Driving Dixie Down

In M a y 1 8 6 3 , two years into the American Civil War, Major-General Ulysses S. Grant captured Jackson, the Mississippi state capital, and forced the Confederate army under  Lieutenant- General John C. Pemberton to retreat westward to Vicksburg on the banks of the Mississippi River. Surrounded, with Union gunboats bombarding their positions from behind, Pemberton's army repulsed two Union assaults but they were finally starved into submission by a grinding siege. On 4 July, Independence Day, Pemberton surrendered. From now on, the Mississippi was firmly in the hands of the North. The South was literally split in two. The fall of Vicksburg is always seen as one of the great turning points in the war. And yet, from a financial point of view, it was really not the decisive one. The key event had happened more than a year before, two hundred miles downstream from Vicks­ burg, where the Mississippi joins the Gulf of Mexico. On 29 April 1 8 6 2 Flag Officer David Farragut had run the guns of Fort Jack­ son and Fort St Philip to seize control of N e w Orleans. This was a far less bloody and protracted clash than the siege of Vicksburg, but equally disastrous for the Southern cause.
The finances of the Confederacy are one of the great might-have-beens of American history. For, in the final analysis, it was as much a lack of hard cash as a lack of industrial capacity or manpower that undercut what was, in military terms, an impress­ive effort by the Southern states. At the beginning of the war, in the absence of a pre-existing system of central taxation, the fledg­ling Confederate Treasury had paid for its army by selling bonds to its own citizens, in the form of two large loans for $ 1 5 million and $ 1 0 0 million. But there was a finite amount of liquid capital available in the South, with its many self-contained farms and relatively small towns. T o survive, it was later alleged, the Con­federacy turned to the Rothschilds, in the hope that the world's greatest financial dynasty might help them beat the North as they had helped Wellington beat Napoleon at Waterloo.

The suggestion was not altogether fanciful. In N e w York, the Rothschild agent August Belmont had watched with horror as the United States slid into Civil War. As the Democratic Party's national chairman, he had been a leading supporter of Stephen A. Douglas, Abraham Lincoln's opponent in the presidential elec­tion of i860. Belmont remained a vocal critic of what he called Lincoln's 'fatal policy of confiscation and forcible emanci­pation'.

 Salomon de Rothschild, James's third son, had also expressed pro-Southern sympathies in his letters home before the war began. Some Northern commentators drew the obvious inference: the Rothschilds were backing the South. 'Belmont, the Rothschilds, and the whole tribe of Jews . . . have been buying

up Confederate bonds,' thundered the Chicago Tribune in 1 8 6 4 . One Lincoln supporter accused the 'Jews, Jeff Davis [the Confed­ erate president] and the devil' of being an unholy trinity directed

against the Union. When he visited London in 1 8 6 3 , Belmont himself told Lionel de Rothschild that 'soon the North would be conquered'. (It merely stoked the fires of suspicion that the man charged with recruiting Britain to the South's cause, the Confederate Secretary of State Judah Benj amin, was himself a J e w . )

In reality, however, the Rothschilds opted not to back the South. Why? Perhaps it was because they felt a genuine distaste for the institution of slavery. But of at least equal importance was a sense that the Confederacy was not a good credit risk (after all, the Confederate president Jefferson Davis had openly

advocated the repudiation of state debts when he was a US senator). That mistrust seemed to be widely shared in Europe. When the Confederacy tried to sell conventional bonds in European markets, investors showed little enthusiasm. But the Southerners had an ingenious trick up their sleeves. The trick (like the sleeves themselves) was made of cotton, the key to the Confederate economy and by far the South's largest export. The idea was to use the South's cotton crop not just as a source of export earnings, but as collateral for a new kind of cotton-backed bond. When the obscure French firm of Emile Erlanger and Co. started issuing cotton-backed bonds on the South's behalf, the response in London and Amsterdam was more positive. The most appealing thing about these sterling bonds, which had a 7 per cent coupon and a maturity of twenty years, was that they could be converted into cotton at the pre-war price of six pence a pound. Despite the South's military setbacks, they retained their value for most of the war for the simple reason that the price of the underlying security, cotton, was rising as a consequence of increased wartime demand. Indeed, the price of the bonds actually

doubled between December 1863 and September 1864, despite the Confederate defeats at Gettysburg and Vicksburg, because the price of cotton was soaring. Moreover, the South was in the happy position of being able to raise that price still further - by restricting the cotton supply. 

