The Cost and Consequences of the Civil War

0:00The first thing I wanted to mention to you is that in the latest issue of the Journal of Libertarian Studies, there's a review of the book that we're using in this class by Thomas di Lorenzo, who's also written extensively about the Civil War and about Lincoln. He's a very perceptive economist. He really knows what he's talking about. So I urge you all The Journal of Libertarian Studies, Volume 18, No. 4, 2004 It also has articles by Scott Trask on William Graham Sumner, one of the most interesting Americans from the 19th century, the late 19th century intellectual, and Joseph Stromberg's article on sovereignty, international law, and the triumph of Anglo-American cunning.

1:10That article is something that Joe is going to present here at our economics workshop, it's a brown bag seminar that's held in the library on Thursday at noon, so, this Thursday, yeah. We have, that's mostly a weekly seminar that the general public is invited to and we cover for all sorts of topics and if you go to the Mises webpage, at the bottom of the webpage you can sign up for announcements of things going on at the institute for people in the local area to attend so that you can be informed about what's actually going on here on a regular ongoing basis.

2:03Okay, in the last class, we were talking about inflation, we were talking about money, we were talking about prices, and how those things just really skyrocketed due to paper money inflation on both sides, but in particular on the part of the Confederacy, which used a lot more inflation to finance itself and we argue that that was another important contributing factor in the economic collapse of the southern economy. But as we get to the end of that chapter, one of the things I didn't cover was how monetary institutions in the US were changed dramatically and now that we're getting into The last chapter, the results or consequences of the war, this little section fits in quite well with that whole discussion.

3:06And what we argue, and what I think is in fact the case, is that there was a sea change in the United States in terms of its money and banking. We went from a system that was almost entirely privately run to one that was publicly controlled. We went from a system where the federal government had almost virtually no role and states played the leading regulatory role to one where the federal government really was the primary regulator. And then, of course, we go from one of very light regulation. In some states, you could open up a bank and accept deposits, issued notes, with almost virtually no requirements placed on you by state governments.

3:57And that's replaced by one of heavy regulation by the Fed, not the Federal Reserve, but by the Federal Government. And we also go from a system that was almost entirely metal-oriented, gold and silver coins, to one that was dominated by paper in the aftermath of the Civil War. Despite this heavy regulation and its uniform, because it's done at the federal level, the American economy continued to suffer the problems of contagion. Of contagion is the primary problem in a money and banking system, whereas the mistakes of one bank or one area of the country can infect the entire system.

4:49And these problems actually, in some sense, got worse in the post-Civil War period. There were a lot of panics and economic depressions after the Civil War. There was a redistribution effect in that the region of the South was devastated by the war, But particularly so in terms of money. Of course, all the Confederate money, all the Confederate bonds became worthless. And so Southerners were starting from ground zero, basically. Whereas the Northeast, where many of the large city banks were located, and basically these banks were given preferential treatment.

5:36They really benefited by essentially controlling loans, banking in the United States. Then we have a lot of interesting developments that occur in the post-war period. The free silver movement came up during this period where people were attacking the gold standard, Wanting, you know, they basically didn't have any money to use and gold coins were too, had too much worth attached to them and so they wanted the free minting of silver coins. Then there's the Greenback Party, again, sort of a monetary political party with the primary aim of increasing the money supply.

6:25In the course, William Jennings Bryant ran for president on the sort of the Greenback platform and on page 77 in the book it discusses the Wizard of Oz as an allegory to the problems of, to the monetary problems in the United States in the late 19th century. So let's take a look at that allegory, The Wizard of Oz, The Wonderful Wizard of Oz was a very important book, obviously a very popular book. It was something that was done in play form in theaters in the United States for years and years and years, as a matter of fact it continues to be.

7:15I think there was even a new version of it on Broadway a few years ago. and then of course Walt Disney made the movie The Wizard of Oz, one of the big first blockbuster movies that continues to play year after year, so it was a big thing in terms of culture in America and it's very interesting that the author, Frank Baum, it's been suggested with a lot of evidence and scholars have debated this issue back and forth, but if you look at a lot of the things in the Wizard of Oz, you'll find that there are all these little signs that he was really talking about monetary problems in the United States.

8:08First of all, the Wizard of Oz, OZ, is the abbreviation for ounce, the ounce of gold, The Emerald City, the Green City, is symbolic of Washington D.C. where the Wizard of Oz is located, the Wizard of Oz is supposed to be the president who is manipulating everything behind the scenes against the population on behalf of the big city banks. The Tin Man, the Scarecrow, the Munchkins represent different groups of people while While the cowardly lion represents William Jennings Bryan. The Tin Man is supposed to represent the industrial workers of the Northeast.

8:57The scarecrow, let's see down there, the Tin Man has no brain? Brain. Yeah. So. No, no, the scarecrow has no brain. One of them has no heart. The lion has no heart. That's eliminate. The lion has no heart. The scarecrow. Let's eliminate, the lion has no heart, the scarecrow, the tin man has no heart, see the tin man is the industrial worker, they were benefiting from Republican policy, and so they didn't have a heart, the farmers were the dupes in all this, so I guess they didn't have a brain, That's right. Cowardly Lion, William Jennings Bryan didn't have the guts to really take the free silver movement forward.

