Southern Reconstruction, Part 3: Discriminatory National Policies

Provided below is the third and final installment of my Southern Reconstruction speech last Saturday in Tullahoma, Tennessee. It addresses national policies after the Civil War that delayed economic recovery in the South but promoted prosperity in the North. 

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During Reconstruction Southerners were required to pay their share of federal taxes for sizable budget items that if funded by an independent defeated foe would have constituted reparations. To be sure, reparations are not a rare form of a victor’s compensation, but it should not be assumed that the Southern states escaped equivalent penalties merely because they were readmitted to the Union.

The table below summarizes federal tax revenues and spending for a quarter century following the Civil War. More than half of federal tax revenues were applied to three items: (1) interest on the federal debt, (2) budget surpluses, and (3) Union veterans benefits. Although compelled to pay their share of taxes to fund them, former Confederates derived no benefit from the allocations.

reparations

But the table does not tell the whole story.

First, the 1869 Public Credit Act required that federal debt be redeemed in gold. During the war, however, the great majority of investors used paper money to buy the bonds even though the paper currency traded at a discount to gold. The discount got as high as 63% while Grant was sustaining heavy casualties in 1864 only to be stalemated at the siege of Petersburg. In short, gold redemption was a huge windfall for the bondholders.

Southerners held few, if any, bonds. Some were held by national banks, which bought them to use as monetary reserves as mandated by the 1863 National Banking Act, but many Northern civilians also owned them. Federal debt jumped forty-fold from $65 million to $2.7 billion during the war. Since bonds and interest had to be paid in gold, the amount of paper currency needed pay them was significantly larger than the face amounts of the bonds and the nominal coupon interest rates. The difference was an extra cost to the taxpayer and a bonus to the bondholder.

The budget surpluses were caused by protective tariffs that generated more income than necessary to operate the federal government. As the table below documents dutiable items were taxed at about 45% until after President Woodrow Wilson was inaugurated in 1913. They were increased again in the 1920s after the Republicans regained the White House. Rates generally remained high until after World War II when the manufacturing economies of the Northern states had no international competitors because of the World war’s destruction of European and Asian economies. In short, American finally became a free-trade advocate only after the manufacturing economies of the Northern states had no international competition.

tariff

Protective tariffs were designed to restrict competition for domestic producers, almost none of which were in the South. The South’s was primarily an export economy. Even as late as the 1930s, 60% of its cotton was sold overseas. Foreign buyers, however, were unable to pay for Southern cotton unless they could generate exchange credits by selling manufactured goods into the USA, which protective tariffs impeded. By one estimate the post-war tariff imposed an implicit 11% tax on agricultural exports. As Cornell professor Richard Bensel puts it, “[The tariff] redistributed [wealth] from the periphery to the [Northern industrial regions] in the form of higher prices for manufactured goods and from the periphery to the national treasury in the form of customs duties.”

Finally, former Confederates derived no benefit from generous federal spending on Union veteran pensions. Ex-Rebel soldiers could only collect much smaller pensions from their respective states. Union veteran pensions were originally paid only to soldiers who sustained disabling injuries during military service, but Republicans gradually expanded eligibility to solidify veterans as one of the Party’s voter constituencies. In 1904 any Union veteran over age 62 was regarded as disabled thereby transforming the program into an old age retirement system instead of the disability-only program it was originally intended to be. In 1893 the pensions represented over 40% of the federal budget. Although dropping as a percent of the total budget thereafter, annual spending on Civil War Union veteran pensions did peak until 1921, which was over 55 years after the war had ended.

Pensions

While some federal spending items not specified in the preceding table benefitted the South, they were few, tiny, or funded by the Southerners themselves. From 1865 – 1873 the federal government spent $103 million on public works, but less than 10% went to the former Confederate states. New York and Massachusetts alone got more than twice as much as the entire South.

Instead the federal government taxed cotton. As prices dropped after the war the levy represented about one-fifth of the market value. It raised $68 million in tax revenue, which was about seven times the amount of public works spending in the South from 1865 to 1873. The tax could not be passed along to buyers since most American cotton was exported where it had to compete in price with cotton from other countries that had no such tax. Southerners regarded the tax as illegal since the US Constitution prohibits a tax on the exports of any state. While no solitary state was singled-out for the tax, it was undeniably concentrated on a single region.

While the Freedmen’s Bureau provided some economic assistance, it was mostly devoted to the ex-slaves. Moreover, the cotton tax alone amounted to nearly three times the federal spending on the Bureau during the Bureau’s entire existence.

