Weidenmier on Sexton, _Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837-1873_

[eh.net-review at eh.net]

Published by EH.NET (March 2007)

Jay Sexton, _Debtor Diplomacy: Finance and American Foreign Relations 
in the Civil War Era, 1837-1873_. Oxford: Oxford University Press, 
2005. ix +287 pp. $74 (hardcover), ISBN: 0-19-928103-3.

Reviewed for EH.NET by Marc D. Weidenmier, Department of Economics, 
Claremont McKenna College.


In _Debtor Diplomacy_, Jay Sexton of Oxford University examines the 
role of financiers in American international relations in the 
mid-nineteenth century. The author's main thesis is that American 
international relations were inextricably tied to American and 
European financiers during the mid-nineteenth century and Civil War 
period. As a result, American foreign relations during this period 
cannot be understood without a deep understanding of the actions and 
motivations of the trans-Atlantic financiers.

The monograph is divided into six chapters. Sexton introduces his 
basic argument in Chapter 1. This is followed by a discussion of the 
House of Baring and their important role in American politics and 
finance in the years leading up to outbreak of the American Civil 
War. Sexton documents the dramatic rise in American foreign 
indebtedness to Europe during the antebellum period.  He argues that 
the United States depended on foreign capital to such an extent that 
it often influenced American political decisions.

Chapters 3 and 4 form the meat and potatoes portion of the monograph. 
In Chapter 3, Sexton examines Union financial polices and 
international relations with Europe during the Civil War. The author 
discusses in great detail how American diplomats worked to achieve 
two goals during the Civil War: (1) float a large U.S. bond issue on 
the London market, and (2) block efforts by the Southern Confederacy 
to achieve recognition from European powers and prevent the South 
from borrowing funds in Europe to buys guns and military supplies. 
Although the United States failed to float a loan on the London 
exchange, the Union sold millions of bonds on the Dutch and German 
exchanges. In addition, Robert Walker and other American officials in 
London were quite successful in thwarting Confederate political and 
financial efforts to achieve recognition from European powers and 
preventing the South from floating a large loan in international 
capital markets.

Chapter 4 focuses on Confederate international relations and 
financial policies in Europe. The author details the difficulties the 
Confederacy had in selling bonds in Europe and securing recognition 
from foreign powers. Sexton's analysis demonstrates that he spent a 
great deal of time reading and analyzing primary source documents 
from the period. For example, he provides a detailed discussion and 
analysis of the British government's decision to remain neutral 
during the American Civil War based on a number of letters and 
documents written at the time. Sexton also argues that the 
Confederacy would have been much better off during the war if the 
rebel nation has shipped cotton to Europe in the first two years of 
the war in exchange for military goods rather than rely on a 
self-imposed cotton embargo ("King Cotton") as a carrot to bring 
European powers into the conflict. Sexton concludes the discussion of 
Confederate policy by arguing that the South should have centralized 
its overseas operations and given the central government greater 
control in buying and shipping supplies from England (as opposed to 
letting the private sector handle blockade running).

Chapter 5 discusses America's post-Civil War relations with England. 
Sexton focuses on the U.S. government's dispute with England for 
allowing the Confederacy to build the commerce raider _Alabama_ on 
British soil. The _Alabama_ wreaked havoc on the U.S. merchant marine 
fleet and sank nearly seventy Union vessels during the Civil War. 
England and the United States settled the dispute in 1871 and a court 
awarded America $15.5 million. Sexton convincingly argues that the 
_Alabama_ dispute was intimately tied to the United States' ability 
to borrow from Europe and refinance its existing debts in the 
post-bellum period. The author's well-supported argument shows how 
politics and economics can reinforce one another in international 
capital markets. Chapter 6 concludes the monograph with a discussion 
of the importance of financiers in American international relations 
during the mid-nineteenth century.

