War embargoes create interesting spikes and pukes in different historical cases that we will unpack. There are eerie similarities between the embargo war spike-and-puke episode of cotton during the Civil War and other embargo spikes and pukes in the 1970s and today’s oil and gas spike (and later puke).

The similarities are in speculation, trade routes, floating capital conversion into fixed capital and liquidity traps, base curve blow-up due to embargo, demand destruction, speculation into new ventures, real income reduction for consumers (wages not following prices), cost-push inflation, and banks caught wrong-footed in the puke portion of the sequence (that we have not had yet). So without further ado, let’s review the sequence.

The historical sequence:

Secession declared by South Carolina, immediately Europe envisions problems for global trade payments for the U.S., as the imports from India and China of the U.S. via London would be impaired.

Perturbation in means of payment

Well, that happened with Russia and the Ukraine war. The war resulted in a problem of international ability to pay for foreign trade. RINSE / REPEAT

“As soon as it is realized that cotton will be in short supply, all commitments with the United States are quickly liquidated. Their enormous exports of cotton and wheat were nearly double the imports from England; they were therefore its creditors and charged it with paying their debts in China and India by means of drafts drawn on London; it is these drafts which, arriving all at once at the start of the war, upset the English market as can be seen on the Bank’s balance sheets.”

Demand Destruction

Demand destruction occurred naturally as the quantity of cotton imports went down from 11 million to 10 millions.

The level of imports from Europe to the South of the U.S. had declined a lot. And to that extent, we could say that the luxury market is probably badly impacted by the events in the GCC, similarly to the situation of the South of the U.S. with the Civil War.

“On December 17, 1860, South Carolina declared its break from the American Union. The news, which had already been anticipated, reached Europe at the end of December. The metallic reserve continued to fall; it was already reduced to 10 million pounds sterling when the discount rate was raised to 8 percent (February 14, 1861). The exchange rate with Paris, at 25 fr. 02, had risen to 25 fr. 50. Cotton imports, which were enormous in 1860, remained at almost the same level in 1861 (12 million and 11 million quintals), despite the blockade of the coasts of the Southern States. The declared war had brought the deepest disruption to the Union, and, while export sales of cotton to Europe still continued, purchases of European products had greatly decreased, with settlements having to be made primarily in metallic currency.”

From a base of 100 in 1847, the price of cotton reached a high of 464 in 1864.

“The year 1864 opened under these conditions: external and internal transactions were engaged on a scale unprecedented until now, prices were strained enough to make negotiations difficult, and the value of cotton imports rose to the enormous figure of 66,900,000 pounds, although the quantity did not exceed 7,600,000 quintals. By putting the four corners of the world and all markets under contribution, they had barely managed to return to the quantity imported in 1855, but the price had more than tripled. Fortunately, the cereal harvest was good and the value of cereal imports of 37 million pounds had fallen to 12,900,000 pounds: despite everything favorable on that side, the metallic reserve was still threatened, and if the discount rate had not been maintained at 7 percent, it would have been seen to disappear, so to speak, as in previous crises. Thanks to the vigor displayed in the face of unfavorable exchange rates, it was prevented from falling below 12 million pounds.”

But it crashed to 79 in 1868. We had the same with the Ukraine war in 2022, followed by a crash to a dangerously low level for the Permian around last summer at $53.

Solution for the Permian?

Start a new war!

Rising imported amounts of cotton but with lower volumes

Embargo spikes are just that: spikes that can crash a few years later, like the Ukraine war followed by the plunge in 2025, something similar to what happened to cotton between 1864 and 1868.

“From 1856 to 1860, the annual import of cotton into France (special trade, current value) varied from 146 to 153 million francs.

In 1860 and in 1861, at the start of the war, while an incomplete blockade allowed an enormous quantity of cotton to pass through, the figure for imports in metric quintals, which had never exceeded 84 million (1856), rose to 123 million metric quintals and, in value, to 202 and 270 million francs. In 1862, with the entire reserve of the Southern States being exhausted, imports fell to 38 million metric quintals and 126 million francs.