9:45And Dorothy stands for everything, just the general American citizen, the average good-natured citizen who does not have a clue about the underlying causes of the problems of society. the yellow brick road of course is the gold standard and the ruby slippers remember the ruby slippers well in the book they weren't ruby they were silver slippers and when Dorothy clicks the silver slippers three times that's supposed to be the cure-all just as the free silver movement and the free and coinage of silver were supposed to be the magic cures for all these problems.

10:47There's no indication really of whether or not how the author actually felt about all these things. He was just building all of these aspects of society into the equation. So he was just looking around, he was looking at this problem, he understood what it was and he just built his imaginary story around it. What was the significance of the water that did away with the Wicked Witches of the East or West? Well, yeah, the Wicked Witches were in the North and the East, right? And the Good Witch was from the South and West or something like that. But they're supposed to represent good regions and bad regions, The People Who Are Exploiting Versus The People Who Are Getting Exploited And so this is a yeah, you really need to read the book in its original context because of course Disney has to, for purposes of making a movie and just subtle changes along the way, the movie makers often change what's written in the book and so it's often important to get what's in

11:59the book Unless the book is written after the movie. In my writings on Star Wars, for example, the movie was written first. And I based my analysis on what the writer had done and what was in the movie. And then somebody wrote a book about it. But that wasn't the author, it was just somebody who was filling in the script. and it turns out that a lot of the things that were in the book kind of conflicted with the movie. So read the original sources. Okay, well in any case the new national banking system that replaced the largely laissez-faire system And it's often regarded that that was somehow in the public's interest.

12:54But when you look at the facts, that's something that's hard to defend precisely because there were all this contagion effects, there was all this redistribution of wealth from some regions to others, from some groups to others. And so after a lot of analysis, the notion that it was in the public interest has become under increasing criticism. As a matter of fact, I quote three leading monetary, mainstream monetary economists in the book who studied the national banking system and found that if they assume the system was based on the public interest motives to improve the economy and help everyone in society, that the system was a colossal failure.

13:40And I quote, The provision of the Acts of 1863 and 1865 that established the national banking system were designed to remedy two perceived defects of the antebellum state banking system. One was the circulation of a wide variety of state bank notes, often at a discount, which made for an inefficient payment system. The second defect was instability of Note Issue, marked by over-issue bank runs and failures and periodic suspension of convertibility into specie or gold. To remedy the first defect, the national bank issues of U.S. bond secured currency replaced state bank notes.

14:26To remedy the second defect, stringent reserve and capital requirements, oversight and regulation by the Comptroller of the Currency were conditions for national bank charters. Unfortunately, the remedies did not work as intended by the architects of the national banking system. Instead, the system was characterized by monetary and cyclical instability, for bank panics, frequent stock market crashes and other financial disturbances. In other words, it never lived up to its promise, and the idea that it was to remedy something that was in the public interest, even if that was what its intentions were, it certainly never turned out that way.

15:20And as a matter of fact, of course, as we get to the turn of the 19th century, these problems of instability become not only more acute but also more important because the economy is continuing to modernize and so this eventually leads to calls for a central banking system as a way of creating even more government intervention, more government control and power over money and banking Okay, the consequences of the war. I introduced this chapter with a quote from Ludwig von Mises and I'd like to recite it here to you because I think it's very important. I think the public's notion of war and its economic effects is decidedly wrong. I think that they've They've been duped by propaganda in a very systematic way.

16:28Economists, however, have a traditional view of war that it's destructive. And I think Mises's quote underlines this. Quote, every unprejudiced person can naturally have no doubt that war can really cause no economic boom. War prosperity is like the prosperity that an earthquake or a plague brings. Earthquakes mean good business for construction workers and cholera improves the business of physicians, pharmacists and undertakers, but no one has has for that reason yet sought to celebrate earthquakes and choleras as stimulators of the productive forces in the general interest.

17:18Now Mises wrote that a long time ago. Unfortunately, what he said there is no longer the case. When we have wars, when we have earthquakes, when we have tsunamis, it won't take but one or two days later before you find some mainstream economist or business writer getting up or in print and saying, well you know that was really too bad for all those people who were killed, but this is really going to be good for jobs, or this is really going to be good for construction, or this is really going to stimulate things that are going on. going on, and this is a basic economic fallacy, and we explain this fallacy in the book by going back to Frederic Bastiat, his parable of the broken window. It's a very simple parallel, but it sort of brings out what's going on here in terms of understanding the basic cause and effect of war. In the parable, some little rotten kid in the streets of Paris decides

18:28The guy has to pick up a rock and throw it through a storekeeper's front window, smash, crash, the glass goes breaking everywhere, the kid runs away, and people start to gather to see what the commotion was about, to give their sympathies to the store owner, and then somebody says, yeah, you know, this is too bad that little rotten kid, but, you know, now all of a sudden Pierre is going to have to pay The window, the man who fixes windows to come and fix this window and so he's going to have more work and then he's going to get that money and he's going to be able to spend more money at the grocery store and so the grocer is going to end up with more money and so the grocer can go out and buy more clothes and then the tailor can have his house painted and then the house painter can and then so that you know really this broken window may have been

19:58on something else and then the money circulates throughout the economy in the same way except we have an extra good functioning window for that store and the same is true with war, earthquakes and so on and so forth. It creates a lot of activity but basically in addition to killing people and destroying capital it It means basically that society is going to have to do without what they would otherwise would have spent that money on. So that the end result is that war, earthquakes, tsunamis are not good for the economy in any tangible way.

