Trade and Finance

Trade and Finance

In July 1873, a group of outlaws loosened a piece of track leading to the derailment of a train near Council Bluffs, Iowa. Jesse and Frank James joined other former Confederate bushwhackers as they removed $2,000 from the train’s safe. It was the first of many notorious train robberies conducted by the James gang and similar outfits. Across the plains in Wyoming, the legendary African American cowboy Nat Love explained why many Westerners seemed to be cheering on these outlaws as if they were some sort of modern-day Robin Hood. “If they were robbers,” Love explained, “by what name are we to call some of the great trusts, corporations and brokers, who have for years been robbing the people of this country?” Perhaps exaggerating the charity of the James brothers, Love argued that they had stolen “from the rich and gave to the poor, while these respected members of society steal from the poor to make the rich richer.”

The story of post–Civil War industrial growth is similar to the development of the West and comes with its own outlaws and pioneers. It is a narrative of rugged individualism aided by government intervention on behalf of industrial development. This development in turn was something that most Americans believed was fuel that kept the engines of progress turning. The story of industrial growth is also a narrative of victimization and agency on the part of those who populated America’s great cities on the eve of the Second Industrial RevolutionA period from the end of the Civil War to the outbreak of World War I that was host to a significant transformation of US industry. Innovations in steel production, the assembly line, and inventions such as the internal combustion engine and the ability to harness the power of electricity were key to the transformation. Equally important was the development of the nation’s financial system that facilitated investment and permitted the growth of corporations.. Like many Native Americans, workers fought to preserve the traditions of their artisan ancestors and argued that all development was not necessarily progress. And just as Western development depended on the railroads built with federal support, the growth of industry was only made possible by the loosening of laws regarding incorporation, federal support of railroads and canals, government contracts, and the use of federal and state troops to force striking laborers back to work.

Incorporation permitted entrepreneurs to enjoy the same profit and control of their business as they would under a sole proprietorship but limited their financial and legal liabilities if their business lost money or harmed others. Unlike a sole proprietorship whose failure could result in the loss of one’s own home or even jail time, the owners of corporations could take risks without fearing the loss of anything more than the time and money they had put into the business. Defenders of corporations pointed out that these protections were the only way entrepreneurs could find investors and managers with the skills and resources needed to start new industries. Without such laws, few of the companies that fueled industrial growth and created jobs would have developed as quickly.

Corporations also permitted individuals to purchase stock—a certificate granting partial ownership of a company. One of the key benefits of incorporation was that stockholders were not legally liable themselves if a corporation they invested went bankrupt or was sued in court. They could lose everything they invested, but nothing more than they had invested. For other investors, companies needing capital sold bonds—a promise to repay a loan along with an agreed-on percentage of interest each year. The sale of stocks and bonds promised to allow ordinary Americans the ability to share in the profits of corporate America. In practice, however, only a small number of families owned securities until mid- to late twentieth century.

Figure 2.19

Steelworkers in Pittsburgh at the turn of the century.

Like the railroads and Western land speculators, Northern corporations depended on government support and sought to influence public officials in a number of ways. For example, Northern business interests lobbied government officials who agreed to increase tariffsTaxes on imported goods. Many nations use these taxes to raise revenue while “protecting” domestic industries by raising the prices of foreign goods. on a number of manufactured goods. These taxes protected the developing industries of the United States against cheaper steel and textiles from Europe by requiring importers to pay a tax when they brought their wares into the United States. In effect, these tariffs raised the price of foreign goods, which gave American-made products a competitive advantage. In an era without federal income taxes, tariffs joined Western land sales as the primary source of revenue for the federal government. Together, these two sources of income permitted the federal government to completely pay its debts related to the Civil War within a single generation.

Those who supported tariffs pointed to the revenue they generated and the domestic job creation that depended on protecting US factories from foreign competition. However, the Republican majority that passed these tariff increases soon came under fire as Southern Democrats returned to Congress in larger numbers. Raising the taxes on foreign imports had upset Southerners because Europeans retaliated with their own tariffs against the products America exported, like cotton and tobacco. Because most US factories were still located in the North, Southerners and Westerners seldom benefitted from tariffs, which resulted in higher prices for manufactured goods. More importantly, Britain turned toward India and other cotton-producing colonies within its empire that were exempt from the taxes that importers of American cotton were required to pay.

