VOLUME 61, NO 3 APRIL 2011 - Foundation for Economic Education

Features8 America’s Turning Point by Jeffrey Rogers Hummel

11 The Economic Costs of the Civil War by Burton Folsom, Jr.

14 Gaining a Nation, Losing the Republic: Reconstruction, 1863–1877 by Bradley J. Birzer

19 Civil War and the American Political Economy by Joseph R. Stromberg

26 The Question of Slavery by Jeffrey Rogers Hummel

34 Gold and Money by Warren C. Gibson

Columns4 Ideas and Consequences ~ The Gasoline Demagogues Will Be Back

by Lawrence W. Reed

24 Our Economic Past ~ Maps and Power by Stephen Davies

32 Peripatetics ~ The Importance of Subjectivism in Economics by Sheldon Richman

38 Give Me a Break! ~ Prohibitionists: Leave Us Alone! by John Stossel

47 The Pursuit of Happiness ~ War Is a Government Program

by David R. Henderson

Departments2 Perspective ~ The Civil War and the Statist Mentality by Sheldon Richman

6 Central Banking Beats Free Banking? It Just Ain’t So! by Fred Foldvary

Book Reviews

42 The Road to Big Brother: One Man’s Struggle Against the Surveillance Society

by Ross Clark Reviewed by George Leef

43 Unchecked and Unbalanced: How the Discrepancy Between Knowledge and

Power Caused the Financial Crisis and Threatens Democracy

by Arnold Kling Reviewed by David M. Brown

44 Commonwealth

by Michael Hardt and Antonio Negri Reviewed by David Prychitko

45 The Privatization of Roads & Highways: Human and Economic Factors

by Walter Block Reviewed by Arthur Foulkes

Page 43

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Page 47

VOLUME 61, NO 3 APRIL 2011

On April 12, 1861, the American Civil Warbegan with the Confederate bombardment ofthe U.S. military’s Fort Sumter in Charleston

Harbor, South Carolina. Nearly four bloody years laterto the day, the war ended with Lee’s surrender to Grantat Appomattox Court House in Virginia. This issue ofThe Freeman is largely devoted to analyzing the reasonsfor and consequences of the conflict that took 620,000lives and inflicted more than one million casualties inall.

The war damaged the country forever, as I suggestedin Tethered Citizens (Future of Freedom Foundation,2001). Here’s an excerpt:

“While early America always had its advocates ofactivist government, that view becomes more promi-nent after the Civil War. . . .

“The Civil War itself and its militaristic effect onAmerican society had important consequences for thenationalist collectivization of America that occurred inthe following decades: It encouraged collectivist intel-lectuals to vigorously promote their reform visions, andit won thinkers to a collectivist cause. It even convincedsome individualists that the world had changed, makingtheir worldview outdated.

“The war’s military collectivization of society pro-foundly impressed some Northern intellectuals, givingthem visions of a new world. The war effort devaluedthe individualism that had characterized the earlier Jef-fersonian America. Service to the Union became thereigning ideal. Order, explicit planning, and regimenta-tion rose in value. Independent thought seemed more aliability than an asset.

“The war, wrote the historian Allan Nevins, ‘trans-formed an inchoate nation, individualistic in temperand wedded to improvisation, into a shaped and disci-plined nation, increasingly aware of the importance ofplan and control.’

“A symbol of that change in mindset is Ralph WaldoEmerson, the transcendentalist author of Self-Reliance,who before the war represented a distinctively Ameri-can cantankerous individualism opposed to institutions

2T H E F R E E M A N : w w w. t h e f r e e m a n o n l i n e . o r g

The Civil War and theStatist Mentality

Perspective

Published byThe Foundation for Economic Education

Irvington-on-Hudson, NY 10533Phone: (914) 591-7230; E-mail: [email protected]

www.fee.org

President Lawrence W. ReedEditor Sheldon Richman

Managing Editor Michael NolanBook Review Editor George C. Leef

ColumnistsCharles Baird David R. Henderson

Donald J. Boudreaux Robert HiggsStephen Davies John Stossel

Burton W. Folsom, Jr. Thomas SzaszWalter E.Williams

Contributing EditorsPeter J. Boettke Dwight R. Lee

James Bovard Wendy McElroyThomas J. DiLorenzo Tibor MachanBettina Bien Greaves Andrew P. Morriss

Steven Horwitz James L. PayneJohn Hospers William H. Peterson

Raymond J. Keating Jane S. ShawDaniel B. Klein Richard H.Timberlake

Lawrence H.White

Foundation for Economic Education

Board of Trustees, 2010–2011Wayne Olson, Chairman

Harry Langenberg Peter J. BoettkeWilliam Dunn Frayda Levy

Jeff Giesea Kris MaurenEthelmae Humphreys Roger Ream

Edward M. Kopko Donald Smith

The Foundation for Economic Education (FEE) is anonpolitical, nonprofit educational champion ofindividual liberty, private property, the free market,

and constitutionally limited government.The Freeman is published monthly, except for combined

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Copyright © 2011 Foundation for Economic Education,except for graphics material licensed under Creative CommonsAgreement. Permission granted to reprint any article from this issue, with appropriate credit, except “Prohibitionists: LeaveUs Alone!”

3 A P R I L 2 0 1 1

P E R S P E C T I V E : T h e C i v i l Wa r a n d t h e S t a t i s t M e n t a l i t y

and their impositions on the person. When the warcame along, Emerson expressed approval that itimposed obligations on everyone. He hoped no onewould be exempt from ‘the public duty.’ In a 180-degree turn, he assigned government and civilizationpriority over ‘the private man.’ In ‘American Civiliza-tion,’ written in 1862, he was willing to grant govern-ment ‘the absolute power of a dictator’ in a crisis.‘Emerson’s characteristic emphasis on individualismand anarchism disappeared.’ [George M. Frederickson,The Inner Civil War: Northern Intellectuals and the Crisis ofthe Union.]

“In Emerson’s words, ‘War organizes [and] forcesindividuals and states to combine and act with largerviews.’ Self-reliance was now replaced by service andobedience, particularly in the military. His new viewsinfluenced his outlook on culture, as evidenced by hissupport for a State-created National Academy of Liter-ature and Art.A new era required new thinking.

“After the war, intellectuals were more interested ina strong central government and nationalism. Jefferson-ian decentralization and individual liberty were seen asa part of the old ways, made obsolete in the new post-war America.The Declaration of Independence becameold-fashioned. . . .

“Unlike poetry before the war, poetry now rhap-sodized on the glory of the nation. Herman Melvillewrote about empire, not freedom.The crushing of theSouthern secession demonstrated the need for stronggovernment and citizen compliance with the State. . . .

“The collectivist intellectuals believed that the CivilWar held important lessons for the new America. Itwasn’t war itself that they valued, but the things thatwar brought. John W. Draper, for example, wrote thatwar taught subordination and stimulated an apprecia-tion of order. Men, said Draper, ‘love to obey’ thosethey believe are their intellectual superiors. ‘In militarylife they learn to practice that obedience openly,’ hesaid, adding that individualism was to blame for thewar.

“What intellectuals such as Francis A. Walker,Charles Francis Adams Jr., and future U.S. SupremeCourt Justice Oliver Wendell Holmes Jr. wished forwas, in [George] Frederickson’s words, a ‘continuance . . . of the crisis mentality of war.’That mentality wouldmaintain the sense of duty to society that was palpable

during the war. While those men wanted conservativeobjectives served, others, such as John Wesley Powell,had ‘humanitarian ends’ in mind.

“The problem for these thinkers was that peacetimedid not inspire service and sacrifice. People becamecentered on their own lives, their families, and immedi-ate communities. But war was a call to duty and the‘strenuous life.’ If only a substitute for war could befound, a call to duty that did not involve bloodshed.‘There is one thing I do not doubt,’ said Holmes, ‘andthat is that the faith is true and adorable which leads asoldier to throw away his life in obedience to a blindlyaccepted duty, in a cause which he little understands, ina plan of campaign of which he has no notion, undertactics of which he does not see the use.’”

* * *Jeffrey Rogers Hummel begins this special issue

with an overview, describing why the war is aptlythought of as a turning point for America.

Following is Burton W. Folsom, Jr.’s assessment ofthe economic costs of the war.

Next, Bradley Birzer documents another sort ofcost: the sacrifice of republican principles through theReconstruction.

Joseph Stromberg then examines the political econ-omy that arose during and emerged from the Civil War,with particular attention to the ensuing Gilded Age.

Finally, Hummel returns to look at the issue of slavery in order to sort out the reasons for secession and war.

Warren Gibson concludes his two-part series ongold and money.

Our columnists have also been hard at work.Lawrence Reed warns that rising gasoline prices can becounted on to bring out the political opportunists.Donald Boudreaux debunks vulgar Keynesianism.Stephen Davies explains how maps serve the interestsof power. John Stossel reports on another assault by theprohibitionists. David Henderson reminds us that war isa government program.And Fred Foldvary, confrontinga claim that central banking is superior to free banking,responds,“It Just Ain’t So!”

Books on domestic surveillance, the financial crisis,Marxism, and private roads occupy our reviewers.

—Sheldon [email protected]

B Y L AW R E N C E W. R E E D

The Gasoline Demagogues Will Be Back

Ideas and Consequences

In late February gasoline prices across Amer-ica were surpassing $3 a gallon. Forecasters

are advising us to expect $4 by summer, maybe higher.So be prepared for something else with it all: the broken-record rhetoric of anti-market types about“gouging.” It’ll be coming from a lot of the same peo-ple who block the drilling for oil just about anywhereand who think it’s always better to be gouged by thetaxman to subsidize noneconomic “green energy” thanto pay a price for gasoline that might reflect real mar-ket conditions.

Economist Thomas Sowell, speaking of big-govern-ment “liberals,” put it well when hesaid that asking them where wagesand prices come from is “like askingsix-year-olds where babies comefrom.” You’ll certainly never hearthem admit that even at $4 a gallon,gasoline is cheaper today (in infla-tion-adjusted terms) than it was whenPresident Reagan decontrolled oil 30years ago.

If you’re expecting me to offer theeconomic argument for government to get out and stayout of energy markets, you’ll have to wait. There’s amoral argument that takes precedence.

Suppose someone offers to buy my house for twicewhat I paid for it a year ago and I refuse. It’s my house,and I really don’t want to move, but I announce that ifsomeone wants to give me ten times what I paid, I’lltake it.

Am I “gouging” somebody? Most people would sayno, but they would be hard put to explain what the dif-ference is between my action and that of those unpop-ular villains who produce and sell gasoline.

It’s true that my house is private property, but so isgasoline.When it’s in the underground tank at the gas

station, it’s the private property of that station untilsomebody else buys it. It’s not public property. It cer-tainly doesn’t belong to people who never took a riskand invested a nickel in it—and that includes all thebellyaching demagogues who will try to further theircareers by bashing wealth-creators.

If it’s wrong to sell gas at $3 or $4 a gallon, what ifthe owner of a gas station decided not to sell it at anyprice? Wouldn’t that be even more wrong? Only if onedistorts the concept of private property to mean thatit’s really not yours if somebody else wants it.

There are plenty of people in the world who willscoff at any defense of oil companies or gas-station

owners on the basis of the “anti-quated” notion of property rights. Butof course those same scoffers willdefend their own property withouthesitation; it’s only other people’sproperty about which they can affordto be cavalier.

So if it’s not yours, don’t claim it. Ifit doesn’t belong to the politicians,don’t demand that they jigger itsprice. This is a moral issue; people of

moral fiber should rise to the occasion and resist thetemptation to steal.

Stockpiling and “Gouging”

Now a little economics, rooted in experiences of adecade ago.When news spread on September 11,

2001, of the terrorist attacks in New York and Washing-ton, many people panicked. Not knowing whether thiswas the start of something much bigger, they did whatseemed to make sense given the extraordinary situa-tion—they began to “stockpile” gasoline because aworld crisis could easily disrupt fuel supplies. Long lines


Lawrence W. Reed ([email protected]) is the president of FEE.

Here we go again.

If it’s not yours, don’tclaim it. If it doesn’tbelong to thepoliticians, don’tdemand that theyjigger its price.

formed at gas stations all over the nation by mid-after-noon. Demand, in other words, soared. Just like Econ101 was supposed to teach us, prices rose.

If the crisis had indeed slashed world fuel supplies,then the initial reaction of the public would have beenboth smart and prescient. Buying more would havepushed up prices. As prices rose they would haveencouraged people to restrict their use of gas to theirmost important purposes, leaving more for others.And the higher prices would have sent a powerful signal for somebody to find new supplies quickly.Thisis the way a free price system works—in gasoline, cof-fee, or anything else.

It became apparent within a day ortwo that the events in New York andWashington had not produced dis-ruptions in the flow of oil or in theproduction of gasoline.Then the mar-ket effectively worked its magic. Peo-ple shopped elsewhere or found waysto do with less while prices werehigh. Folks eventually calmed down,and the lines at the gas stations evap-orated. Suppliers rounded up moresupplies. Prices fell.The upward spikeset into motion the market forces thatsolved the “problem.”

Saber-Rattling and Bad Laws

Nonetheless, politicians ignorant of marketplaceeconomics rattled their sabers and piled bad law

on top of previous bad law. State officials cried foul andthreatened “price gougers” with prosecution.

Ohio’s attorney general went after 27 retailers thatcharged $4 or more, decrying the price hikes as“unconscionable acts.” He forced the culprits to giverefunds to customers and make donations to the American Red Cross or face fines of up to $25,000 per violation.

Any stations in Wisconsin that simply changedprices more than once in a 24-hour period were threat-

ened with fines of up to $200 for each customer they“overcharged.”

In Florida, authorities declared that stations whichraised prices by more than a dime a gallon were in vio-lation of the Sunshine State’s emergency rules andcould face penalties of $25,000 per day.Two weeks afterthe terrorist attacks, Missouri’s attorney general sentletters to 48 gasoline retailers telling them that if theyhad boosted prices for any grade of gas above $2.49after September 11, they would have to pay fines of“triple any gas-gouging profits, or $750, whichever wasgreater, plus investigative costs of $250.”

My home was in Midland, Michi-gan, at the time. A woman therenamed Sonja Sturgeon managed Bob-bie’s Point Citgo, a gas station targetedby the state’s attorney general forgouging. Sturgeon readily admitted tothe local paper that the store boostedprices to $3 at about 8:30 p.m. onSeptember 11 because she wasn’texpecting a new supply until later inthe week.“The whole point of raisingthe prices was to send customersdown the road to buy gas,” she said.“It had nothing to do with gougingthe customers.”

Perhaps the attorney generalwould have advised Bobbie’s Point Citgo to behave asthough nothing had changed in the wake of September11. Keep prices the same or raise them no more than10 percent. Would that have done anyone a favor?Surely, the lines would have been many blocks longer,and station after station would have run out, leavingpeople at the back of many lines without any hope ofgetting a drop.

Let’s see, which is better? Gas at $3 after a 15-minute wait, or no gas at $2 after sitting in line for anhour? This is not rocket science.

Brace yourself for another round of gasoline pricehysteria. It’s going to be déjà vu all over again.

5 A P R I L 2 0 1 1

T h e G a s o l i n e D e m a g o g u e s W i l l B e B a c k

As prices rise, theyencourage people torestrict their use ofgas, leaving more forothers and sending apowerful signal forsomebody to findnew supplies.

In “More Bits on Whether We Need a Fed,” aNovember 21 Marginal Revolution blog post(www.tinyurl.com/3y2gsbx), George Mason Uni-

versity economics professor Tyler Cowen questions“why free banking would offer an advantage over post-WWII central banking (combined with FDIC andpaper money).” He adds, “That’s long been the weakspot of the anti-Fed case.”

Free banking is better than central banking becauseonly in a free market can the optimal prices and quan-tities of goods be determined. Thosegoods include the money supply, andprices include the rate of interest.

There is no scientific way to knowin advance the right price of goods.With ever-changing populations,technology, and preferences, marketsare turbulent, and fluctuating humandesires and costs cannot be accuratelypredicted.

The quantity of money in theeconomy is like that of other goods.The optimal amount can only be dis-covered by the dynamics of supply and demand. Theimpact of money on prices depends not just on theamount of money but also on its velocity—that is, howfast the money turns over.The Fed cannot control thissince it cannot control the amount people want tohold, or the demand.Also, even if the Fed could deter-mine the best amount of money for today, the impactof its moves take months to play out, so the centralbankers would need to be able to accurately predict thestate of the economy months into the future.

The Fed also fails because of political pressure.Although the Fed is supposed to be independent, in

practice, when the economy is depressed, there is strongpolitical pressure to “do something,” specifically to “stim-ulate” by expanding the money supply. Since Congresscreated the Fed and can alter it, it is impossible for theFed to be purely independent of politics.

The Federal Reserve was set up to provide pricestability, yet the United States suffered high inflationduring the 1970s and continuous inflation since WorldWar II.The Fed was also supposed to provide economicstability, but since World War II there have been severe

recessions in 1973, 1980, 1990, and2007–2009.The Fed was supposed toensure stability in the financial system,but it failed to prevent the Crash of2008 and the Great Recession thatfollowed. But the challenge is toexplain why free banking would bebetter.

Suppose gold once again became aglobal currency. It would be the realmoney, and the U.S. dollar would bedefined as a particular weight of gold.A $20 gold coin had about an ounce

of gold before 1933.Under free banking most transactions would not

occur with gold, but rather with more convenientmoney substitutes. Banks would issue paper bank notesinscribed with their bank names.Anyone holding banknotes could exchange them for gold. For example, if$1,000 was equivalent to an ounce of gold, then anyonecould go to a bank and convert $1,000 in paper bills toone ounce of gold coins. Likewise one could withdraw$1,000 of deposits in gold coins.

Central Banking Beats Free Banking?It Just Ain’t So!


B Y F R E D F O L D VA R Y

Fred Foldvary ([email protected]) is a lecturer in economics at Santa ClaraUniversity.

The optimal quantityof money in theeconomy, like anyother good, can onlybe discovered bymarkets, notpredicted by the Fed.

7 A P R I L 2 0 1 1

Competition among banks, as well as convertibilityinto gold, would result in price stability, since the bankswould only be able to issue as many bank notes as thepublic was willing to hold. If there were more banknotes than that, they would come back to the bank tobe exchanged for gold. But the money supply wouldalso be flexible, since if there were a greater demand tohold money, the amount of bank notes or bank depositswould increase.

