Monthly Archives: October 2016

Monetary Theory During Reconstruction

(October 27, 2016.) – In 1976 economist Milton Friedman won the Nobel Prize for work on monetary theory, which can be revealing when applied to Southern Reconstruction.

A common measure of a country’s economic wealth is the total value of goods and services it produces annually, termed the Gross National Product (GNP). Friedman’s insight was to express GNP in terms that made it amenable to monetary analysis. To illustrate, American GNP might also be expressed as the product of our money supply multiplied by the rate at which the average dollar changes hands. In algebraic terms:

(M) x (V) = GNP

The above equation is an algebraic tautology where (M) represents the supply of money and (V) is the velocity-of-money, which is the pace at which individual dollars are spent. The equation is revealing because it may be applied to any region, as well as to the entire country. Thus, ceteris paribus, parts of America with larger bank deposits create greater economic output. Similarly, regions with faster rates of dollar turnover generate more economic output. Geographic areas with both greater bank deposits and quicker rates of dollar turnover are doubly blessed.

Milton Friedman

Milton Friedman

For many decades after the Civil War national banking policy favored the North over the South—and to a lesser extent the West—on factors affecting both bank deposits and money velocity. The 1863 National Banking Act authorized a maximum of $354 million in National Banknotes. Banks located chiefly in the Northeast had already issued $300 million by the end of 1866, which was the year after the war ended. Moreover, the ceiling was not raised for the final $54 million until 1870. Although the ceiling was entirely removed in 1875, it was no longer profitable for banks to issue new national banknotes because of technicalities relating to reserve requirements that did not affect pre-existing banknotes.

As a result, at the turn of 19th to the 20th century thirty-five years after the Civil War, the South had only 6% of America’s bank deposits although the eleven former Confederate states had 18% of America’s population. Like Westerners, Southern politicians sought remedies to the persistent over-concentration of banking in the North, but to no avail.

Unfortunately, the lower population density in the South and West also tended to cause a detrimental lower velocity of money in such geographic areas. Even though Milton Friedman would not win his Nobel Prize for another hundred years, Indiana Governor Oliver Morton recognized the consequences of regionally slow money velocity:

The ten-dollar bill which is used in a county in Iowa will not change hands half a dozen times while the same ten-dollar bill would change hands a hundred times in Massachusetts…because the [Western] population [is] comparatively sparse, money does not pass from hand to hand so readily, and the actual currency must supply the place of bank credits, bank checks, and savings institutions.

Despite repeated Southern objections to money supply maldistribution little was accomplished until 1900 when the reserve technicalities noted above were adjusted by the bond refunding terms of Gold Standard Act. Even though Republican Westerners like Governor Morton were aware of the injury to their own states caused by Northeast banking concentration, their support for the status quo was secured by means of protective tariffs, federal public works spending, and generous Union veterans pensions, which did not stop growing until 1921. Persistent banking concentration in the Northeast through artificial restrictions is one example of seldom-discussed Reconstruction factors that lasted far beyond 1877, which is the year conventionally—but erroneously—accepted as the end of the era.

Washington Post: Reconstruction Op-Ed

Two historians recently wrote an Op-Ed at the Washington Post recommending that the federal government fund a Reconstruction Memorial in Beaufort, South Carolina.  Every reason cited involved the black experience. There was no mention of non-blacks except to remark that “20th century…white supremacists dismissed Reconstruction as a mistake.”  Regrettably the remark seems to falsely imply that anyone identifying non-racial faults with Reconstruction is a white supremacist. In truth, however, the consequences of Reconstruction were far more multiracial and lasted much longer than the currently popular race-centric narrative suggests.

1938 Black Sharecroppers

1938 Black Sharecroppers

The elephant in the room is Southern poverty. A century after the end of the Civil War eight of the ten states with the lowest per capita income were former Confederate states. President Franklin Roosevelt’s 1938 report on Southern economic conditions disclosed that whites comprised half of the region’s sharecroppers and two-thirds of its almost equally destitute tenant farmers. Roosevelt’s report stated univocally that white sharecroppers were “living under economic conditions almost identical to those of Negro sharecroppers.”

Sharecropper incomes ranged from $38 to $87 annually in 1938 thereby equating to $0.10 to $0.25 per day. By comparison during the depression that followed the 1873 Financial Panic sixty-five years earlier, the Ohio Department of Labor Statistics estimated the poverty line at one dollar a day.

1938 White Sharecroppers

1938 White Sharecroppers

Shortly after the Great Depression of the 1930s began, General Motors CEO Alfred P. Sloan—honored presently by the MIT Sloan School of Management—voluntarily cut his annual salary from $500,000 to $340,000. His $160,000 cut was more than all the income taxes paid by Mississippi’s two million residents that year. Widespread Southern poverty also led to lower life expectancies. Sixty-five years after the end of the war, for example, South Carolina was in 1930 the only state with as much as half of its population under the age of twenty.

The Post editorialists ignore the national agendas that contributed toward protracted Southern poverty. Examples include high protective tariffs that averaged 45% for fifty years after the war, generous Union Veterans pensions that did not even stop growing until 1921 and approximated 40% of the federal budget in 1893, discriminatory railroad freight rates, discriminatory banking regulations, absentee ownership of Southern resources, lax monopoly regulation, and the requirement (after termination of the Freedmen’s Bureau in 1870) that the nearly indigent Southern states alone bear the financial burden to educate the children of former slaves even though emancipation was a national policy.

Another common flaw of modern Reconstruction historians is their failure to adequately examine how developments in one part of the country affected other parts. The Post Op-Ed makes no mention of such intersectional factors. There is instead a tendency to portray the “white supremacist” South as an evil twin to the rest of the country and largely responsible for today’s lingering racial problems. At the least, however, a valid picture of Reconstruction requires knowledge of how the Gilded Age in the North impacted the South. The experience of Amos Akerman is an example.

Five years after Akerman served as a Confederate quartermaster during the Civil War, President Ulysses Grant appointed him attorney general. He was the most vigorous of Grant’s five attorneys general in pursuit of Southern racial justice. After only a year in office, however, Grant abruptly asked him to resign after Akerman had taken actions contrary to the interests of the Union Pacific Railroad and railroad moguls Collis Huntington and Jay Gould. Akerman’s replacement would later resign amid bribery accusations.

In short, the interpretations of many modern Reconstruction historians focus too much on racial injustices and not enough on the political and economic factors affecting all races of Southerners. At best, such historians are substituting one mythology for another. Their narratives are driven by the zeitgeist of our era and ignore the wisdom expressed by Carlos Eire who was a child refugee from Castro’s Cuba and won the National Book Award for his memoir of his escape and re-settlement in America: “Show me history untouched by memories and you show me lies. Show me lies not based on memories and you show me the worst lies of all.”

Phil Leigh October Speaking Engagements

Date: October 20, 2016

Host: Baton Rouge Civil War Roundtable
Time: 6:30 PM
Topic: Trading With the Enemy
Place: Drusilla Seafood Restaurant
Suite D
4482 Drusilla Lane
Baton Rouge, Louisiana 70809
Phone: 225-923-0896

My Civil War Books:

The Confederacy at Flood Tide
Lee’s Lost Dispatch and Other Civil War Controversies
Trading With the Enemy
Co. Aytch: Illustrated and Annotated