Via the National Bank Act of 1863 the federal government once again to establish a national banking system. In the background of this decision was awareness of the Panic of 1837, which is often attributed to the demise of the Second Bank of the United States, although some historians place the blame squarely at the feed of Nicholas Biddle, who served as President of the bank and allegedly took action to ensure that failure to renew the bank’s charter would have an adverse effect on the US economy. Regardless, the free banking area which followed the decisions of 1836 and 1837 was seen as chaotic and it was not uncertain whether wholly independent banking institutions could adequately oversee federal finances during the Civil War.
As noted by Calomiris and Haber (2014), the cost of the war greatly exceeded expectations, and Secretary of the Treasury Samuel Chase feared a general collapse of the eastern banking conglomerates. Therefore, he utilized the National Bank Act to ensure that the government could take out a large number of loans, rather than raising money via increased taxes, by utilizing the stability of a bank whose banknotes were federally ensured. Furthermore, it was decided to tax state banks at a higher rate than the federally chartered banks, further strengthening the stability of the federal banks.
However, advocacy for a free banking system remained strong, and some regional banks such as those in New York were motivated to take additional risks in order to remain profitable under the newly disadvantageous state banking environment. Indeed, competition between federal chartered banks and the state banks continue to prove a source of instability, and has led to the modern ‘dual’ banking system. Although the National Bank Act taxed banknotes issued by the bank, it did not tax personal accounts. Therefore, consumers continued to utilize the lesser banks for personal banking, and the banks invested heavily (arguably, excessively) based upon the cash deposited with them.
Following the Civil War, the United States once again sank into a depression, known as the Long Depression which dominated much of the latter Nineteenth Century. Although an argument could be made that this was a result of the National Bank Act, Friedman (1990) focus upon the role of the Coinage Act of 1873 which in conjunction with global economic trends resulted in severe inflation as the value of silver dropped precipitously. As Friedman explains, increasing global demand for gold coincided with increasing demand for goods and services and a decreasing supply of new gold. In turn, this resulted in deflation, and this played a particularly important role in the American West where lack of specie led to renewed demands for paper currency and the increased circulation which could be provided by the proliferation of state banks.
Following the American Civil War, federal policy was focused upon Reconstruction, which ultimately lead to the Compromise of 1877 and the election of Rutherford B. Hayes. Considering that there was genuine interest in rebuilding the postwar South, why didn’t the Southern economy experience growth which was similar to that seen in the North. Of course, one of the most obvious answers is that the South had traditionally lagged behind, remaining a primarily agricultural rather than industrial economy.
According to Margo (1990), another important factor was the approach to education in Southern states. This disparity became particularly pronounced due to the large number of African-Americans in this region, and the simultaneous failure of the state governments to provide adequate education opportunities for freed slaves and their descendants. In 1880, decades after the war had ended and slavery was abolished, nearly eight percent of African-Americans in the south were illiterate. This meant that in an increasingly technical economy, where reading and writing continue to be vital skills, the South had essentially crippled itself by seeking to suppress the freed slaves.
Of course, there were reform minded efforts to establish better school for both Whites and Blacks. For the cohort of southern Black individuals born between 1916 and 1920, the average educational attainment was seventh or eighth grade. Although this is dismal from a modern perspective, it nevertheless represented a substantial improvement from the late Nineteenth Century, when the average educational attainment was three years less. Subsequently, for those born between 1926 and 1930, the average southern Black attended more than ten years of schools. Consequently, we can trace the gradual improvement of the southern economy between the Civil War and the Second World War, and note that there is at least an apparent correlation between increasing education and economic strength.
Another perennial problem with the southern economy was that, even long after the Civil War, southerners remained wedded to an antebellum notion of the plantation ideal. Consequently, southern politicians often neglected the cities, and made little effort to promote urbanization or industrialization. Indeed, state regulations even sought to prevent local municipalities from subsidizing the growth of industry in their city. Even in cases where the federal government might have provided needed funds, southerners remained deeply suspicious of any federal role in their community, and they thus stubbornly clung to their deeply antiquated rural economy. This tendency would not be reversed until the Second World War stimulated rapid industrial expansion across the entire United States.
As noted by Wright (1986), the pivotal catalyst for change in the South was not the Civil War or Reconstruction, but rather the Great Depression and the Second World War. The war forced the South to embrace industrialization, as the labor market of the 1940s became the tightest in modern US history. As men were increasingly drafted for military service, or sought opportunities in northern factories, southern agriculture was desperately in need of unavailable unskilled laborers. This resulted in a continually stagnant economy until after the war, when mechanization finally became prevalent during the 1950s. Ultimately, the South thus struggled economically because it was dependent upon a large labor force which largely dissipated following the Civil War. During the 1930s and 1940s, this problem only worsened and improvement became almost inevitable since the status quo was unsustainable.
Calomiris, Charles. Fragile by Design. Princeton University Press, 2014.
Friedman, Milton. The Crime of 1873. The Journal of Political Economy 98(6), 1999.
Margo, Robert. Race and Schooling in the South. University of Chicago Press, 1999.
Wright, Gavin. Old South, New South. Louisiana State University Press, 1986).