The Structure of Capital Goods

Free banking mitigates the boom-bust cycle.There isa structure to capital goods similar

to a stack of pancakes. At the bottomof the stack are rapidly circulatingcapital goods such as inventory closeto the consumer-goods level. As wego up the stack, the capital goods turnover more slowly.At the top are long-duration investments such as real-estate development. Goods becomemore sensitive to interest rates as youmove up the stack. Lower interestrates make the stack steeper, as there is more investment in long-terminvestments.

In a free market the “natural rate”of interest depends on the preferencefor goods sooner rather than later,or “time preference.” Interest is the premium paid toshift purchases from the future, for which one wouldhave to save enough to pay cash, to the present day byborrowing.

The Fed lowers the rate of interest by creating fiatmoney out of nothing. As a result, businesspeople bor-row more for capital goods high on the stack, such asreal estate. Prices rise fastest and soonest where themoney is being injected into the economy with loans.Thus real-estate prices escalate, creating a bubble likethose that occurred before 1973, 1980, 1990, and 2007;indeed a similar bubble occurred during the 1920sbefore the Great Depression.

Every boom preceding a bust has been fueled byartificially cheap credit. With free banking the interestrate would not be manipulated down.The natural rate

of interest would raise the carrying cost of borrowedfunds, reducing if not preventing the financial fever.

Further Reforms

Free banking is not a panacea: There need to beother reforms to achieve sustainable economic

growth. Punitive taxes, subsidies, and arbitrary restric-tions all distort the economy, stifle enterprise, and cre-ate turbulence. But even without such other reforms,the case for replacing central banking with free bankingis strong, resting on three facts:

1. The optimal money supplyand interest rates are unknowable inadvance, and can only be discoveredby market dynamics.

2. Political pressure makes theFed expand the money supply andreduce interest rates when the econ-omy is depressed, and this fuels anunsustainable boom that results in thenext bust.

3. Government insurance, guar-antees, the expectation of bailouts,and other subsidies induce excessiverisk-taking, making financial crashesworse.

Cowen states that if the Fed wereto shut down, the new base money would be Treasurybills. (Base money currently consists of money in cir-culation, bank vault cash, and commercial bankreserves on account at the Fed.) But folks don’t buygroceries with Treasury bills. The best transition basemoney would be the current amount of FederalReserve notes, whose supply would be frozen, as sug-gested by Professor George Selgin. Then new-moneyexpansion would be the money substitutes issued bythe banks, convertible into base money. Eventually,with the abolition of legal-tender laws, world financialmarkets would converge on a common global cur-rency, gold.

The case for free banking is similar to the case forhealthy living. It is better to prevent economic illnessthan to have to treat it.

C e n t r a l B a n k i n g B e a t s F r e e B a n k i n g ? I T J U S T A I N ’ T S O !

Free banking is not apanacea. Governmentstill distorts theeconomy in manyways. But evenwithout furtherreforms, the case forreplacing centralbanking is strong.

The Civil War represents the simultaneous cul-mination and repudiation of the AmericanRevolution. Four successive ideological surges

had previously defined American politics: the radicalrepublican movement that had spearheaded the revolu-tion itself; the subsequent Jeffersonian movement thathad arisen in reaction to the Federalist State; the Jack-sonian movement that followed the War of 1812; andthe abolitionist movement. Although each was unique,each in its own way was hostile to government power.Each had contributed to the long-termerosion of all forms of coercive authority.

“Nowhere was the American rejec-tion of authority more complete than inthe political sphere,” writes historianDavid Donald.“The decline in the pow-ers of the Federal government from theconstructive centralism of George Wash-ington’s administration to the feeble vac-illation of James Buchanan’s is so familiaras to require no repetition here. . . .Thenational government, moreover, was not being weak-ened in order to bolster state governments, for they toowere decreasing in power. . . . By the 1850s the author-ity of all government in America was at a low point.”

The United States, already one of the most prosper-ous and influential countries on the face of the earth,had practically the smallest, weakest State apparatus.The great irony of the Civil War is that all that changedat the very moment that abolition triumphed. As thelast, great coercive blight on the American landscape,black chattel slavery, was finally extirpated—a triumphthat cannot be overrated—the American polity did anabout-face.

Insofar as the war was fought to preserve the Union,it was an explicit rejection of the American Revolu-tion. Both the radical abolitionists and the South’s fire-eaters boldly championed different applications of therevolution’s purest principles. Whereas the abolitionistswere carrying on the assault against human bondage,the fire-eating secessionists embodied the tradition ofself-determination and decentralized government. As a legal recourse, the legitimacy of secession was admit-tedly debatable. Consistent with the Antifederalist

interpretation of the Constitution thathad come to dominate antebellum poli-tics, secession undoubtedly contravenedthe framers’ original intent. But as a rev-olutionary right, the legitimacy of seces-sion is universal and unconditional. Thatat least is how the Declaration of Inde-pendence reads. “Put simply,” agreesWilliam Appleman Williams, “the causeof the Civil War was the refusal of Lin-coln and other northerners to honor the

revolutionary right of self-determination—the touch-stone of the American Revolution.”

American nationalists, then and now, automaticallyassume that the Union’s breakup would have been cat-astrophic. The historian, in particular, “is a camp fol-lower of the successful army,” Donald wrote, and oftentreats the nation’s current boundaries as etched instone. But doing so reveals a lack of historical imagina-tion. Consider Canada. The United States twice

B Y J E F F R E Y R O G E R S H U M M E L

America’s Turning Point


Jeffrey Rogers Hummel ([email protected]) is an associate professorof economics at San Jose State University. He is the author ofEmancipating Slaves, Enslaving Free Men:A History of theAmerican Civil War.

mounted military expeditions to conquer its neighbor,first during the American Revolution and again duringthe War of 1812. At other times, including after theCivil War, annexation was under consideration, some-times to the point of private support for insurgenciessimilar to those that had helped swallow up Florida andTexas. If any of these ventures had succeeded, histori-ans’ accounts would read as if the unification of Canadaand the United States had been fated, and any otheroutcome inconceivable. In our world, of course,Canada and the United States have endured as separatesovereignties with hardly any untoward consequences.“Suppose Lincoln did save the American Union, did his success in keeping one strong nation where theremight have been two weaker ones really entitle him toa claim to greatness?” asks David M.Potter. “Did it really contribute anyconstructive values for the modernworld?”

The common refrain, voiced byAbraham Lincoln himself, that peace-ful secession would have constituted a failure for the great Americanexperiment in liberty, was just plainnonsense. “If Northerners . . . hadpeaceably allowed the seceders todepart,” the conservative LondonTimes correctly replied, “the resultmight fairly have been quoted as illus-trating the advantages of Democracy; but whenRepublicans put empire above liberty, and resorted topolitical oppression and war rather than suffer anyabatement of national power, it was clear that nature atWashington was precisely the same as nature at St.Petersburg. . . . Democracy broke down, not when theUnion ceased to be agreeable to all its constituentStates, but when it was upheld, like any other Empire,by force of arms.”

“War is the health of the State,” proclaimed Ran-dolph Bourne, the young Progressive, disillusioned bythe Wilson administration’s grotesque excesses duringWorld War I. Bourne’s maxim is true in two respects.During war itself the government swells in size andpower, as it taxes, conscripts, regulates, generates infla-tion, and suppresses civil liberties. Second, after the war

there is what economists and historians have identifiedas a ratchet effect. Postwar retrenchment never returnsgovernment to its prewar levels.The State has assumednew functions, taken on new responsibilities, and exer-cised new prerogatives that continue long after thefighting is over. Both of these phenomena are starklyevident during the Civil War.

Before Fort Sumter national spending was onlyabout $2.50 per person per year, or $50 per person intoday’s prices. The central government relied on onlytwo sources of revenue: a very low tariff and the sale ofpublic lands. The war brought not only protectionistimport duties but also a vast array of internal excises,the country’s first national income tax, and an extensiveinternal revenue bureaucracy with 185 districts reach-

ing into every hamlet and town. Fed-eral outlays soared from 1.5 percentof the economy’s output to almost 20percent, approximately what the cen-tral government spends today. Thenational debt climbed from a modest$65 million, less than annual expendi-tures, to $2.8 billion. This providedthe justification for replacing theantebellum monetary system of freebanking and financial deregulation(which some economic historiansbelieve was the best the country hasever had) with inflationary fiat

money and nationally regulated banking.Protectionism would continue to dominate U.S.

trade policy mercilessly until the Great Depression andwas just one manifestation of the Lincoln administra-tion’s effort to enlist special interests through govern-ment subsidies and privileges. The Yankee Leviathanalso was responsible for the first federal aid to transcon-tinental railroads, land grants for higher education, aDepartment of Agriculture for farmers, and troops tobreak strikes for employers. The prewar regime of Jacksonian laissez faire was effectively supplanted byRepublican neomercantilism, an alliance between busi-ness and government that became so scandalous duringthe Grant era that it has gone down in history as, to useVernon Louis Parrington’s label for the postwar feedingfrenzy, the “Great Barbecue.”

9 A P R I L 2 0 1 1

A m e r i c a ’s Tu r n i n g P o i n t

The claim thatpeaceful secessionwould have meantthe failure of theAmericanexperiment is justplain nonsense.

Lincoln’s war delivered a blow to civil liberties aswell. The Union’s resort to nationally administeredconscription touched off so much resistance that thePresident suspended habeas corpus throughout theNorth.Traditional estimates are that the administrationimprisoned without trial or charges 14,000 civiliansduring the conflict, but some historians believe the fig-ure to be much too low. To be sure, the greater numberwere citizens of either the border states or the Confed-eracy itself, and many of those arrested secured quickrelease within a month or two, usually after swearing aloyalty oath. Yet the federal government at the sametime monitored and censored both the mails andtelegraphs and shut down over 300 newspapers forvarying periods.

Many of these measures were of course abandoned atthe fighting’s end. Federal spending fell from its wartimepeak to only 3 to 4 percent of GDP. Although not a trivial decline, it still left spend-ing at twice prewar levels, and the largest postwar expenditures were war-related. Interest on the war debt ini-tially accounted for 40 percent offederal outlays, and by 1884 veterans’benefits were consuming 30 percent.These benefits were so lavish that theyconstitute the national government’s first old-age anddisability insurance and stand as a precursor to SocialSecurity. The impact of the Civil War was even felt inthe seemingly unrelated area of obscenity. Congresspassed the first act regulating mail content in response tocomplaints that troops were ordering pornographicmaterial, and this became the basis for the Comstockwitch hunts of the 1870s.

The Real Turning Point

This ratchet effect is a phenomenon historians fre-quently observe.Yet the Civil War did something

more. Despite wars and their ratchets, governmentsmust sometimes recede in reach, else all would have beengroaning under totalitarian regimes long ago. Bothconservatives and so-called liberals date the majorpolitical turning point in American history at the GreatDepression of 1929. Previously Americans are supposedto have self-reliantly resisted the temptations of govern-

ment largess and confined federal power within strictconstitutional limits. Although Franklin D. Roosevelt’sNew Deal is responsible for Social Security, whichalong with health care, now ranks as the national gov-ernment’s primary expense, this legend ignores severalinconvenient facts.To begin with, the New Deal simplyemulated the Wilson administration’s previous war col-lectivism. Moreover the growth of government underthe New Deal was trivial compared to its growth dur-ing the United States’ next major conflict:World War II.

More astute analysts push the watershed in U.S. his-tory back to the Progressive Era. Progressivism emergedat the beginning of the twentieth century as a diverseinclination, varying in different parts of the country and including members of all political parties. But itbecame the country’s first dominant mindset to advo-cate government intervention in the free market and in personal liberty at every level and in every sphere.

My contention, however, is thatAmerica’s decisive transition must bedated even earlier.

The Yankee Leviathan co-optedand transformed abolitionism. It shat-tered the prewar congruence amonganti-slavery, anti-government, andanti-war radicalism. It permanently

reversed the implicit constitutional settlement that hadmade the central and state governments revenue-inde-pendent. It acquired for central authority such newfunctions as subsidizing privileged businesses, managingthe currency, providing welfare to veterans, and pro-tecting the nation’s “morals”—at the very moment thatlocal and state governments were also expanding.And itset dangerous precedents with respect to taxes, fiatmoney, conscription, and the suppression of dissent.

These and the countless other changes mark theCivil War as America’s real turning point. In the yearsahead, coercive authority would wax and wane withyear-to-year circumstances, but the long-term trendwould be unmistakable. Henceforth there would befew major victories of Liberty over Power. In contrastto the whittling away of government that had precededFort Sumter, the United States had commenced itshalting but inexorable march toward the welfare-warfare State of today.


J e f f r e y R o g e r s H u m m e l

The YankeeLeviathan co-optedand transformedabolitionism.

Even after 150 years, the Civil War evokes memo-ries of great men and great battles. Certainlythat war was a milestone in U.S. history, and on

the plus side it reunited the nation and freed the slaves.Few historians, however, describe the costs of the

war. Not just the 620,000 individuals who died, or thedevastation to southern states, but the economic costsof waging total war.What was the economic impact ofthe Civil War on American life?

The first and most important point is that the CivilWar was expensive. In 1860 theU.S. national debt was $65 mil-lion. To put that in perspective,the national debt in 1789, theyear George Washington tookoffice, was $77 million. In otherwords, from 1789 to 1860, theUnited States spanned the con-tinent, fought two major wars,and began its industrialgrowth—all the while reducingits national debt.

We had limited government,few federal expenses, and lowtaxes. In 1860, on the eve of war,almost all federal revenue derived from the tariff. Wehad no income tax, no estate tax, and no excise taxes.Even the hated whiskey tax was gone. We had seem-ingly fulfilled Thomas Jefferson’s vision: “What farmer,what mechanic, what laborer ever sees a tax-gatherer ofthe United States?”

Four years of civil war changed all that forever. In1865 the national debt stood at $2.7 billion. Just theannual interest on that debt was more than twice our

entire national budget in 1860. In fact, that Civil Wardebt is almost twice what the federal government spentbefore 1860.

What’s worse, Jefferson’s vision had become a night-mare.The United States had a progressive income tax,an estate tax, and excise taxes as well. The revenuedepartment had greatly expanded, and tax-gathererswere a big part of the federal bureaucracy.

Furthermore, our currency was tainted. The Uniongovernment had issued more than $430 million in

paper money (greenbacks) anddemanded it be legal tender forall debts. No gold backed thenotes.

The military side of the CivilWar ended when GeneralsUlysses S. Grant and Robert E.Lee shook hands at AppomattoxCourt House. But the economicside of the war endured for gen-erations. The change is seen inthe annual budgets before andafter the war. The 1860 federalbudget was $63 million, but afterthe war, annual budgets regularly

exceeded $300 million.Why the sharp increase?First, the aftermath of war was expensive. Recon-

struction governments brought bureaucrats to theSouth to spend money on reunion. More than that,federal pensions to Union veterans became by far thelargest item in the federal budget (except for the inter-

B Y B U R T O N F O L S O M , J R .

The Economic Costs of the Civil War

11 A P R I L 2 0 1 1

Burton Folsom, Jr., ([email protected]) is a professor of history atHillsdale College and author of The Myth of the Robber Barons andNew Deal or Raw Deal?

During the Civil War, demand notes [top] backed by goldwere replaced by greenbacks with no backing.

est payment on the Civil War debt itself). Pensions arepart of the costs of war, but the payments are imposedon future generations. In the case of the Civil War, vet-erans received pensions only if they sustained injuriessevere enough to keep them from holding a job. Also,widows received pensions if they remained unmarried,as did their children until they became adults. Confed-erates, of course, received no federal pensions.

Pensions and Tensions

The Civil War pensions shaped political life inAmerica for the rest of the century. First, northern

states benefitted from pension dollars at the expense ofsouthern states.That kept sectional tensions high. Sec-ond, Republicans “waved the bloody shirt” and blamedDemocrats for the war. Republican presidents hadincentives to keep the pension system strong, and theGrand Army of the Republic (GAR) lobbied to get asmuch money for veterans as possible.

The federal government established pension boardsto determine whether injuries to vet-erans warranted a pension. But theissue was complex. Sometimes, veter-ans created or faked injuries; othersargued that injuries received after thewar—for example, falling off of a lad-der while fixing a roof—were reallywar injuries. If the pension boardturned down an application, the veteran sometimespleaded to his congressman—who was often able to geta special pension for his constituent through Congress.The corrupt pension system corroded politics for thewhole 1865-1900 period.

President Grover Cleveland tried to stop congress-men from voting pensions to constituents with bogusinjuries by vetoing bill after bill. His successor, Ben-jamin Harrison, “solved” the problem by signing theBlair bill, which liberalized pensions to the point thateven old age made a veteran eligible for a pension.During the 1890s, after most veterans had died, pensionpayments remained a huge and corrupting item in thefederal budget.

The economic impact of the Civil War extendedbeyond pensions. One argument made during the warwas that transportation needed to be improved to con-

nect California with the other Union states. PresidentLincoln signed a bill establishing federal subsidies forbuilding two transcontinental railroads.

Lincoln was a gifted writer and an able defender ofnatural rights, but on railroad subsidies he had a reverseMidas touch. During the 1830s, for example, whenLincoln was in the Illinois legislature, he helped leadthe charge for a $12 million subsidy to bring railroadsto the major cities of Illinois. Unfortunately for Lin-coln, the money was wasted and the railroads largelywent unbuilt.According to William Herndon, Lincoln’slaw partner, “[T]he internal improvement system, theadoption of which Lincoln had played such a promi-nent part, had collapsed, with the result that Illinois wasleft with an enormous debt and an empty treasury.”

Bribes Across America

When Lincoln signed the transcontinental rail-road bill in 1862, he was creating an even

larger boondoggle. The Union Pacific and CentralPacific Railroads were to be paid bythe mile to lay track from Omaha toSacramento. Thus, the UP and CPhad incentives to create mileage, butnot quality mileage. Their railroadswere sometimes not straight, andother times went over hilly terrainthat was impossible for a train to sur-

mount. When finished, parts of what they had builtwere unusable, but both lines had paid off politicians(with some of their subsidy money) to continue thesubsidies and not inquire closely on how they werebeing spent.

