The post below is a copy of Chapter One of my book Lee’s Lost Dispatch and Other Civil War Controversies. The book contains an additional ten chapters including one that describes the biggest Union error. (Footnotes are available in the book but not the post below.)

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While imprisoned two years at Fort Monroe, Virginia, after the end of the Civil War, former Confederate President Jefferson Davis admitted that the Confederacy should have replaced King Cotton Diplomacy for a nearly opposite policy. Failure to do so was perhaps the Confederacy’s biggest error.

For months Davis was held in virtual isolation except for the occasional company of a US Army physician. Lieutenant Colonel John Craven, MD, kept a record of their conversations, summarizing many in various writings, including the 1866 book Prison Life of Jefferson Davis. Although King Cotton Diplomacy sought to restrict cotton exports as a means of motivating diplomatic recognition for the Confederacy from European nations, Craven reports that Davis realized it would have been better to export as much cotton as possible at the start of the war so that the staple could be safely warehoused overseas and sold as needed for foreign exchange. Historian Burton Hendrick states, “With the metal obtained from [cotton sales] deposited in London and Paris banks, the Confederacy would construct a stronger financial foundation than that of the Federal Government. Mr. Davis would quickly become a richer President than Mr. Lincoln.”

Hendrick summarizes Craven’s notes and recollections with Davis on the matter:

“South Carolina placed Mr. Memminger in the Treasury,” Craven quotes [Davis] as saying, “and while [I respect] the man, the utter failure of Confederate finance was the failure of the cause. Had Mr. Memminger acted favorably on the proposition of depositing . . . cotton in Europe and holding it there for two years as a basis for [our] currency, [it] might have maintained itself at par until the . . . [end]; and that in itself would have insured victory.”

More than three million bales of cotton rested unused in the South at the time of secession; if these had been rushed to Europe before the blockade . . . [was effective], said . . . [Davis,] they would have ultimately brought in a billion dollars in gold. “Such a sum,” Craven quotes Davis as saying, “would have more than sufficed for all the needs of the Confederacy during the war.”

Although ultimately flawed, King Cotton Diplomacy appeared to be logically sound at the start of the war. Great Britain was the world’s leading economy, and cotton textile manufacturing was the country’s largest industry. Over a fifth of her people were economically dependent upon the sector. In 1860, nearly 90 percent of Britain’s cotton imports came from the United States, all of which was grown in the South. According to historian Frank Owsley, “all [British leaders] believed alike . . . that the cutting-off of cotton supply in the South would destroy England’s chief industry . . . and bring ruin and revolution on the land.” Faced with revolution at home, it was logical to conclude that few British and French leaders could resist recognizing the Confederacy in an effort to obtain more cotton. French leaders were particularly sensitive to such concerns since the country counted among its citizens some who were old enough to remember the Reign of Terror following the French Revolution.

But, the strategy failed for two reasons.

First, the European economies were buoyed by demands in America for armaments to fight the Civil War. That the South was dependent upon overseas sources for most of its weapons is widely appreciated. However, even the North relied upon imports to a considerable extent. For example, until autumn 1862, over half of the shoulder arms used by Union soldiers were European imports. Consequently, the decline of the cotton textile sector in Europe that was induced by the shortage of raw materials was more than favorably offset by growing demand for arms exports.

Second, about a year after the war started, the Confederacy realized it was necessary to sell cotton in order to purchase the supplies required to continue fighting. Thus, the European cotton shortage peaked early in 1863, steadily improving thereafter.

On March 4, 1861, the same day President Abraham Lincoln made his first inaugural address, President Davis held his first cabinet meeting. During the session, Confederate Attorney General Judah Benjamin stated that if war came, he was convinced it was going to be a long and bloody one. Therefore, he recommended that large quantities of cotton immediately be shipped to Europe, where the government could sell it for specie. Any unsold bales could be inventoried and sold as needed in the future to raise hard currency. Secretary of State Robert Toombs and Vice President Alexander Stephens supported the suggestion. Although Davis agreed that any resultant war was likely to be long and bloody, Treasury Secretary Christopher Memminger ridiculed Benjamin’s idea. It was contrary to prevailing King Cotton dogma. He also did not believe the central government had the constitutional authority to become a cotton trader.

