Our Economy:The Good, The Bad, and The Ugly–Chapter Three–19th Century

Early 19th Century

The United States economy was mostly agricultural with increasingly industry throughout the first third of the 19th century. Most people lived on farms and produced much of what they consumed. A considerable percentage of the non-farm population was engaged in handling goods for export. The country was an exporter of agricultural products. The U.S. built the best ships in the world.

The textile industry became established in New England, where there was abundant water power. Steam power began being used in factories, but water was the dominant source of industrial power until the Civil War.

The building of roads and canals, the introduction of steamboats and the first railroads were the beginning of a transportation revolution that would accelerate throughout the century.

Political developments

The institutional arrangements of the American System were initially formulated by Alexander Hamilton, who proposed the creation of a government-sponsored bank and increased tariffs to encourage industrial development. Following Hamilton’s death, the American school of political economy was championed in the antebellum period by Henry Clay and the Whig Party generally.

Specific government programs and policies which gave shape and form to the American School and the American System include the establishment of the Patent Office in 1802; the creation of the Coast and Geodetic Survey in 1807 and other measures to improve river and harbor navigation; the various Army expeditions to the west, beginning with the Lewis and Clark Expedition in 1804 and continuing into the 1870s, almost always under the direction of an officer from the United States Army Corps of Topographical Engineers, and which provided crucial information for the overland pioneers that followed; the assignment of Army Engineer officers to assist or direct the surveying and construction of the early railroads and canals; the establishment of the First Bank of the United States and Second Bank of the United States as well as various protectionist measures such as the tariffs of 1816 and 1828).

Thomas Jefferson and James Madison opposed a strong central government and, consequently, most of Hamilton’s economic policies, but they could not stop Hamilton, who wielded immense power and political clout in the Washington administration. In 1801, however, Jefferson became president and turned to promoting a more decentralized, agrarian democracy called Jeffersonian democracy. He based his philosophy on protecting the common man from political and economic tyranny. He particularly praised small farmers as “the most valuable citizens”. However, Jefferson did not change Hamilton’s basic policies. As president in 1811 Madison let the bank charter expire, but the War of 1812 proved the need for a national bank and Madison reversed positions. The Second Bank of the United States was established in 1816, with a 20-year charter.

Thomas Jefferson was able to purchase the Louisiana Territory from Napoleon in 1803 for $15 million, with money raised in England. The Louisiana Purchase greatly expanded the size of the United States, adding extremely good farmland, the Mississippi River and the city of New Orleans. The French Revolutionary and Napoleonic Wars from 1793 to 1814 caused withdrawal of most foreign shipping from the U.S., leaving trade in the Caribbean and Latin America at risk for the seizure of American merchant ships by France and Britain. This led to Jefferson’s Embargo Act of 1807 which prohibited most foreign trade. The War of 1812, by cutting off almost all foreign trade, created a home market for goods made in the U.S. (even if they were more expensive), changing an early tendency toward free trade into a protectionism characterized by nationalism and protective tariffs.

States built roads and waterways, such as the Cumberland Pike (1818) and the Erie Canal (1825), opening up markets for western farm products. The Whig Party supported Clay’s American System, which proposed to build internal improvements (e.g. roads, canals and harbors), protect industry, and create a strong national bank. The Whig legislation program was blocked at the national level by the Jacksonian Democrats, but similar modernization programs were enacted in most states on a bipartisan basis.

The role of the Federal Government in regulating interstate commerce was firmly established by the landmark Supreme Court ruling in Gibbons v Ogden, which decided against allowing states to grant exclusive rights to steamboat companies operating between states.

President Andrew Jackson (1829–1837), leader of the new Democratic Party, opposed the Second Bank of the United States, which he believed favored the entrenched interests of the rich. When he was elected for a second term, Jackson blocked the renewal of the bank’s charter. Jackson opposed paper money and demanded the government be paid in gold and silver coins. The Panic of 1837 stopped business growth for three years.

Agriculture, commerce and industry

Population growth

Although there was relatively little immigration from Europe, the rapid expansion of settlements to the West, and the Louisiana Purchase of 1803, opened up vast frontier lands. The high birth rate, and the availability of cheap land caused the rapid expansion of population. The average age was under 20, with children everywhere. The population grew from 5.3 million people in 1800, living on 865,000 square miles of land to 9.6 million in 1820 on 1,749,000 square miles. By 1840, the population had reached 17,069,000 on the same land.

