How A Post-Civil War Monetary Crisis Brought Down Reconstruction
The Civil War ravaged the South; railroads were ripped up, cotton plantations were destroyed, and the few Southern industrial centers of the time, such as Atlanta, were burned down. The Southern rail system before the Civil War was a small patchwork of different gauges–the distance between the rails–that primarily transported cotton to the nearest port. By comparison, the North had triple the track mileage linking the industrial centers under one gauge (Josef, 2019). Northern money flooded the railroads after the war; by 1873 the nation had laid down 33,000 miles (53,000 km) of new track (Richardson, 2007, 131) and railroads employed thousands of demobilized soldiers from both the North and South. Railroads turned to governments and banks in search of capital; they also turned to European banks when they couldn’t get capital in America, as many European bankers wanted a piece of the expanding American market. The trouble was that railroads required constant investment to pay off their debts; any break in the system could bring everything down (Dove, 2014). Ultimately, the cause of the eventual crash of the railroads and ensuing panic was America’s monetary policies.
Before the Civil War, America didn’t have a national currency; most people handled their transactions in local currencies. This system disincentivized long-distance commerce because it was expensive for most businesses to convert multiple outside currencies into their local currency. Congress solved this problem with greenbacks in the Legal Tender Act of 1862; the act forced businesses to accept the new currency, thus lowering transaction costs (Lowenstein, 86-106). Congress debated what to do with greenbacks after the war; they helped economic growth, but wartime printing devalued the currency in relation to gold. Some people thought the solution was pegging dollars to gold and silver. Silver was less valuable than gold on paper, so each piece of silver created more money than gold. The inflationary policy was soon called free silver. Farmers, miners, and small businesses supported free silver since it devalued their debts; bankers, large corporations, and industrial workers opposed the policy. In response, Congress passed several coinage acts to right national finances by devaluing silver. The laws tightened the money supply, turning investors away from long-term projects like railroads. In early 1873, Europe entered a recession following the crash of several stock exchanges, thus reducing European investment in the U.S. (Leab, 2014, 227-9). The breaking point came in September when Jay Cooke & Company, a large investment bank founded by industrialist Jay Cooke, went bankrupt (Unger, 1964, 213). This collapse caused shockwaves across the country: struggling businesses responded with mass layoffs (Unger, 226), the New York Stock Exchange stopped trading for ten days (Kindleberger, 1990, 321), and 105 railroads went bankrupt by the Panic’s first anniversary (Kleppner, 1973, 1556). The greatest effect of the downturn was that it ultimately changed national politics for the worse, especially for recently freed slaves.
From 1865 to 1877 the national government reconstructed the Southern states so they would support the rights of former slaves. One opponent of Reconstruction was President Andrew Johnson, the man who succeeded Abraham Lincoln following his assassination on April 14th, 1865. Johnson was the only Southern Democrat to stick with the Union when his state joined the Confederacy; his loyalty–and ability to attract Northern Democrats–is why he became Lincoln’s vice president for the 1864 election (Richardson, 40-2). Johnson wanted to reintegrate the South by reestablishing the old Southern political system. Undermining Lincoln’s legacy turned the Republican Congress against Johnson, so Johnson spent his presidency fighting Congress…and lost (Forner, 1990, 82-6 92-9, 1000-23). Republicans won the presidential election the following year by running General Ulysses S. Grant as their candidate. Elite southern whites felt humiliated for losing their right to other human beings as property; poor southern whites felt humiliated for losing their social standing (Richardson, 89-93). Grant tried to protect civil rights while reintegrating the Southern states. However, Grant’s administration was embroiled in scandals because Grant hired people with questionable character. Each controversy weakened Reconstruction. Grant’s poor staffing also divided the Republicans over political goals. Some Republicans prioritized protecting the freed slaves' civil rights; other Republicans felt they should back off civil rights to consolidate the party’s gains (Forner, 222-35). The 1873 crash, and the following year’s midterms, decided the party’s direction.
Southern Democrats portrayed the crash as a Republican failure to fellow Southerners. They promised both elite and poor Southern whites that by returning them to power, they would herald the return of the old South. The Republicans further aided their efforts through a poor response to the Panic (Kleppner, 281-93). The Democrats took over the House that November. The Democrat victory and ongoing economic depression fueled a turn amongst Republicans from civil rights to economic issues (Richardson, 170-73, 186). The 1876 presidential election determined which way the country, and ultimately the Republicans, would go. The election results were clear in all but three states: South Carolina, Florida, and Louisiana; the party that won all three would win the White House. House Democrats disputed every step of the process. Republicans, fearing another war, promised to end Reconstruction if the Democrats accepted a Republican victory and thus the Democrats agreed and dropped their opposition (Forner, 238-47). The civil rights of the recently freed slaves marched off with the federal troops leaving the South; it would be almost a century before any meaningful progress was made toward securing those rights.
Works Cited
Dove, J. (2014). “Financial markets, fiscal constraints, and municipal debt: Lessons and evidence from the Panic of 1873”. Journal of Institutional Economics, 10(1), 71-106. https://doi.org/10.1017/S1744137413000234
Foner, E. (1990). A Short History of Reconstruction, 1863-1877. Harper & Row.
Josef. (2019, November 10). Railroads During The Civil War. Worldwide Rails. https://worldwiderails.com/railroads-during-the-civil-war/
Kindleberger, C. P. (1990.) Historical Economics: Art or Science? University of California Press.
Kleppner, P. (1973). "The Greenback and Prohibition Parties," (A. M. Schlesinger, ed) History of U.S. Political Parties: Volume II, 1860–1910, The Gilded Age of Politics. Chelsea House/R.R. Bowker Co.
Leab, D. (2014). Encyclopedia of American Recessions and Depressions [2 volumes]. ABC-CLIO.
Lowenstein, R. (2022). Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War, Penguin Press.
Richardson, H C. (2007). West From Appomattox: The Reconstruction of America After the Civil War, Yale University Press.
Unger, I. (1964). The Greenback Era: A Social and Political History of American Finance, 1865–1879. Princeton University Press.