20:46And that anytime somebody gets up there and says, yeah, this is going to be good for the economy, just tell them they're wrong. I think it's probably a good sign of how badly we've gone in terms of our economic knowledge. That what Mises said 80 years ago about nobody would dare say such a stupid thing, now people say all the time. Okay, yes? Okay, yes.

21:42Yeah, that is an entirely bogus argument. And the idea that science is somehow stimulated by war, it's just not true. We've never seen that kind of thing in any of our research. It's just not true. We've never seen that kind of thing in any really truly positive way. Now there are some new inventions, there are some advances that occur as a result of wars. For example, Claire's favorite thing, nuclear energy and nuclear power was stimulated, brought on line sooner than it otherwise would have been because of the war and the cold war and all that, so it's not that nothing is produced or increased or invented or discovered, but the net effect is that it actually hurts all of these areas of technology and advancement and the Civil War is a good case study on this.

23:03and historians have gone back and looked at things, particularly looked at things before the war. How were things before the war, you know, for so long historians just looked at what happened after the war and said, wow, this must be to the Civil War, this must be the result of the Civil War. Anything that was good, they said, boy, this must have been the result of the Civil War. And what they found is that, well, at least once we filter things through in the theoretical approach, that the advances, the so-called advances after the war, most of them were there before the war, and there was really no advance during the war, and that growth and development was actually slower after the war.

23:51So you have to have the theoretical approach, which is a tool to help pry open a better understanding of history. And let me try to explain what I mean there. For a long time, historians held a positive view of the war, that it had a positive impact. Primarily, they label this as the North destroying the agrarian society, the power of agrarian slave-based, plantation-based economy and that the US became a global power, militarily, economically, and they wiped out the Indians, we had an industrial revolution, Big business started developing, the intercontinental railroads were built and we completed our manifest destiny.

24:51So this is sort of the positive spin that the historians put on the post-war period. We argue that the war didn't do any of this and actually hurt many of these developments or slowed them up. In other words, they can't take credit for all those positive developments. However, there are some interesting things, some of which I mentioned earlier, about the reform movements of the late 19th century, like populism. It's sort of the fly in the ointment. The general results of the war, of course, the North won, the Union was maintained, 1 million people were killed or wounded, slavery was abolished in the United States, We added three amendments to the Constitution, of course, about slavery and about solidifying the Union.

26:22Only in isolated states, like Wyoming, we had a fight really hard, George. George, what you don't realize is that women have been controlling the world all along. They never needed the right to vote. What they absolutely did in the play of the Cisterna. They should have withheld their favors until they got the whole. Okay, this is a general audience here. We're out on the web here, so. Okay, there's, we could go into a lot about this general issue of war, about World War II and post-World War.

27:10We can go back to that if you want to in the question and answer period, that'd be fine. But sticking with the Civil War itself, the war obviously destroyed a lot of labor and capital. As I just mentioned, one million people killed or severely wounded. Maine, there was a lot of people who lost limbs and were unable to work after the war. A lot of capital was destroyed. Mostly the physical building type capital was destroyed in the south, the burning of cities and things of that nature, the bombing of cities, the destruction of housing, the southern railroad system was pretty much completely depreciated by the end of the war.

27:58They used iron rails back then and those things were just about completely worn out and the northern system wasn't in great shape either. a big part of their capital base. There was a decrease in the amount of farmland under production and of course farmland was the landed capital of the United States. And most everything else in terms of machinery, housing, factories, warehouses was depreciated during the war and businesses were disrupted. were disrupted. All kinds of businesses failed during the war, lost their markets, lost their input suppliers, had to convert over to war uses and so forth. So there was a lot of depreciation of the capital stock and disruption of business and business practices. So when we look at the results of the war, emancipation was really the one clear, solid, great thing that happens.

29:00And historians are not completely uncritical. Generally things were good, according to their point of view. But there were some things that these left-wing historians had problems with. For example, the rise of the robber barons, the big city businesses that developed in the late 19th century century and made huge fortunes and controlled large industries. Then there is populism which I mentioned, the development of labor unions, and then of course many historians are critical of reconstruction, that reconstruction was ineffective, that it didn't work, that it may have made matters even worse, that That there was a lot of corruption that went on during Reconstruction and that nothing was really done to help the former slave population.

30:05Theory can help us make sense of this all. If we think back to what the Republican economic agenda was, what their interests were like, Who were they supporting? Well, they favored protectionism, tariffs, national money and banking, over small businesses, farmers, and labor that work for small business. Okay, so their agenda helped people in the Northeast in terms of banks, steel, cotton textiles, people up there in big businesses and because they were protecting their business, they were helping to generate all those profits.