In 1863 and 1864, the figures rose again to 55 and 67 million metric quintals and, in value, to 261 and 315 million francs, exceeding the 1861 import figure by only 45 million francs, whereas the cotton import of 270 million francs coincided with another import of 390 million francs of cereals. The whole having passed unnoticed, so to speak, without causing any disruption in business, how, in 1864, with cereal imports being reduced to 29 million francs, could one want to attribute all the market’s troubles to a cotton import of 315 million?”

A short-term spike does not preclude a total disaster in the commodity later, which happened for cotton. It happened first in 1868 and continued with a total oblivion in the 1870s.

The Embargo spike creates an all-time high of the era

“RISE AND FALL OF PRICES.

In the comparison of high quoted prices, it must always be remembered that the crisis of 1864, which broke out at the most acute moment of the Civil War in the United States, gave for cotton, for fabrics, and for hemp, prices that had never been seen before and that we will not see again, we hope.”

Slowdown in manufacture due to Cotton Spike

Manufacturing input prices created problems for manufacturing products that are then re-exported to pay for soft commodities. You could say that a bit of the same is likely happening in China today at the margin.

“The crisis was aggravated by the lack of supply of raw materials, such as cotton and wool for the factories, which were supposed to provide the means to pay for cereal imports.”

Reduction of demand, but rise in price, but reduction of exports back to the U.S. As already discussed, the GCC will import less from the rest of the world. And they might need cash, and swaps would be preferable for the U.S.; otherwise, they are forced to sell UST, which would not be good for U.S. capital markets.

Continued bifurcation between value in currency and volumes in 1864

So at the peak of the crisis in 1864, the prices had risen enormously, so the imports in value increased and the world had to find imports from elsewhere, which is exactly what happened.

Rising speculation and new ventures during the inflationary period of the U.S. civil war

“In 1863, 263 newly formed companies had already requested 78 million to be constituted. In 1864, 282 new companies made a call for funds of 126 million; including the old companies, the public was invited to subscribe for 141 million. The recently created enterprises represented, in the two years 1863–1864, a sum equal to that paid for all the businesses launched from 1856 to 1862.

There was there an expansion of business which could not last; it recalled the period of railroad construction from 1846 to 1850. Issues [of stock] followed one another incessantly with a premium; it was hoped that this would last forever, and no thought was given to future payments which far exceeded available resources. Every day gave birth to a new railway project. Suspending their construction was impossible; only the banking, finance, commerce, and mining enterprises—in a word, all the speculations—could stop at the first signal and liquidate in the shortest possible time. The credulous shareholder was caught; all that remained for him was to swear that he would not be caught again.”

Market Operators on Margin

“As in the time of the railway mania, thousands of people, both in and out of business, had subscribed to securities well beyond their resources. Now, as soon as the transmission of securities with a premium is no longer done so easily, everything stops; not only is nothing more subscribed to, but one cannot even make the payments. The last securities issued became unsellable; credit failing, recourse was had to finance bills; here is what is meant by these words.”

Difference between now and then

Cotton had to be sourced from elsewhere post Civil War. The embargo spike was followed by a massive puke; this would probably be a much bigger puke because the factor at the margin is that ground transportation is getting massive competition while a new polymer-based, true solid-state solution is coming into production right now. It is inherently cheap and has few manufacturability issues while providing 450 Wh/kg.

In other words, what’s coming is not an imperfect substitution followed by restoration of demand post-spike. What we will see is a permanent hysteresis in demand (demand that does not come back post-spike).

This to some extent dampens oil price speculation. The introduction of a substitute typically results in a cartel break-up. In that context, the UAE, seeing what’s coming, is leaving the cartel for all the right reasons

Diverting imports to India and to Egypt

Paying a lot with your own products. Guyana and Brazil are net exporters. EU opening free trade with those regions.

“In any case, to meet the immense imports of cotton from Egypt and India, the export of precious metals to the Levant [the Middle East] took on great developments: from 13 million pounds sterling from 1857 to 1861, it rose to 23 million. This small sum, in the presence of the quantities of cotton imported, proves well that even in the most primitive civilizations, needs are soon satisfied when one has the means to pay for products; one thus returns to the general conditions of exchange, and relations once established will not cease, even with the disappearance of the cause that originated them.”

