The Economic Impact of the American Civil War

The American Civil War caused a tremendous economic impact across the United States, including the creation of paper currency and the abolition of slavery.

Jul 18, 2022By Owen Rust, MA Economics in progress w/ MPA
10 dollar american greenback 1860s
An image of US currency during the Civil War era, known as “greenbacks,” via the Smithsonian Institution, Washington DC


Prior to the American Civil War, the South primarily relied on unpaid slave labor to grow and harvest cash crops, most paper money consisted of banknotes made by private banks, and infrastructure like roads, canals, and railroads were sparse west of the Mississippi River. As a result of the American Civil War, all of that changed radically. Government-issued currency became popular, wartime spending dramatically boosted industry and infrastructure, and the government subsidized settlement of the West. Civil War spending created the “critical mass” of government power and spending that ultimately developed the western territories and turned the United States into a major world power.


The Economic Situation in the 1850s

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A map of unequal railroad distribution between the North and South in 1850, via the University of Nebraska at Lincoln


By 1850, a major economic divide had grown between the North and South in the United States. While America had begun as a primarily agricultural nation in the early 1780s, the North had developed substantial industry in urban areas by the mid-1800s. The South, meanwhile, had remained almost entirely agrarian. Relying on slavery to provide unpaid labor for the growing and harvesting of cash crops like cotton and tobacco, the South had seen little political desire to industrialize.


The North was able to industrialize thanks to steady immigration from Europe. In the 1840s, massive immigration to the US from Germany and Ireland, influenced by a devastating potato famine in Europe, helped the North rapidly industrialize thanks to low-cost immigrant labor. This immigration not only provided a larger labor force for the North than the South, but it also increased the North’s population at a more rapid rate. This led to a growing political power imbalance, as northern states would come to dominate the US House of Representatives–where states received Representatives based on population–and the Electoral College.


Industrial North vs. Agrarian South

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A factory in the North, circa 1850, via World Socialist Web Site


The persistence of slavery in the South created a growing economic and cultural divide. By 1860, a quarter of all Northerners lived in cities. At this point, a majority of workers in the region were involved in industry or commerce rather than agriculture. Thanks to better opportunities for jobs, as well as more transportation access and availability of finished goods, the vast majority of immigrants to the United States, almost all from Europe, remained in the North. All of these causes compounded to expand industry much more rapidly in the North.

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Thanks to a warm climate and fertile soil, as well as unpaid labor through slavery, the South had little incentive to devote resources to industrial development. Due to the lack of railroads and canals compared to the North, it was more difficult to transport heavy finished goods. Only a handful of Southern cities had enough people to support factories, versus many such cities in the North. Over time, this growing economic divide furthered a political and socio-cultural divide between the North and South, with leaders in the two regions being less and less able to reach a consensus.


Economic Causes of the American Civil War: Slavery

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A line of slaves being marched to auction, 1862, via the National Archives, Washington DC


Slavery was introduced to the South under British colonization. By the 1850s, it had become indispensable for agricultural labor. The plantation system required lots of physical labor for the mass production of tobacco and cotton, meaning replacing slave labor with wage labor would be a financial catastrophe for wealthy farmers. Slavery was highly successful for wealthy farmers, and the American South was producing three-quarters of the world’s cotton by 1860. Abolishing slavery would destroy the ample profits enjoyed by plantation owners, so political support for slavery in the South was iron-clad.


However, iron-clad support for slavery met increasing opposition beginning with the Second Great Awakening religious movement in the 1830s. Many Americans, especially in the North, began opposing slavery for religious reasons. The Second Great Awakening helped spur a growing abolition movement that sought a nationwide end to slavery. Defenders of slavery correspondingly increased their own argumentation, arguing that slavery was necessary for economic survival and that it was necessary for slaves’ own good. Supporters of slavery often used racist arguments that blacks were not mentally suited to overseeing their own affairs and thus needed masters to ensure their well-being.


