Last week I posted about Jeff Hummel’s article “US Slavery and Economic Thought” in David R. Henderson, ed., The Concise Encyclopedia of Economics. Many commenters have posted their thoughts on the article. One of the things I love is when people go back to the longer article behind the blog post instead of settling for the teasers I cited. One commenter, Warren Platts, did so, quoting this segment from the article:
A confirmation of slavery’s productive inefficiency is the significant decline in Southern production and per capita income after the Civil War. The real value of total commodity output (agriculture, manufacturing, and mining) in the eleven defeated Confederate states did not return to 1860 levels until nearly two decades later, and as population had also increased, real output per person in 1880 was nearly 20 percent below the pre-war level.
Platts then wrote:
That doesn’t make any sense to me. Maybe someone can explain. It seems to me that an economy with relatively high productivity is an efficient economy. And productivity is usually measured in real output per person. So how can an economy whose real output per person is 20% lower than it was 20 years ago be considered a more efficient economy?
Jeff Hummel sent me a response that he felt was too long for comment. My problem with that, however, was that it was too good to just be a comment. It deserves a place as a standalone post. Here is Jeff’s answer:
To be clear, I’m not suggesting that the post-Civil War South was necessarily “a more efficient economy” by any measure. Despite the increase in efficiency (welfare) brought about by the abolition of slavery (with the consequent decline in output), other post-war factors not directly related to emancipation also affected real income and/or the efficiency of the Southern economy as a whole . Demand for US cotton had fallen because Britain and other importers had shifted their wartime purchases to India, Brazil and Egypt. The South did not regain its market share until the 1880s, while at the same time world cotton consumption was growing at half the rate of before the war.
Wartime Republican governments had raised tariffs to protectionist levels, ending prewar policies of relatively free trade, and the burden of these tariffs inevitably fell disproportionately on the South’s export economy. Customs were also the main source of revenue for the national government. Yet residents of the former Confederate states seldom, if ever, received two of the largest post-war government expenditures funded in part by tariffs: interest on plus war debt payment and veterans’ benefits. The new Reconstruction governments in the South, for all the benefits they bestowed upon ex-slaves, also made extravagant new spending on railroad subsidies, public education, and other social services that, relative to wealth, required some of the highest state and local taxes up to that point in the world US history.
Emancipation undermined the South’s financial sector, as slaves were an important form of security before the war. Nevertheless, a new, well-developed financial system could have emerged had it not been for the war-related changes in the country’s monetary and banking legislation. The new National Banking System openly discriminated against the South, banned state-licensed banks from lending on real estate and banned state-licensed banks in the South, as elsewhere, from issuing banknotes. Pre-existing restrictions on branch banks and the fact that national banks had to adjust their debt issuance to an ever-shrinking supply of government bonds prevented credit from shifting to areas with the highest interest rates.
State-licensed banks could still issue deposits, but the 19th century was a time when checking accounts were restricted to those of recognized wealth or unquestioned probity. The poor or inconspicuous were thus confined to cash. But the denomination of national banknotes could not be less than one dollar (despite wartime inflation, equivalent to $18 in 2022); the circulation of greenbacks available in lower denominations has been contracted; and a coinage ratio that favored large-denomination gold coins, combined with the meltdown of silver coins during wartime inflation, had meant that the pre-war supply of silver coins had shrunk by two-thirds. All of this happened during a period of deflation, when the purchasing power of every dollar steadily increased.
The net effect of all these factors was to starve the postwar South of credit and loose change just as the South’s money needs had expanded. The slave plantation had been a mini-planned economy in which resources were allocated at the planter’s discretion. After emancipation, most slaves had to buy many of their necessities for the first time. Meanwhile, interest rates in the rural South rose to five times their pre-war levels. Is it any surprise that southern farming has essentially been reduced to bartering? After all, sharecropping is about cotton or other products that are exchanged for the use of land. And the almost exclusive source of rural credit was small country shops proposing food, clothing and agricultural supplies, with crops pledged as collateral.
Incidentally, when I read Jeff’s answer, I was reminded that he had covered a number of these topics in his master’s degree in monetary theory at San Jose State University, which I took on at Zoom from January to May 2021.
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