Although the monograph is interesting and well researched, the book 
has a couple of shortcomings. In several places, Sexton makes the 
argument that the Union blockade was very important in preventing the 
Confederacy from obtaining vital military supplies from England. The 
author overstates the importance of the Union blockade. As shown by 
Lebergott (1981), Confederate ships were generally successful in 
running the Union blockade until late 1864 and early 1865 given that 
steam powered blockade runners generally faced Union clipper ships 
powered by the wind. The small supply of Confederate merchant vessels 
(as noted by the author) and the poor financial standing of the 
Southern government was by far the most important reason for the 
small number of military supplies -- relative to what the Confederate 
government desired -- that crossed the Atlantic during the war.

Sexton also argues that the cotton bonds issued by the Southern 
Confederacy in London to raise funds to fight the war were not an 
economic success. Instead, the author argues that the South should 
have issued cotton certificates in Europe with the assistance of 
William Lindsay, a prominent Englishmen who was also a member of 
Parliament. While we will never know the outcome of this alternative 
financing strategy, the argument that the Erlanger Loan was not a 
success is simply inconsistent with the historical record. Given the 
Southern Confederacy's unwillingness to levy and collect taxes, it is 
simply amazing that the Confederate government was able to issue any 
bonds in Europe (Lebergott, 1983).

As pointed out by Weidenmier (2005), the cotton bonds were largely 
issued to settle overdue debts with British gun contractors who had 
cut off trade credit to the rebel nation. British manufacturers 
supplied nearly two-thirds of Confederate guns during the war 
including the standard battle arm of Johnny Reb, the Enfield Rifle. 
The importance of British guns to the Confederate cause explains why 
the South continued to make interest payments on the cotton bonds _in 
gold_ as late as March 1865, despite the onset of domestic 
hyperinflation and weeks before the surrender of the Confederate 
capital to Grant's army. To service the cotton bonds in March 1865, 
the Confederate government dispatched a ship carrying gold coin to 
run the Union blockade to England at a time when the probability of 
running the blockade was less than 20 percent (Lebergott, 1983). 
Indeed, it seems very unlikely that a government would go to such 
lengths to service a debt obligation (while defaulting on every other 
debt obligation) unless it had substantial economic value to the war 
effort (no guns equals no war). Financial markets understood the 
importance of the cotton bonds to the rebel cause given that the debt 
issue traded for 50 pounds sterling (50 percent of par value) in 
January 1865 -- three months before the fall of Richmond -- while all 
other Confederate assets were trading for about five percent of their 
par value at this stage of the war.

Notwithstanding these shortcomings, Sexton has written an interesting 
historical account of U.S. foreign relations with Europe in the 
mid-nineteenth century with a focus on the American Civil War. The 
author has successfully demonstrated the importance of financiers in 
American international relations with Europe in the Civil War period. 
This book is likely to be of interest to diplomatic historians and 
economic historians with an interest in the interplay between 
politics, economics, and financiers during the American Civil War.

References:

Lebergott, Stanley (1983). "Why the South Lost: Commercial Purpose in 
the Confederacy, 1861-1865." _Journal of American History_, 70:58-74.

Lebergott, Stanley (1981). "Through the Blockade: The Profitability 
and Extent of Cotton Smuggling, 1861-1865." _Journal of Economic 
History_, 41: 867-88.

Weidenmier, Marc D. (2005).  "Gunboats, Reputation, and Sovereign 
Repayment:  Lessons from the Southern Confederacy."  _Journal of 
International Economics_, 66: 407-422 (also published as NBER Working 
Paper #10960).


Marc D. Weidenmier is an Associate Professor of Economics at 
Claremont McKenna College and the NBER. His recent publications 
include, "Can Interest-Bearing Money Circulate? A Small Denomination 
Arkansas Experiment, 1861-1863," _Journal of Money, Credit, and 
Banking_, (co-authored with Richard Burdekin, forthcoming), and 
"Volatility in an Era of Reduced Uncertainty: Lessons from Pax 
Britannica." _Journal of Financial Economics_, 79: 693-707 
(co-authored with William Brown and Richard Burdekin, also published 
as NBER Working Paper #11319).

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