What a Real Civil War Would Do to the U.S. Economy

The No. 1 film in the United States for the past several weeks has been Civil War, which tells the story of a domestic conflict that breaks out in the contemporary United States. The film is focused on the fighting itself. But the war it depicts—which begins with the secession of several states—would have enormous economic implications for the states themselves and the country as a whole.

Would any U.S. states have the economic basis to survive as independent countries? How would they go about acquiring militaries? And could a fractured America eventually reestablish a single market?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.

Cameron Abadi: Are there any American states or sections of the country that have a sufficient economic basis to be stand-alone countries if they were to secede today?

Adam Tooze: California and Texas, New York as well, have economies that are the size of mid-sized European countries. California’s GDP is about the size of Italy, and Texas is about the size of Spain. Do those stand alone, European countries of that size? I mean, they’re certainly sophisticated and large economic entities, but they live, broadly speaking, by trading. That’s essential. I mean, no one in their right mind would choose to stand totally alone. It’s only the privilege of really large continental-sized economies like the U.S., like China, like India, to a degree even Japan, where their economic size is so large that they can afford to have a trade share of 10 percent or 15 percent or something like that. The United States’ trade share, combination of imports and exports as a share of GDP, I think is kind of at the same level as India’s. But when you break them up, you would imagine that they would all have to trade more.

If you took trade off the table in this nightmarish world of civil war, how would they do with self-sufficiency? I mean, you’d have to say that California- and Texas-sized chunks, or Spain- or Italy-sized chunks of the economy, or South Africa-sized chunks of the economy, for that matter, or Turkey, for instance, can do most of what it takes to sustain a modern economy, with a partial exception, I think, of ultra-high-end, super sophisticated microchip production, for instance. It’s not obvious that anyone could do that other than the Taiwanese in Taiwan. But most other things, motor car manufacturer, airplane manufacturer on a modest scale, nuclear reactor development probably would all be within reach.

And if you look at the fundamentals of Texas and California, you know, the fundamentals in the sense of your sort of bare-bones sense of what is necessary to survive, then they’re both major energy producers. They’re both fossil fuel producers and renewable energy producers. They rival each other now in solar and wind development. Neither of them has that much coal, but they could do without and they could just run on oil, gas, nuclear, wind, and sun and live happily ever after. And then the other thing is that they’re both substantial agricultural producers. California in particular would be living high on the hog. If they weren’t able to export, they would have a kind of crash in agricultural prices because they’d have such a huge surplus. And there is actually a study from 10 years ago about the agricultural self-sufficiency of Texas, and it does have some areas in which it is actually reasonably sufficient but has huge deficits in all of the basics. So corn, soybeans, wheat, sugar, pork.

America is as rich as it is because large parts of the country do have a really, genuinely, astonishingly favorable mix of resources. And even in other apocalyptic scenarios, like dramatic, very bad climate change scenarios, large parts of the U.S. do in the end have the resources to see their way through that. It partly accounts for America’s blasé attitude to that kind of scenario. The problem is the institutional stuff. California can’t insure fire risk and so on. But that’s not because it’s too poor. It’s simply because no one in their right mind would take the risk in the private market. So I think it’s a matter of institutional design. Hard to imagine them not being able to somehow cope.

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CA: So if these states secede and that leads to hostilities, how easily could they go about acquiring militaries? And in financial terms, when would international markets begin helping these new countries with financing? Whose recognition do you need to qualify for sovereign debt bonds, for example?

AT: So if you’re an American state, you don’t need to invent an army. You have one in the form of the National Guard. California’s, which is, I think, the strongest in the U.S., has 24,000 troops, many of whom have combat deployment experience. About 38,000 California National Guardsmen—“men,” they’re called, though I’m sure there were women as well—have been deployed since 2001. These are units with combat experience. They’ve taken casualties as well. There are Army, Navy, and Air national guards. It’s one of the ways in which people get military scholarships to go through college in the United States. The Army component of the California National Guard is an 18,000-strong combat brigade with four regiments and integrated combat aviation. It’s probably about as much capacity as the German Bundeswehr can field right now. California has huge tax and debt capacity, and the only reason it doesn’t deploy them even more is various types of domestic fiscal rules and fiscal restraint.

The way states bootstrap themselves into the financial system can be best studied by looking at periods where lots of new states were being formed, like in the 19th century. And if you look at nation-state formation in the 19th century in Europe, in the Balkans, say, with the emergence of Greece or Serbia, for instance, and then what becomes Yugoslavia or Bulgaria, Romania, these entities which emerge as nation-states over the course of the 19th century, breaking away from the Ottoman Empire and eventually from the Habsburg Empire. The way they establish their capacity to borrow is by various types of hypothecation. So you attach the revenues of a particular tax stream or business to a private entity, which then generates the income necessary to service the debt. So, generally speaking, sovereign debt is distinctive because we treat the sovereign essentially as the taxing power. And the reason why sovereign debt is generally high-grade is that states have the option to tax across the board and essentially tax GDP, which is the most diversified flow of income you can have in a society. And that seems like an advantage when you have a well-established, fiscally capable state.

When you don’t have that, creditors want something more tangible. And so what you would do is you would mortgage, for instance, streams of revenue from tobacco exports or streams of revenue from—there was a raisin monopoly established in Greece for a while, because dried fruit was one of the things they would export. And then you put representatives of the creditors on the board of the monopoly that buys raisins or tobacco. So that’s the second element. First, you hypothecate, you designate an income stream and you say, this is what’s going to service the debt, potential creditors. And then secondly, we’re going to give you some control over this. So we’re going to remove this from the discretion of our, as of yet, not creditworthy politicians. And we’re going to instead put this in the hands of you, the creditors. And that will give you greater confidence because you control the flow. We’ll, to an extent, subvert the sovereignty we’ve just gained by handing a slice of that sovereignty to you, foreign creditors.

CA: Under what conditions would it be conceivable that the U.S. single market could be recreated in a post-civil war America in which the seceding states were victorious?

AT: The crucial point to make would be that in the scenario you’re sketching, the U.S. would be reintegrating after having lost its unity in a cataclysmic civil war. So what would be the analogy to that? I mean, in Europe, the analogy might be to the fall of the Roman Empire, in which case you’d be talking a millennium or more before it’s recomposed. Or more modestly, perhaps you might be thinking about the disintegration of the Habsburg-dominated continental order, anchored in Habsburg dynastic power and the Catholic Church, the kind of universal monarchy of Charles V in the early 1500s, which then disintegrated with the Reformation and the wars of religion culminating in the Thirty Years’ War, the Treaty of Westphalia, and the emergence of something like the Westphalian system of sovereign states, just as a shorthand. If that’s the cataclysm that we’re talking about, then it’s several centuries before things grow back together again by way of the free-trade politics of the 18th and 19th centuries and then the horrific wars of the 20th and then reunification.