Chapter 13 — Understanding the Conflict between the North and South over the Role of the Federal Government in the Economy.
By Clyde N. Wilson of S.C., Ph.D., S.I.S.H.
The economic issues that created conflicting sectional interests and helped bring on the WBTS are often not very well understood, even by those who write about them. There are many roadblocks to understanding the complexities of economic history. Certain economic policies lead to some people making money. These people, and the politicians who speak for them, are eager to obscure the truth and make it appear that such policies are good for everybody. I might argue that President A created good economic times (B) that followed his administration. But just because B follows A does not prove that A is the cause of B. In the vast conditions and actions of a large national economy, what caused B may be something unrelated to the actions of President A. Politicians and special interests neither know nor care about the truth, they are seeking advantage. And much history is written as if politicians’ arguments tell us the truth about economics.
We have it on very high authority that the love of money is the root of evil. Yet almost all of us would like to have a comfortable amount of it. The saying is perhaps aimed at those who always want more and more. Money can be inherited. It can be earned by hard work, brains, and good luck. But another way to get money is from the government. The government holds the sword and the purse. It can collect from the people all the money it wants and give it away to whoever it wants. Throughout history, in every form of government, there have been those who rely on influence and cleverness to get rich out of government. America is largely a story of the success of free enterprise, of hardworking and smart people who have spread prosperity and improved life for all of us. But there also runs through American history a strong element of the other kind of enterprise – getting money from government.
At the ratification of the U.S. Constitution, everyone knew that the Northern and Southern States had different and sometimes conflicting economic interests, arising from their different ways of making a living. In the first days of the government Alexander Hamilton proposed a regime of public debt, national bank, tariff, and business subsidies. Thomas Jefferson saw this program as a scheme for certain people, Northern capitalists, to make money out of the taxpayers, to create an elite class of special beneficiaries of the government. The contested philosophies of Hamilton and Jefferson dominated national politics from their time until the WBTS. Each side had victories and defeats until the Republican Party took power in 1861, and, with the South not voting in Congress, implemented Hamilton’s ideas with a vengeance. They said their policies were benevolent, good for everybody, and necessary for progress. The South thought they were being exploited to make certain loud and influential Northerners rich.
The most important matter in our discussion is the tariff. A tariff is a tax on goods imported from another country. It is collected at an official port by customs officials when the products are unloaded. To land cargo without paying this tax is illegal smuggling. The drafters of the Constitution agreed that the proposed new Federal Government needed a source of money to pay for its necessary officials and delegated powers. The Constitution provided that to raise this money Congress might legislate and collect a tariff on imported goods. It was a customary kind of tax and one that generally affected only people affluent enough to import luxuries. It required no levies on the States or direct taxation of citizens. In regard to taxes, it is important to note that the Constitution provided: 1) that there be no trade barriers between states; 2) that products exported by any State could never be taxed; and 3) all taxation was to be equal among the States.
Some Southern statesmen saw a problem with this. George Mason, who had been an important player in drafting the Constitution, refused to sign or support it for this reason. He pointed out that it would be used by the wily businessmen of the Northern States to place unfair taxation on Southerners. Mason demanded but failed to get a provision that tariff laws should require a 2/3rds rather than a majority vote to pass. The first tariffs were 5-10 per cent. But from 1816 on we find constant clamor that the rate be raised. Textile, iron and other manufacturers demanded a “protective tariff.” What is a protective tariff? It is raising the tax so high that nobody can afford to buy imported goods. People will have to buy manufactured goods from Northern factory owners. The truly “Abominable tariff” of 1828 raised it to 50% on many products. South Carolina referred to Jefferson’s Kentucky Resolutions and nullified the law as unconstitutional. The tariff came down for awhile but there was constant pressure to raise it. “Protection” was a major plank of the Whig Party and then of the Republicans. Democratic President Polk managed in 1846 to get the tax down to a “revenue” rather than a “protective” level. This caused angry discontent among many if not all Northerners and added greatly to the growth of the Republican Party. Especially since Polk also ended the national bank and vetoed a huge “internal improvements” boondoggle for the Great Lakes area.
What did the South have to say about the protective tariff? First, the South supplied the overwhelming part of U.S. exports. Its economy rested on supplying cotton, rice, sugar, and tobacco to the outside world. There would hardly have been any foreign trade otherwise. Always the great bulk of federal revenue, at times up to 5/6ths, was collected by the tariff at the Southern ports. Northerners paid little in taxes, although the tariff did raise the price of goods for Northern consumers while it profited factory owners. What is going on here? Let us suppose a Southern farmer wants to buy a bolt of cloth for clothes for his bonded people. He can buy this for $10 from British imports even after a 5% tariff. The merchant who ships his cotton can also bring in the cloth in exchange so that he does not have to pay any cash money, which he has little of anyway. Britain led the world in manufacturing and sea transport. A similar bolt, purchased from MA, cost $11. But when you put a 50% tariff on imports the British cloth now costs $15. The MA factory owner is no longer going to charge $11 for his product when his competitor is out of the market. He is going to charge $14.95. The Southern statesman John Randolph and others asked why factory owners, among all the other occupations in the country, required the special “protection” of the government. The Union was intended to be beneficial to all the States, but instead was being used to extract prosperity from the South for the benefit of wealthy Northerners. Worse, New Englanders snarled that Southerners had declining prosperity because they were lazy and extravagant, not wise and industrious like Yankees. Senator Calhoun replied that the South sold its products for what it could get in the open world market while New England had government guaranteed profits. Senator Benton said that that the South used to be known for good living and hospitality. Thanks to the tariff all that was left was the hospitality.