New Orleans and St. Louis joined the United States and grew rapidly; entirely new cities were begun at Pittsburgh, Marietta, Cincinnati, Louisville, Lexington, Nashville and points west. The coming of the steamboat after 1810 made upstream traffic economical on major rivers, especially the Hudson, Ohio, Mississippi, Illinois, Missouri, Tennessee, and Cumberland rivers. Historian Richard Wade has emphasized the importance of the new cities in the Westward expansion in settlement of the farmlands. They were the transportation centers, and nodes for migration and financing of the westward expansion. The newly opened regions had few roads, but a very good river system in which everything flowed downstream to New Orleans. With the coming of the steamboat after 1815, it became possible to move merchandise imported from the Northeast and from Europe upstream to new settlements. The opening of the Erie Canal made Buffalo the jumping off point for the lake transportation system that made major trading centers in Cleveland, Detroit, and especially Chicago.

Labor shortage

The U.S. economy of the early 19th century was characterized by labor shortages. It was attributed to the cheapness of land and the high returns on agriculture. All types of labor were in high demand, especially unskilled labor and experienced factory workers. Wages in the U.S. were typically between 30 and 50 percent higher than in Britain. Women factory workers were especially scarce. The elasticity of labor was low due in part to a lack of transportation and low population density. The relative labor scarcity and high price was an incentive for capital investment, particularly in machinery.

Agriculture

The U.S. economy was primarily agricultural in the early 19th century. Westward expansion plus the building of canals and the introduction of steamboats opened up new areas for agriculture. Much land was cleared and put into growing cotton in the Mississippi valley and in Alabama, and new grain growing areas were brought into production in the Midwest. Eventually this put severe downward pressure on prices, particularly of cotton, first from 1820 to 1823 and again from 1840 to 1843.

Before the Industrial Revolution most cotton was spun and woven near where it was grown, leaving little raw cotton for the international marketplace. World cotton demand experienced strong growth due to mechanized spinning and weaving technologies of the Industrial Revolution. Although cotton was grown in India, China, Egypt, the Middle East and other tropical and subtropical areas, the Americas, particularly the U.S., had sufficient suitable land available to support large scale cotton plantations, which were highly profitable. A strain of cotton seed brought from New Spain to Natchez, Mississippi, in 1806 would become the parent genetic material for over 90% of world cotton production today; it produced bolls that were three to four times faster to pick. The cotton trade, excluding financing, transport and marketing, was 6 percent or less of national income in the 1830s. Cotton became the United States’ largest export.

Sugarcane was being grown in Louisiana, where it was refined into granular sugar. Growing and refining sugar required a large amount of capital. Some of the nation’s wealthiest people owned sugar plantations, which often had their own sugar mills.

Southern plantations, which grew cotton, sugarcane and tobacco, used African slave labor. Per capita food production did not keep pace with the rapidly expanding urban population and industrial labor force in the Antebellum decades.

Roads

There were only a few roads outside of cities at the beginning of the 19th century, but turnpikes were being built. A ton-mile by wagon cost from between 30 and 70 cents in 1819. Robert Fulton’s estimate for typical wagonage was 32 cents per ton-mile. The cost of transporting wheat or corn to Philadelphia exceeded the value at 218 and 135 miles, respectively. To facilitate westward expansion, in 1801 Thomas Jefferson began work on the Natchez Trace, which was to connect Daniel Boone‘s Wilderness Road, which ended in Nashville, Tennessee, with the Mississippi River.

Following the Louisiana Purchase the need for additional roads to the West were recognized by Thomas Jefferson, who authorized the construction of the Cumberland Road in 1806. The Cumberland Road was to connect Cumberland Maryland on the Potomac River with the Wheeling (West) Virginia on the Ohio River, which was on the other side of the Allegheny Mountains. Mail roads were also built to New Orleans.

The building of roads in the early years of the 19th century greatly lowered transportation costs and was a factor in the deflation of 1819 to 1821, which was one of the most severe in U.S. history.

Some turnpikes were wooden plank roads, which typically cost about $1,500 to $1,800 per mile, but wore out quickly. Macadam roads in New York cost an average of $3,500 per mile, while high-quality roads cost between $5,000 and $10,000 per mile.

Canals

Because a horse can pull a barge carrying a cargo of over 50 tons compared to the typical one ton or less hauled by wagon, and the horse required a wagoner versus a couple of men for the barge, water transportation costs were a small fraction of wagonage costs. Canals’ shipping costs were between two and three cents per ton-mile, compared to 17–20 cents by wagon. The cost of constructing a typical canal was between $20,000 and $30,000 per mile.

