the first year of the Wilson administration and later structured as a graduated tax during Wilson’s term. Southerners had long supported the tax as an alternate government revenue source that would enable tariffs to be cut. Consequently, tariffs were reduced to 27% during Wilson’s eight years as compared to 48% in the eight preceding years and 38% in the eight following years. Also under Wilson the long-sought Southern goal of banking reform materialized when the Federal Reserve System was created. The 1916 Federal Farm Loan Act and Warehouse Act were outgrowths of the Southern sub-treasury plan explained earlier.⁶¹

Another example of progressivism among Southern leaders was monopoly regulation.

After former Confederate Postmaster General John Regan became a US Congressman in 1875 he was one of the first advocates of railroad rate regulation. His proposals would have outlawed discriminatory rates and rebates and levied heavy fines for violations. Eight years later he gained an important ally when Illinois Senator Shelby Cullom proposed a commission to regulate rates, which resulted in the Interstate Commerce Commission (ICC) in 1887. Southern Democrats provided much of the congressional leadership and a sizeable voting bloc to enact the Interstate Commerce Bill. Unfortunately, it took decades of additional legislation to equip the ICC with the tools needed to enforce fair rates on the railroads.⁶²

Along with other agrarian sections of the country, the South was saddled with discriminatory railroad rates that took decades to rectify. Even as late as the 1940s Georgia Governor Ellis Arnell led a fight against “the freight-rate cartel” that hindered Southern economic development. Finally, in 1945, the ICC reduced “class-freight rates” 10% in the South and West and increased them 10% in the North and East. It was a tardy start at dismantling a genuine obstacle to Southern economic progress.⁶³

Finally, protective tariffs, which were constantly opposed by Southerners, were the root cause of monopolies. In 1899 the president of New York based American Sugar Refining conceded, “The mother of all trusts is the customs tariff bill.” By 1907 his company controlled 98% the country’s sugar processing capacity and it was the city’s most profitable manufacturing business. Its most popular brand, Domino Sugar, remains familiar to consumers today. The company dominated the refined sugar business from 1870 to end of World War I.⁶⁴

As one contemporary Wall Street economist insightfully explained in 1906:

Our politicians are not looking for the real cause of trusts. They are not bent on exterminating the trusts that supply campaign funds that keep them in power. They vote for tariff laws to aid the trust and harm the people and then for anti-trust laws that will neither harm the trust nor aid the people. Such anti-trust laws are only intended to keep the people quiet, to distract attention, and to delay the application of the real remedy [tariff cuts].

The trusts know that their friends [in Congress] could not long remain in power if they did not pose as “trust busters” and spend part of the time concocting harmless remedies.⁶⁵

In conclusion, the presently dominant race-centric interpretation of Reconstruction often minimizes political and economic factors that affected the South for nearly a century after the Civil War and which David Cohn cogently summarized in The Life and Times of King Cotton:

The agrarian South had been delivered over to non-agrarian interests, and had become a satellite of the banking industrial Northeast. And the already burdened cotton farmers were to bear heavier burdens in the future. They could complain in vain…of railroad rates that crippled them, of gouging by trusts and combines operating in cottonseed oil, jute bagging, farm implements, and other adversities. They might work hard, live meanly, and die in poverty to pass on to [future generations] the apparently irrevocable estate of poverty.⁶⁶

While the modern interpretation justifiably condemns white Southern racism for holding African-Americans in poverty, there is little recognition that Northerners often falsely attribute the lingering poverty of Southern whites to endemic inferiority.⁶⁷

While it is appropriate that Reconstruction history include a thorough analysis of racism and its protracted affects, historians who came of age during and after the civil rights movement of the twentieth century seldom fail to lack such a focus. By contrast, modern writers give far less attention to numerous political and economic aspects of the era, even though such factors are at least equally important in terms of understanding the meaning and present day implications of Reconstruction.

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Annenberg Classroom, Voting Rights Timeline, http://www.annenbergclassroom.org/Files/Documents/Timelines/VotingRights.pdf.

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