Figure 2.20

A photo showing brokers inside the New York Stock Exchange in 1908. In this image, information about share prices are printed on paper and placed on kiosks. Similar methods were used in the 1880s, but information traveled via the telegraph.

Competing perspectives regarding the tariff remained a cornerstone of US political debate. Soon this debate included policies regarding monetary policy and laws regulating corporations. America followed Britain and other leading nations in adopting the gold standardA monetary system where currency is exchangeable for a fixed amount of gold. in 1873. Prior to this decision, American money had been backed by both silver and gold. Anyone with American currency could redeem dollars for silver or gold at a certain percentage tied to the relative value of those precious metals. In addition, the government agreed to buy back the greenback currency it had issued during the Civil War, a currency that was not backed by anything more than the government’s promise to back these paper bills.

The adoption of the gold standard gave Americans and foreign investors great faith in the value of the money printed by the federal government. However, it also restricted the nation’s currency to the value of the gold held by the federal government. This restriction had upset many Southerners and Westerners because most of the nation’s gold and gold-backed currency was located in the East. Westerners were particularly eager to have the nation’s currency backed by silver because this would increase the value of recently discovered silver deposits in Western locales such as Nevada. In addition, connecting silver to the nation’s currency would benefit Western banks. In 1874, for example, New York and Massachusetts banks held $120 million of gold-backed US currency. Every bank in every state west of Ohio controlled less than half of that amount. The gold standard meant that a Western farmer had to borrow money from middlemen who had access to the money in Eastern banks. As a result, much of the net profit from a successful farm went to satisfy commissions and interest charges. Even worse, a single unsuccessful crop often meant foreclosure and loss of one’s farm to a distant East Coast banker.

Approximately half of those who went to the West to establish farms eventually migrated to one of the Eastern or Midwestern cities. Given the frequency with which Western farmers went bankrupt, Eastern financiers took on significant risks each time they sent money out West. As a result, the high interest rates Western farmers were forced to accept were not simply the result of greedy Eastern bankers. In politics and finance, however, perception is reality. These charges, along with the frequency of foreclosure, led to the creation of an East-West divide. In addition, because the amount of money that was printed was tied to a finite amount of gold rather than the increasing value of real estate and factories, banks were not able to make as many loans as they would have if there had been more money in circulation.

Corporations might have had easier access to Eastern money, but the limits of the money supply likewise resulted in high interest payments that cut into their profits. The public seldom sympathized with bankers and businessmen, however, and each farm foreclosure or factory shutdown widened the gulf of distrust between labor and capital. The federal government did not believe that it was proper to increase the money supply by printing more currency. This philosophy was influenced by the tradition of noninvolvement in the economy, a tradition of hands-off management known as laissez-faireA phrase that roughly translates to “let it be,” laissez-faire refers to a political system that enacts few restrictions on the actions of businesses and maintains low taxes on private property..

Because currency was scarce, its value increased each year—a phenomenon known as deflation. Deflation benefitted banks and those who already controlled large amounts of currency for the simple reason that the money they held increased in value automatically, while the loans they made were repaid with dollars that were worth more than the original dollars the bank had loaned. For those such as farmers who owed money, however, deflation required them to pay back loans in the future with dollars that were worth more than those they had originally received.

The belief that America’s bankers and industrialists were corrupt was evidenced by the rapidity with which a single phrase became the symbol of post-Reconstruction America. Referring to the perception of corporate domination and corruption among government officials, novelist Mark Twain labeled the era the Gilded Age in an 1873 novel. However, Twain’s contemporaries understood that greed and corruption were hardly new. Would-be reformers in the 1870s referenced the practices of banks and railroads to the questionable finance and cronyism that had been used to finance canals and other projects in decades past.

However, the size and scope of modern graft was now conducted on a national scale. In addition, the number of journalists had increased along with literacy rates. The result was that dozens of newspapers were printed in nearly every language and every city, with many of these journalists exposing scandals or at least repeating rumors of corruption. Even the most benign business deals were conducted with increasingly ambitious financing schemes that invited speculation—among both financiers in Wall Street and those who gathered on Main Street to discuss politics. Similar themes regarding suspicion of corporations and financiers would continue long past the Gilded Age. However, for the first time, a significant number of Americans debated and understood the impact of tariffs and monetary policy on their own lives.