Only 100 miles of canals had been built in the U.S. by 1816, and only a few were longer than two miles. The early canals were typically financially successful, such as those carrying coal in the Coal Region of Northeastern Pennsylvania, where canal construction was concentrated until 1820.

The 325-mile Erie Canal, which connected Albany, New York, on the Hudson River with Buffalo, New York, on Lake Erie, began operation in 1825. Wagon cost from Buffalo to New York City in 1817 was 19.2 cents per ton-mile. By Erie Canal c. 1857 to 1860 the cost was 0.81 cents. The Erie Canal was a great commercial success and had a large regional economic impact.

The Delaware and Raritan Canal was also very successful. Also important was the 2.5-mile canal bypassing the falls of the Ohio River at Louisville, which opened in 1830.

The success of some of the early canals led to a canal building boom, during which work began on many canals which would prove to be financially unsuccessful. As the canal boom was underway in the late 1820s, a small number of horse railways were being built. These were quickly followed by the first steam railways in the 1830s.

Steam power

In 1780 the United States had three major steam engines, all of which were used for pumping water: two in mines and one for New York City’s water supply. Most power in the U.S. was supplied by water wheels and water turbines after their introduction in 1840. By 1807, when the North River Steamboat (unofficially called Clermont) first sailed, there were estimated to be fewer than a dozen steam engines operating in the U.S. Steam power did not overtake water power until sometime after 1850.

Oliver Evans began developing a high pressure steam engine that was more practical than the engine developed around the same time by Richard Trevithick in England. The high pressure engine did away with the separate condenser and thus did not require cooling water. It also had a higher power to weight ratio, making it suitable for powering steamboats and locomotives.

Evans produced a few custom steam engines from 1801 to 1806, when he opened the Mars Works iron foundry and factory in Philadelphia, where he produced additional engines. In 1812, he produced a successful Colombian engine at Mars Works. As his business grew and orders were being shipped, Evans and a partner formed the Pittsburgh Steam Engine Company in Pittsburgh, Pennsylvania. Steam engines soon became common in public water supply, sawmills and flour milling, especially in areas with little or no water power.

Mechanical power transmission

In 1828, Paul Moody substituted leather belting for gearing in mills. Leather belting from line shafts was the common way to distribute power from steam engines and water turbines in mills and factories. In the factory boom of the late 19th century it was common for large factories to have many miles of line shafts. Leather belting continued in use until it was displaced by unit drive electric motors in the early decades of the 20th century.

Shipbuilding

Shipbuilding remained a sizable industry. U.S.-built ships were superior in design, required smaller crews and cost between 40 and 60 percent less to build than European ships. The British gained the lead in shipbuilding after they introduced iron-hulled ships in the mid-19th century.

Steamboats and steam ships

Commercial steamboat operations began in 1807 within weeks of the launch of Robert Fulton‘s North River Steamboat, often referred to as the Clermont.

The first steamboats were powered by Boulton and Watt type low pressure engines, which were very large and heavy in relation to the smaller high pressure engines. In 1807, Robert L. Stevens began operation of the Phoenix, which used a high pressure engine in combination with a low pressure condensing engine. The first steamboats powered only by high pressure were the Aetna and Pennsylvania designed and built by Oliver Evans.

In the winter of 1811 to 1812, the New Orleans became the first steamboat to travel down the Ohio and Mississippi Rivers from Pittsburgh to New Orleans. The commercial feasibility of steamboats on the Mississippi and its tributaries was demonstrated by the Enterprise in 1814.

By the time of Fulton’s death in 1815, he operated 21 of the estimated 30 steamboats in the U.S. The number of steamboats steadily grew into the hundreds. There were more steamboats in the Mississippi valley than anywhere else in the world.

Early steamboats took 30 days to travel from New Orleans to Louisville, which was from half to one-quarter the time by keel boat. Due to improvements in steamboat technology, by 1830 the time from New Orleans to Louisville was halved. In 1820, freight rates for keel boats were five cents per ton-mile versus two cents by steamboat, falling to one-half cent per ton-mile by 1830.

The SS Savannah crossed from Savannah to Liverpool in 1819 as the first trans-Atlantic steamship; however, until the development of more efficient engines, trans-ocean ships had to carry more coal than freight. Early trans-ocean steamships were used for passengers and soon some companies began offering regularly scheduled service.

