The Industrial Revolution and the Launch of America's Economy
In 1810, the United States' Gross National Product was 517 million dollars. By 1909, according to lecture, it had grown to $25,968 million. How did a nation of rural farmers evolve into an industrial heavyweight? Although there were many factors that allowed the U.S. economy to expand, the combined effect of railroad construction and maturation, the development of banking and financial structures and support from foreign capital flows allowed America to become a modern nation.
The construction of railroads revolutionized transportation, stitched together a national market and boosted economic development as a whole. Before railroads, one had to transport goods by wagon, or take long, often perilous sea routes. Atack and Passel note that early forms of transportation suffered from high costs, slow delivery times and irregular service (Atack 143). In the 1830s, canal and steamboat routes allowed commerce to develop, but these routes were limited to regional waterways. Railroads, however, reduced travel times, could travel in spite of bad weather and provided many social benefits to local areas. For instance, lecture explained that small towns would crop up around railroad junctions, leading to the creation of more markets. Railroads also created demand for products nationwide. Products grown in the Midwest could be shipped to western states like California, or once isolated regions like the South. Indeed, by 1899, commerce had become the largest sector of GNP (32%) according to lecture. This national network greatly expanded the demand for products like cotton and wheat. With steel rails and refrigeration cars, railroads helped make sure that transportation would be smoother and more versatile. Refrigeration cars allowed transportation of once perishable goods, thus allowing for an explosion of the cattle industry. In addition, the continued construction of railroads added to the nation's capital stock. When railroads first began building after the Civil War, this "take-off period" further accelerated industrialization that had begun in the 1840s. As Atack and Passel put it, "Rhetoric aside, the railroad was important whether its contribution was less than 5 percent in 1859 or 1890. Almost certainly no other nineteenth-century innovation mattered more" (455).
Despite what Atack and Passel say about railroads, the development of banking and finance is almost equally as important for the country's economic growth. Atack and Passel note that banks can help an economy develop through "Mobilizing capital, substituting bank loans for inadequate equity markets, and facilitating trade by reducing transaction costs" (87). Indeed, the banking system in the United States, though largely fragmented in its infancy, helped finance major projects like canals and railroads. The banks also influenced the money supply through the creation of currency and later the issuance of personal checks. Banks also stimulated regional economies - one reason why New York is considered the financial center of the United States is because banking interests first developed there. This regional development is important for it allowed the spread of "domestic commerce, industry, and agriculture" (108) across the nation. By the 1880s, the banking system was more regulated and relatively stable compared to earlier decades. Although there was no central bank yet, the National Banking Act of 1863 created a series of federal banks with reserve requirements. Also, banks had learned to deal with panics by forming unofficial clearinghouses to make sure debts were properly accounted. The result of the banking system's maturation was the development of modern accounting, managerial and corporate practices. As businesses expanded, they relied on the banks for capital, which was then used to fuel economic production.
It can be argued that analyzing the flaws of the banking system also gives a better understanding of American economic development. Before the Civil War, state-chartered banks, institutions with little or no reserve requirements, flourished. These state-chartered banks had multiplied after Andrew Jackson torpedoed the Second Bank of the United States. As lecture and the authors explain, these banks printed their own currency, which often led to problems. Besides the problem of inter-bank exchange rates - newspapers would publish data to help a bank in Ohio for example figure out how much its cash was worth compared to a bank of Delaware - money creation was often a problem. As lecture explains, as the banks printed more money, they helped fuel speculation and drove inflation rates higher. In addition, because of their deregulated state, the banks would often collapse during panics, as people withdrew their savings. These incidents occurred several times during the 19th century, thus worsening the financial downturns. It is possible that if America maintained a central bank, like the Second Bank of the United States for instance, or had placed stricter regulations in place on the banking system, the country may have grown at a much more stable rate than endure the wild swings of the 1830s, 1870s and the 1890s.