31:01Whereas it hurt small business, it hurt labor in small business, and it hurt regions like the South, parts of the Northwest. And those were the groups that made the backbone of all of these reform movements, like populism, the Greenback Party, the Free Silver Movement. and so it's not a situation where things are inconsistent where the historians say well there were some good things and there were some bad things and we really don't know how to latch them all together but if we realize that the Republican Party was a very dominant party in the United States they really controlled the federal government and most state governments their agenda was in place they were protecting industries they were establishing these these favorite regulations for for big city banks.

32:00And so they were helping to create these large industries. They were helping to create these mega wealthy individuals at the expense of the little guy. And the little guy formed the backbone of these reform movements who were complaining. A large number of Americans were complaining about conditions in the United States during this time. So we go back to the theory, we look at the policy of the dominant party, and it all fits together fairly well for history. So the Republican agenda is not true laissez-faire. That's one of the mistakes that the historians made is that they labeled the Republican party agenda as laissez-faire.

32:51But it wasn't in the sense that where government was just leaving business to its own. It was creating conditions where business, big business, almost had the right to exploit the rest of the economy by manipulating federal economic policy. So their agenda was better classified as mercantilist. The Transcontinental Railroad. Here's another case where historians said, Transcontinental Railroad, great accomplishment, amazing. We've got three lines running across the country. The U.S. had to subsidize these lines to a fairly significant extent, but the social results of this policy was a good thing. Because if you look at the profits of the railroads And then you add in all the satisfaction that consumers got out of the railroads, and then you consider like multiplier effects and things of that nature that Keynesian economists assume.

34:04Then they just come up with the idea that these transcontinental railroads were a wonderful and great thing. The problem with this analysis is that it just doesn't hold up too well. In terms of railroads providing a lot of consumer satisfaction, they really didn't. They really didn't. And the reason they didn't is, I mean, consumers were like the idea of having the railroads. Don't get me wrong. But railroads can price discriminate. They can charge you one price and you another price. They can charge one farmer a certain amount to bring to bring their crops to market and another price to another farmer to bring their crops to a different market so that if they can charge you a higher price because you value that service more, then you don't really have the surplus of value.

35:05Every time we buy something, we get more enjoyment out of it than the money we give up. That's why we do it. But if the business that we're dealing with can discriminate, and they find out how much you like the product, then they raise the price. So that, like the movie theater charges people who go at night, what, $8? No, I'm always cheap. You go during the day? Any time. I'm still cheap. He's a senior citizen. Well, yeah. Price discrimination. That's price discrimination in the day, night, and so there's that kind of thing that's going on with railroads in a major way so that historians have made a basically an incorrect assumption about the value of these railroads in order to for their calculations to come out in a positive way. Yes Ozzie.

36:01The Commerce, the Department of Commerce, didn't they have any, and didn't they have some influence over these railroad barons, the hell with the public people, Vanderbilt and all those guys? No, no they didn't. They were just cynical. I was going to say that especially the railroads were discriminating in the south. They were keeping the bank corrupt. And finally the federal government was the only one with enough muscle to control the railroads. Yeah, they eventually passed the Sherman Antitrust Act. And that was designed specifically because of what the railroads were supposedly doing to their customers and so on.

36:58That is the United States. And, you know, basically what happened prior to the war is that the railroad system was fairly well developed in the East. So that, you know, basically there was all sorts of connecting routes in the east, out to Galveston area, I think up to Minnesota even, and of course...

37:50That wasn't true in the southeast. In the southeast, yes, there was an extensive railroad system in the southeast. There was a line that came from Savannah, for example, over here. There was a line out of Mobile to Ohio, yeah, someplace like that. And then there was another one that came up to Montgomery, I think. I was thinking that, say, in Alabama, that the line ended in Columbus or something, and then you couldn't get from there to Montgomery, and then there was a different gauge or different width.

38:51and mobile to Columbus too. So there was a pretty extensive system of transportation in the East, largely because it paid. And there was also public subsidies for some of these roads. But the big deal, the big question was, who's going to build to the West? And essentially what happened after the war as a result of these subsidies was that there was three lines built. Northern line, central line, and the southern line. So that as a result of the subsidies, we got not just an intercontinental railroad, we got three of them. And there's really not much commerce going on with the West.

39:39There's not much weight in terms of settlement and those kind of things, so that it was really a lot of overkill as a result of these subsidy programs these railroads were essentially not needed and if they were needed really all you would have to have is one railroad so that say for example the northern one which was the most private one in the best run let's take that one off and take off the southern one and then build a west coast railroad system to connect the cities of South, North, Northern California, Oregon and so on. You would save for a very long time all the resources that were, had to be used in order to build those extra rail lines. And it wouldn't necessarily have to be the central one that was built. It could be the northern one. It wouldn't really matter which one was built. And think of all the timber, all the lumber, all the Iron that was used, all the labor that was used during this process, we could have probably

41:07gone without the extra Western railroads for decades without ever actually needing them. And that of course meant that it was difficult for these railroads to make a profit because there was so much capacity vis-a-vis the demand for the services. And then there's other issues like importing lots of immigrant Chinese labor, the conflicts with the American Indians and the slaughter of American Indian tribes that took place, even I think somehow the disappearance of the Buffalo I think is even related to the building of these intercontinental railroads so that what the subsidy program did was it diverted mountains of cash And without the subsidy, we think that a better built, lower cost, more timely system would have been built in its place.