Lincoln is not responsible for the corruption thatoccurred after he died, but the Republican leaders dur-ing the war committed themselves to many federalinterventions other than the constructive one of endingslavery.The National Banking Act of 1863, and amend-ments to it, brought greater federal control to bankingand imposed a 10 percent tax on state bank notes.

The Morrill Act of 1862 gave 17.4 million acres offederal land to states to build land-grant colleges toteach citizens agriculture and science. Gifts of land andstatements of educational focus seem like minor inter-ventions, but the Constitution gave no role to the fed-


B u r t o n F o l s o m , J r.

Lincoln had a reverseMidas touch when itcame to railroads.

eral government in subsidizing education or creatinguniversities.The Morrill Act became an entering wedgefor later interventions (the Hatch Act of 1887 and theSmith Lever Act of 1914) that established direct federalsubsidies to those same land-grant colleges.

Once the federal government intervenes in an area,it’s hard to remove the controls and easy to expandthem. The Gilded Age generation did, however, haltsome of those Civil War interventions. Those movesback to freer markets in the late 1800s help account forthe tremendous economic growth during that time.

Some Rollbacks

The starting point here is the decision after the CivilWar to reduce the $2.7 billion

national debt. From 1866 to 1893, theU.S. government had budget surpluseseach year and slashed the nationaldebt to $961 million. Annual revenueduring these years was about $350million and expenses was about $270million—most of which consisted ofCivil War pensions and interest on thenational debt.

One reason the federal budgetstended to be lower in the 1880s thanin the 1860s and 1870s was that inter-est payments on the debt declinedsharply as the debt disappeared. Forexample, the annual interest on thenational debt dropped from $146 million in 1866 toonly $23 million in 1893. The generation that foughtthe Civil War became the politicians of the GildedAge, and they had the fortitude to wipe out almosttwo-thirds of the Civil War debt.

Speaking of Civil War politicians, those in the Grantadministration—long maligned by historians—estab-lished many of the conditions for the freedom andprosperity of the Gilded Age. For example, Granthelped make sure the U.S. government had budget sur-pluses by winning $15.5 million from Britain for dam-ages done to Union ships by the Alabama and otherships the British built for the Confederates. In 1875Grant also signed the Specie Resumption Act, which

promised to redeem the Civil War greenbacks for gold.Grant committed the United States to a sound cur-rency and fiscal restraint.

Also under Grant, the income and estate taxes wereabolished in 1872. He committed the U.S. governmentto budget surpluses with revenue almost exclusivelydrawn from tariff duties and excise taxes on alcohol andtobacco. Even before Grant was able to abolish theincome tax, he had it changed from a progressive to aflat tax.

The income tax during the Civil War—the first inU.S. history—was not onerous by today’s standards.Early in the Civil War, Congress passed a flat 3 percenttax on all income over $800 (which was much more

than most families earned). ThenCongress made the tax progressiveand raised the top marginal rate to 10percent.

When Grant had the income taxabolished, he returned the nation tothe tax system envisioned by theFounders. In Federalist 21, for exam-ple, Alexander Hamilton defended asystem of consumption taxes (tariffsand excises) against income taxes—which can be more divisive and moreeasily manipulated by politicians.Under consumption taxes, Hamiltonargued, “The amount to be con-tributed by each citizen will in a

degree be at his own option, and can be regulated by anattention to his resources.”

Hamilton added, “If duties are too high, they lessenthe consumption. . . . This forms a complete barrieragainst any material oppression of the citizens by taxesof this class, and is itself a natural limitation of thepower of imposing them.”

After the Civil War, Americans chose to consumealcohol and tobacco in sufficient quantities to help paydown the debt each year for most of the rest of thecentury. American industry recovered under such lim-ited government, and the Civil War generation pavedthe way for economic greatness.They overcame muchof the financial damage from the Civil War.

13 A P R I L 2 0 1 1

T h e E c o n o m i c C o s t s o f t h e C i v i l Wa r

The generation thatfought the Civil War became thepoliticians of theGilded Age, and theyhad the fortitude towipe out much ofthe war debt.

Adead president, carpetbaggers, scalawags, burn-ing crosses, white hoods, an occupied South,Boss Tweed, Thomas Nast cartoons, the New

York Democratic machine, and an imprisoned JeffersonDavis—all provide vivid images of the dozen years fol-lowing the surrender of Robert E. Lee’s forces at Appo-mattox in April 1865. As every historian knows, oftento his chagrin, these 12 years were tumultuous, confus-ing, and chaotic, especially in hind-sight. The period of course is also aletdown after the tragedies andnobilities of the Civil War years.Whereas individuals had a clear pur-pose during the war—no matterwhat side they chose—political com-promises and plunder definedReconstruction.

A period of governmental cor-ruption, monetary instability, grossexpansion of political power, the solidification of publicschooling, Anglo-Saxon racialist beliefs, manifest des-tiny, Indian Wars, and extreme violence, Reconstructionwitnessed a giant leap toward a cohesive nation-state–far from the founding vision of a decentralizedfederal republic.

A mere two months before John Wilkes Booth assas-sinated him in 1865, President Abraham Lincoln metwith his two top generals, Ulysses S. Grant and WilliamTecumseh Sherman, on the steamship The River Queen,just outside of Hampton Roads,Virginia.Though Lin-coln would call for “malice toward none” and “charityfor all” in his second inaugural, delivered in early Marchof the same year, he offered his fullest plan and desiresfor what a reconstructed union might look like in a

private conversation with Grant and Sherman. Lincolnassured them he wanted nothing more than

to get the deluded men of the rebel armies disarmedand back to their homes. . . . Let them once surren-der and reach their homes, [and] they won’t take uparms again. . . . Let them all go, officers and all, Iwant submission and no more bloodshed. . . . I want

no one punished; treat them liberallyall around. We want those people toreturn to their allegiance to the Unionand submit to the laws.

While Lincoln had waged a terriblyhard and total war, he also desired thesoftest peace possible. Indeed, if onetakes Lincoln’s words on The RiverQueen at face value, the United Statesof 1865 would look very much like the

United States of 1860, with one exception: Returningstates would need to accept the emancipation of all slavesthrough the Thirteenth Amendment to the U.S. Consti-tution. His architects of total war, Grant and Sherman,agreed completely with the President. Neither of Lin-coln’s generals knew how much longer the war wouldlast, they explained to him, but they believed the war wasrapidly approaching an end with possibly only one ortwo major battles left.They had reached the endgame.

B Y B R A D L E Y J . B I R Z E R

Gaining a Nation, Losing the Republic:Reconstruction, 1863–1877


Bradley Birzer ([email protected]) is the Russell Amos Kirk Chair in American Studies and a professor of history at Hillsdale College. He isthe author of several books, including his most recent about the Americanfounding, American Cicero:The Life of Charles Carroll. He dedicatesthis article—for his friendship and inspiration for over 20 years—to LarryReed.

Whereas individualshad a clear purposeduring the war,political compromisesand plunder definedthe Reconstruction.

When Booth cut down Lincoln at Ford’s Theater onGood Friday, two months later, he changed the entirecourse of American history. Had Lincoln presided overthe peace, one has no reason to doubt, he would havereconciled constitutional relations with, among, andbetween the former Confederate states, officers, and cit-izens as quickly as politically possible.The war, after all,had been viewed by almost all sides as a noble tragedyfor the common good of the republic and for the vision(no matter how varied) of the American foundingfathers. Men, for the most part, had chosen to fight, andthey had chosen to fight again andagain. Though a draft existed in theNorth, for example, after the sum-mer of 1863, 94 percent of all Unionsoldiers had volunteered. As GeneralJoshua Chamberlain, the classicistfrom Maine’s Bowdoin College, hadastutely observed of the surrenderceremonies in April 1865: “Honoranswering honor. . . [as men] of nearblood born, made nearer by bloodshed. . . . On our part not a sound or a trumpet more, nor roll of drum; nor a cheer, nor word norwhisper of vain-glory, nor motion ofman standing again at the order,but an awed stillness rather, andbreathholding.”

Just outside of Appomattox CourtHouse, Robert E. Lee’s former Con-federate forces, what remained of theArmy of Northern Virginia, walked through two linesof Union soldiers. The Union soldiers saluted thedefeated for hours on end that day. “Reluctantly, withagony of expression,” Chamberlain recorded, the Con-federate soldiers “tenderly fold their flags, battle-wornand torn, blood-stained, heart holding colors, and laythem down; some frenziedly rushing from the ranks,kneeling over them, clinging to them, pressing them totheir lips with burning tears.”

Such a scene, of course, is a far cry from the milita-rization and politicization, the martial law and theintrusion of Leviathan that one normally associateswith Reconstruction as it actually happened. Though

President Jefferson Davis’s final executive order calledfor all Confederate States of America troops to divideinto terrorist cells and launch attacks against civiliansand urban areas, Lee countermanded the order throughdeed and word, telling the men to “be good citizens asthey had been soldiers.”

With Lincoln’s death, though, the war became per-sonal in a way that it had not been during the massbloodshed of the previous four years. To many in thecountry, especially in the North, Lincoln’s death trans-formed him into a full-fledged American martyr, and

his reputation exploded.The Radi-cals within the Republican party—Senator Benjamin Wade of Ohio,Senator Charles Sumner of Massa-chusetts, Representative ThaddeusStevens of Pennsylvania, and Rep-resentative George Julian of Indi-ana, to name a few—manipulatedthis loss to their advantage morethan any other group. These menhad despised and resented Lincolnas a spineless moderate, lacking aproper nationalist and vindictivestreak.

The Radicals had attemptednothing less than a congressionalcoup against Lincoln in December1862, openly desired a military dic-tatorship throughout much of thewar, and proposed their own ver-sion of Reconstruction as early as

1863.Their vision of postwar America involved remak-ing the entirety of the South in their own image, withextensive punishment for all involved. Just as they hadwanted Lincoln to wage an ever-increasingly hard war, they wanted a peace imposed by the sword. Lin-coln’s death provided them with a symbol aroundwhich to rally northerners against their southernbrethren. “Within eight hours of his murder Republi-can Congressmen in secret caucus agreed,” Lincolnbiographer David Donald explained,“that ‘his death is agodsend to our cause.’” As the leader of the Radicals,Wade, stated,“[T]here will be no more trouble runningthe government.”

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Thaddeus Stevens, Benjamin Wade, George Julian,and Charles Sumner were among the RadicalRepublicans who wanted Lincoln to take a morevindictive approach to Reconstruction.commons.wikimedia.org

Wade and his fellow Radicals would have no smallpart in nationalizing the United States over the nextdozen years. “The New England reformers thoughtthey had struck down evil incarnate when they crushedthe Sable Genius of the South; and their horror at thecorruption and chaos of the Gilded Age was intensifiedproportionately as they discovered the extent of theirown previous naiveté,” the cultural critic and historianRussell Kirk in wrote The Conservative Mind.“They haddreaded an era of Jefferson Davis; but now they were inan era” of the radicals and “of worse.”The true reform-ers “awoke to find their fellow-Republicans, the oli-garchs of their party, intent upon concrete plunder.”

Not surprisingly, governmentgrew dramatically during the fouryears of the Civil War. The Unionprinted greenbacks, founded the U.S.Secret Service to protect the fiatmoney (the second federal policeforce, the first having been set upafter the passage of the Fugitive SlaveLaw of 1850), taxed incomes, pro-moted university education, built warfactories and railroads, raised tariffs,declared—in some places—martiallaw and suspended freedoms ofspeech and habeas corpus, used troopsto break labor strikes, and encouragedmobs to do what it believed it couldnot do openly.

In the South, President JeffersonDavis nullified the Confederate constitution almostfrom day one. Davis often ignored Congress and hisown vice president, and he used the full power of hisoffice to harass any political opposition. Most notably,through fraud Davis shut down the one opposition todevelop, the classical-liberal Conservative Party ofNorth Carolina. The Confederate States of America(CSA) taxed incomes, excess profits, and licenses, andraised tariffs on imports as well as exports. Because cur-rency flowed only intermittently throughout theSouth, the CSA printed an outrageous amount of papercurrency and established—to the horror of averagesoutherners—the Tax-In-Kind men, empowered by thegovernment to take whatever livestock, produce, and

materiel they deemed necessary for the war effort.Unlike the North, the South conscripted throughoutmuch of the war, set prices, and enforced loyalty oaths.The CSA, contrary to popular memory, also rigorouslyenforced its own laws against the several states makingup the Confederacy.

With the collapse of the Confederate government,no confederate laws continued, of course.With the endof the war the Union repealed many, if not most, of itswar measures.The legacy and symbolism of such mar-tial laws, however, remained into the Progressive periodand beyond: If Lincoln could centralize the Union anddefeat the Confederacy and slavery, could we not also

use the federal government to wagewar against poor standards, poverty,immigrants, or whatever any Progres-sive might resent? Perhaps no figurebetter represents this than John WesleyPowell, a Union officer who lost hisarm in the 1862 Battle of Shiloh andis often regarded as the father ofAmerican Progressives. Tellingly,through the Department of the Inte-rior, the U.S. Geological Survey, andthe Bureau of Ethnography, Powellcrafted and promoted plans to remakethe West (sometimes physically)through the powers of the federalgovernment.

Believing the federal governmentunder Lincoln had never gone far

enough, the Radicals of Reconstruction expanded thescope and reach of the federal government as quickly aspossible. Not only did the Fourteenth Amendment tothe U.S. Constitution apply the Bill of Rights to thestates, but it also repositioned virtually all federal law assuperior to all state and local laws, thus attenuating evenfurther the already difficult balance of federalism. MostReconstruction laws began in the Radical-controlledcongressional Joint Committee on Reconstruction,dominated by Wade. Most important, through the impe-tus of the Joint Committee, Congress passed a series ofhaphazard laws establishing martial law over various dis-tricts of the South. The rule of law, such as it was, wasenforced through military rather than civilian courts.


B r a d l e y J . B i r z e r

If Lincoln couldcentralize the Unionand defeat theconfederacy andslavery, could we notalso use the federalgovernment to wagewar against whateverany Progressive might resent?

Through a series of laws Congress provided extensivefunding for public schooling and welfare (direct aid) forfreed slaves, and it sometimes enforced the propertyrights of blacks.

None of this should suggest that somehow the Rad-icals were, as a whole, pro-black. As the Pulitzer prize-winning historian T. H. Williams once noted, theRadicals “loved the Negro less for himself than as aninstrument with which they might fasten Republicanpolitical and economic control upon the South.” Inreality the Radicals were little better in their promotionof rights, dignity, and liberties of blacks than had beenthe plantation owners of the previous generations.Each group—white men of the North and South—desired to manipulate the black popu-lation for its own aggrandizement and profit.

As Robert Higgs has definitivelyshown in his path-breaking work,Competition and Coercion, Americanfreedmen did exceedingly well interms of culture, economics, and liter-acy in the 50 years after emancipa-tion, but did so through their ownefforts and despite significant govern-ment and societal obstacles: “Freefrom competitive counterpressuresand strongly equipped to enforcecompliance, public officials could dis-criminate pretty much as their pleasure or capricemight dictate. Under these circumstances it was a defi-nite blessing for the blacks that the governments of thepost-bellum South were still quite limited in the rangeof functions to which they attended. Such salvation asthe black man found, he found in the private sector.”

Not surprisingly, given the abusive attitudes whiteRadicals held toward American blacks, corruptionproved endemic to the entire Reconstruction effort.So much money flowed from Congress into the recon-structed South that manipulators and opportunistsprofited wherever and whenever possible, which wasmore often than not.The Reconstruction governmentssimply had no manpower or will to prevent the cor-ruption. They often participated directly in the cor-ruption, using it for political gain. The famous

nineteenth-century Scottish observer of America,James Bryce, recorded his own thoughts on the periodin The American Commonwealth: “Such a Saturnalia ofrobbery and jobbery has seldom been seen in any civ-ilized country, and certainly never before under theforms of a free self-government.” He compared theAmerican officials of Reconstruction to Romanprovincial governors in the last days of the Republic:

Greed was unchecked and roguery unabashed. Themethods of plunder were numerous. Every branchof administration became wasteful. Public contractswere jobbed, and the profits shared. Extravagantsalaries were paid to legislators; extravagant charges

allowed for all sorts of work done atthe public cost. But perhaps the com-monest form of robbery, and thatconducted on the largest scale, was forthe legislature to direct the issue ofbonds in aid of a railroad or otherpublic work, these bonds being thendelivered to contractors who soldthem, shared the proceeds with thegoverning ring, and omitted to exe-cute the work. Much money washowever taken in an even more directfashion from the state treasury orfrom that of the local authority; andas not only the guardians of the pub-

lic funds, but even, in many cases, the courts of law,were under the control of the thieves, discovery wasdifficult and redress unattainable. In this way theindustrious and property-holding classes saw theburdens of the state increase, with no power ofarresting the process.

While almost all white leftist historians have down-played or ignored this corruption since the 1960s, theyhave done so at great peril to the dictates of honestyand truth.

As they had failed to do with Lincoln in theattempted congressional coup of December 1862, theRadicals tried to gain control of President AndrewJohnson’s cabinet with the Tenure of Office Act.WhenJohnson violated this law in February 1868, the House

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White men of theNorth and Southboth desired tomanipulate the blackpopulation for theirown aggrandizementand profit.

of Representatives impeached him on a strict party-linevote, 126-47. The failure of the Senate to support theHouse’s impeachment undercut the strength and confi-dence of the Radicals. Indeed, though Radical regimesremained in power until 1876, the Radicals never againwielded the same kind of power as they had in the sec-ond half of the 1860s.

In part the Radicals also failed because Ulysses S.Grant never accepted the fanatical premises on whichRadicalism had developed. A moderate Republican atbest, Grant resented the postwar bloodthirstiness of theRadicals, few of whom had ever seen battle. Despitethis, Grant was a determined nationalist and, when hewas not dealing with the corruption in his own admin-istration, he was promoting “Americanness” whereverpossible. This became most clear in his policy towardthe American Indians.

