Economic Change and Industrialization
ECONOMIC CHANGE AND INDUSTRIALIZATION
The United States entered the nineteenth century as an agrarian nation of five million residents. Within one hundred years, the United States transformed itself into the world's leading industrial power with a population of nearly seventy-six million. While America's transformation from an agrarian nation to an industrial power is noteworthy because of the pace at which it occurred, it is more remarkable because it did not transpire in all regions of the nation. Indeed, by 1900 the United States effectively contained two separate economies—the industrialized North and the agrarian South. To understand America's economic transformation it is necessary to examine three separate snapshots of the American economy: The antebellum economy, the American economy during the Civil War, and the postbellum economy.
the antebellum economy
In 1800, the United States was a nation of farmers. Manufacturing was completed at home, in small mills (for the production of lumber and textiles), or in craft shops (for leather products and other household items). American manufacturing continued on a small scale until 1807, when President Jefferson's trade embargo halted the importation of European goods because American merchants were caught in the middle of the war between England and France. Because European products, particularly English textiles, were no longer available to American consumers, American firms had an opportunity and an incentive to grow. As a result, textile factories sprouted in New England during the 1810s and especially during America's war with England (1812 to 1815), which again cut off British imports. Although textile factories (and later, factories producing iron and other products) were born and thrived during the antebellum period, the manufacturing sector lagged well behind the agricultural sector in total employment. By 1860 the manufacturing sector employed one and a half million Americans; the agricultural sector employed nearly 5.8 million workers.
Ultimately, the rise of the American manufacturing sector was limited by firms' ability to transport their goods to distant markets. In 1800, products could be moved between American cities via the ocean or inland waterways. Overland transportation was extraordinarily costly and impractical. However, two developments in the antebellum period led to a dramatic change in the way producers shipped their goods to American markets. First, the Erie Canal opened in 1825. The completion of the canal allowed farmers to ship agricultural products from Midwestern farms to Eastern markets, and it also allowed manufacturers to ship goods from Eastern factories to Midwestern cities. The success of the Erie Canal led to a canal building boom in the United States, although none of the canals built after the completion of the Erie had a similar economic impact on the nation. Second, in the early 1830s, the railroad appeared on the American landscape. Canals had opened markets on waterways, but the railroad allowed manufacturers to sell products in markets throughout the country.
Manufacturing was not limited to the North in the antebellum period, but the Northeast and Middle Atlantic States possessed a manufacturing capital stock seven times that of the South. In the South, agriculture was the dominant sector of the economy. Tobacco was the South's leading crop at the turn of the century, but by 1820, cotton was king in the South. Cotton reached its position of primacy in part due to ideal soil conditions and Eli Whitney's cotton gin. Slavery (the "peculiar institution") also played a major role in the success of cotton. In fact, research completed by economic historians Robert Fogel and Stanley Engerman shows that large southern plantations (those that possessed more than fifty slaves) were uncommonly productive because of the use of gang labor. According to their estimates, antebellum southern farms were, on average, forty-one percent more efficient than their northern counterparts.
Differences between the Northern and Southern economies created the foundation for the Civil War, but it was a disagreement over the resource-rich territories of the West that would eventually lead to the outbreak of hostilities. The gold rush of 1849 caused Americans to pour into California; it also called attention to the enormous value of natural resources contained in the western territories. Neither the South nor the North wished to relinquish control over the territories, and Southerners viewed slavery in the territories as critical for the institution's survival. The issue of slavery in the territories led to a bitterly contested Presidential election in 1860, and South Carolina's secession in December 1860. Four months later, in April 1861, the bloodiest conflict in American history had started.
the war economy
On the eve of the Civil War in 1860, the South had invested an estimated $2.7 billion in slaves. This represented an outlay of three times the total capital investment made by the manufacturing sector in the entire United States. Thus, it is not surprising that southerners were willing to fight to preserve the institution of slavery.
Economists Claudia Goldin and Frank Lewis have estimated that the Civil War cost the American people $6.6 billion. (Measured in 2003 dollars, the cost would be between $115 and $140 billion.) This estimate takes into account the direct expenditures on the war (guns, uniforms, and ammunition), the destruction of property, and the loss of human life. While the war was extremely costly, it did serve as a catalyst for several important changes in the American economy.
With the daunting task of having to pay for the war, the federal government faced a serious fiscal crisis. In response, the federal government levied the first personal income tax in the nation's history. It also engaged in large scale borrowing. The magnitude of the federal government's debt had a profound impact on the nation's financial markets, and, ultimately, it caused the government to suspend the use of gold and silver coins as a form of currency for everyday transactions. The war also led to increased economic activity in several industries. The primary beneficiaries of the Civil War were the textile firms of the Northeast and the farms of the Midwest. However, the war did very little to stimulate growth in most of the industries in the manufacturing sector.
While economists agree on what the Civil War cost the American people and the impact the war had on the American economy during the 1860s, there is disagreement on the impact that the war had on the postbellum economy. For some historians and economists, the Civil War was a watershed event that sent the South and the North on divergent paths of economic development. However, many others believe that the postbellum economy continued trends that had begun in the antebellum period. Empirical evidence suggests that the latter interpretation is correct.
the postbellum economy
In 1860, personal income per worker was approximately ten percent higher in the South than in the Midwest. A mere ten years later, a southerner's income was only seventy percent of a midwesterner's. Finally, at the turn of the century, this figure had fallen to fifty percent. There are several reasons for this radical reversal of fortune in the South.
