The Civil War: 1861-1865

In contrast to the industrializing North, the South remained rural and dependent on the North for capital and manufactured goods. The economy of the South was also dependent upon slavery which could only be sustained through political power. This power was put in jeopardy when the Republican Party, organized in 1856, called for the end to the expansion of slavery, wishing instead to focus on industry, commerce and business. The Republican victory in the 1860 election resulted in seven Southern states declaring their secession from the Union even before the new President, Abraham Lincoln, took office on March 4, 1861. Eventually, eleven Southern slave states seceded and formed the Confederate States of America and fought against the U.S. federal government, which was supported by all the free states and the five border slave states in the North.

As the war escalated, Washington required enormous funding. The Morrill Tariff, passed in 1860, was revised upward twice between 1861 and 1862. With the low-tariff Southerners gone, the Republican-controlled Congress doubled and tripled the rates on European goods, which reached 49 percent in 1868. Ironically, the U.S. never put a tariff on goods from the Confederacy because the U.S.A. never recognized the legal existence of the C.S.A. As the war progressed, the North blockaded the Southern states and very little legal trade occurred between either side because most goods were considered war contraband. Thus, the Confederacy collected only $3.5 million in tariff revenue during the war and had to resort to inflating their currency to pay for the war.

The American Civil War was the deadliest war in American history, causing 620,000 soldier deaths and an undetermined number of civilian casualties. The industrial advantages of the North secured a Northern victory and that victory sealed the destiny of the nation and its economic system. The war’s legacy included the abolition of slavery in the United States, a plunge in the economic fortunes of the South, a rapid expansion of industry in the North, a restoration of the Union and a strengthening of the federal government. The social, political, economic and racial issues of the war decisively shaped the reconstruction era that lasted to 1877 and brought changes that made the United States a superpower.

The CEPPI Index clearly records a dramatic fall in economic conditions during the war. Inflation surged in 1862-1864 and by war’s end, the price level had almost doubled. Budget deficits also exploded with the deficit averaging 6.6% of GDP in each of the war years. One bright spot, if any, was the growth in GDP, which averaged a respectable 3.4%. However, this growth was concentrated in the North as the South was generally devastated. The CEPPI Index, which had achieved an Excellent rating in each of the two years prior to the war, dropped to Fair in 1961 and then remained Poor in each of the following 4 years. Overall, the CEPPI score averaged a 75.3 or Poor, which represents the worst economic period in the country’s history.