U.S. government relations with theIndians had never been consistent.They had gravitated between viciousbrutality (as had been the case underAndrew Jackson) and respect and pro-tection of Indian property (such asunder Franklin Pierce).After the CivilWar, under the Johnson and Grantadministrations, the U.S. governmentwaged a fierce war against the Indians,confiscating their best property, relegating whatremained of the tribes to the worst land. The greatestatrocity committed by the federal government againstthe Indians came just at the very end of Reconstruc-tion. After a tragic misunderstanding, the militarydecided to round up, forcibly remove, and detain a siz-able minority of the Nez Perce Indians, a tribe faith-fully allied to America since 1805.When the Nez Perceunderstandably resisted, the government spared neithertime nor expense to defeat them. As The Nationreported in 1877:

How far the Indian insurrection on the Pacific Slopeis for the present suppressed is not decided, but itwere well, while its lesson is fresh, to realize that theNez-Perces are not to blame for the expensive and

sanguinary campaign, unless being goaded into abrief madness by the direct and endless oppressionof our Federal authorities be blameworthy. . . . [T]heneglect and bad faith of the general Government,continued for a quarter of a century, are apparent inthe records of Congress.There was swindling, not inpetty matters and by individuals, requiring detectionand proof, but on a grand scale by the United Statesitself.

It would be difficult to find a more telling exampleof government corruption and abuse of power duringthis period than the directing of the military against apeaceful, allied people, farmers and ranchers who hadbeen occupying the same land—the Palouse and CamasPrairies of the Pacific Northwest—for nearly 500 years.

Nation-building always and every-where demands conformity anddestruction of local and individualdifferences. To overcome such divi-sions, the builders must create a reli-gious type of myth and fundamentalsymbols to rally the population andwith which to defend the new nationwith unrelenting force. The Recon-struction government did all of thiswithout apology, and immigrants

(especially Roman Catholics), blacks, and Indians suf-fered intensely. “Nationalism in the sense of nationalgreed has supplanted Liberalism,” E. L. Godkin, one ofthe great classical liberals of the day and the founder ofThe Nation, noted in hindsight in 1900. “We hear nomore of natural rights, but of inferior races, whose partit is to submit to the government of those whom Godhas made their superiors.” Americans, Godkin argued,had forsaken the Declaration of Independence as wellas the Constitution. Further, he wrote,“The great partywhich boasted that it had secured for the negro therights of humanity and of citizenship now listens insilence to proclamations of White Supremacy.”

Men who had fought valiantly on the battlefields ofthe Civil War must have asked themselves what, if any-thing, it had all meant.


B r a d l e y J . B i r z e r

Grant resented thepostwar blood-thirstiness of theRadicals, few ofwhom had ever seen battle.

The task before us is to assess in largely materialterms the political-economic system arisingduring and after the American Civil War. Ideo-

logical issues existed, certainly, but much evidence sug-gests that pure idealism had a rather limited run.Antislavery was one of many themes generally servingas the stalking horse for more practical causes. Slaveryitself was a colossal background fact constituting, as historian James L. Hustonstates, the biggest single capi-tal investment in the UnitedStates—an enormous mate-rial interest uniting millionsof people (not just in theSouth) through ties of inter-est, commerce, and senti-ment. This interest stoodathwart the political-eco-nomic ambitions of powerfulinterests in the Northeast.

We may think here oflarge “forces” at work, eachwith limits and counter-ten-dencies. Where slavery isconcerned, Americans shirked the job of finding a rea-sonable solution. Offered one—disunion—somerejected it, after which the blunt instrument of war per-mitted another solution of sorts. As historian HowardZinn writes: It was not the moral enormity of slaverybut “the antitariff, antibank, anticapitalist aspect of slav-ery which aroused the united opposition of the onlygroups in the country with power to make war: thenational political leaders and the controllers of thenational economy.”

Political scientist Thomas Ferguson believes that thegoals of money-driven coalitions explain the greaterpart of American political history. During the mid-nineteenth century, railroads represented the biggestnew business opportunity, provided large-scale govern-ment subsidies (state and federal) were available. North-ern railroad promoters and land speculators, manybased in New England, worked both to get subsidies

and remove obstacles. On theremoval side, some of them,like John Murray Forbes,donated money to JohnBrown’s good works inKansas apparently to put pres-sure on southern opponentsof internal improvements.

The Republican Partyplatform of May 1860 statedthe minimal program of a his-torical bloc of northeasternfinancial and manufacturinginterests and Midwestern andwestern farmers. It began ona high note of egalitarian and

republican ideology, aired some Free Soil, antislaverygrievances, and thudded to rest with some practicalmatters: protective tariffs, homesteads (good for votesbut rather ambiguous), federally funded improvementsof rivers and harbors (Great Lakes subsidies), and aPacific railroad. In addition, the party’s friendliness tocentral (national) banking was no secret. The Hamil-

B Y J O S E P H R . S T R O M B E R G

Civil War and the American Political Economy

19 A P R I L 2 0 1 1

Joseph Stromberg ([email protected]) is an independent historianand writer living in northern Georgia.

Railroads presented one of the main opportunities for northernmercantilists to use the Civil War to start or secure their fortunes.

tonian mercantilism of the platform was its centraltheme, if not quite its only one. Alas for its adherents,they soon found a large bloc of their recent opponents(and potential taxpayers) leaving the Union, beginningwith South Carolina in December 1860.

The opposition to northern mercantilism hadremoved itself from the system. “Why fight to bring itback?” historians Thomas C. Cochran and WilliamMiller ask. Over the Secession Winter of 1860–1861many northerners asked just that question. Matterswere, after all, rather complex. Key New York tradinginterests were heavily involved with southern cotton—the petroleum of the mid-nineteenth century—andNew England manufacturers processed it. If the incom-ing administration refused to accept secession and usedforce to retain states allegedly “inrebellion,” war would come. Manyagreed that, generally speaking, warwas never good for business as awhole. For some months hesitationreigned.

Ready for War

It seems clear that key leaders of thenorthern “developmental coalition”

represented by the Republican Partywere ready enough for war, providedother people bore most of the costs.Astax historian Charles Adams writes,“The Wall Street boys and the men ofcommerce and business were determined to preservethe Union for their economic gains”—a calculationmade easier for them after the contrasting U.S. andConfederate tariff schedules were released in early1861.

With the highest tariff rates at 47 percent (North)and 12 percent (South), a massive shift of English andEuropean trade to Norfolk, Charleston, Mobile, andNew Orleans seemed likely. U.S. revenues would plum-met, and northern business imagined short-run (orlonger) catastrophe. A good many more northern busi-nessmen began to calculate the possible benefits of awar. On cue, hesitating newspapers changed their line.Of course access to the Mississippi River (quiteunthreatened in reality), the reluctance of any State

apparatus to lose territory, and ideological nationalismplayed their parts.

War came, and Republican economic operatorsmade the most of it. With so many of their formeropponents assembled in another Congress in Mont-gomery (later Richmond), Republican interest groupsconducted what historian Ludwell Johnson calls “a warof economic and political aggrandizement.”

To fund and man the actual military struggle, Con-gress provided numerous excise taxes, inflationaryGreenback currency, bond issues (public debt), anunprecedented income tax, tariffs, and mass conscrip-tion. Interestingly, most northern enterprisers doingwell off the war (like Mellon, Morgan, Armour, andGould) paid substitutes and never went near a battle.

The costs of the war could indeed beshifted. For interests getting vestedunder cover of the war, there werealso tariffs (dual-use, it seems), bank-ing acts, the Homestead Act (1862),the Contract Labor Law (1864),Pacific (and other) subsidized railroadprojects complete with land-jobbing,and of course the inevitable riversand harbors acts. The resulting con-centration of capital, active strike-breaking by federal troops in St.Louis and Louisville, and (fairly typi-cal) 50 percent profit rates on U.S.war contracts round out this pretty

picture. Transparent loopholes in the Homestead Actensured that land speculators and mining, timber, andoil companies got far more land than genuine settlersdid. In addition, historian Jeffrey Rogers Hummelnotes that the Morrill Act of 1862 granted considerablewestern land to eastern states partly in support of fed-eral military education (more fodder for organizedland-jobbers). Intentionally or otherwise, the FourteenthAmendment (1868) hastened, as historian Arthur A.Ekirch, Jr., writes,“the triumph of national big businessunder the gospel of the ‘due process clause.’’’

It follows that a minimal definition of laissez faire asunderstood by Republicans during and after the warwould run as follows: open-ended, active federal assist-ance for connected businesses through tax money,


J o s e p h R . S t r o m b e r g

It seems clear that theeconomic interestsrepresented by theRepublican Partywere ready enoughfor war, providedother people boremost of the costs.

favorable statutes and legal rulings, and other institu-tional favors, with no corresponding obligation of thesebusinesses toward society or even the State itself. Soassisted, businessmen would make big bucks and accu-mulate capital, thereby greasing the wheels of progressand development. This was all the common good weneed ever expect—a cozy arrangement indeed, despiteconflicts and divisions already visible within theRepublican machinery.

Historian Clyde Wilson notes that for Republicans“the revolution . . . was the point” and finds it odd thatscholars fully informed on wartime and postwar cor-ruption “imply that it mysteriously appeared after Lin-coln’s death, and somehow miss the obvious conclusionthat it was implicit in the goals of the Lincoln warparty.” Lincoln’s first secretary of war, Simon Cameron,Pennsylvania iron manufacturer andRepublican political boss, oversawmany a dodgy deal. Lincoln himselfknew his associates quite well andjoked that at least Cameron “wouldn’tsteal a red-hot stove.” Small wonder,then, that Ludwell Johnson finds prof-iteering and fraud “so pervasive thatthey seemed to be of the very essenceof the Northern war effort.”

Johnson sees northern wartimepractice with regard to southernproperty as a policy of “redeeming theSouth by stealing it.” Under vaguedoctrines of “war powers” and the like, the administra-tion quickly moved to confiscate “rebel” property for-feited for withdrawal of “allegiance” owed. In occupiedConfederate territory the U.S. government created spe-cial tax districts whose funny auctions of “abandoned”property attracted insider bidders with advance infor-mation.The New England Emigrant Aid Company—aland company previously active in Kansas, doing busi-ness under a philanthropic veneer—set its sights onconquered parts of Florida. Here it would make moneywhile sharing the bounty of New England civilization.Edward Atkinson, an antislavery textile manufacturerfrom Massachusetts, took an interest in the Floridaproject, writing to a colleague,“If he [the former slave]refused to work, let him starve and exterminate himself

if he will, and so remove the negro question—still wemust grow cotton.” (As philanthropy this was perhaps abit narrow.) And cotton was a hot item—confiscated,stolen, or gotten through trade with the enemy, forwhich Lincoln personally issued the licenses. Out of$30 million worth of cotton seized under an 1863 lawonly 10 percent actually reached the U.S. Treasury.Another $70 million in cotton was simply “stolen byRepublican appointees,” as Wilson notes.

In any case, the war was not inexpensive. Claudia D.Goldin and Frank D. Lewis estimate direct war costs in terms of expenditures, lost wages, and more at$3,365,846,000 for the North and $3,285,900,000 forthe South. In Georgia alone General Sherman guessedthat of $100 million in property destroyed by his forces,80 percent was “simple waste and destruction” and not

a matter of military necessity. For theSouth as a whole, estimated wealthfell between 1861 and 1865 by about40 percent—not counting the valueof slave “property.” Hummel gives afigure of 50,000 for civilian deaths inthe South, presumably of all races,genders, and conditions. Of southernwhite males aged 18 to 45, 18-25percent had been killed.

Reorganized Production

Counting Reconstruction as apolitical continuation of the

war, we may now survey the political-economic struc-ture yielded by the struggle. Here the old debate aboutwhether the war retarded or accelerated Americanindustrialization is of little interest. Mere questions ofproductivity (or output per square worker) matter lessthan how production was reorganized and who bene-fited from any changes. In Hummel’s view the wartimeillusion of prosperity and full employment cannot sur-vive the fact that wages fell, in real terms, by one-third.In the end, he concludes, the war retarded real growth;indeed, there was a waste of roughly five years’ accumu-lation of wealth.War contracts had not made up for lostsouthern markets.

In this new economy railroads were both cause andeffect. Organized as much for land speculation as for

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One historian foundprofiteering and fraud“so pervasive thatthey seemed to be of the very essence of the Northern war effort.”

transportation, subsidized railroads gave early signs ofhaving far exceeded demand; in other words, railroadsrepresented massive overinvestment. Yet subsidizedtransportation was the key lever of the post-1865American economy.William Appleman Williams writesthat the demand for railroad regulation was not social-ist, but merely applied “[Adam] Smith’s argumentagainst mercantilist joint-stock companies to the rail-road corporations of their own time.” Railroads partic-ularly required large-scale bureaucratic organization.The modern corporate form served them well, andtheir short-run success strengthened the corporateform.As Peter N. Carroll and David W. Noble observe,the railroad corporation “patterned itself on the Unionarmy, the first major public bureaucracy.”

Along with increased corporate organization cameconcentration of capital reinforced by the details ofwartime contracts and favored by the tax structure. Noless a libertarian than Roy A. Childs,Jr., wrote in 1971 that “much of theconcentration of economic powerwhich was apparent during the 1870swas the result of massive state aidimmediately before, during, and afterthe Civil War. . . .” Further, in thedecades after the war, this led, as WillisJ. Ballinger noted in 1946, to animbalance in favor of savings invested in fixed capital(“oversaving”). (This spawned from the 1880s forwardmuch discussion of “oversaving” and “overproduction,”with overseas economic empire as a proposed solution.)

A New Industrial Order

Wartime corruption was only a small part of thestory. It is more important that, as Richard F.

Kaufman observes, the Civil War brought about a “newindustrial order . . . composed largely of war profiteersand others who grew rich on government contracts . . .and . . . were able to influence the economic recon-struction.” Further, important and persisting capitalistfortunes arose from wartime contracts: “J. P. Morgan,Philip Armour, Clement Studebaker, John Wanamaker,Cornelius Vanderbilt, and the du Ponts had all beengovernment contractors. Andrew Carnegie got richspeculating in bridge and rail construction while assis-

tant to the Assistant Secretary of War in charge of mili-tary transport.” If there indeed were Robber Barons,they got their start in the war.

There were various tensions in the Republicandevelopmental bloc. Some New Englanders, for exam-ple, favored lower tariffs and even dared hope that partyregulars might steal a little less at a time. According tohistorian Williams, the Radical wing stood for infla-tionary currency, high tariffs, and holding the southernstates as “a new frontier” for Yankee enterprise.

In political scientist Richard Franklin Bensel’s view,a Republican-led northern developmental coalition ofcapitalists, financiers, and farmers successfully imposed asingle market and commercial code on the entireAmerican federation through neomercantilist activism.The war saw the emergence of a powerful new class offinanciers in New York City. After 1865 much of theirmoney went into railroads as they worked to remove

Greenback currency from circulationfrom 1870 on. Here they broke withthe Radical Republicans. Bankerspreferred to control any expansion ofcredit and wanted their loans repaidin dollars of equal or greater valuethan those they had lent. Deflationsuited them.The Republican capital-ist-and-farmer alliance may have

lasted as long as it did only because a generous andexpanding pension program for Union veterans partlyoffset what Midwestern and western farmers lostthrough high tariffs. (A qualified veteran typically gotabout a third of the average workingman’s wages for ayear. Here was America’s first major welfare program.)

Historian Gabriel Kolko notes rapid expansion andaccumulation of capital from 1871 to 1899. Because ofrecurring upper-class panics over labor organization,“violence was used in America more than in any othercountry that bothered preserving the façade of democ-racy”—and the violence was always disproportionate.The Civil War had stimulated manufacturing, railroadinvestment and building, and mining. Big enterprisesrested on family alliances and nepotism. As a result,Kolko writes, the idea of social consensus “whollyobscures the real basis of authority in the United Statessociety since the Civil War—law and the threat of


J o s e p h R . S t r o m b e r g

If there indeed wereRobber Barons, theygot their start duringthe war.

repression.” Alas for the members of the ruling class,they so successfully broke “the possibility of opposition[that] they also destroyed as well, social cohesion andcommunity.”

In a polemic written in 1937,Texas historian WalterPrescott Webb made a case for the West and Southagainst the North. Railroads, built only in the Northbetween 1860 and 1875, killed off southern river traf-fic. The North enjoyed major bounties: high tariffs,Union army pensions (seven-eighths of which went tothe North—a way of spending the “surplus” raised byhigh tariffs), northern ownership of most industrialpatents, and finally, the modern corporation as such—with 200 majors in 1937, all based inthe North. This financial-capitalist“feudalism” was sustained by theSupreme Court’s dogma of corporatepersonhood (1885, 1886, 1889).Antic-ipating Bensel’s analysis by 50 years,Webb noted how Union army pen-sions ($8 billion, all told) compensatedthe West for what it lost on the tariff.

Historian C. Vann Woodwardnotes that, ground down by tariffsand northern business control ofmost patents, the South remainedtrapped as an exporter of raw materi-als. Along with the famous freight-rate differential (which lasted into the 1940s), theselevers worked as effectively as the British Board ofTrade in reducing the southern economy to colonialstatus. As Hummel writes, national banking rules “sti-fled recovery of the South’s credit markets.” Nor wasthere cash in small denominations. Here Hummel fillsin some gaps in Woodward’s argument. (On the orien-tation of banking law toward the convenience andprofit of northeastern financiers, Bensel’s YankeeLeviathan account reinforces Hummel’s EmancipatingSlaves, Enslaving Free Men.) Further, Hummel notes,southerners were taxed to pay interest on the nationaldebt, nearly all of which went to northern parties and

to fund Union army pensions—29 percent of the fed-eral budget by the mid-’70s. Here again was a net out-flow northward, while the same southerners paid statetaxes for Confederate pensions. Not surprisingly, rail-road bonds issued by Republican governments in theSouth during Reconstruction had been “the occasionof most political fraud below the Mason-Dixon line.”

It can be argued that in the end agriculture alwayspays for industrialization. Bensel is quite clear: “The[American] developmental engine left the southernperiphery to shoulder almost the entire cost of indus-trialization. . . . The periphery was drained while thecore prospered.” This means that independence was a

serious economic option whoseadvantages for the South Benselbriefly discusses. But as historianEugene D. Genovese writes, “Sinceabolition occurred under Northernguns and under the program of avictorious, predatory outside bour-geoisie, instead of under internalbourgeois auspices, the colonialbondage of the economy was pre-served, but the South’s politicalindependence was lost.”

