Building a Nation (and a Market)
The Treaty of Paris in 1783 officially ended the Revolutionary War and marked the beginning of the United States of America. But a piece of paper doesn’t make a nation. Indeed, the first legal attempt to create a “United States”, the Articles of Confederation failed. It was replaced in 1786 with the Constitution and in 1788, George Washington was inaugurated as the nation’s first president. Although the name of the nation said “United States”, economically it was anything but “united”.
Economically, the nation was more a collection of diverse regions and cities, each with its own economy. There was some trading between these regions/cities, but not really very much. For the most part, each region and major city survived on its own. Foodstuffs were largely grown locally in nearby farms. The majority of “manufactures” were really small craft type production, the stuff of a blacksmith, local mill, or tailor. Prior to independence, each region & port city largely traded with England and not with each other. New England states exported timber, ships, and fish. The southern states exported tobacco, rice, and indigo. After independence, the immediate economic challenges were to re-establish these exports (they had been disrupted by the war), and to establish a national currency, banking, and economic policy.
Between 1790 and 1860, the United States developed its first capitalist industry — textile manufacture. At the same time, a full-scale working class was formed. Neither development was seriously slowed by the existence of enslavement. … Aside from farming and artisan work, little in early America was produced for sale. As Degler reminds us: “The census of 1810 reported that the value of cloth manufactured in the home was ten times greater than that produced outside the home.” During the War of 1812, however, commercial production, both inside and outside the home, increased significantly. Household manufacture, the dominant form in 1815, thrived so long as transport difficulties precluded any wider market than the home or neighborhood. (In 1813, a magazine hailed the feat by a 3-horse “waggon”, loaded with $3,000 worth of merchandise, of traveling from Boston to Philadelphia in only two weeks.) Basically, the household system of production was in part simply an expression of the subsistence economy: family workers made goods for their own use or at times for general sale. [Weinberg, p.65]
The Main Story: Creating an Integrated Economy
The size and extent of a market or an economy is largely determined by two factors: (1) the communication and transportation technologies and (2) the existence of social institutions such as money, banking, laws and courts that support trading. . In 1790 neither the institutions nor the transport/communication infrastructure existed to enable a truly integrated single-economy for the United States. The period between the Revolutionary War and the Civil War, 1783-1860 is generally referred to as the Antebellum period. The dominant economic “story” of the Antebellum period is that of efforts to create a single national economy and large national market. This is not a simple or easy story, though. It involves several sub-plots to meet specific challenges.
The new constitution for the nation laid a good foundation for creating a single, national market or economy through the “Interstate Commerce Clause”. This clause reserved to Congress the sole right and power to regulate commerce across state lines. Though it would be tested in the Supreme Court, ultimately this clause creates a single “free market” by making tariffs and trade barriers between states illegal. With state legal barriers to trade eliminated (or greatly reduced), the challenge became making trade between states and regions practical and profitable. There were perhaps four struggles involved. Let’s look at each.
Sub-plot #1: Inventions Change Regional Production and Comparative Advantage
Of course before people in different regions can trade profitably, they need something to trade. People in each region need to specialize in producing goods/services that people in the other region(s) need or can’t produce as cheaply. Economists call this phenomenon the “specialization based upon comparative advantage”. At the start of the Antebellum period, there were few such goods. Each region traded primarily with Europe or within itself, and not with other parts of the U.S. But a series of inventions, innovations, and mass migration to settle the West changed all this.