Note that the demand for tariff had nothing to do with the bonded people in the South except that it potentially detracted from their standard of living by making their masters poorer. This was a battle between an industrial region and an agricultural region that could have happened if there had not been a single African-American bonded servant. Note also that the wisest observers of the time and later said that the South was exactly correct about the results of the tariff, that it did not create prosperity but transferred wealth from one group to another, that free trade among countries was best for all.
“Internal improvements” meant building roads, railroads, canals, harbours, river improvements at Federal expense. This provided large subsidies for private corporations, some of which did not fulfill their promises. Almost all the money was spent in the North. Southerners from Jefferson on said they could not find anything in the Constitution that gave Congress such power and that State and private enterprise could meet any real needs. “Internal improvements” were popular. In his earlier career Lincoln pushed through the IL legislature a canal building program which was never finished and threw the State into bankruptcy.
Few people understand that bankers and other wealthy people like government debt. The government has a large income and should not normally need to borrow money. But the rich like for the government to sell them bonds from which they get risk free and tax free interest. Hamilton said that public debt is a public blessing because it meant that the rich and powerful would support the government. Southerners noted that they paid most of the taxes that conferred this benefit on wealthy Northerners. Throughout the antebellum period Democrats tried to pay off the Federal debt and almost succeeded. Wall Street bankers and brokers enthusiastically supported Lincoln’s war and congratulated each because they knew a large debt would be created. While young boys and old men in the South fought to defend their homes, the financiers enjoyed their yachts, fast horses and women, and lit their cigars with $50 bills while dining on thick steaks at Delmonico’s.
The question of banks and money is the most poorly understood economic controversy of all. First off we must understand that the “national bank” was not a government bank, although the government appointed its head and put up 1/5 of its stock. It was a private bank that had the privilege of handling the government’s money and of issuing paper money (banknotes) that, with assumed government backing, could circulate as currency. Critics asked why Congress should give away its power and responsibility to provide a sound currency? Most people then and later did not understand the invention of “fractional-reserve” banking. They assumed that people deposited real money in banks for interest and banks loaned out the money. But bankers discovered that at any one time all depositors would not ask for their deposits in real money (gold and silver). They could loan out 20 times more money than they had on deposit simply by printing out paper banknotes that supposedly represented real money. This gave the bankers effective and extremely profitable and irresponsible control over the country’s credit and currency. The fluctuating value of unbacked bank money was responsible for the inflation and deflation that caused depressions, known in those days as “panics.” The Republicans in 1861 spread around the loot by creating a chain of “national” banks rather than one, but the principle was the same.
Nothing in the Republican platform, which was implemented in full during the WBTS, had anything to do with Northern interest in the welfare of Southern black people, which casts an interesting light on many historians’ insistence that the war was all about “slavery.” Lincoln said that he was opposed to slavery in the abstract but that he did not have any power to do anything about it and wouldn’t know what to do if he did. All that he and the party insisted on was that there would be no “expansion of slavery,” i.e., that there would not be any new States that would be settled by Southerners who would vote against the North’s economic interests. Jefferson had pointed out that the spreading out of the slaves over more territory was a good thing for them because it improved their lot and chances for freedom.
Anyone who leaves out the significance of what happened in early 1861, between Lincoln’s election and Fort Sumter, and insists it was all about “slavery” will never know the truth about the WBTS. Congress passed the Republican tariff of 50 to 60% on most imports. The new Confederate government voted a tariff of 5% and announced that Northerners could have free navigation of the Mississippi river and use of the port of New Orleans. Influential Northerners realized what this would mean (because tariffs were then only being collected at seaports). They would lose their captive source of revenue and market in the South. Their profits would nose-dive. They might even have to pay taxes themselves. Not only would they lose the South, but it was obvious that the whole Mississippi Valley would prefer to trade through the low tariff Confederacy rather than the United States. In public speeches and private letters, in newspaper editorials and petitions to Congressmen, and in every other way, influential Northerners let it be known that war was preferable to allowing the South to escape. One could fill several books with such statements. When asked why the South could not be allowed to peaceably secede, Lincoln invariably referred to the loss of revenue – not “slavery.”
Suggestions for Class Discussion
What are the arguments in support of high tariffs in contrast to the arguments in support of low tariffs or free trade?