Railroads

Railroads were an English invention, and the first entrepreneurs imported British equipment in the 1830s. By the 1850s, the Americans had developed their own technology. The early lines in the 1830s and 1840s were locally funded and connected nearby cities or connected farms to navigable waterways. They primarily handled freight rather than passengers. The first locomotives were imported from England. One such locomotive was the John Bull which arrived in 1831. While awaiting assembly, Matthias W. Baldwin, who had designed and manufactured a highly successful stationary steam engine, was able to inspect the parts and obtain measurements. Baldwin was already working on an experimental locomotive based on designs shown at the Rainhill Trials in England. Baldwin produced his first locomotive in 1832; he went on to found the Baldwin Locomotive Works, one of the largest locomotive manufacturers. In 1833, when there were few locomotives in the U.S., three quarters of locomotives were made in England. In 1838, there were 346 locomotives, three-fourths of which were made in the U.S.

Ohio had more railroads built in the 1840s than any other state. Ohio’s railroads put the canals out of business. A typical mile of railroad cost $30,000 compared to the $20,000 per mile of canal, but a railroad could carry 50 times as much traffic. Railroads appeared at the time of the canal boom, causing its abrupt end, although some canals flourished for an additional half-century.

Manufacturing

Starting with textiles in the 1790s, factories were built to supply a regional and national market. The power came from waterfalls, and most of the factories were built alongside the rivers in rural New England and Upstate New York.

Before 1800, most cloth was made in home workshops, and housewives sewed it into clothing for family use or trade with neighbors. In 1810, the secretary of the treasury estimated that two-thirds of rural household clothing, including hosiery and linen, was produced by households.^[ By the 1820s, housewives bought the cloth at local stores and continued their sewing chores. The American textile industry was established during the long period of wars from 1793 to 1815, when cheap cloth imports from Britain were unavailable. Samuel Slater secretly brought in the plans for complex textile machinery from Britain, and he built new factories in Rhode Island using the stolen designs. By the time the Embargo Act of 1807 cut off trade with Britain, there were 15 cotton spinning mills in operation. These cotton spinning mills were all small operations, typically employing fewer than 50 people, and most used Arkwright water frames powered by small streams; all of these mills were located in southeastern New England.

The economy grew every year from 1812 to 1815 despite a large loss of business by East Coast shipping interests. Wartime inflation averaged 4.8% a year. The national economy grew 1812–1815 at the rate of 3.7% a year, after accounting for inflation. Per capita GDP grew at 2.2% a year, after accounting for inflation. Money that would have been spent on imports—mostly cloth—was diverted to opening new factories, which were profitable since British cloth was not available. This gave a major boost to the industrial revolution, as typified by the Boston Associates. The Boston Manufacturing Company built the first integrated spinning and weaving factory in the world at Waltham, Massachusetts, in 1813.

Middle 19th century

The middle 19th century was a period of transition toward industrialization, particularly in the Northeast, which produced cotton textiles and shoes. The population of the West (generally meaning from Ohio to and including Wisconsin, Minnesota, Iowa and Missouri and south to include Kentucky) grew rapidly. The West was primarily a grain and pork producing region, with an important machine tool industry developing around Cincinnati, Ohio. The Southern economy was based on plantation agriculture, primarily cotton, tobacco and sugar, produced with slave labor.

The market economy and factory system were not typical before 1850, but developed along transportation routes. Steamboats and railroads, introduced in the early part of the century, became widespread and aided westward expansion. The telegraph was introduced in 1844 and was in widespread use by the mid-1850s.

A machine tool industry developed and machinery became a major industry. Sewing machines began being manufactured. The shoe industry became mechanized. Horse drawn reapers became widely introduced, significantly increasing the productivity of farming.

The use of steam engines in manufacturing increased and steam power exceeded water power after the Civil War. Coal replaced wood as the major fuel.

The combination of railroads, the telegraph and machinery and factories began to create an industrial economy.

The longest economic expansion of the United States occurred in the recession-free period between 1841 and 1856. A 2017 study attributes this expansion primarily to “a boom in transportation-goods investment following the discovery of gold in California.”

Commerce, industry and agriculture

The depression that began in 1839 ended with an upswing in economic activity in 1843.

Railroad executives invented modern methods for running large-scale business operations, creating a blueprint that all large corporations basically followed. They were first to encounter managerial complexities, labor union issues, and problems of geographical competition. Railroads had to manage safety, traffic and freight over large geographic areas and had to keep track of railcars, which could go missing for months. Railroads also made extensive use of telegraph communications.

Historian Larry Haeg argues from the perspective of the end of the 19th century:Railroads created virtually every major American industry: coal, oil, gas, steel, lumber, farm equipment, grain, cotton, textile factories, California citrus.