The first really significant invention to affect regional production was Eli Whitney’s cotton gin. This simple device changed the entire world textile production. By enabling the cost-effective use of long-fiber cotton, Whitney made the South the world’s lowest cost cotton producer and made cotton cheaper than wool. The result made plantations and the use of slave labor even more profitable in the South. Plantation owners and wealthier farmers rapidly expanded the South westward. Tobacco had already made Kentucky profitable, but cotton made Tennessee, Alabama, Mississippi, Louisiana, Arkansas, Texas, and even Missouri profitable. Cotton rapidly became the nation’s number international export. It might appear that the rise of “King Cotton” was only a continuation of the plantation-based, tobacco-export focused economy of the Colonial South, but it had three effects that strengthened the U.S. economy. First, the cotton had to be shipped and financed. The South didn’t have the banks or shipping companies to do this, but the New England states and New York did. Second, the sale of cotton overseas brought in a huge flow of foreign monies and capital into the states, more than could be spent on imports from Europe. Much of this influx of European money became the financial capital that would build the growing nation. It expanded the South westward making inland transportation, particularly the Mississippi-Ohio-Tennessee Rivers a vital transport “highway” leading to the port of New Orleans. Ultimately, though, the South’s relative economic independence (it largely produced its own foodstuffs, textiles, and small crafts) and it’s dependence on exports would make it the last region to be completely integrated into the economy and also put it on the opposite side of the North on tariffs (lead cause of Civil War).
In the West, other inventions were changing the landscape, literally. First, students should keep in mind that in this period “the West” means those states that we typically call the “Midwest” today. In other words, it’s the region from Ohio to Iowa and from the Ohio River north to the Great Lakes and Minnesota. At the beginning of this period this area was completely unsettled. Waves of English, Irish, German, and Scandinavian immigrants combined with an exodus of farmers from Eastern states turned this region into giant, fertile breadbasket of farms. Besides the railroad and canals (more about these below), the inventions that enabled this transformation were farm machinery. In particular, two inventions stand out. Cyrus McCormick’s horse-drawn reaper increased the productivity of a single farmer by 8 or 10-fold. But before fields could be reaped, they had to be sown and plowed. Here John Deere’s plow excelled. Deere developed a plow that made cutting through the prairie sod possible.
In the eastern and New England states, the poorer ground for farms, shorter growing season, and shortage of labor made local farm products more expensive. Instead, these states began to buy increasing volumes of food from the West. Instead of agriculture, the Eastern/Northern states began to focus on manufacturing, finance, and trade. Thanks to technologies that were frequently copied or stolen from Europe, and were occasionally developed locally, a growing manufacturing economy began to thrive.
The earliest factories emerged late in the 18th century when water power was made available for productive purposes. By the War of 1812, the countryside in New England was punctuated by many of these operating units. Location of the water source was a paramount consideration and so most of these new factories were necessarily to be found in rural areas. The factory quickly replaced many putting-out operations as it facilitated employer control of production. All the raw materials could be centralized in one place; close supervision of workers resulted in a more uniform quality of product; the availability of greatly heightened power made it all the easier to push the pace of work (speed-up) and increase the number of operations a single worker must perform (stretch-out).
It was not until the late 1840s and the 1850s, however, that the factory system began to be the norm in American industry. This development was crucially facilitated by the use of the steam engine which freed industry from its rural water-power moorings. The new power source was completely mobile and factories could now be located in cities and towns with a labor force and customers nearby. In conjunction with newly built railroads, frozen waterways, a historic impediment to long-distance shipments, were no longer to be feared. Industrial production could be a year-round activity. The market for manufactured goods expanded as transportation improved.
Leaders in factory production by 1850 were the flour, cotton, textiles, and lumber industries. By 1860, 41 percent of the national labor force worked outside agriculture.58 Just 20 years earlier, most workers in manufacturing jobs had been employed “in shop and mill establishments, not `factories’.” The proportion of the labor force employed in agriculture dropped sharply in the industrializing state of Massachusetts, as follows:
The Census of 1860 showed a great stream of farm workers leaving the farms for industrial jobs in the cities of Massachusetts: “Net immigration from the five other New England states and New York was of the same order of magnitude as that from Ireland.”
Women were an indispensable part of the manufacturing labor force in antebellum times. In the early 1830s, two of every five workers in manufacturing of the Northeast were women.62 In cotton textile mills of the Northeast around 1832, over four of five workers were women or children. Women workers in that region were paid only 40 percent of men’s wages.