Conventional wisdom often attributes the South's poor economic performance in the postbellum period to the wartime destruction of its cities, infrastructure, and capital stock. However, this explanation is inadequate. Northern armies destroyed Charleston, Atlanta, and Richmond, and they also did extensive damage to Southern infrastructure and capital stock. Nonetheless, the southern transportation network had been restored to its prewar condition by 1870, and the damage to the capital stock and southern cities was repaired in an equally timely fashion. Indeed, economic historians Jeremy Atack and Peter Passell point out that Japan and Germany recovered very rapidly from much more extensive physical damage caused by fighting during World War II. The decline of the southern economy cannot be attributed only to the wartime destruction of cities, capital, and infrastructure.
Economic historians attribute the decline of the southern economy to many different factors, but three stand out: a reduction in the supply of labor in the southern economy, a decrease in demand for the South's staple crop, cotton, and a dramatic transfer of wealth from slave owners to African Americans. The reduction in the supply of labor in the postbellum southern economy may be attributed to the emancipation of the slaves. In the antebellum economy, slaves on large plantations worked in gangs, and the gang labor system was extraordinarily productive. However, it was not productive simply because of the number of workers (slaves) involved. Rather, the gang labor system was extremely productive because of the intense effort and long hours put in by slaves. With emancipation it became possible, at least to some extent, for an African-American worker to choose how long and how hard he or she worked. While plantation owners in the South tried to encourage African Americans to continue working under the gang labor system, land owners were unwilling to pay the wages that would be needed to entice workers to spend such long, hard days in the field. Ultimately, the supply of labor in the South decreased because emancipated slaves were unwilling to work as many hours as they had once been forced to work.
A reduction in the demand for southern cotton was the second major factor leading to a decline in southern economic output in the postwar era. Before the Civil War, England had been the leading importer of southern cotton. During the Civil War, England was forced to find alternative sources of cotton, so imports from India, Brazil, and Egypt increased dramatically. The South regained its antebellum market share by the late 1870s; however, by that time the price of cotton was declining. As a result, southern incomes did not return to their antebellum level.
Finally, there was a dramatic transfer of wealth from slave owners to former slaves. Before the passage of the Thirteenth Amendment slaves were "capital" assets possessed by their owners. Granting slaves their freedom immediately reduced a slave owner's personal wealth by the value of his or her slave holdings. This was not a net loss to the southern economy, for the slave owners' wealth, namely the ability of the slaves to perform hard work, was transferred back to its rightful owners—the freed slaves themselves. This did, however, have the effect of reducing the "capital stock" in the southern economy. Former slave owners who might have wished to sell one or more of their slaves in order to invest in other types of capital (machinery, land, or buildings) no longer possessed an asset to sell. Therefore, the South, already lagging behind the North in capital accumulation, continued on its path to being a region rich in labor but poor in capital.
As the southern economy struggled with institutional changes caused by emancipation and economic changes dictated by the market for cotton, the northern economy flourished. The production of the agricultural sector increased rapidly, and so did the output generated by the manufacturing sector. Indeed, by 1880 the value of northern manufacturing output exceeded the value of northern agricultural output.
The increase in agricultural and manufacturing output may be traced to the spatial expansion of several sectors. The Homestead Act of 1862 led to an expansion in the number of improved acres of farm ground, and an increase in the demand for manufactured products led to the development of regional manufacturing centers. Furthermore, between 1860 and 1890, U.S. manufacturing firms took advantage of an ever-improving transportation network that allowed goods to be sold in any corner of the nation. In fact, by 1894, the United States had become the world's largest producer of manufactured goods.
The divergent paths taken by the northern and southern economies in the nineteenth century cannot be attributed to the Civil War. While the Civil War increased the pace at which these two economies grew apart, it is critical to recognize that the economic rift between the North and the South had its origins in the antebellum period. Quite simply, southerners tied their economic fortunes to the production of a single crop—cotton. As a result, the South was ill suited to adapt to a world economy that was rapidly changing in the postbellum period. While southerners chose their economic path in the antebellum period, economic development in the postbellum South period could have been much more substantial than it turned out to be. Between 1865 and 1900 (in fact well into the twentieth century), the South struggled with the institutional changes brought about by emancipation. Ultimately, African Americans were treated as second-class citizens. As a result, the South failed to make full use of a precious resource (the talents and energies of freed slaves) and suffered through decades of economic stagnation.
Atack, Jeremy, and Passell, Peter. A New Economic View of American History: From Colonial Times to 1940. New York: Norton, 1994.
Fogel, Robert, and Engerman, Stanley. Time on the Cross: The Economics of American Negro Slavery. New York: Norton, 1989.
Goldin, Claudia, and Lewis, Frank. "The Economic Cost of the American Civil War: Estimates and Implications." The Journal of Economic History 35 no. 2 (1975): 299–326.
Walton, Gary, and Rockoff, Hugh. History of the American Economy, 9th edition. Fort Worth, TX: Harcourt College Publishers, 2001.
Fred H. Smith