Iron industry

The most important technological innovation in mid-19th-century pig iron production was the adoption of hot blast, which was developed and patented in Scotland in 1828. Hot blast is a method of using heat from the blast furnace exhaust gas to preheat combustion air, saving a considerable amount of fuel. It allowed much higher furnace temperatures and increased the capacity of furnaces.

Hot blast allowed blast furnaces to use anthracite or lower grade coal. Anthracite was difficult to light with cold blast. High quality metallurgical coking coal deposits of sufficient size for iron making were only available in Great Britain and western Germany in the 19th century, but with less fuel required per unit of iron, it was possible to use lower grade coal.

The use of anthracite was rather short lived because the size of blast furnaces increased enormously toward the end of the century, forcing the use of coke, which was more porous and did not impede the upflow of the gases through the furnace. Charcoal would have been crushed by the column of material in tall furnaces. Also, the capacity of furnaces would have eventually exceeded the wood supply, as happened with locomotives.

Iron was used for a wide variety of purposes. In 1860 large consumers were numerous types of castings, especially stoves. Of the $32 million of bar, sheet and railroad iron produced, slightly less than half was railroad iron. The value added by stoves was equal to the value added by rails.

Coal displaces wood

Coal replaced wood during the mid-19th century. In 1840 wood was the major fuel while coal production was minor. In 1850 wood was 90% of fuel consumption and 90% of that was for home heating. By 1880 wood was only 5% of fuel consumption. Cast iron stoves for heating and cooking displaced inefficient fireplaces. Wood was a byproduct of land clearing and was placed along the banks of rivers for steamboats. By mid-century the forests were being depleted while steamboats and locomotives were using enough wood to create shortages along their routes; however, railroads, canals and navigable internal waterways were able to bring coal to market at a price far below the cost of wood. Coal sold in Cincinnati for 10 cents per bushel (94 pounds) and in New Orleans for 14 cents.

Charcoal production was very labor and land intensive. It was estimated that to fuel a typical sized 100 ton of pig iron per week furnace in 1833 at a sustained yield, a timber plantation of 20,000 acres was required. The trees had to be hauled by oxen to where they were cut, stacked on end and covered with earth or put in a kiln to be charred for about a week. Anthracite reduced labor cost to $2.50 per ton compared to charcoal at $15.50 per ton.

Manufacturing

Manufacturing became well established during the mid-19th century. Labor in the U.S. was expensive and industry made every effort to economize by using machinery.^[75] Woodworking machinery such as circular saws, high speed lathes, planers and mortising machines and various other machines amazed British visitors, as was reported by Joseph Whitworth.

In the early 19th century machinery was made mostly of wood with iron parts. By the mid-century machines were being increasingly of all iron, which allowed them to operate at higher speeds and with higher precision. The demand for machinery created a machine tool industry that designed and manufactured lathes, metal planers, shapers and other precision metal cutting tools.

The shoe industry was the second to be mechanized, beginning in the 1840s. Sewing machines were developed for sewing leather. A leather rolling machine eliminated hand hammering, and was thirty times faster. Blanchard lathes began being used for making shoe lasts (forms) in the 1850s, allowing the manufacture of standard sizes.

By the 1850s much progress had been made in the development of the sewing machine, with a few companies making the machines, based on a number of patents, with no company controlling the right combination of patents to make a superior machine. To prevent damaging lawsuits, in 1856 several important patents were pooled under the Sewing Machine Combination, which licensed the patents for a fixed fee per machine sold.

The sewing machine industry was a beneficiary of machine tools and the manufacturing methods developed at the Federal Armories. By 1860 two sewing machine manufacturers were using interchangeable parts.

The sewing machine increased the productivity of sewing cloth by a factor of 5.

In 1860 the textile industry was the largest manufacturing industry in terms of workers employed (mostly women and children), capital invested and value of goods produced. That year there were 5 million spindles in the U.S.

Steam power

The Treasury Department’s steam engine report of 1838 was the most valuable survey of steam power until the 1870 Census. According to the 1838 report there were an estimated 2,000 engines totaling 40,000 hp, of which 64% were used in transportation, mostly in steamboats.

The Corliss steam engine, patented in 1848, was called the most significant development in steam engineering since James Watt. The Corliss engine was more efficient than previous engines and maintained more uniform speed in response to load changes, making it suitable for a wide variety of industrial applications. It was the first steam engine that was suitable for cotton spinning. Previously steam engines for cotton spinning pumped water to a water wheel that powered the machinery.

Steam power greatly expanded during the late 19th century with the rise of large factories, the expanded railroad network and early electric lighting and electric street railways.