While the United States seems to have developed transportation and banking systems on its own, it had considerable help from foreign investors. These wealthy individuals and financial intermediaries, mostly from Britain, would invest their capital in the United States so they could earn superior returns on their money. The United States was also a leading net exporter during this time period, which helped attract even more capital. It is no coincidence that some of the heaviest periods of infrastructure construction coincided with higher than normal capital flows. Lecture explains that from 1829 to 1838, 15.8 million dollars flowed into the United States. The number is over fifteen times what the United States received in foreign capital from 1799-1828. The influx of foreign capital allowed the U.S. to construct projects like the Eerie Canal and similar waterways. This example of foreign capital and infrastructure construction happened multiple times in the 19th century according to lecture. From 1869 to 1878, 73.8 million dollars flowed into the country, while the period from 1879 to 1888 saw 78.4 million arrive. Both these periods coincided with the third and fourth waves of railroad construction according to lecture. It is possible that if the country did not have these timely foreign capital flows, its infrastructure would have developed at a much slower pace.
One could argue that foreign capital flows were directly tied to the health, and thus growth prospects of the economy, because when gold flowed out of the country, the U.S. suffered. During the "long 19th century," negative gold flows impacted growth by reducing the money supply. During the Panic of 1837, Atack and Passel note that the British government raised its interest rates. Because the U.S. had a small, open economy at the time, it had "little control over its own monetary system" (101) and thus gold flowed out of the country and a contraction ensued. During the Crisis of 1893, a depression in Europe forced investors to withdraw their U.S. holdings, and the resulting decrease in the money supply caused a depression in the U.S. as well. During the Panic of 1907, England raised its interest rates, causing gold to flow out. Shortly after, banks found themselves in a liquidity crisis. Finally, in the days before World War I, panicky investors in Europe withdrew their gold from America, causing the money supply to decrease and interest rates to increase. The problem could have caused a much larger catastrophe in the U.S. had the country not gone off the gold standard and begun exporting to the various warring states. With such impact on growth, foreign capital flows were often the difference between prosperity and depression. The United States would need a central bank so that it, and not Europe, could control the money supply and economic growth.
Of course, railroad construction, the development of banking and foreign capital flows were not the only drivers of U.S. economic growth. In the antebellum period, agriculture (especially the growth of the cotton industry) played a significant role in the evolution of the economy. But since this paper looks at a larger timescale (from the 1790s to 1918), one can see that agriculture's influence, while important, is relatively less than the above mentioned factors. The first reason, from a pure numbers perspective, is that agriculture's influence on GNP rapidly decreased during the 19th century. In 1859 according to lecture, agricultural production made up 35 percent of GNP. 40 years later, agriculture's GNP share had dropped to 18 percent. Also, the additional human capital gained from agricultural work was not as great as the capital increase in manufacturing. Atack and Passel explain this scenario occurred because farm workers were generally unskilled laborers, while factories employed skilled workers. Indeed, labor productivity came mostly from factories rather than farms. Finally, any advances agriculture did make was likely due to the development of railroads. When the railroads stitched together a national market, farmers suddenly had much larger markets to sell their goods. The advent of refrigeration cars allowed oranges in Florida for example, to be transported across the country. Though agriculture helped the nation develop a fledgling economy, it is of relatively lower importance in the big economic growth picture.
Likewise, the development of manufacturing is of lower importance than the previously mentioned factors. This is not to say manufacturing's development was not important - indeed, by 1899, its share of GNP was 31 percent. But manufacturing's success was largely due to the spread of railroads. Lecture says that before the railroads, manufacturing was characterized by the putting-out system, in which firms would contract out their work to people who would construct the product in their home. In this way, cloth and other goods could be created and then sold to local markets. But railroads paved the way for mass production. When railroads expanded across the country, entrepreneurs had more incentive to expand their factories and adopt new methods and technologies to produce more efficiently. Textile manufacturers in New England now had markets for their goods and services in California and needed larger factories to accommodate this new demand. It should be noted that manufacturing was outranked by commerce in 1899. Such commercial success was likely due to goods and services traveling across the nation on railways.
The U.S. economy's remarkable growth during the "long 19th century" owes much to the above mentioned factors. America's combined utilization of land, labor, capital and technology during this time transformed it from a small group of new, independent colonies into a global economic power that would bail out Europe after World War I. No other country in the past couple centuries has seen such a transformation.
748 words, 5 pages
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