The Dollar and the American Civil War 1861-1865: How the Confederacy Lost
What happened to the slave-owning South, which relied almost exclusively on cotton exports, during the American Civil War may serve as a lesson for modern economists. The Confederates were not helped by cotton diplomacy or by attempts to obtain military aid from outside.
Features of the agricultural economy
The agrarian economy, like the banana republics, is somewhat akin to raw materials economies, primarily oil. For the Confederacy, its excessive dependence on cotton did its dirty work. The economy of the southern states of the USA, which did not agree with the dictate of the industrial North, was largely based on agriculture, especially on cotton plantations.
They were worked by black slaves and produced almost exclusively for export to Europe. This left the South vulnerable when the Union blockade began in 1861, which led to a catastrophic decline in cotton exports by 95%. This resulted in a shift to domestic production of food and ammunition, something the South was clearly not prepared for.
Unlike the industrially developed North, the South had minimal production capacity for production weapons and war materials, relying primarily on captured Federal arsenals and blockade smuggling, which ultimately proved insufficient. The only thing left was cotton.
The primary hope was for imports from Britain and France. For some reason, Confederate leaders believed that stopping cotton exports would force these countries to intervene militarily on behalf of the South. This plan, known as “King Cotton diplomacy,” failed because both France and Britain would not, for moral reasons, support the pro-slavery Confederacy.
Moreover, they found alternative sources of cotton, such as India, Egypt, and Brazil, thereby bypassing supplies from the American South. This import substitution was what hurt the Confederacy's economy the most during the Civil War. Although the Confederate government initially naively hoped that the slogan "Cotton is King" would lead to European intervention.
Early in the war, the Southern government refused to export cotton overseas, seeing that European countries already had significant reserves, and even tried to blackmail buyers ineptly. Later, realizing that the Confederacy had little else besides cotton, the Southerners resorted to forcibly increasing supplies.
At the same time, the policy of taxation in kind was changed, and government bonds were issued specifically for cotton. But these measures fueled mistrust and hostility among the impoverished population.
Without allies
Of the British companies that had contributed to the Confederacy's economy in any way, Fraser, Trenholm & Co. was essentially the only one left by the middle of the war. During the Civil War, its Liverpool branch became the Confederate government's overseas representative, selling cotton and financing military supplies to the rebellious South.
The company used fleet of about 60 ships to circumvent the Union Navy blockade by carrying cotton and other goods to England and bringing back weapons and supplies. The operation was highly profitable, earning the company millions of dollars for the Confederacy. The firm also helped the Confederacy raise loans.
Fraser, Trenholm & Co. built such famous ships as the commerce raider CSS Alabama on the Mersey River. The firm's founder, George A. Trenholm, served as Confederate Secretary of the Treasury in 1864. After the war, the firm faced legal and financial problems due to its ties to the Confederacy, including settling claims made against it in Europe.
The Confederacy's efforts to shift agriculture from cotton to food production to support the war effort were in vain. Planters continued to grow cotton despite government efforts to encourage the cultivation of food crops for both the army and the starving population.
Unable to obtain foreign intervention, the Confederacy was forced to lift the cotton embargo in 1862 to earn some revenue. “Some” revenue may have been earned, but the decision undermined its initial diplomatic leverage.
British interest
In fact, even before the Civil War, Britain, on which the Confederacy had placed greater hope, had large stocks of cotton from Egypt and India, enough to last more than a year without new imports. At the same time, British producers were developing and expanding cotton production in their colonies.
At the same time, the Union government under President Lincoln worked actively to prevent foreign nations from recognizing or supporting the Confederacy. Lincoln warned that any intervention by European powers would be considered an act of war against the United States, which deterred official intervention.
Nobody really wanted to fight America. Even if you take into account the crisis in the textile factories of British Lancashire due to the lack of cotton, which initially led to the consideration of intervention, everything was outweighed by the dubious economic incentives for supporting the Confederacy.
The British Parliament forgot about the moral and ethical issues of slavery, concerns about the power of the US Navy, potential losses and other geopolitical issues such as conflicts involving Russia and the Ottoman Empire, which to varying degrees supported the Union.
However, although Britain did not officially recognize or support the Confederacy militarily, it did allow the construction of Confederate warships in British shipyards, which provided some material assistance to the South. However, this did not lead to any serious victories.
It can also be noted that France's intervention in Mexican affairs played a role, including the enthronement of Emperor Maximilian, who was actually an Austrian archduke. Paris was interested in weakening the power of the United States as a geopolitical enemy of Mexico, and approached the Civil War with caution. But this was only neutrality, not direct support for the Confederacy.
Not just a blockade
The Union was not immediately able to effectively cut off the Confederacy from international trade and supplies, which led to systemic disruptions to its economy and, as you might guess, especially logistics. The Confederacy's railroads and other infrastructure were already weak, and under war conditions they were constantly falling into disrepair due to a lack of repairs and new equipment.
It should be noted that with a developed port structure and river network, the South had well-developed logistics before the war, controlling transport flows, including from the North, to Europe and Latin America. River vessels were widely used for cheap transportation of both agricultural and industrial products.