42:24Stanford, wasn't Stanford one of the guys, one of the big wheels in the Western Railroad and he was equal to the Easterners, in other words, their pressure that they put on the government for subsidies and favoritism and all this and that. Yeah, Lehman-Stanford, I think, was responsible for western coast rail lines. And you know, Ozzie, like I said, I'm not saying that one road over the middle, I'm not picking the roads.

43:09But say, for example, this is St. Louis, and we hadn't built a rail line to the west. Well, there's absolutely no reason that as farmers start using this area to grow a lot of crops or feed a lot of cattle or whatever, that a railroad line couldn't have gone out into that area. So that you just need a spur line to get to the river and then you're into international markets. So a very similar thing happened in Texas. You know, Texas has a few rivers that were used initially by the first people to go there to grow cotton.

43:54And so they would congregate around the rivers. But there was a lot of area that was perfectly good for cotton growing that was unusable because of transportation costs. And so they started building wood plank roads and then eventually railroads. into some of these areas that weren't served so that, you know, a common notion is build it and they will come. You know, build the baseball park and the fans will come and it will be a success. That just never works. It only works once in a great moonshot of a time and only by pure luck. As a matter of fact, if the argument is, build it and they will come, that usually is a recipe for disaster.

44:45You need sensational stars and a lot of steroids. That thing of subsidizing railroads is still with us, isn't it? It always deals with the retirement of railroad employers today. I don't know. Yes, it's a category on your federal... Oh, yes, yes, yes. There is a thing in there. How many of you see it? It bothers me. I've got a friend that's a Vice President. They held these political types out in just about every state and railroad companies. And they're out there as lobbyists who deal with state legislatures and that kind of thing, making sure that the benefits that there's no negative legislation against their particular railroad.

45:32Well, the railroads have been a mess of a business pretty much from the start when government started getting involved but you know back to Ozzie's question here in terms of you know would they build the railroads well of course if they're growing crops in this area they're going to build a railroad network to serve that and you know so that a private owner can look out there at the potential and the potential rewards, the potential business that's developing, that might develop, that could develop, put their own money down and sure enough those are the type of roads that are going to be built when and where necessary and they're going to be beneficial to the local economy and to the railroad owner themselves.

46:24Yes, James. I think Tommy Lorenzo makes the point that in Utah, the Latter-day Saints, they built their own railroad system. How expensive was that? Do you know the details of that? I really don't know about that. Well, you know, most of these systems were privately owned. It's just that they were given various forms of subsidies and protections. And that's true of some of these eastern roads as well. It's just that when the federal government gets involved in it, it becomes a much bigger, more luscious types of subsidies that are being generated.

47:24the great northern route, the great northern was... it was a little bit for steel, wasn't it? well, at the least subsidized I mean, not steel, but the product they got from hibbing and all those places, the ore and stuff that they got out of there yeah, I would imagine so built their reputation on that. Great Lakes, you know, what the steel going out and the raw materials coming in and it depended where the, I mean, the railroads were built around those, I think, were built during World War II.

48:10Well, that's a lot later, though. Yeah. And during the global rush days, it might take from two months to six months to get from New York to California. If they went around South America, or if they went across the isthmus, half of them would die. Yeah. I'd say the railroad was needed. Well, I mean, yeah, if you were a 49er... Or if you were one of the... California had a considerable population. Well, not actually before the gold rush. It wasn't that big of a populous of a state. There were, and you come to this point too, that it was the need become substantial. Private money does it.

48:57There were railroads and other means of conveyance in the gold rush days to accommodate the needs of the gold rush traffic Across Nicaragua and Central America, there's one river going to Nicaragua and a railroad in the isthmus of Tehuantepec, Mexico, there are all kinds of transit points down through there, and not only Panama too, there's a railroad there, and that goes all the way around, and I don't see, and I wonder, as a question of economic theory, what's the difference in highways and other roads, and Transportation in Railroads. We subsidized a lot out of all these road systems and railroads and everything, and aren't they basically a question of economics?

49:49They're the same. If one thing gets there, one thing gets built. Like early railroads, you had spurs going everywhere, all by private money, and many of them didn't do too well. Well, you know the private roads and railroads work just fine. Now sometimes there was boom bust cycles in the economy where these large capital projects went under just like everything else and sometimes the government subsidies would create competition that would make the the private sector is perfectly capable of transporting, providing the necessary transport.

50:40There's no economic rationale for why transport should somehow be treated differently than anything else. And, you know, getting people across the country is a fairly easy process and doesn't necessitate the need for railroads in any sense. It's only heavy materials that require railroad conveyance in the absence of water conveyance. Is this true or not? Every time they had a big board hassle like between the big eastern railroads and they, several authorities said that the railroads can transport more goods more efficiently and more cheaply than any other type of transportation, air, sea, whatever, air, sea and water.

51:40whatever, heresy and trucking and so forth. Is that not still true? I mean, that is true. Why is it then that they don't, their government doesn't uptake that? What's in the railroads, or in other words, make them more efficient and rebuild a lot of them and so they can take advantage of it and think of the jobs that would be created if they put the railroads back up The government, Ozzie? Why doesn't the government do that? No, I don't mean the government. Why don't they encourage it? Ozzie? Ozzie, you're breaking my windows. No, I mean, it makes sense. If one type is more efficient than the other, well...