Under Republican auspices thefederal government asserted com-plete primacy over economic regula-

tion, while advancing a big-business bloc allied to itsparty.This was in the essential Federalist tradition.“Lib-eral reform” of the 1870s was partly rooted in bour-geois panic over imaginary Paris Communes about toarise on our shores. One result was attempts in the Northto disenfranchise “unreliable” voting blocs of workersand immigrants. Here were the beginnings of “de-par-ticipation”—the conscious project of removing thepeople from popular government in favor of permanentbureaucratic management intended to be both effectiveand inexpensive. Here was America’s answer to Ben-thamism. Our troubles did not begin (or end) with theProgressive Era.

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Ground down bytariffs and northernbusiness control ofmost patents, theSouth remainedtrapped as anexporter of rawmaterials.

B Y S T E P H E N D AV I E S

Maps and Power

Our Economic Past

The modern world (meaning since the latereighteenth century) is different in several pro-found ways from earlier times. One of the most

important of these is the nature and power of govern-ment. Modern States can do things beyond the reach ofearlier ones, however large or aggressive.This expandedcapacity is a feature of modern government whether itis actually used or not: It is always there as a possibility.The kind of extensive government we have now, therange of activities it undertakes, and the degree of con-trol and regulation exercised by political elites overeveryday human affairs were simply notpossible in earlier times. Whether ornot this capacity is used depends onbeliefs, ideas, and interests, but thecapacity itself has a different source. Itderives from “technique,” a categorythat includes technology but has awider meaning. Above all it includesways of organizing and understandinginformation.

In this context a key technique andone of the most important foundationsof the modern State is the map. Theapparently neutral art of cartography isactually one of the main sources ofmodern political power. The most important aspect ofthis is the cadastral map or survey. Unlike a topograph-ical map, it does not simply record the natural featuresof the terrain. It also captures, in a radically simplifiedand systematized form, a huge amount of knowledge ofsuch matters as ownership, rights and entitlements, val-ues, social relations, and obligations.

Cadastral Surveys

Maps and surveys of this kind were found to somedegree in the ancient world but they disappeared

with much else of the governing power of the great

empires of antiquity during the sixth and seventh cen-turies. Such maps began to reappear during the lateRenaissance, initially in Italy, latterly in the Nether-lands, Germany, France, and the United Kingdom.

Before the creation of a cadastral survey this knowl-edge existed in the form of dispersed and tacit knowl-edge, scattered among many people and only accessibleto those in a locality and then only partially. In this sit-uation many kinds of action by rulers, particularly tax-ation but also control and regulation of the physicalenvironment and people’s use of the land, were difficult

or even impossible.Cadastral surveys do not capture all

this dispersed knowledge or even thegreater part of it. They do, however,capture a significant part in a way thatmakes it simplified, standardized, andsystematically organized or structured.This enormously increases the abilityof rulers to act on society and controlor direct human interactions, and so inturn to have great influence on theoutcome of those interactions, whetherintentionally or unintentionally. Thispoint is explored by James C. Scott inhis work Seeing Like a State.

The history of the United States shows this lastpoint clearly. One of the first things undertaken by thegovernment of the newly established republic in 1785was a cadastral survey of the Northwest territories,which was subsequently expanded to all of the territoryof the United States apart from the original colonies.This was the Public Lands Survey System, which hasbecome a model for similar systems in many parts ofthe world. The initial idea was to use this capacity to


Stephen Davies ([email protected]) is academic director at the Institute ofEconomic Affairs in London.

create a society of independent freeholders. However, ithas been used both consciously and unintentionally tovery different ends.

The very act of capturing information in this wayand the power it gave to rulers to direct and controlthe use of the land by private individuals and corpora-tions meant that decisions made by the political classnow had a huge influence on the course of settlementand development. All kinds of possibilities wereexcluded while others could be encouraged ordirected.Thus the decision to divide the land surveyedinto regular rectangular blocks produced a particularkind of urban settlement and development that wouldnot have occurred had the dispersed local knowledgeworked through informal institutionsand private agreement.A whole rangeof government functions, in particularthe control and regulation of mucheconomic activity, is only possiblebecause of the information capturedin the maps and surveys.

Scott indicates that maps of thiskind, by capturing a simplified versionof the tacit knowledge of the localpopulation, enable remote outsiders tohave at least some knowledge of whatthe situation is on the ground (liter-ally). This opens up a range of other-wise unavailable options for them. For example, itmakes possible large-scale urban planning and redevel-opment of the kind that became common in theUnited States after World War II. Instead of the sponta-neous urban development described by Jane Jacobs, wehave had the large-scale planned reconstruction advo-cated by her arch-nemesis Robert Moses. As Scottpoints out, this technique has also made possible cata-strophic social “experiments” such as Soviet collec-tivization of agriculture and the Tanzanian “Ujaama”system of land reform.

Maps and surveys of this kind are not the only tech-niques that have aided the transformation of govern-ment, of course.Another, equally important, is the kindof accurate decennial census established in 1790 in the

United States. Census-taking has a long history (as mostof us will gather from reading the Gospels), but again itbecame much more systematic, extensive, and impor-tant from the early modern period on. Today a lot ofwhat government does depends on the accuracy andcompleteness of the census, which is why taking part init is enforced by such stringent penalties.

Limits of Knowledge

However, this also shows the ultimate limits of suchtechniques and the modern State that is based on

them. Governments around the world today faceincreasing problems of noncompliance with and resist-ance to the census. Even if these difficulties can be

overcome, there is an even more basicproblem that affects maps and surveyseven more. Although a cadastral sur-vey is a powerful way of capturingand distilling tacit knowledge, it isinevitably imperfect. Much of thelocal, dispersed knowledge is nevercaptured.What is captured is radicallysimplified and much of the subtletyand nuance are lost. This does notmatter so much if the governmentactivity is relatively simple. However,complex activities will simply notwork.

In other words, although modern techniques giverulers and elites enormous powers that their predeces-sors did not have, they are still limited in what they cando effectively by the nature of knowledge and the lim-its of the tools and techniques at their disposal. Todaylarge organizations—private ones, too, but above allgovernment—are operating at or beyond the limits oftheir capacity in terms of what their foundational tech-niques will allow them to do effectively.This is one ofthe main reasons many programs and agencies are seento be simply not working, and it is also why so manypoliticians and officials experience not power but frus-tration.Time to simplify and take a more modest viewof what things like maps make possible in the modernworld.

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M a p s a n d P o w e r

The very act of capturinginformation throughcadastral surveys gaverulers new power todirect and control the use of land.

Slavery can neither fully explain nor ultimatelyjustify the American Civil War.This realization isunfortunately obscured because most scholars

and buffs alike have usually sought a single cause forthose four years of soul-wrenching conflict. The earlynationalist interpretation, put forward by historianJames Ford Rhodes, blamed one factor and one factoronly: slavery. Slavery induced the southern states tosecede, and Rhodes unreflectively assumed that thenational government had no option but to suppressthem. Later revisionisthistorians, such as AveryO. Craven and James G.Randall, contended thatslavery was dying of itsown accord and attrib-uted the war instead to a “blundering genera-tion” of politicians,manipulated by irre-sponsible extremists andfanatics on both sides.The Progressive per-spective of CharlesBeard also denied slav-ery’s role and replaced it with economic considerations.Then, beginning in the 1950s, a neo-abolitionistschool, which today dominates Civil War scholarship,reaffirmed the centrality of slavery.

Yet while these competing interpretations havewaxed and waned, the underlying quest for the oneoverriding cause continues unabated.What southernerscalled their “peculiar institution” was indeed the funda-mental cause of secession. That proposition no longer

admits of any doubt. Historians would be hard pressedto find any causal claim in all human history for whichthe empirical support is more overwhelming.

But when historians go on to claim that secessionmade war inevitable, they embrace a common but log-ically indefensible leap. Only a few prominent neo-abolitionist historians, such as Eric Foner and KennethStampp, have recognized that Civil War causationbreaks down into at least two questions. Why did thesouthern states want to leave the Union? And why did

the northern statesrefuse to let them go?Just because slavery isthe answer to the first, it does not neces-sarily follow that itanswers the second.These two questionsare often conflatedbecause so manyAmericans approachthe Civil War with animplicit and unchal-lenged prejudice infavor of national unity.

Yet secession and war are distinct issues. For seces-sion to lead to war, northerners had to be determinedto hold the Union together with violence. And schol-arly research has demonstrated that slavery had very lit-tle, if anything, to do with that determination, either on

B Y J E F F R E Y R O G E R S H U M M E L

The Question of Slavery


Jeffrey Rogers Hummel ([email protected]) is an associate professorof economics at San Jose State University. He is the author ofEmancipating Slaves, Enslaving Free Men:A History of theAmerican Civil War.

Slavery was behind the South’s secession. It wasn’t behind the North’s violentresponse, however.

the part of President Abraham Lincoln or of the north-ern public generally.

The sole northern group that had always madeopposition to slavery their primary goal was the aboli-tionists. They burst on the national landscape in the1830s, demanding the immediate emancipation of allslaves, without any compensation to slaveholders, andfull political rights for all blacks. Less well known is thatthey were also often advocates of disunion. The mostprominent and vitriolic of these abolitionists, WilliamLloyd Garrison, went so far as to denounce the Consti-tution for its proslavery clauses as “a covenant withdeath and an agreement with hell.” During one Fourthof July celebration he publicly burned a copy, proclaim-ing: “So perish all compromises with tyranny!” Hebelieved that, if anything, the North should secede.Thatway it would get out from under the Constitution’sfugitive-slave clause and become ahaven for runaway slaves. The slogan,“No Union with Slave-Holders”appeared on the masthead of Garri-son’s weekly paper, The Liberator, foryears.

Thus passionately opposing slaveryand simultaneously favoring secessionare quite consistent. And Garrison’sstrategic vision was hardly unique tohim. Nearly all of slavery’s most radical opponents ini-tially shared it, including Frederick Douglass, the freeblack leader who in 1838 had escaped from slavery inMaryland, and Wendell Philips, a wealthy lawyer andBoston Brahmin. Needless to say, this disrespect for theUnion did not go over well in the free states. Aboli-tionist lecturers, presses, and property were frequenttargets of hostile mobs throughout the 1830s. Nor didall abolitionists support disunion. Many eventuallywould turn away from Garrison to take up politicalactivity in a quest for respectability and success. As theantislavery crusade split into doctrinal factions, theresort to the ballot box would bring both a broadenedappeal and a dilution of purity.

The Republican Party eventually triumphed byreducing political antislavery to its lowest commondenominator. The party’s main position, preventingslavery’s extension into new territories, carried no taint

of disunion. It allowed northerners to take steps againstslavery in a distant sphere while honoring their consti-tutional obligation to leave the local institutions of thesouthern states alone. Here moreover was an antislaveryposition that could be made consistent with racism.Keeping slaves out of the territories was an excellentway to keep blacks out altogether. Abolitionists hadfailed to win over the North because they had put theiropposition to slavery ahead of the Union. Republicanssucceeded because they put the Union ahead of theiropposition to slavery.

Republicans and the Slave Power

That Republicans promised not to interfere withthe peculiar institution in the existing states—to

the point of supporting in 1861 a proposed unamendablethirteenth amendment that would have explicitly guar-

anteed slavery—goes without saying.Even the platform of the abolitionistLiberty Party, which conducted pres-idential campaigns in 1840 and 1844,had respected this constitutional con-straint. But there were other constitu-tionally permissible steps that thecentral government could have takenand yet the Republican platformeschewed, such as abolishing slavery

in the District of Columbia and prohibiting the inter-state and coastal slave trade. Lincoln even promised inhis first inaugural to enforce the fugitive slave law, sohated among many northerners.

The plain fact that Lincoln was not an abolitionist isoften cited by those who wish to deny that the seced-ing states were concerned about slavery’s future. Theobservation has become commonplace today that spe-cial interests inordinately influence government policy.This has actually always been the case; it is just lessnoticeable or objectionable when government is smalland unobtrusive. One of the most powerful specialinterests during the pre-Civil War period was whatabolitionists and Republicans referred to as the “SlavePower.” Despite constituting only one-quarter ofsouthern families in 1860, slaveholders had dominatedAmerican politics both in the southern states and at thenational level.

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T h e Q u e s t i o n o f S l a v e r y

It is not as well-known thatabolitionists wereoften advocates of disunion.

Then in 1860 a northerner who had not carried asingle slave state, and in ten of them did not get a singlerecorded vote, was elected president. Nationwide, Lin-coln received only 40 percent of the popular vote.Yethe won with the electoral votes of every free stateexcept New Jersey, where he got four out of the state’sseven. The contest in the South—mainly between theSouthern Democratic and Constitutional Union candi-dates—had proved utterly irrelevant. Even if the votesof all Lincoln’s opponents had been combined, he stillwould have won. Nothing could make the loomingpolitical impotence of the slave states more stark.Almost overnight a special interest that had dictatedpolicy in Congress, to the executive, on the SupremeCourt, and usually in both major parties was politicallydispossessed.

Southern fire-eaters recognizedthat a major faction within theRepublican Party did favor furthersteps to divorce the general govern-ment from slavery. Lincoln appointedto his cabinet at least two of theseradical Republicans: William HenrySeward of New York as secretary ofstate and Salmon Portland Chase ofOhio as secretary of the treasury.Even if the radicals did not immedi-ately have their way, the RepublicanParty now controlled federal patron-age, the postal service, military posts, and judicialappointments. Lincoln could put Republicans, aboli-tionists, and even free blacks into public office all overthe South.That a national administration—for the firsttime—morally condemned the peculiar institutionmight in and of itself trigger slave resistance. And theRepublican commitment to a territorial policy that theSupreme Court had already declared unconstitutionalin the infamous Dred Scott decision showed that slave-holders could not rely on paper guarantees.

The editors of the Richmond Enquirer described howLincoln’s victory must in the long term destroy slavery.“Upon the accession of Lincoln to power, we wouldapprehend no direct act of violence against negro prop-erty,” the editors conceded. But “the use of federaloffice, contracts, power and patronage” would result in

“the building up in every Southern State of a BlackRepublican party, the ally and stipendiary of Northernfanaticism, to become in a few short years the openadvocate of abolition.”Already a Missouri congressman,Frank Blair, Jr., whose family had long been powerfulwithin Democratic circles, had gone over to theRepublicans and delivered 10 percent of that borderslave state’s presidential vote to Lincoln.

The Enquirer also understood that the eventual “ruinof every Southern State by the destruction of negrolabor” would be accomplished through the increase infugitive slaves after tampering with the peculiar institu-tion in the upper South. “By gradual and insidiousapproach, under the fostering hand of federal power,Abolitionism will grow up in every border Southern

State, converting them into freeStates, then into ‘cities of refuge’ forrunaway negroes from the gulf States.. . . There are no consequences thatcan follow, even forcible disunion,more disastrous to the future prosper-ity of the people of Virginia.”

Nothing to Lose

Secession was risky. But withRepublicans in control of the

national government, many southernwhites felt they had nothing to lose.Slavery seemed eventually doomed

otherwise. Slaveholders could better depend on anindependent central authority to provide protectionsagainst runaways by policing the new borders. As oneGeorgian explained in a letter to his representative inCongress,Alexander H. Stephens, independence wouldpermit southerners to erect “an impassable wallbetween the North & the South so that negroes couldnot pass over to the North or an abolitionist come tothe South to annoy us any more.”

Other southerners disagreed, however, includingStephens himself. Although he would become theConfederacy’s vice president, he opposed his state’ssecession, judging “slavery more secure in the Unionthan out of it.” By leaving the Union, southerners wereabandoning the Constitution’s protections for slaveryand possibly unleashing the very plague of runaways



Almost overnight aspecial interest thathad dictated policythroughout thefederal governmentwas politicallydispossessed.

they feared. Indeed, Lincoln would warn in his firstinaugural that the seceding states could no longer relyon this national subsidy. The withdrawal of the deepSouth’s representatives from Congress would makefree-state control over the national government morepronounced than ever. The Republicans would have afree hand in the territories, whereas the economic via-bility of a small, independent slave republic was indoubt, especially if it could not expand. Even withoutresorting to war, Republicans could have implementeda set of policies that would have brought the peculiarinstitution to an end within an independent Confeder-acy, certainly by the turn of the century, if Lincoln hadbeen purely interested in ending slav-ery rather than preserving the Union.

As Lincoln took the oath of office,the Union still contained eight slavestates, more than had left. Secessionhad so far failed in the upper South,where the black population was lessdense. Even in a few states of the lowerSouth, disunion had triumphed byonly narrow margins. Some northern-ers were prepared to allow the newGulf Coast Confederacy to depart inpeace. Militant abolitionists such asGarrison were mainly concerned thatSouth Carolina’s secession was just abluff. Even Horace Greeley’s staunchlyRepublican New York Tribune hadbriefly come out for letting the cottonstates go, hoping “never to live in a republic whereofone section is pinned to the residue by bayonets.”

Lincoln’s Determination

Lincoln, on the other hand, was determined to pre-serve the Union by force if necessary. Slavery’s

abolition did not figure at all in either his avowed justi-fications or his private motivations. “I hold that . . . theUnion of these States is perpetual,” the Presidentasserted in his first inaugural address, cautiously reveal-ing this unyielding posture. “The Union is unbroken,and to the extent of my ability I shall take care, as theConstitution itself expressly enjoins upon me, that thelaws of the Union be faithfully executed in all States.”

Lincoln’s determination received the hearty applauseof powerful northern interests. Westerners feared theclosing of the lower Mississippi River, even though theConfederate government promised free navigation.Eastern manufacturers worried that they would losesouthern markets to European competitors because ofthe Confederacy’s free-trade policy. Yankee merchantsand shipbuilders faced an end to a monopoly on theSouth’s coastal trade that the government granted toU.S. vessels. Holders of government securities wereedgy about the Union’s loss of tariff revenue. But in thefinal analysis, American nationalism proved to be themost compelling opponent of southern independence.

Republicans had promised northernvoters that they could have both anti-slavery and Union. Now that theUnion was imperiled, the RepublicanParty had to take decisive action orface political oblivion.

The deep South’s refusal to abideby the outcome of a fair and legalelection struck northern voters as aselfish betrayal of the nation’s uniquemission. “Plainly the central idea ofsecession is the essence of anarchy,”argued Lincoln. Indeed, his inauguralequated secession with despotism. “Amajority held in restraint by constitu-tional checks and limitations, andalways changing easily with deliberatechanges of popular opinions and sen-

timents, is the only true sovereign of a free people.Whoever rejects it does, of necessity, fly to anarchy ordespotism,” because “unanimity is impossible; the ruleof a minority, as a permanent arrangement, is whollyinadmissible.” Worse still, the successful breakaway ofthe lower South raised the possibility of other regionsseparating.