Table Translation: Production of Precious Metals from 1849 to 1863

The table tracks the production of Gold (Or) from “Old Sources” (Anciennes) and “New Sources” (Nouvelles), and Silver (Argent) from all origins. Figures are in millions of pounds sterling (l. st.).

The UK develops trade with India as a result of the war in the US.

“The development of trade with British India manifested itself following the American war, as it supplied the largest part of the cotton demanded by European factories. The immense metallic stock poured into its markets immediately gave trade a speed and extension previously unknown; moreover, it created new [trades] which were impossible in kind and which, with metal, were immediately settled.”

Imperfect substitution versus superior substitution

The other commodities rise in sync, but why?

“The observation of what happened during the crisis of 1864 already pointed to this. Although the price variations at that time mainly affected cotton, nevertheless other products—even besides wool, silk, and hemp—reached their highest prices at the same moment, which clearly proves that we were then in an upward trend [inflationary current]. If the Civil War in the United States hastened the explosion of the crisis, we were already marching toward it with great strides.”

Imperfect substitution effects, with smaller variations.

“The price variations for wool were less significant.

From 100 in 1845–1850, the price rose to 146 in 1857, then fell back to 105 in 1858–1859 during the liquidation of the crisis. The high cost of cotton pushed it back up to 159 in 1865, then it lowered to 88 in 1870–1871, and finally, after having reached a price of 157 again during the crisis of 1873, it descended to 106 in 1879. The gaps were less wide than for cotton, although the oscillations moved in the same direction.”

Silk, being a poorer substitute than wool, resulted in a smaller increase in price.

“Silk, during the same period, doubled in price, from 100 to 204 (1845–50–1857), but at the height of the cotton crisis it had already fallen back to 139, which indicates clearly enough that it could not satisfy the needs of consumers. Once the Civil War was over, it rose again to 200, then, except for a slight price recovery in 1870–1871, it declined steadily until reaching 87 in 1876.

In summary, of the three main textiles, only two, wool and silk, despite a large drop in price, are above the prices of 1845–1850.”

Push-cost inflation in manufactured products using Cotton

With the raw material spike, the manufactured products using cotton as input rise but to a lower extent, and Juglar explains that labor had to absorb a lower increase in wages. Post-war embargo spike and during the puke, the fall in manufactured products using cotton as an input was lower too. Once again, we see the same situation today with consumer sentiment very low for the same reason: they are the ones paying for those war-induced price spikes.

“In summary, of the three main textiles, only two, wool and silk, despite a large drop in price, are above the prices of 1845–1850.

If we examine what the influence of these variations was on manufactured objects and if we take, for example, cotton yarns and fabrics, here is what we observe:

While from 1845–1850 to 1864 the price of cotton rose from 100 to 460, the price of yarns rose from 100 to 349 and that of fabrics from 100 to 275.

Thus, the rise of the manufactured product did not follow the rise of the raw material. Furthermore, the difference is more pronounced in inverse proportion to the amount of labor that goes into the manufactured product. Nothing indicates better the normal, always considerable gap that must exist between the raw material and the manufactured product; also, when cotton rises from 100 to 460, the price of the fabric increases only from 100 to 275.

A contrary effect occurs in a decline:

When cotton drops from......... 460 to 73

Yarns drop from...................... 349 to 88

Fabrics drop from.................... 275 to 81

The gaps are again here in the opposite direction, and it is the fabrics that present the most stability.”

Characterization of the Cotton Spike: Speculation

War embargo spikes are characterized by a large amount of speculation. In other words, the price is not simply reflecting a shortage of supply; it is reflecting a large amount of speculation on top of it, which leads to a puke post-war embargo, evidently.

“Variations in the discount rate are not observed only at the time of crises; there are particular incidents where it is advantageous to rectify or at least to avoid too great gaps in the exchange rates; let us cite: the loss of a harvest, a forced liquidation following a declaration of war, a great speculation on cotton, coal, or metals, which gives rise to a mad exaggeration of prices, large foreign loans to drain the cash [specie]; in these cases, these variations indicate the state of the market.”