52:33That sounds like an engineer's report. It's fine as far as it goes in the sense that if you had to pick one system, that might be the most overall viable one because we couldn't use airplanes to carry really, really heavy stuff. and you know so basically you'd really prefer to have a mix of things and I'm going to come to a solution to your problem here you're probably not going to like it but in a market economy consumers like choice they don't want just one system one size fits all I hate the concept of one size fits all because in my case it never does I know I'm getting to your problem so you like I like railroads and a lot of people love railroads. There's a great nostalgia for railroads and there's a lot of engineering efficiencies with regard to railroads in terms of moving freight and people and all sorts of things.

53:33And there's nothing wrong with that. In terms of figuring out what's the best mix of railroads and planes and cars, I mean you wouldn't want to have to wait for the railroad to come and drive you to your home. Well, I understand what you're trying to say, Ozzie. And the basic problem with railroads is that they face too strong of a competition from federal highway building and things of that nature.

54:18If there was no... Right, they're in Washington and they're getting the federal money for that. And look at all the pollution that arises from that. If you had an efficient train system, I don't know how... Several years ago, when we traveled in Europe, they had a great train system. But the point of it is, is that the car, the automobile is going to asphyxiate the United States. Well, I accept your medical opinion on that, but the important thing is that, I think this points out, is that it's only a market economy that can figure out what mix of transportation services is the best for an economy at any one point in time. And that's going to change. It's not going to stay the same.

55:12In 1965, we went all the way around Santa Fe Railroad to Los Angeles, Southern Railroad to Portland and Union Pacific back to Chicago. We had to get to Chicago from Tiffin, Ohio. I worked two summers on the railroad as a section hand. When I worked there, they still had human maintenance, but when they went to automated maintenance, my God, I got on that train and rode from Okay, you're going off the subject, Ozzie. You're getting off the track. Okay, so just calm down. We're going on to tariffs now.

56:13Okay, tariffs. The Morrell Tariff of 1862. Tariffs were...

56:43For 20% on average before the war, the rest of the century, including the Civil War itself, the Republicans raised tariff rates up to about 50%, so that the tariff rates on imported goods were increased by 150% of their pre-war levels. Scientists have found that 21 major industries had 100% tariff protection, and what this meant is the 50% rate was the tax that they had to pay to import it, and that tax rate was significant enough basically to prevent anything from being imported in 21 major industries.

57:37So people in those industries were completely insulated from competition and from abroad. The losses to consumers under these types of tariff was tremendous. They were paying lots of money for products that were made out of iron, textiles, machinery and so forth. This loss to consumers, of course, translates into gains to the producers, the iron producers and the textile manufacturers in the northeast and almost entirely in the north, yes. Now of course there's steel, iron, excuse me, iron in a few places in the south, but Almost all of that is in the north, and at least prior to the war, there's very little textile manufacturing in the south that was done almost entirely in the north.

58:40Now, with those tariffs and with that protection, some of that started to leak down into the south, so that, you know, Birmingham, for example, was an iron town, and Richmond produced some iron, and textiles were moved down into the south as well. I think there was some iron production in Tennessee and other places, so because of the protection and the fact that we couldn't get cheap imports from Europe, some of it did leak back down into the South, but initially it was all beneficial to the Northeast and the Midwest. Now this is going to have the effect of reducing potential income, reducing potential economic growth, and keeping the standard of living down.

59:40In the book, we report on the increasing skepticism about the so-called beneficial effects of the war. And some of this gets to the question of technology, education, science, and so on. George Taylor, a historian, you know, talks about the economy growing after the war. But in terms of comparing it to before the war, the economy was growing very well before the war as well. So in terms of economic growth, they can't find any positive effect from the war. Robert Starkey, another historian, looked at economic institutions before the war and after the war and found that only banks were somehow different as a result.

1:00:30And that's something that we said was going to be different, is that banks were now more more likely to be nationally chartered banks rather than state chartered banks and they held more government debt because the government had issued more government debt. And that the financial power in the country was clearly in the northeast and clearly had financial power over the south and west. And I think we quote him something to that effect. Yes, He says, as the national banking system took shape after the war, it was apparent that human ingenuity would have had difficulty contriving a more perfect engine for class and sectional exploitation, creditors finally obtaining the upper hand as opposed to debtors and the developed east holding the whip over the underdeveloped west and south.

1:01:29This tipping of the class and sectional balance of power was, in my opinion, the most momentous change over the 23-year period of 1850 to 1873. This is a historian named Robert Sharkey, Sharkey as in the big fish with the big teeth. Hunter Dupree looked at the issue of technological advance and you see things like the development of steam powered ships and warships and things of that nature and the Gatling gun and all that kind of things that we see on TV and you get the impression that technology advanced significantly during the war but after examining the question Dupree said that the Civil War actually Inventors like Edison and those guys, tremendous impact on...

