During Reconstruction, Southerners were required to pay their share of federal taxes for sizable budget items that if funded by an independent defeated foe would have constituted reparations. For example, after World War II, Germany and Japan were not required to pay any part of the interest expense on US war bonds, or any portion of the federal benefits to US war veterans. In contrast, after the Civil War Southerners had to pay their share of such costs in the form of federal taxes.
More than half of federal tax revenues for at least the first twenty years after the war were applied to three items: (1) interest on the federal debt, (2) budget surpluses, and (3) veterans’ benefits. Although compelled to pay their portion of taxes to fund them, Southerners derived virtually no benefit from the three budget items.
One way Southerners were essentially fined after the war was in the payment of interest on federal debts. While nearly all federal-debt bondholders were Northerners, Southerners who held debts of the Rebel states or the Confederacy collected no interest because the Thirteenth Amendment repudiated their claims. Moreover, interest on federal debt had to be paid in specie, as opposed to greenbacks, which traded at a discount to specie. Therefore, the amount of taxes paid in greenbacks to meet the interest obligation was a larger sum than the interest paid in the form of specie. The differential was an extra cost to the taxpayer, but a bonus to the bondholder.
A second way that postwar Southerners were penalized was in the redemption of federal debts. Budget surpluses after the war were mostly used to pay down such debt. Nearly all the federal bonds representing that debt were sold during the Civil War as the US national debt increased more than forty-fold, from $65 million to nearly $2.7 billion. Most bonds were purchased with greenbacks that traded at discounts to specie of as much as 60 percent. By 1869, the remaining debt was $2.5 billion, and Congress gave bondholders a windfall by requiring that bonds be repaid at par in specie, as opposed to greenbacks. Surpluses were also set aside to redeem greenbacks at face value for specie after 1875, even though greenbacks could have been purchased for as little as forty cents on the dollar in summer 1864. Few Southerners held greenbacks at the end of the war because it was a federal currency.
A third way Southerners were disadvantaged for decades after the war was in the manner of financing the budget surpluses used to retire federal Civil War debt. The surpluses were funded by protective tariffs that generated more income than necessary to operate the federal government. Dutiable items were taxed at about 45 percent. The purpose of the excess was to restrict competition for domestic producers, almost none of which were located in the South. It was a form of corporate welfare that remained in place until Woodrow Wilson became president in 1913.
Protective tariffs were injurious to farmers, white and black, who sold primarily to export markets, which were intensely competitive and where prices could not be artificially inflated by US government fiat. Moreover, American tariffs motivated Europeans to buy cotton from India, Brazil, West Africa, and Egypt, where they could more competitively export their own manufactured goods to pay for the fiber. Such diversion of European buyers away from US growers was detrimental to Southern cotton farmers.
One annoyed victim of Reconstruction-era US tariffs was Georges Clemenceau, who became the French prime minister during World War I. While working as a correspondent for a French newspaper in New York, he wrote, “Protectionism is rampant in [the United States]. . . . People have been made to pay ridiculous prices for articles of primary necessity.” Perhaps after observing the impotence of Southerners’ objections to federal budget and taxing policies punitive to their region, he was influenced to later insist on German reparations after World War I. If so, it led to disastrous German leadership consequences after the Weimar Republic was bankrupted and the Nazis gained control.
A fourth way postwar Southerners bore a discriminatory burden was in the use of their federal taxes to pay for Union veteran pensions. Because they were in rebellion against the central government, logically no Confederate soldiers received a federal pension. Ex-Rebel soldiers could collect pensions from their respective states only. Although Southern states quickly enacted aid programs to primarily benefit disabled veterans after the war ended, few had much money for such purposes for years to come.
While some might question whether several budget items not mentioned above could have disproportionately benefitted the South, such items were either vanishingly small or funded by taxes paid by Southerners themselves. Two examples are the Freedmen’s Bureau, which was nearly triple funded by a discriminatory tax on cotton, and the underbalanced public works spending in the South. Additionally, the great majority of spending not delineated above was for military defense and the Post Office. For example, in a typical year like fiscal 1870, over 83 percent of tax revenues went for interest on debt, surplus, defense, veterans’ benefits, and the Post Office. None of those expenditures benefitted Southerners except for a small portion of the Post Office and defense outlays.
For eight years after the war, despite their greater needs, all of the states of the former Confederacy combined received less than 10% of federal public works spending. Massachusetts and New York got more than twice as much public works investment as all of the former Confederate states. Over that period the cotton tax alone generated revenues that were more than seven times the amount of public works investment in the South.
In sum, the readmitted former Confederate states were treated as an exploited internal colony of the Union. Aside from the damaging tariffs and taxes-as-reparations, historian David Cohn summarized:
The agrarian South had been delivered over to non-agrarian interests, and had become a satellite of the banking industrial Northeast. And the already burdened cotton farmers were to bear heavier burdens in the future. They could complain in vain . . . of railroad rates that crippled them, of gouging by trusts and combines operating in cottonseed oil, jute bagging, farm implements, and other adversities. They might work hard, live meanly, and die in poverty to pass on to [future generations] the apparently irrevocable estate of poverty.
In retrospect, the defeated Confederate states may have fared better as a British colony, like Canada, which was then known as British North America. The slaves would have been freed because slavery was outlawed throughout the British Empire in 1833. The Southern states could have purchased manufactured goods at much lower prices because Britain was a proponent of low tariffs. Southern farmers could have exported freely to Europe without fear that Europeans might shop elsewhere in retaliation for high American tariffs. Within twenty-five years after the American Civil War, the British Empire evolved into the Commonwealth of Nations following a culmination of increasingly cooperative commerce among its members, which also would have benefitted the Confederacy had it been a Commonwealth member.