Draining of resources by abnormal pricing.

“...different conditions. The war in the United States suspended trade with Europe; it was suddenly necessary, first, to liquidate all ongoing operations, then to enter into relations with other countries for the production of products that were lacking, and especially cotton. We were thus able to survive during the struggle. This struggle having ended, without abandoning the new cotton-producing countries, we turned back to the old ones—that is to say, to the United States. From this came terrible shocks, as evidenced by the price variations. All these movements are reflected with great clarity by the balance sheets of the Bank of England.”

Rising rates at the end of the Speculation phase

The embargo blows up the rate curve. Note that rates are positively correlated with rates as famously explained by Thomas Tooke, contrary to what many believe, and this relationship was rediscovered by Gibson and cited by Keynes as the “Gibson paradox”. There is no paradox: Thomas Tooke explained it perfectly by a situation of more means of circulation needed for the same volume of commodity, also the relationship between return in kind and return in money in a situation where money is falling in value during wars against commodities broadly (not only the embargoed commodity) and market participants ask for more rates to compensate for the fall in value of money.

“The great difficulty of the moment was the purchase of cotton in countries where relations were not established and where one could not pay with English products. A large number of new companies were constantly making new calls for funds, and commerce, as a result of all these transactions, took on vaster proportions every day. The most pressing engagements had been liquidated and a little calm allowed for the discount rate to be lowered to 6 percent on February 25, 1864; as early as the month of April it had to be raised to 7, 8 and 9 percent, and despite some intermissions and a lowering to 6 percent in July, at the moment when the maximum of the portfolio was reached, it had to be raised to 9 percent in September. The two most critical moments occurred in April and May, then in August, September, and October, with the discount at 9 percent. The minimum of the cash reserve observed on May 4 does not coincide, which is not rare, with the maximum of the portfolio, but if we seek what the share of discounted bills [commercial paper] and temporary advances was, we find that at this moment, while discounted bills fell by 1,500,000 pounds, temporary advances rose by 4 million pounds.”

Difficulty in Small and Medium Commerce Already Liquidated

(We have a bit of that between the large tech firms and the other businesses), reflected by a bifurcation of new all-time highs.

“In August, September and October on the contrary, while the discounted bills rose by 2,500,000 pounds, the temporary advances fell by 3,800,000. The nature of the credit granted by the Bank indicates those who claim it. Small and medium-sized businesses were already liquidated; only the large positions remained, as clearly shown by the bankers’ current accounts which, having increased by only 500,000 pounds in April, increased by 1,900,000 pounds in August when the total of current accounts increased by only 2,200,000 pounds. The exchange rates indicate the...”

Overheating in 1864

“Until then, they had struggled without deciding to liquidate; it was finally necessary to yield and there was, if not a complete liquidation, at least a beginning of liquidation. All the financial centers [places] of Europe were affected and the shock spread to Frankfurt, Turin, Lisbon, Madrid, Berlin, Amsterdam, Hamburg, Vienna; in a word, as in all crises, which is their specific character, the shock propagated like a trail of gunpowder to all centers of commerce.

This crisis, like the previous ones, was not only limited to Europe; it crossed the Atlantic and we see it raging in America, in Brazil; if the United States did not take part, it is because there the Civil War suppressed all business; India and Australia felt the aftershock.

The solidarity of the markets and the simultaneity of crises thus bursts forth before everyone’s eyes.”

Using the the (Proto) Central Bank

We had that in the middle of last year on the REPO spikes.

“...one had recourse. If each of these appeals to the Bank were named a crisis, one would have to say that there were two crises in 1864: the first in May and the second in September; it was only the latter shock that was felt across the main centers of commerce.”

Banking Problems leading to the Fall of the Banks involved in Cotton Speculation

At the news of the suspension of payments by the Leeds Banking Company (September 17, 1864), the excitement was great. Senseless speculations, undertaken under the same conditions as those of the Western Bank of Scotland in 1857, made it inevitable, though the surprise was still the same.

The cotton districts were especially hit in September, October, and November; everywhere prices had to drop: among the main products affected, we will mention cotton, sugar, jute, rice, and fruits.

