The North Had Neo-Mercantilism, But the South Embraced State Socialism with Forced Industrialization Like in Stalinist Russia

While the Civil War saw the triumph in the North of Republican neo-mercantilism, it saw the emergence in the South of full-blown State socialism. Nowhere did the Confederacy have greater disadvantages than in industrial output. A single county in Connecticut manufactured firearms in 1860 worth ten times more than that produced in all southern states. Except for the Tredegar Iron Works in Richmond, the South did not even have a cannon foundry. With little native industry to call upon, the Rebel government moved immediately and directly into its own war production.

General Josiah Gorgas, the Pennsylvania-born Chief of Confederate Ordnance, took the lead in establishing government-owned facilities. By 1863 his diary revealed justifiable pride in this forced industrialization: “It is three years ago today since I took charge of the Ordnance Department. . . . I have succeeded beyond my utmost expectations. . . . Large arsenals have been organized at Richmond, Fayetteville, Augusta, Charleston, Columbus, Macon, Atlanta and Selma, and smaller ones at Danville, Lynchburgh, and Montgomery. . . . A superb powder mill has been built at Augusta. . . . Lead smelting works were established by me at Petersburg, and turned over to the Nitre and Mining Bureau, when that Bureau was at my request separated from mine. A cannon foundry established at Macon for heavy guns, and bronze foundries at Macon, Columbus, Ga., and at Augusta; a foundry for shot and shell at Salisbury, N.C.; a large shop for leather work at Clarksville, Va.; besides the Armories here and at Fayetteville, a manufactory of carbines has been built up here; a rifle factory at Asheville; . . . a new and very large armory at Macon, including a pistol factory; . . . a second pistol factory at Columbus, Ga. . . . Where three years ago we were not making a gun, pistol nor a sabre, no shot nor shell (except at the Tredegar Works)—a pound of powder—we now make all these in quantities to meet the demands of our large armies.”

In addition to the powder mill, chemical plant, small-arms factories, and foundries belonging to Gorgas’s Ordnance Bureau, the Confederate Navy set up its own cannon foundry and powder mill, as well as numerous shipyards. The Nitre and Mining Bureau extracted and refined coal, iron, copper, nitre, and lead. The Confederate Quartermaster Bureau ran its own clothing, shoe, and wagon factories. The southern state governments also operated arsenals, powder mills, textile mills, flour mills, saltworks, and a variety of other enterprises.

When the authorities did purchase supplies from private firms, they dictated prices and profits. The Rebel government sometimes loaned one-half the start-up capital to businesses, which in turn had to sell two-thirds of their production to the government. Because rigid regulations and soaring inflation made genuine profits impossible, private owners, one after another, turned their factories over to the public officials. Right from the conflict’s beginning, the Confederacy had violated its constitution by loaning money for the completion of strategic railway links. Seven-eighths of the freight and two thirds of the passengers transported on the Virginia Central Railroad during one year, to cite just one example, were for the government’s account. Toward the very end, President Davis took possession of all un-captured southern railroads, steamboats, and telegraph lines outright, incorporating their employees and officers into the military.

—Jeffrey Rogers Hummel, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War, 2nd ed. (Chicago: Open Court Publishing Company, 2014), e-book.

The Major Accomplishment of the Jacksonian Democrats Was Divorcing the Central Government from the Banking System

At the war’s close the United States could boast higher taxation per capita than any other nation. But all the new and old taxes combined were just sufficient to cover about one-fifth of the Civil War’s monetary cost. Chase therefore borrowed some money directly from the general public, with the aid of an extravagant publicity campaign handled by private financier, Jay Cooke. The Union had to go to the banks for most of its loans, however. And this required that Congress undermine the restraints built into the country’s prewar financial structure.

That structure was the ideological handiwork of the Jacksonian Democrats. Its major accomplishment was divorcing the central government from the banking system. There was no nationally chartered central bank, and the Treasury, as much as possible, avoided dealing with the many state-chartered banks. The only legally recognized money was specie, that is, gold or silver coins. The economy’s currency consisted solely of bank notes redeemable in specie on demand. Private competition thus regulated the circulation of paper money.

Although traditional historians have subjected this era of unregulated banking to trumped-up charges of financial instability, many economists are coming to agree that it was probably the best monetary system the United States has ever had. The alleged excesses of the fraudulent, insolvent, or highly speculative “wildcat” banks were highly exaggerated. Total losses that bank note holders suffered throughout the entire antebellum period in all states that enacted free-banking laws would not equal the losses for one year from today’s rate of inflation (2 percent), if superimposed onto the economy of 1860. Moreover, most of these losses resulted from too much regulation, not too little.