1:02:54in advance and knowledge and that thing were actually stopped during the war. He mentions a few. For example, if we're not at war, one of the things we use the military for is exploring and charting and all that kind of stuff and that had to stop during the war. Robert Bruce historian said that the war was a distinct detriment to science and the famous Alfred Charles Chandler looked at transportation and business organization, yet found no benefit from the war. He concluded, quote, if we take a broad perspective, then it seems safe to say that of all the decades in the second half of the 19th century, the decade of the 1860s witnessed the fewest and least important changes in the organization of American transportation.

1:03:47He also argued that, quote, the Civil War appears to have had little impact on the organization of American transportation and manufacturing, particularly if viewed from the perspective of a half a century of rapid development. In other words, he saw a lot of the rapid development and innovation occurring before the war, not after the war. and there's other Civil War historians are in American historians are quoted in here we note that the the phrase Yankee ingenuity that Americans were somehow technologically adept and they could solve problems with technology was something that was coined by Henry David Thoreau at least as early as 1843. So in 1843, Americans were already known to be technologically advanced and Kenneth Sokoloff looked at the number of patents that were registered in the United States and found that in the pre-war period, the rate of patent registration was very significant.

1:05:06So they can't really find anything in Republican policy and the Civil War that contributed in a positive way. We also look at economic growth during, before, during, and after the war. And there's a table here, table 4.1, where we look at the capital stock formation in the country. And capital stock is really what drives prosperity. If your population saves and those savings get put into capital or tools, then what we find is that the economy grows, income and wages increase.

1:05:58And in this table, basically what it shows is that the rate of capital formation increases in the United States and in the two decades prior to the Civil War, 1840 to 1860, the rate of economic capital formation, capital stock formation, is at its highest level in our history. And then in all subsequent periods, the capital stock formation declines and now we're back to a much lower level, approximately only one half the rate of capital formation now as it was in the two decades prior to the Civil War.

1:06:49Now this would indicate to me and did indicate to me that if I looked at income statistics, That that would ultimately be reflected in those income statistics. And the guy who put these together, Robert Gallman, is kind of interesting. On page 93, he said, let's see, he surmised, quote, One would think that the effects of the war on improved farmland would have largely been removed by 1875. So when he was looking at this capital stock, one of the things he was looking at was improved farmland, land that had been cleared and ready for plowing. And during the war, as I said, the amount of farmland decreased because a lot of it was allowed to lay fallow and trees and bushes and stuff grew back onto it.

1:07:43Now he's saying you would have thought ten years after the war that all that land would have been reclaimed and put back into production. But why wasn't it? Class, this is your final examination here. The manpower was depleted. Well, certainly the manpower was depleted, that's true. What about the McCormick Reaper? Didn't that come in about 1850 or something? No, that was a little bit later. That was what? Yeah, but that had a tremendous impact on... But in terms of answering this question, why would it be, according to Goldman, he would have thought, well, 10 years later they should have got all that land back into production. The population had stabilized itself.

1:08:30Don't we have to know something about land ownership after the war? No. What about the physical laborers in the field? No, there wasn't really a shortage of that. As a matter of fact, there was... This former slave population was actively looking for land of their own. It has to relate to markets. It has to. Is it customer base or not? That's getting close. Was it taxes? It was taxes, yeah. Remember, Republican agenda was to, quote-unquote, protect the United States. to provide protection for iron and textile industries and those sorts of things.

1:09:20So the prices of those goods went up, the wages in those industries went up. But for the South that was producing a lot of cotton and other export goods, now there was less of a market for their particular crops. The relative price of cotton was now far below the relative price of these manufactured goods in the United States. So basically our economy drifted away from its strength in agriculture and moved towards its comparative disadvantage in manufacturing iron products and textile goods. So its protectionism tariff taxes essentially which disadvantaged agriculture so it was was no longer as profitable to be in agriculture as it once was.

1:10:13It would be more profitable to go get a job in an iron foundry or in a textile mill. So Galman's quizzical statement, again, is readily answered with respect to the economic Talk Tools, Understanding Republican Economic Agenda and Policies. I think I'll save the reconstruction of the New Deal for the last class and see if we Do we have any questions about growth and policy and the Republican economic agenda at this time?

1:11:09Anybody have any questions or comments? I'm no student of the Civil War and certainly what reconstruction, but I've always had the general feeling that reconstruction dealt more with some kind of psychological reconstruction as opposed to the non-reconstruction of the South with the military occupations and that kind of thing. In terms of the way you think about reconstruction today, whether it be Europe after World War II or Japan or whatever, South Korea, was there any of that, was there any real economic reconstruction of the South?

1:11:57Not that I know of. Not that I know of with respect to, you know, rebuilding infrastructure and things of that nature. There was very little effort in that regard. It was, as far as I can tell, it was a Federal Army occupation. Union, and it was designed to basically occupy the South until Southerners in particular states were willing to concede, sign pledges, you know, that sort of thing, to get back in the Union. They weren't going to be allowed out of the Union, but to get back in the Union, they Everybody, or many large categories of people were disenfranchised and then re-enfranchised by different categories.