Cotton Prices from 1859 to 1864

(Price per pound)

1859: 6 1/2 d.

1860: 5 3/4 d.

1861: 7 5/8 d.

1862: 14 1/4 d.

1863: 20 1/2 d.

1864: 22 1/2 d.

Such a rise could not be maintained, and it was difficult to account for the means employed to pay for such a costly import; what we must note is that to compensate for an import of 86 million pounds sterling in 1864, only a value of 59 million pounds sterling was exported.

In this part above, Juglar explains that the excess of demand destruction led to a reversal and bank troubles.

Post-Embargo Liquidation Crisis

“In 1861, at the start of hostilities, there had been an early liquidation in anticipation of events, then, despite the troubles they brought to business, the period of transactional development had followed its course until 1864, when the end of hostilities came to overturn the equilibrium—maintained with such difficulty—by stopping the rise in prices and causing a decline, not only in cotton, but in many other products. This was the true crisis, characterized like all crises by the modifications noted in bank balance sheets at the end of the price rise, at the beginning of the decline, and without which there is no serious liquidation.

The end of the prosperous period was well-marked in all the major centers of commerce and business; liquidation alone did not proceed everywhere with the same speed. The maximum of the portfolio had been reached at the Bank of England in 1863, 25,300,000 pounds; in 1864, in the month of May, when the metallic reserve had fallen to its lowest, at 12,400,000 pounds, it did not exceed 20,900,000 pounds; at the end of the year, it was reduced to 17,700,000 pounds with a cash reserve of 14,300,000 pounds. The most pressing needs had been satisfied and already people wanted to start again; indeed, in 1865, the portfolio rose again to 24,100,000 pounds and the cash reserve to 16,400,000 pounds.”

Post-war liquidation Crash

“The end of the prosperous period was well-marked in all the major centers of commerce and business; liquidation alone did not proceed everywhere with the same speed. The maximum of the portfolio had been reached at the Bank of England in 1863, 25,300,000 pounds; in 1864, in the month of May, when the metallic reserve had fallen to its lowest, at 12,400,000 pounds, it did not exceed 20,900,000 pounds; at the end of the year, it was reduced to 17,700,000 pounds with a cash reserve of 14,300,000 pounds. The most pressing needs had been satisfied and already people wanted to start again; indeed, in 1865, the portfolio rose again to 24,100,000 pounds and the cash reserve to 16,400,000 pounds.

Crash of 1866 in England. — Speculation was so heavily committed in England that the crisis of 1864 could not force it to liquidate; it tried once more to continue its course, but despite its efforts, it could not go far, and a year had not passed before it succumbed. For the observer of balance sheets, the maximums of the two portfolios were not noted at the same moment; thus, while liquidation was beginning immediately in France, in England the situation was simply masked—they did not liquidate. The decline of the portfolio, which had already begun and which, from August 10 to December 14, 1864, amounted to 6,700,000 pounds, stopped and the progression continued.”

Crash in 1866

“Crash of 1866 in England.

The year 1866 is considered in England to be a disastrous year. Epidemics hit both humans and animals, the war in Europe, the return of peace to the United States—bringing about great changes—overturned all situations and all commercial combinations. As early as February, a joint-stock discount company set off a series of suspensions of payments that continued until May 10, when the bankruptcy of Overend Gurney broke out, leading to the suspension of the Bank Act of 1844 and the maintenance of the discount rate at 10 percent for fourteen weeks.

This was the most serious commercial shock of modern times. The end of the Civil War in the United States, by causing low prices to follow high prices for cotton, came to overturn all positions taken; all forecasts were thwarted. Price variations, insufficient harvests of cotton in the United States and India, of wheat in Europe, increased taxes in the United States to pay for war costs—everything diminished consumers’ resources. The rise in prices, which had suffered only a short and slight interruption after the crises of 1857 and 1864, was finally stopped. This rise was so general and continuous that one did not want to believe in a reaction. It was already at its apogee in 1864, but it only ended in the final months of 1866, when the true liquidation began.”

First part of the Liquidation in 1864, Crash 2 years later.

In a sense we might be in 1864 since we are seeing liquidations already in the smaller firms owned by some Private Equity firms.