Economic Causes of the American Civil War: Tariffs & Trade 

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A political cartoon displaying the controversy of tariffs before and during the Civil War era, via Ashland University


The South’s lack of economic diversification led to a second problem: tariffs, which are taxes on imports. In the early 1800s, many finished goods were imported to the United States from Europe. Over time, however, the North made more and more of its own finished goods. As a result, the central government was encouraged to protect new Northern industries by placing imports on European rivals. This upset the South, which relied more heavily on European imports than the North. As a result of the tariffs, European goods cost more, disproportionately raising finished good prices for Southern consumers.


Southern opposition to tariffs was a political issue up to the start of the Civil War. In the late 1850s, the Republican Party called for increasing tariffs to raise more revenue for the central government. When Republican candidate Abraham Lincoln won the presidential election in 1860, despite not being on the ballot in ten states in the South, Southerners were outraged. They no longer had enough political power to hope to maintain slavery and low tariffs in the long run.


Wartime Economy in the North

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Union naval uniforms, 1864, via the United States Navy


After the South seceded from the United States in early 1861 and created an independent nation, the Confederate States of America, war erupted in April. Due to its massive industry, the North benefited economically from tremendous wartime spending. The US government could spend billions on its military, including soldiers’ uniforms, pay, and supplies. This generated massive profits for northern factories, especially those that made rifles and other military equipment.


However, although the North spent twice as much as the South during the war, its population was more than twice as much as the South. This meant the per capita wartime spending was lower in the North, meaning it did not burden taxpayers as much. While the South quickly lost territory during the Civil War, and had to devote many white farmers to soldiering, the North did not lose its own agricultural or industrial base. The North’s economy grew substantially during the war, boosted by government spending. Not only was the Confederacy’s government spending lower during the war, but it did not mobilize quickly to direct wartime production. The South’s preference for state sovereignty, similar to the nation under the ill-fated Articles of Confederation, proved disastrous for the war effort.


Economics During the American Civil War: The Homestead Act of 1862

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A photograph of homesteaders in Colorado after 1862, via the Western Colorado Jr. Rangers


In May 1862, during the ongoing Civil War, Congress passed the Homesteading Act of 1862 to help quickly settle the West. Aside from helping expand the United States’ economic base through additional agriculture and natural resource development, the law helped encourage Union wartime enlistment by allowing veterans to deduct their time of service from residency requirements. The Act also discouraged Southerners from joining the Confederate military: those who took up arms against the United States were ineligible to receive a land grant.


The Union’s expansion westward even during the War was linked to its economic advantages and wartime production. Unlike the Confederacy, which valued state and local independence more than the United States, the Union nationalized all railroads and telegraph lines. During the course of the War, the Union and Confederate economies moved in opposite directions: the Union enjoyed a stronger economy boosted by government spending, while the Confederacy saw economic recession and shortages due to loss of natural resources, transportation disruptions, and crucial agricultural manpower diverted to fighting.


The South’s Economy at the End of the War

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Images criticizing the alleged hypocrisy of Southerners in regard to food shortages during the Civil War, via Encyclopedia Virginia


By the end of the US Civil War, the South was economically devastated. Food shortages had led to bread riots by the middle of the conflict and were widespread across the [remaining parts of the] Confederacy by 1865. And while the Union utilized up to 200,000 Black soldiers as part of the war effort, the Confederacy only allowed the use of a much smaller number of Black soldiers at the very end of the war. This is unsurprising, as enslaved people would have little motivation to support the Confederacy! The last-minute law allowing the use of Black troops did not even grant them their freedom from slavery, reducing their incentive to perform well.


The forced abolition of slavery at the end of the Civil War, codified into national law with the 13th and 14th Amendments to the US Constitution, further eroded the South’s post-war economy. Another blow to the South was the loss of cotton exportation supremacy. During the Civil War, authorities developed cotton production in Egypt to substitute for the loss of the American South’s “King Cotton” exports. This international competition in the cotton market would prevent the South from enjoying such profitable prices in the future.


