What was the main effect of the system of debt peonage that emerged in the South during the late 19th century?
Debt peonage often entailed servitude for both poorer whites and freed slaves alike. The main economic effect was that people remained poor; African Americans were "free," but they were sometimes worse off physically than when they lived on plantations where they were fed and given medical attention, and the lower-class whites were still virtually indentured servants.
The post–Civil War breaking of plantations into smaller farms and the resulting sharecropping was a form of exploitation, especially as the local merchant and the land owner (landlord) became the same person. With this total control, the merchant/landlord could demand that the farmer grow cotton almost exclusively, sacrificing food crops, for which he would not pay. And if the farmer were asked to grow x amount of acres of cotton and harvest it, he would have no time nor even the space for a food crop. In this way, the farmer was forced to purchase food from the merchant because he did not have the time or the cash to go elsewhere. Merchandise at the local store was usually overpriced, as well.
Since the farmer bought his food supplies, etc. on credit, he needed a bumper crop to pay off his debt at season's end in order to have anything left over. Lacking education and fundamental skills (90% of freed slaves were illiterate), the farmer usually could not challenge the bookkeeping that was often manipulated by the unconscionable merchant/landlord. Often, then, the sharecropper came out in debt at the end of the year. Even if a farmer were perceptive and skilled enough to detect the illegal accounting, he could be labeled as a troublemaker and sent out of the county by the local sheriff.
Additionally, sharecroppers had little choice but to borrow money from the landlord/merchant because the South was unable to re-establish an economically viable network of banks that could serve the agricultural economy. While there were always fewer banks in the South than in the North, the antebellum National Banks of the South had been very prosperous, having holdings that were nearly twice those of the North's banks. But after the Civil War, the fall of the Confederate government and collapse of its monetary system ruined the antebellum financial structure. When National Banks were constructed, there were such restrictions on agricultural loans that obtaining such loans was prohibitive. Furthermore, State chartered banks were kept from competing because Congress in 1865 passed a ten percent tax on notes issued from all non-National Banks. Added to all this, the sharecropper had almost no collateral to put up for a loan, so commercial banks were not inclined to loan him money.
African Americans labored in a system that was nearly the same as slavery. Debt peonage requires that a person’s debt be paid off through work. After the Civil War many newly freed African Americans accrued sharecropping debt that was then paid off through labor.