"The crisis of 1864 had caused many poorly committed houses to disappear, but had left banks and finance companies standing. The Crash swept everything away. Extravagant speculations in railways were one of the causes of this crisis. Entrepreneurs accepted bonds, shares, and other securities in payment; they borrowed against them on the market and thus transformed floating capital into fixed capital. The capital that was immobilized was taken from the country's working capital, then buyers were sought for the committed securities, bonds, shares, etc. The operation succeeded at first and yielded large profits; immediately there was a crowd of imitators who, from 1863 to 1866, requested concessions from parliament. Let us add to these mad operations the speculations on cotton, the new commercial relations with India, and, far from being surprised by the panic of May 1866, one will be astonished that it delayed for so long. The house of Overend played only a secondary role like many others; if it succumbed with more brilliance, it is because its commitments were more imprudent and heavier than those of its competitors."

Banking Collapse due to Cotton Speculation in India

Here is an extract that explains what happened to India in relation to the cotton speculation.

“The crisis of 1864 had caused many poorly committed houses to disappear, but had left banks and finance companies standing. The crash swept everything away. Extravagant speculations in railways were one of the causes of this crisis. Entrepreneurs accepted bonds, shares, and other securities in payment; they borrowed against them on the market and thus transformed floating capital into fixed capital. The capital that was immobilized was taken from the country’s working capital, then buyers were sought for the committed securities, bonds, shares, etc. The operation succeeded at first and yielded large profits; immediately there was a crowd of imitators who, from 1863 to 1866, requested concessions from parliament. Let us add to these mad operations the speculations on cotton, the new commercial relations with India, and, far from being surprised by the panic of May 1866, one will be astonished that it delayed for so long. The house of Overend played only a secondary role like many others; if it succumbed with more brilliance, it is because its commitments were more imprudent and heavier than those of its competitors.”

Maximum (followed by banking crises) and Minimum of Cotton Prices

“Cotton. — Since 1837, the maximum figures are found in 1846, 1856, 1866, 1869, and 1881, that is to say, the year preceding the crisis. The two maxima of 1866 and 1869 are due to specific causes: 1866 to the end of the Civil War, 1869 to the recovery of business, which was soon halted by the war of 1870.

The minimum figures are observed during the liquidations in 1848, 1884, and the very year of the crisis in 1837 and 1873.”

Cotton Similarities with Oil Today

Cotton was the foundational commodity for the United Kingdom, the dominant manufacturing power of the 19th century. Striking similarities can be found in the pattern of market overheating and the subsequent commodity crash of 2007—though the latter occurred without the catalyst of a wartime embargo.

While the two oil shocks of the 1970s were followed by periods of stagflation and recession, a critical difference exists today: unlike the 1970s, when the world was forced to endure supply shocks, modern advancements in electric vehicles (EVs) and renewables act as massive deflationary forces on energy costs.

Conclusion:

The historical events described in this report are entirely factual; any resemblance to our current economic situation is far from coincidental.

The Search for Yield: Just as 19th-century investors poured money into any “new railway project” or “finance bill” they could find, we see the same behavior in modern tech bubbles or the subprime mortgage lead-up to 2008.
The Liquidity Trap: The author’s point about transforming “floating capital” into “fixed capital” is the 1860s version of a “liquidity crunch.” People think they are wealthy because their assets (like houses or long-term infrastructure) have high values, but they go bankrupt because they don’t have the actual cash to pay their immediate bills.
The “Masking” Phase: The description of England trying to hide the 1864 trouble rather than liquidating it is exactly what we call “kicking the can down the road” today. It almost always results in a much more violent crash later on (like 1866).

The comparison to oil is particularly interesting. Both cotton and oil are “master commodities”—when their price triples, every single part of the economy feels the heat, from the cost of a shirt (or a gallon of gas) to the stability of the world’s largest banks.

The most “troubling” part is usually the human psychology mentioned in the text: the “credulous shareholder” who swears they won’t be caught again, only to jump into the next “upward trend” a year later.

Civil War Cotton Embargo Price Spike: How it applies to today's Oil embargo price spike.