According to Owsley, about four million cotton bales were available in the South in 1861, and at least half could have been exported because the federal blockade was practically nonexistent during the first year of the war. By comparison, the European textile mills required about 3.8 million bales of cotton feedstock annually, with Great Britain alone needing about 2.6 million bales. Thus, if the Confederacy were able to ship two million bales to Europe and sell an average of five hundred thousand bales yearly, that would have supplied less than 15 percent of the normal annual (1860) demand.

It unlikely that such a meager increase in the actual wartime supply could have prevented a significant rise in cotton prices. Thus, the Confederates should have realized a disproportionately large amount of proceeds from limited tonnage sales. As historically recorded, cotton prices during the war averaged over seventy cents per pound in the commercial markets. If Benjamin’s proposal had caused them ton drops to an average sixty cents per pound, Owsley’s estimate of two million 500-pound bales would be valued at about $600 million in specie. Since US greenbacks traded as low as thirty-seven cents per dollar of specie, the $600 million specie value of Confederate cotton abroad would have been as much as $1.5 billion in US currency.

Moreover, it’s likely that the politically powerful large cotton growers would have welcomed Benjamin’s suggestion because Southern farmers needed credit as early as autumn 1861. Due to the King Cotton Diplomacy embargo, they had massive inventories that they could not convert to cash. Although officially voluntary, the embargo was airtight. For example, during the prewar five-month period from September 1, 1860, to January 31, 1861, the top five Southern ports received 1.5 million cotton bales from the hinterlands. In the corresponding period a year later, they received less than ten thousand bales, a decline of over 99 percent. Additionally, much 99 percent would be wastefully burned to keep it out of Union hands when the Yankee army increasingly occupied Confederate territory as the war progressed.

Instead of burning cotton, the growers would have gladly preferred to sell it to the Confederate government, thereby obtaining the financial resources to continue operating at more-nearly normal capacities. Such a scheme was considered in autumn 1861. The plan called on the government to purchase cotton with newly issued Confederate bonds or notes. Such action would relieve planters from the burdens of unsold inventory and provide the government with a fungible asset that could be shipped to Europe and sold for foreign exchange credits as needed.

The federal blockade was largely ineffective during this period. Contrary to popular belief, fast blockade runners of special designs, including low silhouettes, were unnecessary until the second year of the war. During fall and winter 1861–1862, ordinary deep-water vessels could easily enter most Southern ports without a significant risk of being stopped by blockading patrols. Author Hendrick explains:

The disappearance of English vessels from the South in the fall and winter of 1861–1862 is . . . easily explained. They were not scared away by the federal blockade. . . . Foreign carries abandoned southern ports for the best of commercial reasons—there were no cargoes to be obtained. Blockade running in 1862 and afterward became one of the most profitable industries. . . . It would have been similarly profitable in [1861], and vessels would have swarmed into southern ports, had not . . . [the embargo] been concentrated on preventing exports.

President Davis was not the only Confederate leader to eventually realize that cotton was a badly misused asset. Vice President Alexander Stephens realized it sooner. In a November 1862 speech in Crawfordville, Georgia, he summarized his earlier opposition to King Cotton Diplomacy in favor of his own Rube Goldberg variation of a plan to get cotton to Europe, where it could be sold for specie.

He proposed that the government issue cotton growers fifty dollars in new bonds paying interest at 8 percent annually for each five-hundred-pound cotton bale. He calculated that such a plan could have acquired four million bales at a cost of $200 million. The cotton was to be pledged to European shipbuilders who would agree to provide deep-water ironclad ships at a cost of $2 million each. He reasoned that perhaps five ships would have been delivered by January 1862 to convoy the cotton to Europe, with additional ironclads arriving regularly thereafter. Even if his plan was started belatedly in November 1862, he envisioned that the warships thus acquired could wreck the federal blockade.