Yet Lincoln also wished to preserve the loyalty ofthe upper South. Southern unionists made clear theirconviction that no state should be forced to remain. Hetherefore initially settled on a defensive strategy touphold national authority. Until the Confederate bom-bardment of Fort Sumter on April 12, 1861, the Presi-dent could not have counted on enthusiastic northern

29 A P R I L 2 0 1 1


Even without war,Republicans couldhave implementedpolicies that wouldhave ended slavery inthe Confederacy, ifLincoln had beeninterested in endingslavery rather thanpreserving the Union.

support for an appeal to arms. The attack, however,electrified the free states, as Lincoln issued his procla-mation calling up the state militias.The President’s callgarnered an opposite reaction in the slave states. Itwiped out any lingering unionism in those that hadalready seceded. Still more decisive was its impact onthe wavering states of the upper South.Virginia, NorthCarolina, Tennessee, and Arkansas all promptly trans-ferred their allegiance to the Confederate States ofAmerica. At a single stroke of the pen, Lincoln hadmore than doubled the Confederacy’s white populationand material resources.

Once war got underway Lincoln continued to insisthe wanted only to preserve the Union, and the newlyelected Congress confirmed this war aim shortly after itconvened. The Crittenden-Johnson resolutions of July1861 denied that the government waswaging war “in any spirit of oppres-sion, nor for any purpose of conquestor subjugation, nor purpose of over-throwing or interfering with therights or established institutions ofthose States,” but only “to defend andmaintain the supremacy of the Con-stitution and to preserve the Union.”In other words, the resolutions prom-ised to leave slavery untouched in theseceding states.

Political Slavery over Chattel Slavery

It is true that northern blacks, abolitionists, and Rad-ical Republicans, from the first salvo, did seek a cru-

sade against slavery.The prospect of wartime abolitionseduced even Garrison and most of his militant fol-lowers into abandoning disunion. Only a handful of slavery opponents remained true to their original principles. Among them was Boston freethinkerLysander Spooner, an abolitionist so enthusiastic aboutJohn Brown’s raid on Harper’s Ferry that he hadearnestly proposed kidnapping the governor of Vir-ginia to hold as hostage in exchange for Brown’s life.But although never a pacifist, Spooner saw absolutelyno moral analogy between slaves violently rising up tosecure their liberty and the central government vio-lently crushing aspirations for self-determination on

the part of white southerners. After the war he wouldwrite that the North had fought for the principle that“men may rightfully be compelled to submit to, andsupport a government they do not want; and thatresistance, on their part, makes them criminals and trai-tors.”“Political slavery” had taken the place of “chattelslavery.”

Lincoln meanwhile was drifting toward the Radicalposition. He publicly warned that he would take what-ever action he thought necessary to win the war. “Myparamount object in this struggle,” the Presidentdeclared in his oft-quoted reply to Horace Greeley, “isto save the Union, and is not either to save or to destroyslavery. If I could save the Union without freeing anyslave I would do it, and if I could save it by freeing allthe slaves I would do it; and if I could save it by freeing

some and leaving others alone Iwould also do that. What I do aboutslavery, and the colored race, I dobecause I believe it helps to save theUnion; and what I forbear, I forbearbecause I do not believe it would helpsave the Union.” Lincoln added, how-ever, that “I have here stated my pur-pose according to my view of officialduty; and I intend no modification ofmy oft-expressed personal wish that all

men every where could be free.”When the preliminary Emancipation Proclamation

appeared on September 22, 1862, it was framed as a warmeasure. It still gave the seceding states until the end ofthe year to cease their rebellion and retain their slaves.The proclamation did not emancipate any of the slavesin the four border states that had not seceded. Nor didit emancipate any slaves in many of the sections of theConfederacy that the Union armies had already recon-quered, including all of Tennessee and large portions ofVirginia and Louisiana.This anomaly inspired a cynicalretort from Secretary of State Seward. “We show oursympathy with slavery,” he stated the day after the finalproclamation was issued,“by emancipating slaves wherewe cannot reach them, and holding them in bondagewhere we can set them free.”

Of course, northerners came around by the war’send to demanding that slavery’s elimination be com-



Only a handful ofslavery opponentsremained true totheir original antiwarprinciples.

plete and permanent. A little more than two monthsbefore General Robert E. Lee’s surrender at Appomat-tox, two-thirds of Congress passed a new, proposedthirteenth amendment abolishing slavery within theUnited States forever. Emancipation was therefore aconsequence of the Civil War. But it was a consequenceunintended at the outset, and played no discernible rolein the northern refusal to let the lower South go inpeace.

Yankee Civil Religion

Although mainstream historians will find no majorsurprises in the above account, they nonetheless

seem oblivious to how instrumental in bringing on thecarnage was northern worship of theUnion as absolute deity.Why was pre-serving the nation’s existing bound-aries such a big deal? Althoughhistorians have thoroughly researchedsouthern motives for secession, theyhave not done as good a job withnorthern motives. Nationalist bias ele-vates perpetual union to an automaticand unquestioned standard. Exactlyhow and why northerners came toembrace this standard has never beensatisfactorily answered. Yet somehowthe mystical identification of Unionwith Liberty had evolved into such acornerstone of the Yankee civil reli-gion that it was impervious to all reason.

Peaceful secession has become a fixture of the modern world. Even before America’s war over seces-sion, Belgium in 1830 had consummated a separa-tion from the Netherlands that was almost entirelywithout bloodshed. Norway seceded from Denmark in 1905 and Singapore from Malaysia in 1965. Sincethen, we have witnessed, among others, the peacefulseparation of the Czech Republic and Slovakia and the peaceful breakup of the totalitarian Soviet Unioninto more than a dozen independent nations, includ-ing Russia. So we ought to be able to view Lincoln’sjustifications for the Civil War with a healthy dose ofskepticism.

When in the mid-1990s Quebec held a referendumon whether to secede from Canada, the Canadian cen-tral government disavowed the use of force to preventthe province’s departure. This incident contains somestriking parallels to southern secession because the pop-ulation of Canada at the time was about 30 million,slightly less than the U.S. population in 1860. Quebechad seven million inhabitants, making it smaller thanthe Confederacy became (about nine million) afterLincoln’s call for troops but larger than the Gulf CoastConfederacy (about five million) at the time of Lin-coln’s inauguration.

The southern states had no right to self-determina-tion because of slavery, runs the retort. But black slavery

was practiced in every one of Britain’sNorth American colonies, from NewHampshire to Georgia, at the openingof the War for Independence. More-over,Virginia’s royal governor issued aproclamation on November 7, 1775,similar to Lincoln’s EmancipationProclamation, freeing any slave whowould bear arms against the rebel-lious colonists. At least 18,000 freedblacks accompanied British forces asthey evacuated Savannah, Charleston,New York City, and other places atthe end of the earlier war. South Car-olina, the only colony with a slavemajority when independence was

declared, lost as much as one-third of its black popula-tion to flight or migration. In short, most argumentsmarshaled to deny the legitimacy of southern inde-pendence in 1861 apply with almost equal force againstAmerican independence in 1776.

As an excuse for civil war, maintaining the State’sterritorial integrity is bankrupt and reprehensible. Yetthat is the only excuse that Lincoln and the RepublicanParty put forward. Slavery, to repeat, neither explainsnor justifies northern suppression of secession. In thefinal analysis we must accept the verdict of MoncureDaniel Conway, another abolitionist, self-exiled fromhis home in Virginia. The Union war effort, he sadlyconcluded, reduces to “mere manslaughter.”

31 A P R I L 2 0 1 1


Most argumentsmarshaled to denythe legitimacy ofsouthern independ-ence in 1861 applywith almost equalforce againstAmerican independ-ence in 1776.

B Y S H E L D O N R I C H M A N

The Importance of Subjectivism in Economics

Peripatetics

After many years, Frédéric Bastiat remains a heroto libertarians. No mystery there. He made thecase for freedom and punctured the arguments

for state socialism with clarity and imagination. Hespoke to lay readers with great effect.

Bastiat loved the market economy, and badlywanted it to blossom in full—in France and every-where else. When he described the blessings of free-dom, his benevolence shined forth. Free markets canraise living standards and enable everyone to have bet-ter lives; therefore stifling freedom is unjust and tragic.The reverse of Bastiat’s benevolence is his indignationat the deprivation that results from interference withthe market process.

He begins his book Economic Har-monies by pointing out the economicbenefits of living in society:

It is impossible not to be struckby the disproportion, truly incom-mensurable, that exists between the satisfactions [a]man derives from society and the satisfactions thathe could provide for himself if he were reduced tohis own resources. I make bold to say that in one dayhe consumes more things than he could producehimself in ten centuries.

What makes the phenomenon stranger still is thatthe same thing holds true for all other men. Everyone of the members of society has consumed a mil-lion times more than he could have produced; yetno one has robbed anyone else.

Bastiat was not naive. He knew he was not in a fullyfree market. He was well aware of the existence of priv-ilege: “Privilege implies someone to profit from it andsomeone to pay for it,” he wrote. Those who pay areworse off than they would be in the free market.“I trustthat the reader will not conclude from the preceding

remarks that we are insensible to the social suffering ofour fellow men. Although the suffering is less in thepresent imperfect state of our society than in the state ofisolation, it does not follow that we do not seek whole-heartedly for further progress to make it less and less.”

He wished to emphasize the importance of freeexchange for human flourishing. In chapter four hewrote:

Exchange is political economy. It is society itself,for it is impossible to conceive of society withoutexchange, or exchange without society. . . . For man,isolation means death. . . .

By means of exchange, men attainthe same satisfaction with less effort,because the mutual services they ren-der one another yield them a largerproportion of gratuitous utility.

Therefore, the fewer obstacles anexchange encounters, the less effort

it requires, the more readily men exchange.

How does trade deliver its benefits?

Exchange produces two phenomena: the joiningof men’s forces and the diversification of their occu-pations, or the division of labor.

It is very clear that in many cases the combinedforce of several men is superior to the sum of theirindividual separate forces. . . .

Now, the joining of men’s forces impliesexchange.To gain their co-operation, they must havegood reason to anticipate sharing in the satisfactionto be obtained. Each one by his efforts benefits theothers and in turn benefits by their efforts accordingto the terms of the bargain, which is exchange.


Sheldon Richman ([email protected]) is the editor of The Freeman.

Bastiat was not naive.He knew he was notin a fully free market.

But isn’t something missing from this account?Indeed, there is: the subjectivist Austrian insight that

individuals gain from trade per se. For an exchange totake place, the two parties must assess the items tradeddifferently, with each party valuing what he is to receivemore than what he is to give up. If that condition did nothold, no exchange would occur. There must be whatMurray Rothbard called a double inequality of value. It’s inthe logic of human action—the discipline Ludwig vonMises christened praxeology. Bastiat, like his classical fore-bears Smith and Ricardo, erroneously believed (at leastexplicitly) that people trade equal values and that some-thing is wrong when unequal values are exchanged.

Perhaps I am too hard on Bastiat. After all, he waswriting before 1850. Carl Menger did not publish Prin-ciples of Economics until 1871.Yet the Austrians were notthe first to look at exchange strictly through subjec-tivist spectacles—that is, from the eco-nomic actors’ points of view. TheFrench philosopher Étienne Bonnotde Condillac (1715–1780) did so ahundred years before Bastiat wrote:“The very fact that an exchange takesplace is proof that there must necessar-ily be profit in it for both the contract-ing parties; otherwise it would not bemade. Hence, every exchange repre-sents two gains for humanity.”

Well, perhaps Bastiat was unawareof Condillac’s argument. That is not the case. Hereprints the quote above in his book and responds:

The explanation we owe to Condillac seems tome entirely insufficient and empirical, or rather itfails to explain anything at all. . . .

The exchange represents two gains, you say. Thequestion is:Why and how? It results from the very factthat it takes place. But why does it take place? Whatmotives have induced the two men to make it takeplace? Does the exchange have in it a mysterious virtue,inherently beneficial and incapable of explanation?

We see how exchange . . . adds to our satisfac-tions. . . . [T]here is no trace of . . . the double andempirical profit alleged by Condillac.

This is perplexing. Clearly, the necessary doubleinequality of value is not empirical or contingent. Con-tra Bastiat, the double inequality explains quite a lot,and his questions all have easy answers.

Yet more perplexing still is Bastiat’s statement inthe same chapter: “The profit of the one is the profitof the other.” This seems to imply what he justdenied.

Bastiat’s failure to grasp this point had consequencesfor his debates with other economists. For example, heand his fellow “left-free-market” advocate Pierre-Joseph Proudhon engaged in a lengthy debate overwhether interest on loans would exist in the free mar-ket or whether it was a privilege bestowed when gov-ernment suppresses competition. Unfortunately, thedebate suffers because neither Bastiat nor Proudhonfully and explicitly grasped the Condillac/Austrian

point about the double inequality ofvalue. As Roderick Long explains inhis priceless commentary on theexchange:

[E]ach one trips up his defense ofhis own position through an incon-sistent grasp of the Austrian princi-ple of the “double inequality ofvalue”; Proudhon embraces it, butfails to apply it consistently, whileBastiat implicitly relies on it, but

explicitly rejects it. . . .Proudhon’s case against interest seems to depend

crucially on his claim that all exchange must be ofequivalent values; so pointing out the incoherenceof this notion would be a telling reply. But Bastiatcannot officially give this reply (though he comes tanta-lisingly close over and over throughout the debate)because elsewhere—in his Economic Harmonies—Bastiat explicitly rejects the doctrine of doubleinequality of value.

How frustrating! Bastiat has so much to teach. Buthere is one blind spot that kept him from being evenbetter.

33 A P R I L 2 0 1 1

T h e I m p o r t a n c e o f S u b j e c t i v i s m i n E c o n o m i c s

Bastiat erroneouslybelieved that peopletrade equal values andthat something iswrong when unequalvalues are exchanged.

Last month we examined some propositions aboutgold as money, drawing from theory and history.This month we ask whether and how gold might

once again serve a monetary function.Money of any sort, commodity-based or not, derives

its value in large part from what economists call a “net-work effect.” Like a fax machine, whose value dependslargely on how many other people have fax machines,we value money because other people value it.We feelconfident our money will buy us what we need tomor-row. A strong network effect means that somethingdrastic has to happen before people will give up theirfamiliar form of money.

Something drastic was hap-pening when U.S. Rep. RonPaul’s Gold Commission was setup in 1979. By the time thecommission’s report was issuedin 1980, inflation had reachedalarming levels: The consumerprice index was at 14 percent and rising.The prime ratewas over 20 percent, and in 1980 silver exploded to $50an ounce and gold surpassed $800 (about $2,300 intoday’s dollars). Bestselling books urged people to buygold, silver, diamonds, firearms, and rural hideouts.

We now know that inflation was peaking and thatthe silver price spike was a fluke caused by a failedattempt to corner the silver market. But none of thiswas apparent at the time, so it was reasonable to wonderwhether our monetary system would survive.What didhappen, of course, was that the new Fed chairman, PaulVolcker, stepped on the monetary brakes hard enoughto break the back of inflation.Two back-to-back reces-sions resulted but were followed by a long period of

recovery in which both inflation and interest ratesdropped steadily. The Gold Commission was largelyforgotten, though the U.S. Mint did get into the busi-ness of producing gold coins in a big way.

We have a crisis of a different sort at present, featuringunprecedented levels of public and private debt ratherthan inflation. In addition, global trade has advanced sig-nificantly and worldwide financial markets are tightlylinked. Many new financial innovations have emergedsince 1980, not just the sophisticated derivatives thatwere at the center of the 2008 crisis, but also innovationssuch as exchange-traded funds (ETFs) that are avail-

able to everyone.The euro is introuble, and there is a real possi-bility that a Chinese propertybubble is about to burst. Gold isabove $1,400 an ounce, up from$250 a decade ago, while silverhas advanced from about $5 toover $30 an ounce.

Ron Paul is no longer a lone voice calling for areturn to gold. Robert Zoellick, president of the WorldBank, astonished everybody recently when he won-dered out loud whether gold should again play a mon-etary role. Although he drew praise from somequarters, most comments were dismissive. Berkeleyeconomist Brad DeLong, for example, nominatedZoellick for the “Stupidest Man Alive.” One isreminded of Gandhi’s four steps to victory: First theyignore you, then they ridicule you, then they fight you,then you win.

B Y W A R R E N C . G I B S O N

Gold and Money


Warren Gibson ([email protected]) teaches engineering at Santa ClaraUniversity and economics at San Jose State University.This is the second ofa two-part series.

In 2010 the Central Bank of China imported over200 tons of gold, more than offsetting recent IMF sales.This is in addition to the 350 tons that are mined inthat country annually. Wealthier Chinese citizens areadding it to their portfolios.While substantial, Chinesegold holdings are still dwarfed by their holdings of U.S.Treasury securities. The gold purchases may beintended mainly as a signal of its displeasure with dollarhegemony. Other central banks are acquiring gold insmaller amounts.

Monetary Links to Gold

Within just a few years ETFs have attained aprominent place in the investment world. None

has been more amazing than theSPDR Gold Trust (GLD), which pur-chases and stores gold bullion for thebenefit of its shareholders. This fundwas launched in 2002 by the WorldGold Council, an industry group, as ameans of stimulating demand. Theresults have exceeded their wildestdreams. GLD now holds about 1,300tons of gold bullion, a hoard largerthan that of any central bank savefour. (A metric ton of gold would filla large suitcase and have a marketvalue of about $45 million.) Compet-ing funds of the same sort now offersilver, platinum, and palladium inaddition to gold.

Gold coins are also selling at a brisk pace.The U.S.Mint offers Gold Eagles along with an array of silverand platinum coins. But it’s difficult to get one-ounceEagles at present, and the smaller sizes have been dis-continued entirely because the Mint has run short ofbullion inventory. Presumably this is bureaucraticineptness, because the bullion markets are highly liq-uid. Canadian Maple Leafs, South African Kruger-rands, and others that compete with the U.S. coins arereadily available.These are all “bullion coins,” so-calledbecause their value is only marginally above their goldcontent.

