Two Paths to the New South: Funders, Readjusters, and the Virginia Debt Controversy, 1870-1883

In the grim. decades after the Civil War Southerners dreamed of industrial growth and agricultural diversification. This "New South" vision proved elusive, of course, fading gradually into the limbo of sloganeering and myth. In the Virginia of the 1870's and 1880's, however, politicians struggled to make this dream a reality. The state's massive debt burden touched off this upheaval, splintering the electorate into competing "Funder" and "Readjuster" factions. The Funders insisted on repaying the bondholders-even if it meant higher taxes and reduced expenditures for schools and asylums. The Readjusters, on the other hand, called for a downward "adjustment" of the debt. More than a prosaic squabble over interest rates, this split reflected markedly different prescriptions for economic growth.

The Funders drew their strength from two major sources-the conservative farmers of eastern Virginia and the commercial classes of the towns. These groups had dominated the state for generations, perpetuating elitist government, white supremacy, and economic orthodoxy. They approached the " New South" dream, therefore, with caution. They desired economic growth, but only so long as it strengthened their traditionalist regime. Committed to laissez-faire, the Funders, argued that the state should confine its actions to preserving social and economic stability. Hence their fear of debt repudiation.

The Readjusters, by contrast, won support from the fringe elements of Virginia society--from mountaineers and poor whites, carpetbaggers and Negroes, Grangers and Greenbackers. These rebels despised the Funder elite's conservatism. Instead they called for wide-ranging reforms to pave the way for economic recovery. Capturing the statehouse, moreover, they put their theories to work from 1879 to 1883. Readjuster lawmakers slashed the debt burden, renovated the tax structure, expanded educational opportunities, and liberalized voting requirements. The party's Congressmen also carried their crusade to Washington, championing protective tariffs for Virginia's industries and Federal aid for her schools. The state became a testing ground for reform.

Even as this agitation crested, however, the movement began to disintegrate. Personal rivalries rocked the Readjuster leadership. Dissidents denounced General William Mahone, the party's most constructive spokesman, as an arbitrary, dictatorial "boss." Racial animosities also erupted. Militant Negroes demanded greater influence, alienating thousands of whites. Mahone attempted to hold the party together with patronage concessions, but the white exodus continued. Recognizing political realities, therefore, the General moved to placate the blacks. The Readjusters established a Negro state college and appointed blacks to urban school boards. Party officials also moved to integrate their local political clubs. Dramatizing this trend, Mahone formed a close alliance with the national Republicans. White resentment flamed, exploited by Funder propagandists, and the readjusters fell from power in 1883.

Returning to the question of economic growth, which of the factions offered the best blueprint for prosperity-the conservative Funders or the reformist Readjusters? The actual performance of Virginia's economy tended to vindicate the Readjusters' stand. Stagnant throughout the Funder 1870’s, state commerce expanded rapidly during the brief Readjuster regime. In part this upsurge merely reflected national economic trends, but Virginia's boom was undoubtedly spurred by Readjuster fiscal policy-a proto-Keynesian amalgam of social service spending and tax cuts. The arguments of twentieth century economists support the insurgents in another major respect. Such experts as Robert Heilbroner and John Kenneth Galbraith stress the importance of social reforms-especially racial justice and mass education as prerequisites for sustained growth. Judged by these standards, the Readjusters' program was clearly superior. Their policies, however, proved too radical for Virginia's political climate. The state soon reverted to its normal conservatism, blocking a promising pathway to the "New South."

Digitization of this thesis was made possible by a generous grant from the Jefferson Trust, 2015.