In i860 the port of Liverpool was the main artery for the supply of imported cotton to the British textile industry, then the mainstay of the Victorian industrial economy. More than 80 per cent of these imports came from the southern United States. The Confederate leaders believed this gave them the leverage to bring Britain into the war on their side. T o ratchet up the pressure, they decided to impose an embargo on all cotton exports to Liverpool. The effects were devastating. Cotton prices soared from 6%d per

pound to 27%d. Imports from the South slumped from 2.6 million bales in i860 to less than 72,000 in 1 8 6 2 . A typical English cotton mill like the one that has been preserved at Styal, south of Manchester, employed around 400 workers, but that was just a fraction of the 300,000 people employed by King Cotton across Lancashire as a whole. Without cotton there was literally nothing for those workers to do. By late 1862 half the workforce had been laid off; around a quarter of the entire population of Lancashire was on poor relief. They called it the cotton famine. This, however, was a man-made famine. And the men who made it seemed to be achieving their goal. Not only did the embargo cause unemployment, hunger and riots in the north of England; the shortage of cotton also drove up the price and hence the value of the South's cotton-backed bonds, making them an irresistibly attractive investment for key members of the British political elite. The future Prime Minister, William Ewart Gladstone, bought some, as did the editor of The Times, John Delane.

Confederate cotton bond with coupons, only the first four of

which have been clipped

Yet the South's ability to manipulate the bond market depended on one overriding condition: that investors should be able to take physical possession of the cotton which underpinned the bonds if the South failed to make its interest payments. Col­lateral is, after all, only good if a creditor can get his hands on it. 

And that is why the fall of N e w Orleans in April 1 8 6 2 was the real turning point in the American Civil War. With the South's main port in Union hands, any investor who wanted to get hold of Southern cotton had to run the Union's naval blockade not once but twice, in and out. Given the North's growing naval power in and around the Mississippi, that was not an enticing prospect.

If the South had managed to hold on to N e w Orleans until the cotton harvest had been offloaded to Europe, they might have managed to sell more than £3 million of cotton bonds in London.

Maybe even the risk-averse Rothschilds might have come off the financial fence. As it was, they dismissed the Erlanger loan as being 'of so speculative a nature that it was very likely to attract all wild speculators . . . we do not hear of any respectable people having anything to do with it'. The Confederacy had overplayed its hand. They had turned off the cotton tap, but then lost the ability to turn it back on. By 1863 the mills of Lancashire had found new sources of cotton in China, Egypt and India. And now investors were rapidly losing faith in the South's cotton-backed bonds. The consequences for the Confederate economy were disastrous.

With its domestic bond market exhausted and only two paltry foreign loans, the Confederate  government was forced to print unbacked paper dollars to pay for the war and its other expenses, 1.7 billion dollars' worth in all. Both sides in the Civil War had to print money, it is true. But by the end of the war the Union's 'greenback' dollars were still worth about 50 cents in gold, whereas the Confederacy's 'greybacks' were worth just one cent, despite a vain attempt at currency reform in 1864.47 The situation was worsened by the ability of Southern states and municipalities to print paper money of their own; and by rampant forgery, since Confederate notes were crudely made and easy to copy. With ever more paper money chasing ever fewer goods, inflation exploded. 

Prices in the South rose by around 4,000 per cent during the Civil War. By contrast, prices in the North rose by just 60 per cent. Even before the surrender of the principal Confederate armies in April 1865, the economy of the South was collapsing, with hyperinflation as the sure harbinger of defeat.

A Confederate 'greyback' State of Louisiana five-dollar bill

The Rothschilds had been right. Those who had invested in Confederate bonds ended up losing everything, since the victorious North pledged not to honour the debts of the South. In the end, there had been no option but to finance the Southern war effort by printing money. It would not be the last time in history that an attempt to buck the bond market would end in ruinous inflation and military humiliation.