While his dream seems unrealistic, in fairness to Stephens it should be noted that Great Britain and France built their first deep-water ironclads shortly before the American Civil War began. Furthermore, during an October 1862 audience with Napoleon III, the Confederate minister to Paris urged the Emperor to dispose of Lincoln’s blockading fleet with French deep-water ironclads, Gloire, Couronne, and Normandie. The emperor replied that he would rather see the Confederacy build its own navy and that the Rebels ought to have some ships like the three mentioned. He agreed that a few such ships could destroy Union commerce and open the Southern ports. Essentially, he was implying that the Confederacy should place orders for new deep-water ironclads with French shipbuilders. However, Napoleon also wanted to avoid war with the United States. Therefore, if such orders were placed, they should specify that the buyer was a neutral country like Italy. Eventually Napoleon declined to let the Confederacy act upon his own suggestion, but there was at least a straw of validity for Stephens to grasp at, at the time.

Less whimsically, Stephens told his Crawfordville audience that the South should continue growing cotton, although it was also important to plant crops that could yield provender for the army as well as civilians. He correctly perceived that certain British interests would benefit if the South stopped growing cotton. Specifically, cotton could be grown in some of the British possessions, such as India. Although the costs would initially be higher than in a peacetime Confederacy, Great Britain’s colonial possessions would be politically more secure sources. Thus, he argued, a Southern embargo could not force Britain into diplomatic recognition. Finally, after a time, sources such as India might learn how to produce cotton at costs comparable to those of the Southern states.

Similarly, in his 1874 Narrative of Military Operations, General Joseph E. Johnston asserts the Confederacy’s misuse of cotton was the chief cause of the Rebel defeat. Like Benjamin and Stephens, the former Confederate general concludes that cotton should not have been embargoed but instead sent to Europe, where it would have been a tradable asset. He attributes the failure to adopt such an initiative to “the government.” Like historian Hendrick, he concludes that such a plan was “practicable” if executed during the first year of the war. Cotton owners “were ready to accept any terms the government might fix. . . . The blockade . . . [was] . . . not at all effective until the end of” the winter of 1861–1862. Johnston claims that an army of half a million men could have been promptly armed and still leave the Confederate Treasury “much richer than that of the United States.”

Johnston’s assertion that a half-million-man army could have been promptly equipped is unrealistic. It was not possible that all of the European nations combined could have shipped five hundred thousand shoulder arms within a few months. Similarly, it would have been difficult to ship the 1861 cotton inventory across the Atlantic that quickly. However, Johnston’s conclusion that the Confederate Treasury would have been wealthier than that of the United States has merit. It depends on the number of cotton bales that could have been sold during the first year of the war. Federal spending in fiscal year 1861 totaled about $80 million, revenues were $50 million, and the gross public debt was about $90 million. On the eve of the Civil War, the nation’s total supply of specie in circulation, including the Southern states, was about $250 million. By comparison, if the South had sold four million bales at thirty cents per pound on the London market, it would have generated proceeds of $600 million in specie. Even if it were only half that amount, the total would still exceed the value of all specie in circulation prior to the war throughout the United States.

In his book, Johnston also argues that massive cotton exporting early in the war would have strengthened Confederate currency, thereby minimizing the desertion that plagued the army during the last year of the war. Since judicious cotton sales on the London market would have enabled the Treasury to accumulate specie reserves, the Confederate dollar could have held its value much better. Johnston explained that the typical solider sent most of his monthly pay home. So long as the buying power of Rebel currency enabled their families to avoid starvation, soldiers held fast to their military duty. However, during the last ten to twelve months of the war, Confederate currency was almost worthless. At that time a soldier’s monthly pay “would scarcely buy [a single] meal for his family.” Increasingly, the soldiers “were compelled to choose between their military service and the strongest obligation men know—their duties to their wives and children.”

At the start of 1862, the market rate for Confederate currency was $1.20 for each $1.00 of specie. A year later it was $3.25 in Rebel paper currency for each $1.00 of specie. By the start of 1864, one dollar of specie could buy $20 of Confederate currency, and by the beginning of 1865, the rate was $60 of Rebel money for each dollar of specie. A week before Appomattox, the rate was 70:1.

