How did slavery restrict economic diversification in the South?

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The South's economy before the Civil War was based almost entirely on slave-grown cash crops, namely cotton. Using slaves on the cotton plantations was very profitable for the plantation owners and investors. The Southern United Staes produced most of the world's cotton during the early nineteenth century. This would have been impossible without slaves to work the fields. It tied up much of the local resources, but because it made the local elite wealthy, they were usually unwilling to diversify the economy by building up industry. It was unthinkable to most slave owners to use slaves in modern factories. Slaves, they reasoned, were unsuited to factory work, as they were less educated and more likely to sabotage the equipment than regular factory workers. Cotton also diminishes the nutrients of the soil. As a result of so much cotton production, many farms in the South were unsuited to growing more nutritious crops.

Most markets and means of transportation were in the North. Northern industry was reliant on the raw materials grown by slaves in the South. Consequently, most slave-produced materials were sold to Northern middlemen. The trade imbalance created by this led to a Southern economy that was not able to market its own products to consumers.

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Slavery was a major hamper to the South's economy. The South was not able to take advantage of the influx of cheap labor from Europe before the Civil War, as these immigrants from Germany and Ireland did not want to come to a place where their labor would never be cheap enough and land would be too expensive to get a good start in life. The South also had trouble attracting major factories, as the region lacked major infrastructure such as canals and railroads. Also, many plantation owners thought that the slaves were too incompetent to be valuable industrial workers. Even if there were factory jobs to be had, the slaves were considered largely too unfit to hold them. Also, the period right before the war was a period of high cotton yields combined with high prices due to increased demand overseas. Many producers saw no reason to create factories when it appeared as though the cotton boom would go on forever.

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Slavery was essentially a system of feudalism in which one class (planters) relied on unfree labor. Without free labor, the South did not develop into an industrial or fully capitalist society. For example, there was very little industry in the South by the outbreak of the Civil War, and there was also very little railroad trackage in the South as compared to the North. In addition, the banking system in the South was very rudimentary, and much of the South's funding came from the North. The cotton harvested by slave labor in the South was turned into textiles in the North or in Europe, and there were few textile mills in the South.

The profitability of cotton, particularly after the cotton gin was invented by Eli Whitney in 1793, and the widespread use of slavery meant that the South was wedded to what it called "King Cotton." Some voices in the South, such as J.D.B. DeBow (the publisher of DeBow's Review) urged the South to move away from agrarianism and become more industrialized, but the South was still a cotton-based economy at the time of the Civil War. 

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Slavery is said to have restricted the South's ability to diversify for two reasons.

First, it is said that slaves would have made bad industrial workers.  Slaves on plantations worked slowly and broke their tools as often as they could as a way of pushing back against their owners.  Slaves in factories could have done the same, causing much more destruction as they broke costly machinery.

Second, slavery meant that the South's capital was tied up in human beings.  Slaves cost a lot of money.  This meant that Southerners had to sink most of their money into buying slaves and therefore lacked the resources to do things like investing in factories.

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