The one-ounce Gold Eagle and the Maple Leafhave an interesting feature:They are legal tender, the

Eagle for $50 and the Maple Leaf for C$100. Whilethe gold price will surely never again see such low levels, it is interesting that the authorities saw fitto establish this modest link between gold andmoney.

Soaring prices for precious metals and unprece-dented demand for bullion gold and silver coins are anobvious sign that investors are worried. Anyone whobuys bullion or coins has to be concerned enough toforgo interest income and pay, directly or indirectly,storage and insurance costs. If and when confidence inthe world’s monetary and banking institutions returns,we can expect a rush out of precious metals and intoproductive assets.

Now to the central question: Willgold again be money?

Don’t Call It a Comeback. Yet.

Gold is too volatile, say some. If,for example, the Fed were to

adopt a stable gold price as its mone-tary target, it would be hitching theU.S. economy to a wild horse. If theFed had tried to track gold’s recentrise, it would have had to engage inmassive quantitative “dis-easing.”Monetary deflation added to fallingaggregate demand would have been adisaster.

The problem with this argument isthat it takes the gold price as given.

Had the Fed hitched its wagon to gold some years ago,it would have added significant inertia to the “wildhorse” and it is likely that the run-up would have beenmilder or nonexistent.

Still, gold targeting by the Fed is probably not agood idea.The Fed has lost a great deal of credibility oflate, thanks in part to Chairman Ben Bernanke’s recentdeclaration on 60 Minutes that the Fed would not“print money” to carry out the next round of quantita-tive easing.The chairman’s life will only get more com-plicated now that Ron Paul has become chairman ofthe House Subcommittee on Domestic Monetary Pol-icy. Should the Fed adopt gold targeting, markets wouldneed to be shown over a long period that it was serious

35 A P R I L 2 0 1 1

G o l d a n d M o n e y, P a r t 2

The Central Bank ofChina is importinggold, gold indexfunds have beengrowing rapidly, andgold coins are sellingwell.Will gold againbe money?

about hewing to gold in the face of political pressuresto the contrary.

One hundred years ago it was common to link con-tracts such as railroad bonds to gold. I have in my pos-session such a bond, issued in 1893 (it’s a beautifullyengraved document, incidentally), which promises topay at maturity “one thousand dollars in gold coin ofthe present standard of weight and fineness.” Borrowersprobably didn’t expect to be paid with a stack of 50gold coins, which would have been inconvenient.Rather, the phrase was meant to protect the borrowerfrom future government debasement of money. Butsanctity of contract went out the window in 1933,when Franklin Roosevelt abrogated all such privatecontracts at a stroke. Predictably, 50 one-ouncegold coins now fetch nearly $70,000.

Gold Clauses

Acomeback of gold clauses inbusiness contracts is a realistic

possibility, provided they could sur-vive legal challenges based on legaltender laws. Imaginative clausescould be created that guaranteed areturn in dollars at least partiallylinked to the gold price. Such thingsalready exist, in fact. Everbank, anonline bank, currently offers, amongother innovative products, a five-yearcertificate of deposit whose return istied to the price of a basket of preciousmetals.At worst, investors get their prin-cipal back.At best, their five-year return is capped at 50percent. Everbank is not, of course, issuing gold-backedmoney, but it is coupling gold to money’s role as a storeof value.

Another possibility is that shares of GLD couldassume an informal monetary role. Those shares cur-rently trade for about $135 each. Originally they repre-sented one-tenth of an ounce but have lost some valueas administrative charges have been deducted. Newsub-shares, perhaps representing one gram each, wouldequate to $45. Getting such sub-shares into circulationwould be much easier via the Internet than gettingpaper shares into circulation. Such schemes would of

course require government forbearance backed bypolitical pressure. That pressure would not likely ariseuntil and unless the current financial crisis grew toalarming proportions.

In 2003 e-gold.com was established as an onlinegold-payment service, growing to five million accountsin 2008, according to its owners. That year the com-pany pleaded guilty to conspiracy to engage in moneylaundering and conspiracy to operate an unlicensedmoney-transmitting business. The company’s problemsseem to have had more to do with security than withgold per se. Still, the e-gold case serves as a reminderthat innovators in gold payments may face legal problems.

Recently J.P. Morgan Chase announced that inaddition to Treasury securities, it would

begin accepting gold as collateral for cer-tain loans. “Many clients are holding

gold on their balance sheets . . . andare looking to make these assetswork for them as collateral,” said acompany spokesman. “It givesanother use to gold as a cash instru-ment,” added a commodities ana-lyst, exaggerating only slightly.

Indeed,Treasury securities are consid-ered very close to money itself in termsof safety and liquidity, so it is ratherremarkable to see gold accepted as sub-stitute collateral even in this minor sec-tor of the financial markets. It suggests agradual movement of gold toward

monetary status.

New Currencies

What about a new currency backed by the FortKnox holdings? There would be practical diffi-

culties, assuming most of the gold is in 400-ouncebars, each with a dollar value exceeding a half-million.It would be expensive to convert all this to coin, andbesides, the smallest practical coin, perhaps five grams,would still represent over $200. A $10 gold notewould fetch a mere speck of gold. More realistic thangold notes would be a spinoff of a new goldexchange-traded fund. Shares of that fund might gain


Wa r r e n C . G i b s o n

This double eagle, minted about acentury ago, has one ounce of gold.That much gold is worth over $1,400now and these coins go for $1,700 ormore, depending on condition.

gradual acceptance as money, especially if a dollar cri-sis were in progress.

U.S. public or private institutions aren’t the onlypossible sources of a return to gold.Though globaliza-tion has been fostered by declining trade barriers andtransportation costs, we still lack the considerableadvantages of a uniform worldwide currency or rigidlylinked currencies. In the late nineteenth century, whenall major currencies were tied to gold, the dollar/poundexchange rate was no more worrisome than the inch/centimeter exchange rate. As things stand now, firmsdoing business in different currencies must divert sig-nificant resources away from satisfying customers andinto managing exchange-rate risk. Currency fluctua-tions have not been minor, as Milton Friedmanexpected when he first proposedfloating exchange rates. During 2010,for example, the euro ranged between$1.19 and $1.45—a variation wideenough to turn a multinational firm’syearly profit into a loss or vice versa.The need for a new global currencymay be an opportunity for someenterprising central bank—China’sperhaps—or some private firm toestablish a new international form ofgold-linked money or near-money.

There are those who defend the gold standard onideological grounds, claiming near perfection for it.This is unrealistic. For example, price inflation can hap-pen under a gold standard. Ironically, as confidenceincreases in a fractional-reserve gold standard, peopleare less inclined to hold monetary gold.The multiplierincreases, and there is price inflation—mild, gradual,and predictable. Increasing prosperity and the conse-quent increasing demands for nonmonetary applica-tions of gold such as jewelry or technology would workin the opposite direction:The supply of monetary goldwould drop, causing deflation. New gold discoveries orbetter mining techniques dilute gold’s purchasing

power—another inflationary development likely to bemild and gradual. But it is conceivable that someonecould invent an economical process for converting base metals into gold—the alchemists’ dream. This very unlikely development could be a major disruptionto an economy using gold-backed money. The mostlikely situation under a gold standard would be gradual,mild deflation as happened in the late nineteenth cen-tury. In short, a totally stable price level, if such couldbe defined, is not something to expect from a goldstandard.

Resource Costs and Stability

We cannot overlook the resource cost of goldlocked away as backing for money. Monetary

gold cannot be used for jewelry orelectronics. Friedman once dismisseda return to gold on the grounds thatthe resource cost would amount to 2percent of GDP. But his estimate waspredicated on 100 percent backing ofthe wider M2 money supply. Under afractional reserve system, the costwould be much lower.

Of course, monetary gold lying“idle” in a vault is only idle in a naivephysical sense. A gold bar sitting

undisturbed in a vault is producing security for holdersand users of money day in and day out.The irony hereis that while the amount of monetary gold would likelydecrease as a fractional-reserve gold system gained con-fidence, our present system seems to require the reten-tion of 8,000 tons at Fort Knox, while leaving thecontrol of money under the increasingly politicizedFederal Reserve—the worst of both worlds.

It is possible that stability will return to our currentmonetary and banking systems.We could have a repeatof 1980 and a couple of decades of stability and growth.If not, there is good reason to believe that gold willmake a return in some form.

37 A P R I L 2 0 1 1

G o l d a n d M o n e y, P a r t 2

A totally stable pricelevel, if such could bedefined, is notsomething to expectfrom a gold standard.

B Y J O H N S T O S S E L

Prohibitionists: Leave Us Alone!

Give Me a Break!

Sometimes I drink Scotch and then, to wakemyself up, I drink coffee. So what? Many peopleconsume mixtures of caffeine and alcohol in

drinks like rum and Coke.But recently some college kids started drinking pre-

mixed combos of alcohol and caffeine with names likeFour Loko and Moonshot ’69. Moonshot ’69 is a pil-sner beer with less than a coffee cup’s worth of caffeine.Until recently, Four Loko contained 12 percent alco-hol—about the same as wine—and as much caffeine as a cup ofcoffee. A few students, afterdrinking Four Loko, landed inthe hospital with alcohol poison-ing. Naturally, hysterical newsreports followed.

A new bogeyman was born:caffeinated alcoholic beverages.

As night follows day, the Foodand Drug Administration inNovember ordered beveragecompanies to lose the caffeine orshut down. The FDA called caf-feine an “unsafe food additive.”Phusion Products says it will nowproduce only noncaffeinatedFour Loko. Moonshot ‘69 is off the market for now,which is bad news for Rhonda Kallman, who foundedthe company that makes it, New Century Brewing.

“There is nothing new about adults combining caf-feine and alcohol,” Kallman writes on her companywebsite. “Who hasn’t enjoyed a rum and Coke, Irishcoffee, Kahlua or espresso martini? . . . Moonshot ‘69 isa beer for beer drinkers that has been enjoyed by craft-beer lovers since 2004.”

Her online petition states:“We the undersigned sup-port the right of responsible adults to choose the beerof their choice. We support Moonshot ‘69 and the

rights of craft brewers across the country to producenew and innovative offerings for the beer drinkingpublic. . . .We call on the federal government to adhereto responsible regulation of alcoholic beverages thatallows adults to enjoy the beer of their choice.”

Unfortunately, Kallman tries to separate her productfrom higher-alcohol FDA targets, but Nick Gillespie ofReason magazine argues that the FDA has no businesslimiting the sale of any of the alcohol/caffeine combos.

“This has been going on for aslong as there have been collegesand universities,” he said.“You cango back to the Middle Ages, andbooze and students go togetherlike, I guess, beer and caffeine.”

Forced Underground

Aren’t some drinks more dan-gerous than others?

“I don’t think so. But when weraised the drinking age to 21 . . .we told young people . . . you canvote, you can enter a contract, youcan go to war, you can die foryour country, but if you want todrink and you’re going to college,

you better go off campus into a basement apartmentsomewhere and chug like there’s no tomorrow becauseyou don’t know when you’re going to be able to getdrunk again.”

He points out that by forbidding pre-21 adults fromdrinking openly around their elders, we deny them thechance to be exposed to responsible drinking.


John Stossel hosts Stossel on Fox Business and is the author of Myths,Lies, and Downright Stupidity: Get Out the Shovel—WhyEverything You Know is Wrong. Copyright 2011 by JFS Productions,Inc. Distributed by Creators Syndicate, Inc.

The FDA banned this beer without any evidence that itcauses any harm.Photo courtesy O’Neill and Associates

About the ban on caffeinated alcoholic drinks, headded,“You can’t minimize the over-reach by the FDA.”

I asked the FDA why Moonshot’69 is included on the ban list whenit’s not marketed to pre-21 adults andit contains less alcohol than more sug-ary drinks. They replied that Moon-shot was referred to the agency bystate attorneys general concernedabout alcohol and caffeine. The FDAasked New Century Brewing for data indicating the legal standard forsafety had been met, but no data wasprovided.

Kallman points out that the FDA “didn’t fullyresearch it either. So they put the onus on the small

entrepreneur to have a scientist. But at the end of theday, it’s 5 percent alcohol by volumeand less than a half a cup of coffee ofnatural caffeine. Where will theystop?”

Never. Government never stops.Gillespie added,“What we should

be having instead of bans [of] bever-ages that people like and . . . con-sume responsibly is . . . a nationalconversation about how, after a cou-ple of hundred years of the Americanexperiment, we can get past the pro-hibitionist mindset and teach peoplehow to drink responsibly like they

do in France, Italy, Spain and many other parts of theworld.”

39 A P R I L 2 0 1 1

P r o h i b i t i o n i s t s : L e a v e U s A l o n e !

By forbidding pre-21adults from drinkingopenly around theirelders, we deny them the chance tobe exposed toresponsible drinking.

Book Reviews

The Road to Big Brother: One Man’s StruggleAgainst The Surveillance Societyby Ross ClarkEncounter • 2009 • 200 pages • $21.95

Reviewed by George Leef

As I write this review, millionsof Americans are annoyed if

not outraged over the recent meas-ures adopted by the so-calledTransportation Security Agency.Airline travelers hate the choicebetween going through a scannerthat effectively undresses them andan aggressive grope of their bodies.

Are those offensive procedures necessary? Are theylegal? What is becoming of our country? At least peo-ple are starting to ask the right questions.

Highly pertinent to the TSA’s heightened arroganceis Ross Clark’s book The Road to Big Brother. Clark livesin Britain, where government surveillance of the citi-zenry is even more advanced than here. Referring toJeremy Bentham’s idea for a prison where the prisonerswould be constantly observed (or at least would thinkthey were), Clark writes, “Modern Britain is one bigpanopticon.” The government watches, monitors, andgathers data on citizens all the time, justifying this asnecessary for their safety. The big lesson readers takeaway from the book is that, like virtually everything theState does, costs greatly exceed benefits. People’s pri-vacy is whittled away, their freedom erodes, their taxesgo up, but criminals are barely inconvenienced by allthe State’s surveillance.

The book is chock full of the author’s witty, oftensarcastic observations on the panopticon that surroundshim. For example, the town of Luton has installedclosed-circuit TV cameras that are supposedly “intelli-gent” since they are able to detect “suspicious” behav-ior. No criminals have been caught thanks to thecameras but, Clark writes, “Should your tastes in win-dow-shopping not match those of the average resident,

the system will pick you out. Should your clothing oryour gait be considered out of the ordinary, the systemwill pick that out, too. . . . [The cameras] are less a cere-bral detective than a skinhead who lashes out at peopleand customs that fall outside his narrow experience ofwhat is ‘normal.’”

But why not give government surveillance achance? After all, it might, occasionally, work. Clarkalerts us to the danger in that line of thought, namelythe likelihood of mission creep. Once the authoritiesget going with their schemes, they won’t stop. Moni-toring of streets ostensibly to help prevent crime hasexpanded into monitoring people’s homes to see howenergy-efficient they are, a development that will prob-ably lead to mandates that homeowners install variousenergy-saving devices if they ever want permission tosell. There is no stopping point once Big Brother getshis foot in your door.

Advocates of increasing government surveillanceusually say, “If you’re innocent, you have nothing tofear.” Clark shows how mistaken that notion is. Withmodern DNA testing, for example, it is possible tomake highly probable (but not perfectly reliable)matches of crime scene DNA evidence with samplestaken from the general populace. Many Europeanpoliticians are pushing for a massive database of manda-tory fingerprints and DNA samples, the better to helpapprehend criminals. Clark points out, however, thatthis will encourage criminals to plant false DNA evi-dence to point investigation toward innocent people—who may have a hard time proving they really were notat the crime scene.

Moreover, officials in Britain are looking into thepossibility of using DNA analysis to help identify peo-ple who might have a genetic predisposition towardcrime. The result of that, Clark fears, will be socialworkers devising “care plans” for individuals suspectedof being potential criminals.The Nanny State will growapace once it gets the mission of trying to prevent peo-ple from going bad.

And what happens when, inevitably, public officialsmake a mistake? Suppose that your name is erroneouslyentered into the Police National Computer? Clark citesa report that 22 percent of the records entered con-tained an error, with the result that innocent people


have been tarred with criminality, thus making it hardfor them to get jobs. It’s also difficult to get the author-ities to correct their mistake. That is just one of themany forms of collateral damage inflicted by the sur-veillance state.

I do not get the sense that Clark is a libertarianseeking to chop down the British Megastate, but afairly ordinary bloke who refuses to believe its propa-ganda that expansive government programs are neces-sary for safety. His demonstration that the SecurityState is an invasive, costly, counterproductive humbug is perfectly aligned with the libertarian critique of the State, however. Just as it is a mistake to turn to gov-ernment for safety, so is it a mistake to turn to it foreducation, for economic progress, for moral uplift, andso forth.

George Leef ([email protected]) is book review editor of The Freeman.

Unchecked and Unbalanced: How the DiscrepancyBetween Knowledge and Power Caused theFinancial Crisis and Threatens Democracy by Arnold Kling Rowman & Littlefield/Hoover Institution • 2009 • 122pages • $29.95

Reviewed by David M. Brown

This slim yet insight-packedvolume makes fair progress

toward explaining the 2008 finan-cial crisis. The first of the book’sthree chapters outlines the “hous-ing industrial policy” that led to thecrisis. The second discusses theconflict between concentratedpolitical power and effective use of

socially dispersed knowledge, and the third suggestsreforms.

Tracing the government’s ever-greater role infinancing and encouraging housing debt, especiallysince the 1960s, Kling observes that regulation-fosteredsecuritization of mortgages necessarily obscures risk. Abank exercises the best oversight over loans that itawards directly; in an unhampered market, loan officershave little incentive to prefer an indirect or “securi-

tized” method of lending. But by rigging the housingmarket for decades to promote the holy grail of home-ownership, politicians fostered and even mandatedmany dubious mortgages that wouldn’t otherwise havepassed muster. Kling draws on his background as a for-mer Freddie Mac economist to highlight the specificproblems of the rickety financial structures that wereonly made possible by governmental assumption ofrisk. “Without the [government] guarantees [of mort-gage-based securities]—or apparent guarantees—indi-rect lending would not have been possible,” heconcludes.

