Last week, I posted on Jeff Hummel’s article “U.S. Slavery and Economic Thought” in David R. Henderson, ed., The Concise Encyclopedia of Economics. Many commenters posted their thoughts on the article. One of the things I love is when people go back to the longer article behind the blog post rather than settling for the teasers that I quote. One commenter, Warren Platts, did so and quoted this segment from the article:

One confirmation of slavery’s output inefficiency is the post-Civil War’s significant decline in southern output and income per capita. The real value of total commodity output (agriculture, manufacturing, and mining) in the eleven defeated Confederate states did not return to its 1860 level until nearly two decades later and, since population had also risen, real output per person in 1880 was almost 20 percent below prewar levels.

Platts then wrote:

This doesn’t make sense to me. Maybe someone can explain it. It seems to me that an economy with a relatively high productivity is an efficient economy. And productivity is commonly measured in real output per person. Thus, how can an economy whose real output per person be 20% lower than it was 20 years previous be considered a more efficient economy?

Jeff Hummel sent me an answer that he thought was too long to be a comment. My problem with it, though, was that it was too good to be just a comment. It deserved a place as a standalone post. Here is Jeff’s answer:

To be clear, I am not claiming that the post-Civil War South was necessarily “a more efficient economy” in all respects. Despite the increase in efficiency (welfare) brought about by slavery’s abolition (with its accompanying fall in output), other postwar factors not directly related to emancipation were also affecting the real income and/or efficiency of the southern economy overall. The demand for U.S. cotton had softened because Great Britain and other importers had shifted their purchases during the war to India, Brazil, and Egypt. The South did not recover its market share until the 1880s while at the same time world cotton consumption was growing at half its prewar rate.

The wartime Republican administrations had hiked tariffs to protectionist levels, ending the prewar policy of relatively free trade, and the burden of these tariffs inevitably fell disproportionately on the South’s exporting economy. The tariff was also the national government’s main source of revenue. Yet residents of the former Confederate states rarely if ever received two of the largest government’s postwar expenditures partly financed by the tariff: interest on plus payment of the wartime debt and veterans benefits. The new Reconstruction governments in the South, despite all the benefits they provided to the former slaves, also made extravagant new expenditures on railroad subsidies, public education, and other social services, requiring some of the heaviest state and local taxation in proportion to wealth up until that time in U.S. history.

Emancipation did undermine the South’s financial sector, given that, prior to the war, slaves had been a major form of collateral. Nonetheless, a new well-developed financial system might have emerged if not for war-induced changes in the nation’s monetary and banking legislation. The new National Banking System openly discriminated against the South, prohibited nationally chartered banks from making real-estate loans, and deprived state-chartered banks in the South, as elsewhere, from issuing banknotes. Preexisting restrictions on branch banking, plus the fact that national banks had to match their note issue to an ever shrinking supply of Treasury securities, inhibited shifting credit to areas where interest rates were highest.

State-chartered banks could still issue deposits, but the nineteenth-century was a period when checking accounts were confined to individuals of recognized wealth or unquestioned probity. The poor or undistinguished were thus confined to cash. But the denominations of national bank notes could not be smaller than one dollar (despite wartime inflation, equivalent to $18 in 2022); the circulation of Greenbacks, available in lower denominations, was being contracted; and a mint ratio that favored large denomination gold coins combined with the melting down of silver coins during the wartime inflation had caused the prewar supply of silver coins to dwindle by two-thirds. All this occurred during a period of deflation, in which the purchasing power of each dollar was continually rising.

The net effect of all these factors was to starve the postwar South of credit and small-denomination cash, at the very moment the South’s monetary needs had expanded. The slave plantation had been a mini-planned economy, within which resources were allocated at the planter’s discretion. Upon emancipation, most slaves for the first time had to purchase many of their necessities. Meanwhile interest rates in the rural South soared to five times their prewar levels. Is it any surprise that southern agriculture was reduced to essentially barter transactions? Sharecropping, after all, involves cotton or other products exchanged for the use of land. And the almost exclusive source of rural credit was small country stores, that advanced food, clothing, and agricultural supplies with crops pledged as security.

Incidentally, in reading Jeff’s response, I was reminded that he had covered a number of these issues in his Masters in Monetary Theory class at San Jose State University that I took on Zoom from January to May, 2021.