Business and Finance
BUSINESS AND FINANCE
By the end of the nineteenth century, when it had become the world's leading industrial nation, the United States was home to many of the biggest and most successful business enterprises in the world. Although the Civil War did not directly cause the rise of big business in America, it did change the fortunes of many firms and industries, including some of those that became especially important during the late nineteenth century. The Civil War had a more direct impact on American banking and finance and transformed the ways in which Americans debated the politics of money.
american business before and during the civil war
Before and during the Civil War, there were few industrial corporations in America. Although the nation was home to hundreds of mechanized factories by 1860, only a few of these factories employed more than 1,000 people. Most businesses were owned and managed by families or small groups of partners. Many of the wealthiest businesspeople in the economy were commission merchants, who specialized in the marketing of particular goods such as raw cotton, wheat, or textiles.
The beginning of the Civil War, which cut off commerce between the North and the South and limited international trade, hurt most business firms in the short run. Over time, however, the war provided some firms with new opportunities. Although the South experienced shortages of raw materials and relied upon imports for many of its needs, some Southern manufacturers were given a boost by military orders for weapons and uniforms. In the North, hundreds of merchants and manufacturers participated in the war economy as contractors or subcontractors. By the middle of the war, when the economy had rebounded, many Northern businesses were recording high profits. After the war ended in 1865, commercial ties between North and South were re-established, and more businesses began to operate on a national scale.
the transformation of banking and finance during the civil war
Before the Civil War, the American banking industry was remarkably decentralized. After 1836, when President Andrew Jackson and Democrats in Congress cancelled the charter of the Second Bank of the United States, there was no national bank. There was also no national currency. Instead, hundreds of state-chartered banks issued their own bank notes (paper money). In addition to issuing paper money, banks also kept deposits, issued loans, and negotiated the commercial paper (written promises to pay) that many merchants and manufacturers relied upon to conduct business. Meanwhile, starting in the 1840s, the U.S. government handled its own modest financial needs with a so-called "Independent Treasury," a national network of government vaults that was separate from the banks and used specie (gold and silver) for all transactions.
The Civil War was so expensive that it created new problems in government finance. In the South, where there were fewer banks and businesses, the Confederate government found itself trying to pay for the war mainly by printing money. This policy created terrible inflation that ended up crippling the South's war effort. The North also printed some new paper money to pay for the war, but unlike the South, it was able to cover most war expenses by collecting taxes and selling government bonds.
To pay for the North's war effort, Congress not only raised taxes on imported goods (the tariff), but also created the first federal income tax in national history. But higher taxes were not enough. By the end of 1861, only eight months into the war, Northern banks and the U.S. government started to run out of gold. In 1862, Congress authorized the Treasury to print paper money (called "greenbacks" because of the ink color) that would help pay for the war. Over the course of the war, the Treasury issued about $450 million worth of greenbacks. The Treasury generated even more cash by selling war bonds. It hired Philadelphia banker Jay Cooke, who used a network of hundreds of subagents to sell the government bonds to small investors as well as big banks. By the end of the war, many Americans had become familiar with a variety of new Treasury bonds.
Some Northern war bonds ended up being used as the basis for a new National Banking System. In a series of laws passed between 1863 and 1865, Congress defined the rules under which people would be allowed to create new national banks. After they deposited at least $50,000 worth of bonds with the Treasury, partners in a national bank were allowed to issue national bank notes. Because the old state bank notes were subject to a high tax, these national bank notes soon provided the United States with its first uniform national currency. Although the United States would not get a true central national bank until the Federal Reserve system was created in 1913, the days of hundreds of different kinds of paper money were over.
the politics of money after the civil war
When the Civil War ended in 1865, the U.S. government debt stood at $2.7 billion, up from $60 million at the beginning of the war. Exactly how to settle this huge war debt soon became a major political issue. Creditors, including the actual holders of war bonds and other investors and banks, had an interest in a deflationary monetary policy that would return the country to the gold standard it had abandoned during the war. Debtors, on the other hand, had an interest in keeping money plentiful and cheap. For over thirty years after the end of the Civil War, national politics was shaped by battles between the hard money proponents of the gold standard and the champions of soft money, who called for more use of greenbacks and silver to boost the money supply.