Steamboats and ships

The number of steamboats on western rivers in the U.S. grew from 187 in 1830 to 735 in 1860. Total registered tonnage of steam vessels for the U.S. grew from 63,052 in 1830 to 770,641 in 1860.

Until the introduction of iron ships, the U. S. made the best in the world. The design of U.S. ships required fewer crew members to operate. U.S. made ships cost from 40% to 60% as much as European ships, and lasted longer.

The screw propeller was tested on Lake Ontario in 1841 before being used on ocean ships. Propellers began being used on Great Lakes ships in 1845. Propellers caused vibrations which were a problem for wooden ships. The SS Great Britain, launched in 1845, was the first iron ship with a screw propeller. Iron ships became common and more efficient multiple expansion engines were developed. After the introduction of iron ships, Britain became the leading shipbuilding country. The U.S. tried to compete by building wooden clipper ships, which were fast, but too narrow to carry economic volumes of low value freight.

Telegraph

Congress approved funds for a short demonstration telegraph line from Baltimore to Washington D.C., which was operational in 1844. The telegraph was quickly adopted by the railroad industry, which needed rapid communication to coordinate train schedules, the importance of which had been highlighted by a collision on the Western Railroad in 1841. Railroads also needed to communicate over a vast network in order to keep track of freight and equipment. Consequently, railroads installed telegraphs lines on their existing right-of-ways. By 1852 there were 22,000 miles of telegraph lines in the U.S., compared to 10,000 miles of track.

Urbanization

By 1860, on the eve of the Civil War, 16% of the people lived in cities with 2500 or more people and one third of the nation’s income came from manufacturing. Urbanized industry was limited primarily to the Northeast; cotton cloth production was the leading industry, with the manufacture of shoes, woolen clothing, and machinery also expanding. Most of the workers in the new factories were immigrants or their children. Between 1845 and 1855, some 300,000 European immigrants arrived annually. Many remained in eastern cities, especially mill towns and mining camps, while those with farm experience and some savings bought farms in the West.

Agriculture

In the antebellum period the U.S. supplied 80% of Britain’s cotton imports. Just before the Civil War the value of cotton was 61% of all goods exported from the U.S.

The westward expansion into the highly productive heartland was aided by the new railroads, and both population and grain production in the West expanded dramatically. Increased grain production was able to capitalize on high grain prices caused by poor harvests in Europe during the time of the Great Famine in Ireland Grain prices also rose during the Crimean War, but when the war ended U.S. exports to Europe fell dramatically, depressing grain prices. Low grain prices were a cause of the Panic of 1857. Cotton and tobacco prices recovered after the panic.

Agriculture was the largest single industry and it prospered during the war. Prices were high, pulled up by a strong demand from the army and from Britain, which depended on American wheat for a fourth of its food imports.

John Deere developed a cast steel plow in 1837 which was lightweight and had a moldboard that efficiently turned over and shed the plowed earth. It was easy for a horse to pull and was well suited to cutting the thick prairie sod of the Midwest. He and his brother Charles founded Deere and Company which continues into the 21st century as the largest maker of tractors, combines, harvesters and other farm implements.

Threshing machines, which were a novelty at the end of the 18th century, began being widely introduced in the 1830s and 1840s. Mechanized threshing required less than half the labor of hand threshing.

The Civil War acted as a catalyst that encouraged the rapid adoption of horse-drawn machinery and other implements. The rapid spread of recent inventions such as the reaper and mower made the workforce efficient, even as hundreds of thousands of farmers were in the army. Many wives took their place, and often consulted by mail on what to do; increasingly they relied on community and extended kin for advice and help.

The 1862 Homestead Act opened up the public domain lands for free. Land grants to the railroads meant they could sell tracts for family farms (80 to 200 acres) at low prices with extended credit. In addition the government sponsored fresh information, scientific methods and the latest techniques through the newly established Department of Agriculture and the Morrill Land Grant College Act.

Slave labor

In 1860, there were 4.5 million Americans of Afro-American descent, 4 million of which were slaves, worth $3 billion. They were mainly owned by southern planters of cotton and sugarcane. An estimated 60% of the value of farms in Alabama, Georgia, Louisiana, Mississippi and South Carolina was in slaves, with less than a third in land and buildings.

In the aftermath of the Panic of 1857, which left many northern factory workers unemployed and deprived to the point of causing bread riots, supporters of slavery pointed out that slaves were generally better fed and had better living quarters than many free workers. It is estimated that slaves received 15% more in imputed wages than the free market.