To clarify how post Civil War banking regulations restrained Southern economic recovery it should be understood that the US Constitution only granted the federal government the authority to coin money and not to print fiat currency. Due to the collapse of the Continental Dollar during the American Revolution the restriction was no mere oversight. The only paper currency circulating prior to the Civil War were the banknotes of independent banks, which merited little value if they could not be redeemed for specie—meaning gold or silver coins. The wheels of commerce required the circulation of such banknotes and/or specie.

The enormous federal financing required by the Civil War compelled monetary changes. The first was the 1862 Legal Tender Act, which paved the way for the 1863 National Banking Act. The first act authorized the federal government to print paper money without gold backing and the second forced national banks to become regular buyers of federal bonds, which were used to finance the war. Independent banks were temporarily almost driven out of existence by placing a 10% tax on their banknotes.

Although the post Civil War South badly needed rebuilding capital it was almost impossible for the region’s investors to organize suitable banks.

First, national bank capital requirements were beyond the means of impoverished Southerners. Second, national banks generally could not make mortgage loans, a type of loan essential to the agrarian South. Third, national banks were prohibited from operating more than a single branch, which was a handicap in the sparsely populated South. Fourth, even though state chartered banks might offer mortgages and/or require less start-up capital, the 10% federal tax on their banknotes burdened them with prohibitive operating costs. Fifth, regulatory limitations on the amount of national banknotes in circulation made it hard to gain authorization to open new national banks thereby leaving banking concentrated in the Northeast.

Northern railroads steadily increased their ownership of Southern operators after the war due to the South’s capital shortage. The Northern owners quickly began using freight rate differentials to block Southern competition to Northern shippers such as steel producers and the makers of other manufactured goods. When asked in 1890 why shipping rates into the North for Southern iron products was higher, one Pennsylvania Railroad agent replied, “It was done at the request of the Pennsylvania iron men.”

Due to its wealth and industrial concentration, however, the region North of the Ohio and Potomac rivers was a market that all manufactures needed to access if they were to compete on a national scale. As a means of impeding competition from Southern and Western manufactures the discriminatory rates were as effective as protective tariffs, which are constitutionally prohibited between states.

Interstate railroad freight practices were not subject to federal review until the Interstate Commerce Commission (ICC) was formed in 1887. One of its chief sponsors was Texas Representative John Reagan who had earlier served as the Confederacy’s Postmaster General. Almost from the beginning, however, the ICC sanctioned discriminatory regional rates. Even before it was formed, Southern railroads charged more per mile than did Northern ones. The disparities were officially acknowledged at the beginning of the twentieth century but were excused on the basis of higher Southern operating cost due to lower population density and seasonal shipment patterns.

No careful study was made until 1939 when rates for the same service in the South were found to be 39% higher than in the North while those in the Southwestern region (Arkansas, Louisiana, Oklahoma, Texas, and part of New Mexico) were 75% higher. The differentials were so discriminatory that remote Northern manufactures could ship finished goods into the South at lower cost than Southern makers of the same items could distribute them within their own region.

Finally in the late 1930s Southern governors banded together and filed a complaint involving the rates applicable to fourteen items manufactured in the South. After two years of hearings the ICC handed down a five-to-four decision in favor of the Southern governors. In November 1939 it ordered rate reductions on ten of the fourteen items covered by the complaint. The decision reversed the Commission’s long-standing position that the presumed higher costs of service in the South justified higher rates.

The Transportation Act of 1940 required the ICC to investigate and eliminate geographically discriminatory rates on all freight classes, not merely fourteen items. In January 1944 President Roosevelt told Georgia Governor Ellis Arnall that the President wanted discriminatory regional rates to end. In May 1944 Georgia filed an antitrust lawsuit against twenty-three railroads for conspiring on rates and named the ICC as a co-conspirator. In June 1944 the ICC completed its investigation. In a seven-to-two decision it ruled that rates in the North be increased by 10% and that those in the South and West be reduced by 10%.

Southern hostility toward protective tariffs was also indirectly opposition to monopolies because such tariffs were a prime cause of monopolies. Many, perhaps most, Reconstruction students fail to appreciate the connection because industrial trusts did not become a familiar part of the business landscape until the last quarter of the nineteenth century.

The first federal response to monopolies was the 1890 Sherman Antitrust Act. Unfortunately, the act targeted only the apparatus of monopoly instead of the cause. Nine years later the president of New York based American Sugar Refining, which controlled 98% of the market through its famous Domino brand, admitted in testimony to an industrial commission:

The mother of all trusts is the customs tariff bill…

[Production economies of scale]…in the same line of business are a great incentive to [trust] formation, but these bear a very insignificant proportion to the advantages granted in the way of protection under the customs tariff…

The tariff bill clutches the people by the throat, and then the governors and attorneys-general of the several States take action, not against the cause but against the machinery…[used]…to rifle the public’s pocket…It is the Government through its tariff laws, which plunders the people, and the trusts…are merely the machinery for doing it.