1:13:15If you were involved in the Confederate government or even the state governments of the Confederacy, those people had to basically either weren't allowed to vote or if they were they had to sign pledges. If you were a soldier, if you were, if you tailed any, any, some adopters. Right. Uh, regarding, if Claire has commented on taxes to the terrorists, I'm sure Ward Allen told me that the young man who worked for a scrap dealer in town outside of Birmingham, he had to ship his scrap the filth to Pittsburgh, because of the railroad tariffs that wouldn't allow him to ship it 10 miles to Birmingham. really that's an amazingly stupid policy I mean it's you know every every time you you think they can't become any more idiotic you find examples that they're Was the cotton gin invented right after the war or in the early 19th century?

1:14:35So that would diminish the need for slave labor?

1:14:52stuff, that was invented at the end of the previous century and so that was already around and it was being developed and made more productive over time and the ability to gin that cotton and get the seeds out mechanically reduced the cost of crude cotton available for manufacturing textile goods. and so, by hand, and combs, well, the Indians processed it by hand, but that technique basically pushed cotton into the primary material for making textiles, giving it a clear comparative advantage and that increased its price, the demand for it increased its price and the production of cotton increased dramatically throughout the entire, certainly the entire pre-war period and I believe it continued to increase afterwards because they were still pushing out cotton production into the west and of course filling in all the open places in the east.

1:16:29Martin, when was the legislation that made interstate tariffs on the interstate commerce? The interstate commerce? It prevented these tariffs between, among the states. Oh, the clause itself is in the Constitution. Yeah, so that's in there, that's in there from the very beginning. Well then how are these, it's been said I think in this class that 70 or 80 percent of the income to the national government was from taxation or tariffs on southern cotton.

1:17:37and others goods, it also prevents the federal government from taxing exports, but it still can tax imports. And so the federal government was taxing the imports into the United States. This is largely the iron and textile goods that I've been referring to, manufactured products, machinery, those kind of things. So that the Southerners aren't paying the tax on the cotton. They're selling the cotton, but then when they buy the iron goods and the textile goods and the finished products, they have to pay the tariff that's built into the price of all those products.

1:18:25And it doesn't matter if it's an imported good that's had to raise its price or a domestically produced good that gets to raise its price. that Southerners and many people who weren't directly involved in those protected industries pay the tariffs indirectly. You certainly don't think of the people in a iron mill in the North that's benefiting from the tariff as having to pay the tariff even though some of the products that they buy may have the tariff worked into it. So the southerners are considered to be basically, at this time, paying the bulk of the cost of the tariff and therefore paying the bulk of the cost of the government.

1:19:17When you said the products were taxed, I mean, the tariffs on them were 150 percent, why didn't that choke off everything? For God's sake, if you tax it three times what it's worth, I mean... Well, actually, Ozzie, the tariffs went from an average of 20% to 50%, okay, and that was enough to choke off virtually all imports in 21... That's actually 50% of the value of the product was the tariff. That's right. And, you know, there's a lot of... that's not unheard of. There's a lot of countries that have had tariff rates of that same sort and still do today.

1:20:10You know, a lot of poor small countries will put heavy tariffs on certain items that they know are going to be imported and then know people are going to have to pay a huge tariff to get them in there because that's their stream of revenue. And so that's been a common ploy of governments. This is not, unfortunately, this is not all that unusual for governments to want to put high tariffs on their economies, even though it's on net detrimental to the economy. It's going to benefit somebody. So, that's the key thing is that the overall equation here is that the government benefits by getting tariff revenues. The producers in protected industries benefit from that protection from competition. But even if you combine the dollar values of those two benefits, the loss to consumers is still much greater because they have to pay more, they get less

1:21:46of the Economy, and there's a lot of misconceptions about this, even on the part of economists, I should say, because we had high tariffs in the United States, and because we were so prosperous in the late 19th century, a lot of people have said tariffs caused the prosperity, but that's not really the case. The case is that the United States was an extremely free economy, basically on the gold standard, despite the monetary problems. We had increasing amounts of labor coming in from Europe and around the world. We had a huge amount of land that was available and we had capital pouring in from around the world German Anti-Trust Act or the Anti-Trust Movement?

1:23:06with the railroads and it's tied up with the farmers and the interest of the farmers getting their products to market and feel that they were being charged too high of a price and that the railroads weren't charging competitive prices well I mean this is I think just another example of how the Republican Party The agenda had sort of put things in the direction of the big guy, like the railroads and the banks, to the disfavor of the small guy, the small farmer and the worker. and so as a result there's a movement a reform movement develops amongst the farmers to somehow put controls on industries like the railroads and that's where it was directed at is against big business like the railroads and and Rockefeller's Oil Company, the mining and industries that were making these huge profits off of the Republican agenda, you know, so that's basically what the target was.

1:24:24Is it the same situation that existed in the first World War into the prosperity and inter-recession of the 20s and 30s?

1:24:54World Trade Tariff levels, rate levels that I've seen in textbooks indicate that the tariffs went down during that time period only to be, of course, the Smoot-Hawley tariff comes back in with the beginning of the Great Depression and world trade re-collapses basically. We had just gotten onto a relatively free system and then it just collapsed back on itself. Yes, I mean they were definitely, they were definitely one of our competitors in a lot of these markets and so yeah, obviously the sentiments from World War I combining with the fact that we were competitors and if we were going to be keeping anybody out it would be the Germans in large part, who were out competing us in some major industries.

1:25:52Okay, we're out of time. Once again, we've got one more class coming up next week.