Although Craven explained that Jefferson Davis was not reproaching Memminger, the former Treasury secretary was deeply stung by the criticism of his dismissal of Benjamin’s suggestion. He felt compelled to defend himself, but did a poor job of it.

First, he asserted that the Confederacy could not have purchased the idle cotton lying about the Southern states early in the war because the South temporarily had no printing presses available to create such financial instruments. But certainly there must have been some way of temporarily meeting that difficulty.

Second, he argued that the 1860–1861 crop had already been gathered and shipped. This excuse may be valid as it applies to the crop warehoused and distributed by the end of January 1861, but it ignores the normal-sized crop that was harvested in fall 1861.

Third, he reasoned that shipping four million bales would require four thousand ships, which was more than were available. But if four million bales were shipped, it need not have been done in one massive operation. If each ship made ten voyages, it would have required only four hundred. Similarly, if only two million bales were shipped, then only two hundred vessels would be needed. But even if only half a million bales reached Europe, an average market value of sixty cents a pound could have provided the Confederacy $150 million. Finally, Memminger assumes that each ship could hold only a thousand bales, but some could carry more than twice that amount.

By fall 1862, the Confederacy’s conventional international credits were exhausted. Something had to be done immediately to enable the government to continue purchasing the necessities of war abroad because only limited supplies could be manufactured in the Rebel states. By spring 1862, the Confederate government owned over four hundred thousand cotton bales. They were withheld from export primarily by the voluntary embargo, because the federal blockade was still largely ineffective. Six months later, the government faced the problem of how to get the inventory to Europe or to trade it for international exchange credits while it was still physically located in the Confederacy because of growing effectiveness of the blockade.

Again, Judah Benjamin was the first to offer a solution. In January 1862, he wrote to the agent for a foreign bank who lived in New Orleans with a proposal. He asked if the bank would deposit $1 million specie value at its European branch into the account of the Confederate government, assuming a to-be-negotiated amount of cotton were deposited with the New Orleans branch conditioned upon the cotton remaining in the Confederacy until the blockade was lifted. Although, Union forces captured New Orleans before the proposal matured, Benjamin had planted a seed that would flower later.

Navy Secretary Stephen Mallory took the first successful steps toward creating additional foreign exchange credits in fall 1862. He was able to purchase ships and supplies by issuing “cotton bonds” that were convertible at the option of the holder into a specific number of bales at a below-market price. The catch, of course, was that the cotton was located inside the Confederacy. Mallory’s government was obligated to deliver the cotton to any port controlled by the Confederacy where it became the bondholder’s responsibility to get the cotton through the blockade. Since the bondholders were permitted to exchange their bonds for cotton at a price that was typically only one-fourth of the market price, the potential profit to such holders was more than large enough to offset the costs, and risks, of running the blockade.

Confederate cotton bonds soon proved to be a popular concept in Europe. The Confederacy’s British agent recommended that new issues be sold in a series of small offerings. He reasoned that the initial ones would be popular enough to drive them to a market price above par, thereby enabling each ensuing series to be sold at increasingly higher prices. It was sound advice but was discarded for a larger offering. With connections to European royalty that rivaled those of Rothschild, the Paris banking house of Erlanger et Compiegne perceived cotton bonds might provide big investment banking profits.

Erlanger proposed to underwrite $25 million of cotton bonds, denominated in British pounds or French francs. The bonds were to be convertible into cotton at a price of twelve cents per pound when the market price was about forty-eight cents. Thus, a buyer of a £1,000 bond could convert it into eighty 500-pound bales worth about £4,000 on the date the bonds were issued. If the price of cotton continued to rise, the underlying bond’s conversion value would climb in parallel, because the bondholder could still convert it into eighty 500-pound bales. In 1864, cotton reached a high price of almost $1.90 a pound, which implies that each £1,000 bond had a conversion value of nearly £16,000.