The North’s Economy at the End of the War

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A photograph of the celebration of the completion of the Transcontinental Railroad in 1869, via The Gilder Lehrman Institute of American History


Although the North had paid tremendous costs in fighting the war, its economy arguably emerged stronger from the conflict. Government spending had developed industries, which now enjoyed close ties with the Republican administration in charge of Congress. Although Andrew Johnson, a Democrat from the South, completed Abraham Lincoln’s second presidential term after Lincoln’s tragic assassination, the Republican Party dominated the central government in the post-war era. This helped wartime industries receive government subsidies and favorable regulations, leading to the rise of industrial capitalism in the North.


Government subsidies and loans were used in the decade after the Civil War to help railroads settle the West. In 1869, the Transcontinental Railroad was completed in Utah, signaling the strength of American industry and central government willpower. Between the Homesteading Act and the expansion of the railroads, industrialists in the North saw strong demand for their goods and services as the nation expanded westward between the end of the Civil War and 1890.


Long-Term Economic Effects of the American Civil War: Settling the West

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A painting of Fort Laramie, Wyoming, which was involved in settling the West, via the Wyoming State Historical Society


Following the US Civil War, a large military and industrial infrastructure existed in the North. The Republican administrations in Washington DC were able to use this infrastructure to settle the West and achieve the Manifest Destiny goal of America’s original founders. After the war, the military occupation of the South led to a massive US Army that could be utilized for means other than defense, as had been traditional before the Civil War. With ample military manpower available after 1865, the central government could easily use it to pacify the Native Americans in the West.


The railroads, built with government aid, also helped settle the West by more quickly depriving Native Americans of the invaluable bison. Buffalo hunters used railroads to access tremendous herds of bison, slaughtering them by the thousands with high-powered rifles. Faced with both a powerful US Army and losing their herds of bison, many Native American tribes had no choice but to accept being moved to reservations.


Long-Term Economic Effects: South Remains Agrarian

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A photograph of African American sharecroppers in Arkansas, circa 1880, via the University of Arkansas at Little Rock


Although the Union victory in the Civil War had forcibly abolished slavery in the South, little changed in the South’s economic base. Many formerly enslaved people had no choice but to return to essentially the same lives as before Emancipation, this time as sharecroppers. Having received little or no financial compensation for slavery, Black farmers took on debt and worked for white landowners, repaying them with a share of the crops they grew.


While some reformers argued during Reconstruction (1865-76) that the South should seek to industrialize, a term dubbed the “New South,” this largely did not occur outside of the few largest cities. The South remained primarily agrarian until World War II, partially due to intemperate climates for factories (too hot) and partially due to political resistance to change. After Reconstruction ended in January 1877 with the inauguration of President Rutherford B. Hayes, the South seized the opportunity to return to racial segregation and support for wealthy white landowners under Southern Democrat state administrations.


Long-Term Economic Effects: Creation of US Currency

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An image of a US “greenback” printed in 1861, via the Smithsonian Institution, Washington DC


The US Civil War is often credited with creating the “modern economy” through industrialization and through modern taxation, banking, and the use of paper currency. Before the Civil War, there was little use of deficit spending, no income tax, and consumers preferred to use gold dollars to paper currency. This all changed swiftly due to the high costs of the war. Both the North and South sold bonds to finance the war due to deficit spending (government expenditures greater than tax revenue), imposed an income tax for the first time, and used paper currency.


Demand notes, also known as “greenbacks,” were first printed in 1861 by the Union. The following year, the government began printing United States notes and declared them legal tender. The green ink that created the nickname “greenbacks” helped “green” become a term synonymous with cash. Although many bemoaned the replacement of gold coinage, paper currency remained prominent after the Civil War. Gold coinage stopped being minted as legal tender currency in 1933, with the paper dollar being fully backed by the US government.

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By Owen RustMA Economics in progress w/ MPAOwen is a high school teacher and college adjunct in West Texas. He has an MPA degree from the University of Wyoming and is close to completing a Master’s in Finance and Economics from West Texas A&M. He has taught World History, U.S. History, and freshman and sophomore English at the high school level, and Economics, Government, and Sociology at the college level as a dual-credit instructor and adjunct. His interests include Government and Politics, Economics, and Sociology.