After the country sank into a serious economic depression following the Panic of 1873 (an event caused in part by the failure of the banking business of Jay Cooke, the North's old chief war bond salesman), many people argued that the Republican party's hard money policy was starving the struggling economy of much needed cash. Soon, a new political party known as the "Greenback Party" challenged Republicans over the money issue. Although it had some success in the Congressional elections of 1878, the Greenback party failed to stop the return to the gold standard, and in 1879 one dollar worth of greenbacks became worth exactly one dollar in gold. Nevertheless, soft money supporters continued to fight against the gold standard by calling on the government to create more money in the form of silver coin. The struggle between the forces of gold and the forces of silver culminated in the 1896 Presidential election, in which the "free silver" Democratic candidate William Jennings Bryan lost to William McKinley, a hard money Republican. In that campaign, Bryan declared "You shall not crucify mankind upon a cross of gold."
the rise of big business in the late nineteenth century
One of the most important developments in the history of business was the rise of large industrial corporations in the United States at the end of the nineteenth century. Before the Civil War, the biggest businesses in America had been textile mills, cotton plantations, and regional railroads. In the decades that followed the Civil War, Americans saw the growth of enterprises that were much bigger than anything that had been seen before. Although family firms, partnerships, and other smaller-scale enterprises continued
to be important parts of the American economy, the new industrial corporations were special because of their unprecedented size and complexity.
The rise of modern big business is often seen as beginning in the 1870s. John D. Rockefeller, who started an oil refining business in Cleveland during the Civil War, founded the Standard Oil Co. in 1870. Just eight years later, Standard Oil controlled 80 percent of the total oil refining capacity in the United States. Gustavus Swift, who started shipping meat out of Chicago by railroad in the late 1870s, built giant slaughtering plants that by 1900 would employ 20,000 people. James Duke, a North Carolina tobacco manufacturer who invested in new cigarette-making machines in the mid-1880s, was selling over 800 million cigarettes a year by 1890. These companies and others like them broke new ground by building national production and distribution networks that allowed them to sell huge quantities of their products. In some cases, these new industrial corporations grew so big that they came to enjoy near-monopoly power over their industries. The Sherman Antitrust Act in 1890, in which Congress authorized the government to break up monopolies, was a response to the rise of giant companies like Standard Oil.
The industrial corporations that emerged in the years after the Civil War not only broke new ground with the size and scope of their operations, but also with their methods of management and finance. Too big and complex to be run by a family or a small partnership, the new corporations were managed by bureaucracies staffed by professional managers. To raise the large amounts of capital they required, many of the new industrial corporations sold stock to the public, something that few companies other than railroads had done before that time. By the 1890s, there were dozens of industrial securities being traded on the New York Stock Exchange; by this time, New York was challenging London for the title of the world's leading financial center.
Over the course of the nineteenth century, as the American economy became more highly industrialized, there were some remarkable changes in the organization of business and finance. The Civil War, which had the effect of reorganizing the U.S. banking industry and creating new political struggles over national economic policy, did not cause drastic changes in most parts of the economy over the long run. More revolutionary was the rise after the war of industrial corporations, which relied upon mass production and mass distribution, as well as new methods of management and finance. Over the years to come, Americans would continue to grapple with the question of whether these industrial and financial enterprises were compatible with the ideals of political democracy and economic prosperity for the average person.
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DeCredico, Mary. Patriotism for Profit: Georgia's Urban Entrepreneurs and the Confederate War Effort. Chapel Hill: University of North Carolina Press, 1990.
Koistinen, Paul A.C. Beating Plowshares into Swords: The Political Economy of American Warfare, 1606–1865. Lawrence: University Press of Kansas, 1996.
Richardson, Heather Cox. The Greatest Nation of the Earth: Republican Economic Policies during the Civil War. Cambridge, MA: Harvard University Press, 1997.
Unger, Irwin. The Greenback Era: A Social and Political History of American Finance, 1865–1879. Princeton, NJ: Princeton University Press, 1964.
Mark R. Wilson