Towards the end of the Antebellum period, a pattern of regional trade was clear. The West (what’s now called Midwest) specialized in agriculture, especially flour, corn, lumber, hogs, and cattle. These foodstuffs were shipped to the Eastern/New England States in trade for manufactured goods, particularly textiles and iron goods. The South produced cotton and tobacco. It sold some to the Northern states, but shipped most to England and France for foreign exchange which was handled in Northern banks.
Subplot #2: Transport and Communication Improvement
None of this trade and specialization would have been possible though without improvements in transport. Initially, the dramatic innovation was a network of canals built to enable low-cost transport in directions that rivers didn’t run. The premier canal was the Erie Canal in upstate New York, but there were numerous others in all states, but particularly Maryland, New York, Ohio, and Indiana. We think of canals as quaint little waterways today, but in 1820 they were radical improvements. It is no exaggeration to say that the Erie Canal “opened” the West. In the process, it brought the vast volume of Western produce to the port of New York City, making it the dominant economic city of North America then and ever since. Canals were also built in the South, but with somewhat less success.
As successful as the Erie Canal and it’s cousins were, though, they were succeeded a few decades later by the iron horse, the steam-powered locomotive and railroad. As European capital flowed into the country it was combined. The nation rapidly built rails. This building process was most prevalent along the same routes that the canals took. Thus the Northeast-Western states trade that blossomed with the Erie Canal continued to grow. Left behind in this process was the South. The South also took to building railroads, but did so more haphazardly. Instead of building an integrated network of railroads that shared common specs, the South built more single-purpose lines. What’s worse, railroads in the South frequently used different “gauges” or specs for track width and size. This meant that a cars on one railroad couldn’t be used on another. Freight would have to unloaded and then re-loaded. Ultimately this would prove a serious strategic disadvantage for the South in the Civil War.
The struggle in developing transport infrastructure was in the financing, ownership, and initiative of the various projects. .Private financial capital, the kind we would call “venture capital”, was generally averse to investing in such projects as canals and new railroads because of the uncertainty of return. .Yet there was little social precedent or tolerance for government-owned and -run transport. As a result, the typical pattern involved some government entity, usually a state or local government, providing the leadership and initial financing for a project. This was usually accompanied with various types of “sweeteners” to attract private capital. The prime example of government leadership in such transport projects was New York State’s developement of the Erie Canal. Later as the focus of transport building shifted to railroads in the West, the prime initiative often came in the form of US government grants of land to proposed railroad companies. These were grants beyond the mere land to build the railroad. Instead, the government would grant ownership of land for as much as 6 miles (36 miles in the far west) on either side of a proposed rail line to a company if it would build the railroad. The companies would then build the railroad and take their profits from selling-off the now-more-valuable land to private settlers instead of looking to future operating profits. These deals were then, as now, controversial. They often enriched politically connected wealthy rail investors, but they also produced built railroads. They constituted a subsidy to private companies, yet once the railroads were started, government “interference in the market” was often resented and resisted.
This question of government involvement in economic development didn’t stop with transport. Another example can be taken from the telegraph.
Subplot #3: Money and Banking
Trade without sound money is extremely difficult. At the same time, financing trade and capital investment is impossible without some kind of sound banking system A full discussion of money and banking is beyond the scope of this course (I suggest taking Econ 202, Macro), yet it is a critical part of U.S. development. While the Constitution gave Congress the power to establish a currency, the early nation struggled greatly with just how to do this. The question of currency is intimately tied to banking. Once an economy has accepted paper money of any type (even just personal promissory notes), banks become the central feature of the money system. A bank creates new money whenever it makes a loan Yes, the way an economy gets “more money” is by having banks make loans. There is no other way. What matters then is who controls the banks, regulates the loan making process, and what “backs” the money. Deciding policy on money and banking was probably the second-most controversial issue in the Antebellum period (second to tariffs/slavery).