Finance, money and banking

After the expiration of the charter of the Second Bank of the United States, federal revenues were handled by the Independent Treasury beginning in 1846. The Second Bank of the U.S. had also maintained some control over other banks, but in its absence banks were only under state regulation.

One of the main problems with banks was over-issuance of banknotes. These were redeemable in specie (gold or silver) upon presentation to the chief cashier of the bank. When people lost trust in a bank they rushed to redeem its notes, and because banks issued more notes than their specie reserves, the bank couldn’t redeem the notes, often causing the bank to fail. In 1860 there were over 8,000 state-chartered banks issuing notes. In 1861 the U.S. began issuing United States Notes as legal tender.

Banks began paying interest on deposits and using the proceeds to make short term call loans, mainly to stock brokers.

New York banks created a clearing house association in 1853 in which member banks cleared accounts with other city banks at the close of the week. The clearinghouse association also handled notes from banks in other parts of the country. The association was able to detect banks that were issuing excessive notes because they could not settle.

Panic of 1857

The recovery from the depression that followed the Panic of 1837 began in 1843 and lasted until the Panic of 1857.

The panic was triggered by the August 24 failure of the well regarded Ohio Life Insurance and Trust Co. A manager in the New York branch, one of the city’s largest financial institutions, had embezzled funds and made excessive loans. The company’s president announced suspension of specie redemption, which triggered a rush to redeem banknotes, causing many banks to fail because of lack of specie.

The United States had been running a trade deficit, draining gold out of the country. Because of the tariff revenues, the U.S. Treasury held a considerable amount of gold, which kept it out of circulation. On September 12, the SS Central America, which was carrying $1.5 million in gold from California, sank, contributing to the panic. Secretary of the Treasury Howell Cobb came to the aid of New York mercantile interests by buying back some of the national debt. On September 25 the Bank of Pennsylvania suspended specie payment, starting a nationwide bank run.

The danger of interest bearing deposits became apparent when bankers had to call loans made to stock brokers, many of whom were unable to pay. Banks then had to curtail credit to commercial and industrial customers. Many businesses were unable to pay workers back wages because the banknotes they held were now worthless.

The Crimean War, which had cut off Russian wheat exports, ended in 1856. The war had caused high wheat prices and overexpansion in the U.S., which had been exporting wheat to Europe. Bountiful western harvests in 1857 caused grain prices to fall. Good harvests in England, France and Russia caused collapse in demand for U.S. grains in 1858 and 1859. This caused railroad shipments from the West to fall, which resulted in the bankruptcy of some railroads.

The inability of the West to sell its crops hurt businesses in other regions, such as New England, which manufactured shoes sold in the West. Cotton and tobacco prices fell, but unlike grains, soon recovered.

The panic left many northern wage earners unemployed, most temporarily, but high unemployment lingered for a couple of years^.

Immigration surge

Immigration to the U.S. surged following the Great Famine (Ireland). There were about 3 million immigrants during the decade of the 1850s. They were mainly from Germany, Ireland and England.

Civil War economy

Union

The Union economy grew and prospered during the war while fielding a very large army and navy. The Republicans in Washington had a Whiggish vision of an industrial nation, with great cities, efficient factories, productive farms, all national banks, all knit together by a modern railroad system, to be mobilized by the United States Military Railroad. The South had resisted policies such as tariffs to promote industry and homestead laws to promote farming because slavery would not benefit. With the South gone and Northern Democrats weak, the Republicans enacted their legislation. At the same time they passed new taxes to pay for part of the war and issued large amounts of bonds to pay for most of the rest. Economic historians attribute the remainder of the cost of the war to inflation. Congress wrote an elaborate program of economic modernization that had the dual purpose of winning the war and permanently transforming the economy.

Financing the war

In 1860 the Treasury was a small operation that funded the small-scale operations of the government through land sales and customs based on a low tariff. Peacetime revenues were trivial in comparison with the cost of a full-scale war but the Treasury Department under Secretary Salmon P. Chase showed unusual ingenuity in financing the war without crippling the economy. Many new taxes were imposed and always with a patriotic theme comparing the financial sacrifice to the sacrifices of life and limb. The government paid for supplies in official currency, which encouraged people to sell to the government regardless of their politics. By contrast the Confederacy gave paper promissory notes when it seized property, so that even loyal Confederates would hide their horses and mules rather than sell them for dubious paper. Overall the Northern financial system was highly successful in raising money and turning patriotism into profit, while the Confederate system impoverished its patriots.

