Was the American Civil War necessary?By all accounts yes.
How did it contribute to democracy as well as capitalism?Do you really need to ask how the Civil War contributed to
democracy? I would argue that slavery is a byproduct of unchecked capitalism. As an economic system capitalism is completely compatible with slavery, but capitalism doesn’t exist in a vacuum. It cannot double as a form of government or replace political philosophy. Capitalism is self-correcting as far as the markets go. I’ll even grant that it can put a spotlight on a very narrow list of basic rights, such as property rights, but that’s as far as it goes. By itself capitalism could no more inform slave owners the labor black slaves provided was not free than it could convince the nation that women had a right to vote and participate in elections.
What do you believe would have been the consequences of compromise with the South to avoid the war – or – a Southern victory in the war?Slave labor would continue in light industries such as textiles and food preparation. On the “bright side” the north would invest in these industries. Free labor would almost guarantee an ROI unless slave-owning industries are badly managed. Assuming after the South's victory we don't help reverse the global trend with respect to human rights progress, the flip side is we’d provide the
Group of 77 with another economic
casus belli. Young, struggling democracies would not only have to deal with the disadvantage we already place them in by subsidizing our agriculture, a protectionist policy poor democracies can’t afford, but now other economic sectors would be under attack by free labor exports from the U.S.
Finally, I may be going out on a limb here, but I think slavery could assist in supporting foreign direct investment, or at least slow the exodus from FDI to portfolio investments.
QUOTE(lederuvdapac @ Sep 14 2006, 12:19 PM)

Economically speaking, the cotton trade in the years following the Civil War period was nowhere near as profitable as it had been.
Do you think just maybe that’s because, having ended slavery and free labor, the cotton trade was no longer as profitable as it was before the Civil War?
QUOTE(lederuvdapac @ Sep 14 2006, 12:19 PM)

This would have put the South in economic disaster and forced them to industrialize whether they wanted to or not.
Left to its own devices the South would eventually industrialize some or most aspects of subsistence agriculture, but they would find a way to use that free labor to their advantage. Although India is fairly modern with heavy and technology industries, some areas refuse to part with child slave labor because of the economic advantage free labor gives them in the world market. You place a scary amount of faith in an economic system.