The early nation muddled its way through the banking and money controversies. Initially, Alexander Hamilton’s First Bank of the U.S. succeeded in establishing a national currency and confidence in the currency. Unfortunately, it was also plagued with scandals of scams on Wall Street, political influence of bankers, and the appearance of bankers becoming richer faster than “working people” (sound a lot like today!). A backlash set in eliminating the central bank. But that made it near-impossible for the U.S. government to finance the War of 1812 (financing wars is another recurring theme), resulting in a second bank. Then a pendulum swung again. Presidents Andrew Jackson and Martin van Buren let the Second Bank expire. They also paid off the US government’s national debt (last time that has happened). This set the stage for the period 1836-1860. The good side was that by paying off the national debt (an unheard-of event in European history), the U.S. obtained an outstanding credit rating internationally, a status it has maintained ever since. Financial capital worldwide considers the U.S. a safe place to invest. Combined with the export earnings of cotton (and wheat after 1848), this provided the financial capital needed to finance expansion for the rest of the century. But, there was a downside to lacking a central bank. There was no single currency or bank-of-last-resort. Each bank issued its own banknotes (currency). Some banks were sound. Some weren’t. Nobody could tell which until a bank failed. As a result, periodic financial panics would plague the U.S. economy throughout the 19th century. Often these panics resulted in economic depressions of at least a decline of 10% in GDP, only to be followed by a boom a couple of years later.
Subplot #4: Inter-regional Struggles
The last sub-plot of our increasing economic integration story story will result in the cataclysm that ended the period: the Civil War. The growing specialization, comparative advantage, transport network, and banking system didn’t just mean a national economy was coming-together. It also meant that national economic policy mattered. And it also meant that each region’s interests were different. The West wanted national government subsidies for development. After 1848 (after McCormick’s reaper and England opening itself to wheat imports), the West increasingly wanted low tariffs on exports. The South wanted no tariffs since it both exported cotton and was a heavy importer of manufactured goods. The New England and Eastern states (which came to be called the “North”) wanted very high tariffs. High tariffs meant the South’s cotton would be cheaper for them than for their English competitors. High tariffs also meant less competition from English manufacturers (who were usually lower-cost). The North also favored the various government subsidies for industrial and farm development. The South opposed such subsidies since it was tariffs on their goods that paid the taxes that paid the subsidies and since the South didn’t benefit as much from the railroad developments.
As the nation’s economy began to integrate economically, it also began to polarize politically. Initially the conflict developed over tariff policy. Increasingly the conflict centered on the question of whether slavery should be allowed in new Western territories. The nation had developed two different agricultural economic models. One, based in the South, used industrial-style self-sufficient plantations using slave labor to produce cotton for export. This model spread into Louisiana, Texas, and Arkansas. The other, the northern model of small, independent farmers selling wheat/corn/hogs for market spread into Minnesota, Illinois, and Iowa. Conflict developed over Missouri and Kansas. The Southern, slave plantation model? Or the Northern small-farm settler model? Southerners wanted slavery in the Western territories since that meant more land for more cotton plantations. Northerners, encouraged by the growing international wheat-export trade needed more land for farms. Eventually these conflicts over tariffs and expansion of slavery to new territories couldn’t be settled politically. They had to be settled on the battlefield in the bloodiest war in American history.
The South would eventually lose that war, largely because of the very economic developments we’ve been discussing. The “West” (meaning Ohio-Indiana-Illinois-Michigan) largely sided with the Northern states because the Eastern seaboard was their trading partner. The South lost its export earnings when Northern banks, financiers, and shippers undercut the South’s ability to finance its cotton trade. And on the battlefield itself, the South suffered. It couldn’t move supplies or troops effectively because of its inferior, mis-matched rail network. Ultimately, the South suffered because the war was fought on its own territory, destroying farms, factories, railroads, and even plantations. It would be nearly a century before the South would fully recover from the war. But by the end of the Civil War in 1865, there could be no doubt that the United States was indeed a “united” economy.