Tariffs breed monopolies like swamps breed mosquitoes. In 1904 John Moody’s The Truth About Trusts listed almost 320 examples. All but about 20 were protected by tariffs. United States Steel was the biggest and was deliberately formed to suppress competition and restrain trade. Even though steel could be produced more cheaply in America than in other countries, U. S. Steel sold products overseas at lower prices than domestically. The differential averaged about $10 – $20 per long ton. Wire nails, for example, which sold domestically for $2 per hundredweight, were priced at $1.55 in Britain. The beneficiaries were the steel trust and its ecosystem, which included its Northern workers.

In 1889 when Andrew Carnegie toured the emerging Southern steel industry centered in Birmingham he declared, “the South is Pennsylvania’s most formidable industrial enemy.” About ten years later Carnegie’s mills were merged into—and became the largest component of—Pittsburgh-based U. S. Steel. Six years later U. S. Steel purchased the biggest Southern steel mills and imposed discriminatory pricing on Southern production. Thereafter, steel from the company’s Alabama mills included an incremental mark-up, termed the “Birmingham Differential,” of $3 per ton over the Pittsburgh quote.

To further penalize Alabama production, buyers of Birmingham steel were required to pay freight from Birmingham plus a phantom charge as if the shipments originated in Pittsburgh. After Georgia-born Woodrow Wilson became President the Federal Trade Commission (FTC) investigated the matter and concluded that Birmingham’s steel production costs were the lowest in the country and 26% below those of Pittsburgh. Yet U. S. Steel continued to require a $3 per ton “Birmingham Differential” on Alabama steel, which was raised to $5 after 1920. Six months after the differential was finally abolished in 1939 shipbuilding plants in Pascagoula, Mississippi and Mobile, Alabama announced major expansions.

The consequences of absentee ownership lasted well into the twentieth century. Former Virginia senator and author Jim Webb wrote in Born Fighting that after most of the post-bellum occupiers from the North left the South “they did so with their ownership of the Southern economy firmly in place so that their businesses could be controlled from outside the region thereby sucking generations of profits out of the South and into their own communities.”

President Roosevelt’s 1938 commissioned-study revealed that absentee ownership was a protracted problem and included such essential industries as electric utilities, railroads, steel manufacturing and even cotton textile mills. Outsiders also controlled most of the area’s natural resources such as coal, feldspar, iron ore, zinc, sulfur, and bauxite. Moreover, the most prosperous work of converting the raw materials into finished goods was located elsewhere. The South typically retained only the lower economic value-added function of extracting and shipping the raw materials.

About 90% of the 4.5 million American blacks at the end of the Civil War were living in the former Confederate states. The great majority were illiterate ex-slaves needing public education. Although the federally financed Freedmen’s Bureau spent over $5 million for black schools for five years after the Civil War, Southerners essentially paid for the schools several times over through the $68 million in federal cotton taxes collected before the end of 1868. After the Republican-dominated Congress discontinued the Bureau in 1870, the former Rebel states had to rely upon their own meager tax resources to pay for educating all their pupils, including the 40% who were black.

One effort in the 1880s to provide federal funding for public education failed to gain traction. In an attempt to avoid cutting tariffs one Northern senator proposed a bill to provide temporary federal monies for education in all the states. The aid was to be apportioned among the states based upon their respective rates of illiteracy. The initial amount was to be $15 million annually, but it would decline each year until it reached $1 million. Based upon the South’s higher illiteracy, the region would have been allocated over two-thirds of the total.

The Senate voted on the bill repeatedly over the next decade and most of the South’s senators voted in favor it. Within three years ten Southern state legislatures also passed resolutions supporting the bill. Some Southern representatives, however, balked because they did not want to give the appearance of supporting protective tariffs, which were creating the embarrassingly large budget surpluses. Some Southern opponents were also concerned that once the temporary subsidies expired their states would inherit higher education budgets than could be sustained from their own tax base. Since most Northerners preferred to spend more money on Union veterans pensions instead of federal aid to education the bill never came to a vote in the House. It died of neglect once higher Union veterans pensions absorbed the budget surplus.

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In sum, while it is necessary that Reconstruction history include a thorough analysis of racism and its protracted effects, contemporary historians should also devote comparable attention to the numerous non-racial political and economic factors that are equally important.

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