—Jeffrey Rogers Hummel, Emancipating Slaves, Enslaving Free Men: A History of the American Civil War, 2nd ed. (Chicago: Open Court Publishing Company, 2014), e-book. 

The Era of Free Banking Ended when the neo-Hamiltonians (Republicans) Established Their “Unqualified Government Monopoly”

The era of free banking was abruptly ended when the neo-Hamiltonian Republicans passed three Legal Tender Acts, beginning in February 1862. These acts of legislation permitted the treasury secretary to issue paper currency (greenbacks) that was not immediately redeemable in gold or silver. Then they passed the National Currency Acts of 1863 and 1864, which created a system of nationally chartered (and regulated) banks that could issue currency. A punitive 10 percent tax was placed on state-chartered banks in order to drive them into bankruptcy. The neo-Hamiltonians were candid about their intention to create an “unqualified government monopoly,” though they rather absurdly claimed that this would allow “all Americans to share in the advantages of the monopoly.” In reality, monopoly is bad for consumers, whether it is a monopoly in steel production, computers, petroleum, or currency. There is no such thing as a “good” monopoly from the consumers’ perspective.

—Thomas J. DiLorenzo, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution—and What It Means for America Today (New York: Crown Forum, 2008), 127.

According to Hummel and Timberlake, the “Free Banking Era” Was the Most Stable Banking System in American History

Despite all the Hamiltonians’ efforts, the Jeffersonians more or less prevailed for decades. The government remained relatively small and decentralized. By the mid-1850s tariff rates were as low as they would be for the entire nineteenth century, and federal subsidies for “internal improvements” were all but nonexistent. The Bank of the United States was dismantled in the 1830s. The American banking system was dominated by state-chartered banks that issued currency backed by gold and silver on demand and that therefore did not inflate their currency beyond what their specie reserves justified. It was not a perfect system, of course, but two highly reputable economic historians, Jeffrey Hummel and Richard Timberlake, have made compelling cases that it was the most stable banking system the United States has ever had. . . .

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A nationalized banking system was one key element of Alexander Hamilton’s agenda that the Lincoln regime resurrected. It did not seem to matter that such a system had been tried twice, with the First and Second Banks of the United States, and each time had created economic instability and corruption. Nor did it matter that during what economists call the “free banking era,” which began when the Second Bank of the United States was dissolved in the 1830s, the purchasing power of American currency remained stable. This stability resulted precisely because the money supply was denationalized. State governments took a more or less laissez-faire attitude toward banking; about half did not even require a state government charter for individuals who wanted to start a bank, accept deposits, and issue banknotes. Banks, then, were “regulated” mainly by competition in the marketplace: a bank that printed too much currency and did not hold sufficient specie reserves would eventually fail. Such failures did occur, but they remained localized and never caused a national bank panic or depression, as has been the case with nationalized banking systems. Panics and depressions are what economists refer to as “contagion effects” of centralized or nationalized banking.

—Thomas J. DiLorenzo, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution—and What It Means for America Today (New York: Crown Forum, 2008), 124, 126-127.

Canada's First Bank, the Bank of Montreal, Was Modeled After the Second Bank of the United States

Canadian bank charters, if not other aspects of the banking system, were modelled explicitly on American examples, a fact that is emphasized by W.T. Easterbrook and Hugh G.J. Aitken in Canadian Economic History. The first Bank of the United States, based on principles enunciated by Alexander Hamilton, served as the model for the stillborn Bank of Lower Canada in 1808. The articles of association that led to the charter of the Bank of Montreal also followed American examples, particularly that of the second Bank of the United States, which began operation only six months before the Bank of Montreal. The latter bank sent its officers to New York to study banking procedures in effect there, and it employed experienced American bankers during its early years. Easterbrook and Aitken saw strong parallels between the centralist organization, branch systems, and uniform stable currency of Hamiltonian principles, and the legislative framework of Canadian banking. Some nineteenth century opinion supports this view. In 1877 Sir Francis Hincks offered the generalization that the Canadian banking system was modelled on the one that formerly prevailed in the United States. He was referring to the first and second Banks of the United States and their branch systems.

—Stephen Edward Thorning, “Hayseed Capitalists: Private Bankers in Ontario” (PhD diss., McMaster University, 1994), 25.