In Kling’s view, bad mortgage regulations, a spate ofmortgage loans requiring unrealistically low down pay-ments, and what he calls a “suits vs. geeks” divide (seewww.tinyurl.com/2dp77fg) were the main causes ofthe housing bubble. But the last two “fundamental”causes stem from the first. So the author’s explanationof the housing crisis boils down almost entirely to thewelter of incentive-skewing mortgage regulations.

The book surveys and critiques several alternativeexplanations for the crisis, including the oft-heard buthistorically unintelligible claim that it resulted from“deregulation.” Unfortunately, this tour does not inves-tigate the role of the Federal Reserve. EconomistRobert Murphy is among those of Misesian-Hayekianpersuasion who point to the malinvestment-encourag-ing effects of the credit splurge of 2001–2003, theperiod during which the Fed lowered the federal fundstarget interest rate from 6.5 to 1 percent.The omissionis odd since Kling elsewhere acknowledges the impor-tance of the Austrian analysis.

A more fundamental discrepancy between knowl-edge and power than that exemplified by thesuits/geeks divide is that exemplified by the hubristicpower-grabbing of government officials, both beforeand after the economic blowout. Instead of arguing thatin 2008 officials should have abstained altogether fromsuch interventions as using tax dollars to buy “toxic”assets, the author suggests that the government mighthave instead tried the stopgap measure of “impos[ing]penalties on firms that make extravagant demands forcollateral to back repurchase agreements” and otherfinancial instruments. Limiting a fresh bout of interven-tion in that way would have been better than the blun-

43 A P R I L 2 0 1 1

Book Reviews

dering and direct central planning the federal govern-ment undertook, but it would still have amounted togiving economic actors orders, discouraging reliance onlocal knowledge and conditions.“Extravagant” terms ofcontract may be the only ones on which a trade can beconducted that satisfies both parties.

The second chapter considers the syndrome offorce-wielding politicians and bureaucrats pretendingto know better than individuals their own unique cir-cumstances, values, goals, and options. The conflictbetween the individual’s knowledge and freedom, onthe one hand, and coercive rules which preempt thatknowledge and curtail that freedom, on the other, liesat the heart of the 2008 debacle (and many other econ-omy-wide slumps). Markets are characterized by pricesignals and other coordinating mechanisms that enablehuman beings to make effective use of widely dispersedknowledge, very little of which we can ever grasp first-hand. Kling observes that modern economies arebecoming ever more specialized and complex even aspolitical power becomes more centralized and resistantto calls for reform. He tries to come up with empiricalgauges of both trends, although that isn’t strictly neces-sary to refute the fallacies and expose the hazards ofcentral planning.

The problem of how to prevent or ameliorate theblunders of the commissars is tackled in the final chap-ter.The author suggests various half-measures that pro-ponents of fully free markets will be less than satisfiedwith: proposals, for example, to merely decentralizegovernment functions that would be better delegatedaltogether to the private sector. Still, most of Kling’sproposed reforms—including a scheme that wouldenlist “competitive governments” to jockey for thechance to collect your garbage, and another to dispensevouchers rather than Medicare-style reimbursements topay medical costs—might make it easier to achievethoroughgoing restoration of markets than leavingthings as they are.

David M. Brown ([email protected]) is a freelance writer and editor.

Commonwealthby Michael Hardt and Antonio Negri Harvard University Press • 2009/2011 • 448 pages • $35.00hardcover; $29.95 paperback

Reviewed by David Prychitko

Some two decades after the col-lapse of communism, socialist

intellectuals still scramble to reha-bilitate Marx and collectivist socialtheory in general, with Duke Uni-versity professor Michael Hardtand Italian sociologist AntonioNegri leading the bunch. Acade-mics are attracted to their radical

critique of existing capitalist institutions. Non-academ-ics and educated laypersons on the left are attracted totheir radical message and hope that the people will suc-cessfully engage in a revolution to overturn privateownership and market exchange.

Although the book has attracted some zealous fol-lowers, it is a difficult read. One wades through lengthyand tiring discussions of Foucault, debates with Sartre,attempts to refashion Marxist theory, and then, sand-wiched in between, hopeful tales about the restora-tion of “authentic identity” among the Maya andlengthy, optimistic claims about how the people ofCochabamba are progressing from “antimodernity”toward “altermodernity.” One suspects that the authorsunderstand that their ideas won’t hold up well if statedin plain English, so they resort to an obscure but intim-idating style. Amidst all of this, and among many otherintellectual detours, stands a full-blown chapter onSpinoza’s concept of love. Suffice it to say that Hardtand Negri argue that people must be trained and edu-cated in love in order to fight the evil forces of privateproperty.

The authors assume (but don’t bother to argue) thatproperty and market exchange block and destroy gen-uine human relationships. Marx had this general insightcorrect, they believe, but they suggest that his analysisneeds to be corrected and updated in its details to fitour postindustrial age. Hardt and Negri claim thatMarx’s theory of alienation, for example, must be fur-ther developed from an analysis of competitive separa-


Book Reviews

tion of people and estrangement of the fruits of theirlabor to an “alienation of one’s thought” itself. Exactlywhat that means isn’t clear, but I think they’re suggest-ing that our thoughts aren’t truly our own, but are cre-ated by the capitalist system that allegedly controls us.

The authors insist that life—genuine, loving humanrelationships—is nestled in “the common.” The com-mon consists of those institutions beyond private andpublic ownership of the means of production and, itappears, the fruits of labor, too. (One of the book’smany confusing aspects is that the meaning of “thecommon” is vague and shifting.) In Hardt and Negri’sview private property is the essence of capitalism, pub-lic property the essence of socialism, and the commonis the essence of—you guessed it—communism. Withthis concept the authors try to break from the totali-tarian consequences of “the victorious revolutions”of Russia, China, and Cuba. They claim to be opti-mistic that the revolution is imminent and, at long last, emancipating.

Nowhere do the authors consider the possibilitythat their revolution might lead to adverse results. Nordo they ever come to terms with the knowledge-com-municating properties of voluntary and open exchangesof property rights.The coordination of plans, which isultimately coordination of thoughts and expectations, iscompletely ignored in the book. How this can happenwithout private property and exchange is a mystery.

The common, the authors proclaim, is the ground offreedom and voluntarism. Activities within the com-mon are the source of true wealth (hence the book’stitle). The freedom of the common is the freedom tofind and develop love, and it provides the source of themultitude’s supposed creative power. But “capital,” thatmeaningless collectivist concept that goes back to Marxhimself, disrupts the common. Capital, they assert,exploits the multitude, the truly productive.

And the multitude is huddled and gathered mainlyin cities, in “the metropolis,” used as another collectivis-tic concept. Marx focused on the factory, but Hardt andNegri claim that the metropolis is supposedly the cur-rent site of “hierarchy and exploitation, violence andsuffering, fear and pain,” and therefore will be the siteof the impending revolt.The authors have absolutely nosense of cities as spontaneous orders where millions

cooperate for mutual gain. Maybe people keep going tocities because they are alienated from their ownthoughts.

Hardt and Negri try to impress with their knowl-edge of Foucault, Laclan, Derrida, and Viveiros de Cas-tro, but where’s Smith? Where’s Hayek? Where’s Jacobs?They never address the spontaneous and invisible-hand-like nature of markets, the communicative andwealth-enhancing nature of exchange, the role thatcities play in such exchange, and the notion of civilsociety, an independent sector that is not fundamentallyorganized through commercial activity or the violentcompulsion of the State. Are they even aware of thecounterargument? And if so, when do they plan toaddress it?

Commonwealth is a pitiable effort at resuscitatingMarx. But it was a lost cause to begin with.

David L. Prychitko ([email protected]) is professor of economics atNorthern Michigan University and coauthor, with Peter Boettke and thelate Paul Heyne, of The Economic Way of Thinking.

The Privatization of Roads & Highways: Humanand Economic Factors by Walter Block Ludwig von Mises Institute • 2009 • 475 pages • $19.00

Reviewed by Arthur Foulkes

Loyola University economistWalter Block is among the

most fearless advocates of freedomtoday. At a time when punditswidely believe the free market hasfailed, Block takes his case fortruly free markets deep intounfriendly territory by arguing forthe full privatization of all roads

and highways.In 2006 officials in Indiana leased 157 miles of the

Indiana Toll Road to a private Spanish/Australian con-sortium. While this was called a “privatization,” Blockwould clearly dismiss it as nothing of the kind. TheIndiana Toll Road remains owned by the state. Realprivatization would mean completely private owner-ship of all streets, roadways, paths, and freeways. Only

45 A P R I L 2 0 1 1

Book Reviews

private roadway owners would determine regulationsand prices.

In the current political climate it may seem Blockhas the cart before the horse. Arguing for free-marketroads these days is a little like a starving person worry-ing about his dessert. Shouldn’t we first try to halt thecurrent growth in the size and scope of governmentand deal with the almost Utopian idea of private streetsand highways later? But anyone who has read Block’sprovocative book, Defending the Undefendable, or hasheard him discuss free-market ideas one on one, knowshe does not blink in his support for freedom. Besides, if“we can establish that private property and the profitmotive can function even in ‘hard cases’ such as roads,the better we can make the overall case on behalf offree enterprise,” he writes.

A big roadblock, so to speak, in arguing for privateroads and highways is that practically everyone takesgovernment ownership for granted. Even many econo-mists, using “market failure” arguments such as the oneabout “externalities,” often cite roads as something onlygovernment can provide. Block carefully takes apartthese arguments. For example, the “externalities” argu-ment contends that private investors would underinvestin roads and highways. But who is to say, given a com-plete lack of market signals, a government agencywould invest the correct amount? Indeed, this part isamong the book’s best contributions.

In addition to giving readers a seminar in logicaleconomic reasoning, Block’s book also reflects his pas-sion for freedom. He believes firmly that governmentmanagement of roads and highways is not only ineffi-cient but also deadly. “Road socialism” causes thedeaths of more than 40,000 people in the United Stateseach year. And although many people blame highwaydeaths on alcohol, unsafe vehicles, or speeding, Blocklays the blame on the government officials who managethe highway system. He explains his conclusion:“It maywell be that speed and alcohol are deleterious to safedriving; but it is the road manager’s task to ascertainthat the proper standards are maintained with regard tothese aspects of safety. If unsafe conditions prevail in a

private, multistory parking lot, or in a shopping mall, orin the aisles of a department store, the entrepreneur inquestion is held accountable.”The problem is that gov-ernment officials are not accountable.

Much of the book, a collection of essays, involvesanswering practical questions, such as how private roadowners might deal with intersections. Block answersthis and other questions fully—maybe a little too fullyfor the casual reader. Still, Block is serious about thiscomplex subject, and his book is not intended to belight reading. Fortunately, his writing style is clear andeasy to follow.

An important assumption underlying the book isthat a competitive free-market road system would nec-essarily be superior to one operated by government. Insupporting that assumption Block presents a series ofarguments familiar to students of the Austrian school ofeconomics. For example, he notes the importance ofmarket signals in directing entrepreneurial decisions.Block also addresses the neoclassical notion of “perfectcompetition.” This highly unrealistic model suggestsroads require government management. Yet, as Blocknotes, “perfect competition” exists practically nowhereand, if that were truly our standard, nearly all marketswould call for nationalization.

After making a strong case for road privatization,Block addresses the thorny matter of getting from hereto there. After wrestling with several possibleapproaches, he admits that privatizing today’s system ofpublic roads would be like trying to unscramble an egg.Yet even an “imperfect privatization will be far prefer-able to none at all. Government streets are an adminis-trative and safety nightmare. It is inconceivable thatprivate initiatives could do worse.”

The fall of the Soviet Union and other collectivizedsystems clearly showed the gigantic problems inherentin government ownership and management of anyenterprise.This lesson has not yet been applied to ourroads and highways. Thanks to Block’s comprehensivework, that may not always be the case.

Arthur Foulkes ([email protected]) is a journalist and freelancewriter in Indiana.


Book Reviews

B Y D AV I D R . H E N D E R S O N

War Is a Government Program

The Pursuit of Happiness

Libertarians and conservatives who argue for eco-nomic freedom and against government controltend to make both principled and practical argu-

ments for their positions. Take health insurance, forexample.The principled argument against governmentregulation of health insurance is twofold: (1) No gov-ernment has the right to dictate to someone what kindof insurance he should buy or whether he should buy it at all; and (2) no government has the right todictate to an insurance company what kind of insur-ance it may sell and what it many charge.The practicalarguments are many; for example, if government setsprices too low, it will cause shortages and rationing,which most people would findundesirable.

But when some of thosesame libertarians and manyconservatives think about war,their critical thinking skillsseem to go out the window.On the principle side, theyrarely argue that the U.S. gov-ernment doesn’t have theright to force U.S. taxpayers to support oppressive dictatorsin foreign countries such asKuwait.Why? Because they seem to think the fact thatan even more vicious dictator, Saddam Hussein,attacked Kuwait makes coerced funds from U.S. taxpay-ers morally obligatory. And on the practical side, theytend to drop their skepticism about the consequencesof government action. Yet, even aside from any argu-ment based on principle, if libertarians and conserva-tives were to be as skeptical of our own governmentabroad as they are of it at home, they would likely favorkeeping the United States out of foreign wars. Indeed,as I shall show, there are two reasons we should be evenmore skeptical of our government’s actions overseas.

One of the strongest practical arguments againstgovernment intervention in the domestic economycomes from Ludwig von Mises: One intervention, bycausing unintended consequences, leads to furtherintervention. At each point in the chain the govern-ment could back down and deregulate. But govern-ments tend not to do that. Take an example I wroteabout in this publication (“Unintended Consequencesin Energy Policy,” March 2009, www.tinyurl.com/adv6gm). Richard Nixon’s price controls on gasolinecaused a shortage that then led to fuel-economy stan-dards for cars.

The same kind of reasoning applies to foreign pol-icy. In 1963 the Central Intel-ligence Agency helped ayoung Iraqi ally who, alongwith other plotters, overthrewGen. Abdel-Karim Kassem.His name: Saddam Hussein.Five years later, the CIAbacked another coup thatmade Hussein deputy to thenew military ruler. Then, in1979, Hussein took his turn as dictator.

In 1980 Hussein proceededto wage a long and costly war on Iran. Interestingly, theReagan administration supported this invasion withbillions of dollars in export credits and with satelliteintelligence. Consider how this one intervention led toanother.

Why did the U.S. government support Saddam Hus-sein in his war on Iran? The Iranian government had

47 A P R I L 2 0 1 1

David Henderson ([email protected]) is a research fellowwith the Hoover Institution and an economics professor at the GraduateSchool of Business and Public Policy, Naval Postgraduate School,Monterey, California. He is editor of The Concise Encyclopedia ofEconomics (Liberty Fund) and blogs at econlib.org.

Intervention has unintended consequences, which beget furtherinterventions.

become an enemy of the U.S. government a year ear-lier, when Ayatollah Khomeini took over and some Ira-nians held Americans in the U.S. embassy hostage.Whydid so many Iranians dislike the U.S. government? Onereason was that in 1953 the CIA had helped depose thedemocratically elected premier, Mohammad Mossadegh,and reinstalled the shah of Iran. The shah created asecret terrorist police force, SAVAK, that tortured itsown citizens and imprisoned political opponents. TheCIA helped train SAVAK. The shah also undertook ahighly inflationary monetary policy that caused thevalue of the Iranian currency to plummet. Inflation andtorture: funny how that upsets people.

No Laughing Matter

Interestingly, when James Woolsey, former director ofcentral intelligence in the Clinton

administration, spoke at the NavalPostgraduate School in August 2003,he addressed the 1953 uprising inresponse to my question. During hisspeech Woolsey had stated that thewar with militant Islam had begun inNovember 1979, when some Iranianstook over the U.S. embassy. I askedhim whether he didn’t think it mighthave begun in 1953, when the CIAhelped depose Mossadegh. Laughing,Woolsey quoted Winston Churchill’s claim that Ameri-cans, after doing many wrong things, would always endup doing the right thing. In other words, Woolseyseemed to admit CIA complicity, but dismissed the ideathat this mattered because the U.S. government, atsome point (he didn’t specify when), had gotten itright.

But Woolsey’s answer evaded the issue: The con-sequences of the U.S. government’s intervention in 1953 have been horrendous and cannot be laughinglydismissed.

Or take the unintended consequences of U.S. gov-ernment intervention in Afghanistan. Although the U.S. government now fiercely opposes the radical Mus-lims who until 2001 ran the Afghan government,

it helped put them in that position in the first place.Zbigniew Brzezinski, national security adviser to Presi-dent Jimmy Carter, bragged in an interview in Le Nou-vel Observateur that in 1979 he had persuaded Carter todestabilize Afghanistan’s pro-Soviet government so thatthe Soviets would invade. In December 1979 Brzezin-ski got his wish: The Soviets invaded Afghanistan. TheCIA proceeded to finance Afghan Muslim jihadisthrough Pakistan.

Just as the economy is a complex nexus of rights andexchanges with each participant having, as Adam Smithput it, his own “principle of motion,” so it is withwhole countries. U.S. government officials—and thereare many—who think they can plan another country tomake it better clearly don’t recognize these principlesof motion. They have what F. A. Hayek called, in his

criticism of government interventionin the economy, a “fatal conceit.”And, as we’ve seen with the above-mentioned wars, the conceit is liter-ally fatal.

There are two reasons to thinkthat the consequences of governmentintervention abroad will be worsethan the consequences of govern-ment intervention at home. First, themajor victims of this foreign inter-vention will typically be foreigners.

Foreigners don’t vote in U.S. elections.Therefore, U.S.politicians will never have to worry about the negativevotes of foreigners and will therefore be more destruc-tive than otherwise. Second, when people see the neg-ative consequences of intervention, they, all else equal,tend to turn against it. That’s why people tend tooppose taxes more than regulation:Virtually everyonecan observe the wealth lost to taxes. But because mostof the obvious consequences of foreign interventionoccur abroad, they are less visible to Americans. Howmany Americans are aware that the CIA helped over-throw a democratically elected prime minister?

War is a government program. Libertarians and con-servatives should bring the same skepticism to war thatthey bring to other government programs.


D a v i d R . H e n d e r s o n

U.S. governmentofficials who thinkthey can plan anothercountry to make itbetter have a literallyfatal conceit.

VOLUME 61, NO 3 APRIL 2011 - Foundation for Economic Education

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Transcript of VOLUME 61, NO 3 APRIL 2011 - Foundation for Economic Education