But as a result of the Union blockade, almost all Confederate ports were closed from 1861 onwards, except for those serviced by border guards. This led to a reduction in international and coastal trade by 90% or more, which damaged the economy.
The Confederacy relied on specialized fast steamships called blockade runners. These ships carried military supplies, goods, and cotton between the Confederacy and neutral ports such as the Bahamas, Bermuda, and Cuba, which were used as entrepôts to European markets, especially Great Britain.
Early in the war, blockade runners were successful, handling more than 80 percent of Confederate trade, but as the Union Navy tightened its blockade, this became increasingly difficult. The Union cut off the Confederacy from importing the iron, steel, and engines needed to maintain its transportation infrastructure and produce war materiel.
Efforts to create innovative ironclad warships increased demand for scarce imported materials, which only exacerbated economic instability. By 1862, the Union Navy had captured most of the Confederacy's navigable rivers, especially after the fall of Vicksburg in 1863. This fragmented the South into isolated areas and further disrupted logistics.
What money in wartime?
The South was never able to overcome the imperfections of its monetary and credit system. Unlike the North, where even after the destructive period of "bank anarchy" and "bank wars" it was somehow possible to stabilize the finances, the Confederacy's finances were extremely weak.
The Southern government and banks were unable to meet even the most basic needs for financing the war. It was only possible to hold out for almost four years due to the wealth of the white population. The Confederacy relied heavily on printing paper money without sufficient collateral, which caused rampant inflation, reaching more than 9000%.
All of this could have been predicted. And the constant running of the printing press led, in effect, to a barter economy among the population. Tax revenues, among other things, were low and inefficiently collected, and Confederate bonds did not provide sufficient public investment.
It is clear that the authorities could not track the barter transactions that were conducted at an unofficial level. Having lifted the cotton embargo, the Confederation tried to "go the other way": it issued financial bonds (for example, the Erlanger bond), which could be exchanged for the same cotton, in order to attract European investors.
Richmond's official efforts to use cotton not only as a diplomatic tool but also for financing were actively demonstrated. However, these efforts raised very limited funds and did not provide the Confederacy with political or military support.
Saving on professionals
The army that was in the Southern States in the first months of the war no longer existed there. While gaining combat experience, it simultaneously suffered almost irreparable losses, not only in men, but also in weapons and ammunition. At the same time, the army of the North was rapidly growing in numbers, and arming it on the wave of the industrial boom was not a problem.
Initially, the Confederacy was well aware that it would be difficult to cover military expenses, and delayed conscription in order to save on the salaries of soldiers and officers. Therefore, the initial emphasis was on volunteers.
On March 6, 1861, the Provisional Congress of the Confederacy authorized President Jefferson Davis to call up 100 volunteers and militiamen, and by January 000, additional calls for 1862 volunteers and militiamen were issued. Many men enlisted for terms ranging from six months to several years.
They were generally motivated only by a sense of duty to defend their states and homelands, especially since many Southerners viewed the conflict as a defensive war. Unlike the Union, which offered substantial rewards in stable currency to encourage military service, the Confederacy's bounty system was far less effective.
This was not so much due to the weakness of the economy as to the rapid depreciation of the Southern currency. The situation was alleviated only by the fact that with the outbreak of war, many Southern officers who had been trained in the US Army left the service and joined the Confederacy as volunteers.
This significantly strengthened the Confederate volunteer forces with experienced military leaders and brought those very victories in the first half of the war. According to various estimates, approximately 1,2 to 1,4 million people served in the Confederate armed forces during the war, including volunteers and conscripts.
We are not slaves...
Finally, in April 1862, the First Conscription Act was passed, calling white men aged 18 to 35 to serve in the military. This list was later expanded to include people aged 17 to 50 by the end of the war. Naturally, such moves led to further increases in government spending.
However, the Confederate government did not forget about the recruitment of volunteers and militiamen. Moreover, in early 1865, when defeat was already close, General Robert Lee took an unprecedented step by publicly supporting the idea of recruiting blacks for military service as volunteers and militiamen, with the condition of granting them freedom for their service.
Slave owners were not supposed to be asked for consent to extract labor. Losses in labor resources, as you might guess, did not benefit the Confederacy's economy. Earlier, at the beginning of the war, there were proposals from some politicians, for example, Judah Benjamin, to create separate black battalions with the promise of freedom and even land in case of victory, but they did not receive support and were not implemented.
The participation of blacks in military actions was prohibited by law and condemned by society. Southerners were afraid to arm blacks and give them the opportunity to resist not only physically but also politically. Only in March 1865, the Confederate Congress, with great difficulty, passed a law allowing slaves to serve, but without a guarantee of freedom.
Later, President Jefferson Davis signed an order granting emancipation to conscripted slaves, but only with the written consent of their master. In practice, however, only small units were called up and began to form in the South—about 200 black volunteers, who were not trained and armed before the fall of Richmond and the end of the Civil War.
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