But Erlanger drove a hard bargain, which caused the Confederacy to reduce the size of the offering from $25 million to $15 million. Erlanger insisted on the right to purchase the bonds at a substantial discount requiring it to pay only 77 percent of face value. Additionally, the banking house was to be paid its customary fees and commissions. Owing to the discounted purchase price, Erlanger was able to offer the bonds to public subscribers at an appealing price of only 90 percent of the face value. That attracted such influential buyers as William Gladstone and Lord Robert Cecil, who both later became British prime ministers. Since the issue was attractively priced, the $15 million offering was initially oversubscribed with orders for $80 million.

Unfortunately, initial buyers were required to deposit only 15 percent of the purchase price, with the balance not due until the settlement date of April 24, 1863. Meanwhile, Union diplomats in Europe scrambled for ways to discredit the loan. About a week before the settlement date, stories appeared in London newspapers describing how years earlier, Jefferson Davis had publicly defended Mississippi’s default on a bond issue mostly held by Europeans when he was a US senator from that state.

Erlanger panicked and threatened to cancel the offering unless the Confederacy agreed to stabilize the price by using some of the deposited funds to buy bonds on the open market. Ultimately about $6 million of the $15 million issue was used in this manner.

Historian John Schwab concluded that a major portion of the bonds repurchased on the open market to support the price were actually bonds owned by Erlanger et Compiegne. Essentially, Erlanger was profiting from an arbitrage by purchasing the bonds from the Davis government at 77 percent of face value and then requiring the Confederacy to buy them back at market prices approximating 90 percent of face value.

Since the cotton was located in the Rebel states, Confederate authorities were only obligated to deliver the bales to a point within “ten miles of a navigable river or railhead” where the new owner—meaning the bondholder—had to arrange transport to the final destination. Consequently, Erlanger and its British investment banking partner organized a blockade running company innocuously named The European Trading Company. One of its ships made 73 round trips between Mobile, Alabama, and Havana, Cuba, before the end of the war.

The biggest use of proceeds the Confederacy received from the Erlanger bonds was to pay off a debt to the British purchasing agency of Isaac, Campbell & Company that bought war supplies for the Confederate government. The agency also took $2 million (at face value) of the bonds as partial settlement. However, when it was later learned that Isaac, Campbell had paid less than it had represented for all items it sold to the Confederacy, the commercial relationship soured. At the least, the action was a violation of trust. At worst, it was fraud. Agents are supposed to earn their fees from disclosed commissions, not hidden mark-ups from the prices paid for merchandise. When the market value of the bonds plummeted after the fall of Vicksburg and the Rebel defeat at Gettysburg, Isaac, Campbell asked that the Davis government redeem its bond holdings at face value. Richmond declined.

But the Erlanger experience had a good effect as well. It convinced the Davis government that cotton could be an even more valuable foreign exchange medium once transferred out of the Rebel states. Consequently, the Confederacy established blockade running regulations to get cotton out and war supplies in. In January 1863, it purchased four ships to operate as government owned blockade runners. By September the ships had run the blockade forty-four times without a single capture. Additionally, cotton-for-credit transactions in Europe were centralized under C. J. McRae in Britain. The Confederate government started aggressively acquiring cotton throughout the South via outright purchases and taxes-in-kind on cotton growers. The change worked wonders. In July 1864, McRae used some of the available financial credits to order fourteen more steamers for blockade running.

In truth, King Cotton was no puppet monarch. It was the most abundant medium of international exchange available in North America. It could have been a primary support for the Confederacy as the foundation of a sound financial system.

But the Rebels misplayed their hand. Instead of initially embargoing cotton, they should have shipped as much as possible to Europe, where it could have been warehoused and sold as required. If such a policy had been vigorously pursued from the start, Jefferson Davis’s government would likely have had more sound money (specie) than Abraham Lincoln’s. Confederate currency would have better held its value. A stronger Confederate dollar might have enabled the typical soldier’s monthly pay to adequately support his family at home, thereby sharply reducing the desertions that plagued the Rebel forces during the last year of the war. Given such benefits, the Confederacy may have been able to exhaust Yankee resolve to continue fighting.