The United States needed $3.1 billion to pay for the immense armies and fleets raised to fight the Civil War—over $400 million in 1862 alone. Apart from tariffs, the largest revenue by far came from new excise taxes that were imposed on every sort of manufactured item. Second came much higher tariffs, through several Morrill tariff laws. Third came the nation’s first income tax; only the wealthy paid and it was repealed at war’s end.

Apart from taxes, the second major source of income was government bonds. For the first time bonds in small denominations were sold directly to the people, with publicity and patriotism as key factors, as designed by banker Jay Cooke. State banks lost their power to issue banknotes. Only national banks could do that and Chase made it easy to become a national bank; it involved buying and holding federal bonds and financiers rushed to open these banks. Chase numbered them, so that the first one in each city was the “First National Bank”. Third, the government printed paper money called “greenbacks“. They led to endless controversy because they caused inflation.

The North’s most important war measure was perhaps the creation of a system of national banks that provided a sound currency for the industrial expansion. Even more important, the hundreds of new banks that were allowed to open were required to purchase government bonds. Thereby the nation monetized the potential wealth represented by farms, urban buildings, factories, and businesses, and immediately turned that money over to the Treasury for war needs.

Tariffs

Secretary Salmon P. Chase, though a long-time free-trader, worked with Morrill to pass a second tariff bill in summer 1861, raising rates another 10 points in order to generate more revenues. These subsequent bills were primarily revenue driven to meet the war’s needs, though they enjoyed the support of protectionists such as Carey, who again assisted Morrill in the bill’s drafting. The Morrill Tariff of 1861 was designed to raise revenue. The tariff act of 1862 served not only to raise revenue but also to encourage the establishment of factories free from British competition by taxing British imports. Furthermore, it protected American factory workers from low paid European workers, and as a major bonus attracted tens of thousands of those Europeans to immigrate to America for high wage factory and craftsman jobs.

Customs revenue from tariffs totaled $345 million from 1861 through 1865 or 43% of all federal tax revenue.

Land sales and grants

The U.S. government owned vast amounts of good land (mostly from the Louisiana Purchase of 1803 and the Oregon Treaty with Britain in 1846). The challenge was to make the land useful to people and to provide the economic basis for the wealth that would pay off the war debt. Land grants went to railroad construction companies to open up the western plains and link up to California. Together with the free lands provided to farmers by the Homestead Law the low-cost farm lands provided by the land grants sped up the expansion of commercial agriculture in the West.

The 1862 Homestead Act opened up the public domain lands. Land grants to the railroads meant they could sell tracts for family farms (80 to 200 acres) at low prices with extended credit. In addition the government sponsored fresh information, scientific methods and the latest techniques through the newly established Department of Agriculture and the Morrill Land Grant College Act.

Agriculture

Agriculture was the largest single industry and it prospered during the war. Prices were high, pulled up by a strong demand from the army and from Britain (which depended on American wheat for a fourth of its food imports). The war acted as a catalyst that encouraged the rapid adoption of horse-drawn machinery and other implements. The rapid spread of recent inventions such as the reaper and mower made the workforce efficient, even as hundreds of thousands of farmers were in the army. Many wives took their place and often consulted by mail on what to do; increasingly they relied on community and extended kin for advice and help.

The Union used hundreds of thousands of animals. The Army had plenty of cash to purchase them from farmers and breeders but especially in the early months the quality was mixed. Horses were needed for cavalry and artillery. Mules pulled the wagons. The supply held up, despite an unprecedented epidemic of glanders, a fatal disease that baffled veterinarians. In the South, the Union Army shot all the horses it did not need to keep them out of Confederate hands. The Treasury started buying cotton during the war, for shipment to Europe and northern mills. The sellers were Southern planters who needed the cash, regardless of their patriotism.

Collapse of the South

The wartime devastation of the South was great and poverty ensued; incomes of whites dropped, but income of the former slaves rose. During Reconstruction railroad construction was heavily subsidized (with much corruption), but the region maintained its dependence on cotton. Former slaves became wage laborers, tenant farmers, or sharecroppers. They were joined by many poor whites, as the population grew faster than the economy. As late as 1940 the only significant manufacturing industries were textile mills (mostly in the upland Carolinas) and some steel in Alabama.

The industrial advantages of the North over the South helped secure a Northern victory in the American Civil War (1861–1865). The Northern victory sealed the destiny of the nation and its economic system. The slave-labor system was abolished; sharecropping emerged and replaced slavery to supply the labor needed for cotton production, but cotton prices plunged in the Panic of 1873, leading Southern plantations to decline in profitability. Northern industry, which had expanded rapidly before and during the war, surged ahead. Industrialists came to dominate many aspects of the nation’s life, including social and political affairs.