by Hugh Brogan
Of equal importance to an industrial revolution is the availability of capital for investment. On this point Andrew Carnegie (1835–1919), the steel magnate, perhaps said the last word: ‘It is astounding the amount of working capital you must have in a great concern. It is far more than the cost of the works.’ To launch such a concern it was first necessary to accumulate sufficient funds, whether by saving or borrowing or selling, to buy a site, build a factory (or ironworks, or steel foundry, or shipyard), hire and train and pay workers, buy raw material, advertise for customers and ensure that your manufactures could be delivered. Initially it would be desirable to have cash in hand, after all this, to pay for new machines and to set against the depreciation of old ones: later on, and of course the sooner the better, the profits of the concern would have to cover this cost. It would also be as well to have something in hand in case the market suddenly collapsed as, in nineteenth-century conditions, it would be certain to do at some stage. These were the ideal circumstances. In reality, they were seldom or never attained. The manufacturer had to borrow to set up his plant and borrow to keep it going, which added interest charges to all his other overheads. Capital was thus of crucial importance at every stage of industrial life, and the capitalist was the great man of the age. Only the man whose resources were large enough to ride out the periodical storms, whether as a lender or as a manufacturer, could be sure of avoiding all the woes of early industrialism, whether bankruptcy, unemployment or takeover. There were few such men in nineteenth-century America, and the prestige of those who did emerge was consequently enormous. So was their wealth and their power.
The importance of capital in the early Industrial Revolution was so great and so obvious everywhere that it gave rise to several new social and economic theories, of which the most famous is Marxism. It also gave rise to the term ‘capitalism’, and this was by no means so acceptable a development. As commonly used, the term is at once too vague and too precise. Too precise, because it emphasizes one element in the rise of the modern industrial economy and subordinates all others in a way which ignores so many facts as to be positively question-begging; too vague, because of its use in political argument. For too many people it has become an all-purpose explanation of everything that has occurred in the past few hundred years; a swear-word to label all they dislike about the past. For too many others, ‘capitalism’ has come to seem the fine flower of human history, the only begetter and guarantor of freedom, progress and civilization. For them, capitalism is a perfected system which ought never to have been tampered with in the slightest degree, and ought now to be restored as carefully as if it were a vintage motor-car.
To the historian of the United States neither of these views makes sense. Even though the USA rapidly became the greatest capitalist country, its capitalist age – the epoch, that is, in which private capital was indeed the dominant force – was conspicuously short, lasting only from the end of the Civil War to 1929. Only during that period, which raced to apply modern techniques to the largely untouched resources of North America, was the need for massive capital investment so urgent and so difficult to satisfy adequately that the appetites of the capitalists, the money men, prevailed over all other social forces. In that age, laws and legal processes were altered, reinterpreted, perverted or ignored; the interests of working men and women were trampled upon; the appeal to the greed, foresight or gambler’s instinct of the wealthy led to innumerable shady operations; the principles of political economy were reinvented, and the interests of the consumer, the ultimate customer, were for long ignored. But by the second decade of the twentieth century the problem of capital accumulation had been solved: the work of the previous sixty years bore fruit in the ceaseless generation of new funds for investment. If progress and prosperity were to be maintained other considerations had to be allowed due weight; what neglect of them could lead to was demonstrated in the Great Crash of 1929 and the long depression that followed, which proved that the great capitalists had been allowed to rule the roost unchecked for a little too long. So ever since 1933 capital has been allowed to be only one of many powers struggling to preserve and extend their interests.
Yet its predominance in what may be called the Age of Gold (after its favourite metal)4 cannot sanely be denied. It was precisely this predominance which marked off the period from the years before and after it. To be sure, the foundations had been a long time a-laying. Capital had been of essential importance in the very opening of America, from the Virginia Company onwards, and the first American multi-millionaire, John Jacob Astor, had made his pile in the fur-trade long before 1834 (when, seeing that the fashion for beaver hats had been superseded by one for silk, he sold out). But for long the problem of securing funds for investment was almost crippling. The success of the Erie Canal touched off the canal boom, but, like the Erie, it had to be supported by state securities. It was the faith and credit of Pennsylvania which encouraged British speculators to invest 835,000,000 in that state’s internal improvements. The British lost the lot in the crash of 1839 and the ensuing depression: in 1842 Pennsylvania repudiated her debts. Various morals were drawn from this affair. Europeans concluded that American securities, even federal ones (bonds, that is, backed by the credit of the United States), were worthless, and it was long before they invested in America again. The Americans concluded that it was madness to risk the good name of their political system, and perhaps its very existence, by letting their state and municipal governments undertake industrial and commercial developments which private enterprise could handle. Roads, canals, railways and telegraph lines were still enormously desirable, but the risks of creating them must in future be borne by individual citizens. This implied that to the same citizens would belong the profits. Astor would not be the last millionaire or even, for long, the richest.
Private capital proved equal to the responsibilities and opportunities thus given to it. It grew rapidly between 1839 and 1861. Individuals might meet disaster in the periodic panics, depressions and recessions which punctuated its upward course, but the business class as a whole prospered mightily. The Civil War brought it ascendancy.
Like so much about the Civil War this was unplanned and unforeseen. The Republicans thought of themselves as the party of the working man and, especially, the farmer. Lincoln spoke for them when, in his first inaugural, he affirmed that
labour is prior to and independent of capital. Capital is only the fruit of labour and could never have existed if labour had not first existed. Labour is the superior of capital and deserves much the higher consideration.
Businessmen themselves were so far from expecting to do well out of the war that they deplored the prospect of hostilities and did all they could to avert them. The mayor of New York, thinking of his city’s huge investment in the South and the cotton trade, even proposed that New York too should secede from the Union. The South had clamorously noticed and denounced the rise of Northern capital for the previous thirty years; one of the most plausible (though in fact fallacious) arguments for secession was that Dixie was in thrall to New York and Boston; but she certainly did not expect that her bid for independence would bring about exactly what she most feared: not only emancipation for the slaves, but hegemony for Wall Street.
Yet secession cleared the way for the Republicans’ economic programme as nothing else could have done. Revenue tariffs, raised to help pay for the war, quickly had protective elements grafted onto them, elements which were never to be entirely removed during the next seventy years, which were rather to be added to and intensified. So American manufacturers were henceforward to have a privileged place in the American market, to the discomfiture of their foreign competitors. Businessmen were also to get most of the profit from the measures which the war Congress passed to aid Western development and cement ocean-to-ocean unity. The 1862 Homestead Act was supposed to help pioneer farmers by giving them homesteads (farms) of 160 acres each out of the public domain in the West, provided only that they cultivated th
e land for five years. Unfortunately for such pioneers the act also allowed them to buy the land cheaply, if they were able, for $1.25 an acre, after only six months’ cultivation. This enabled land speculators to lay their hands on vast areas of the best land for what were, to them, trivial sums: they simply hired agents to masquerade as real farmers. Settlers had to buy their land from the speculators, at inflated prices. But so it had ever been on the frontier. The Acts setting up the Central Pacific and Union Pacific Railroads (1862) and the Northern Pacific Railroad (1864) were novelties of spectacular importance. For one thing these, with Chase’s National Currency Acts of 1863 and 1864, which awarded national charters to certain banks, were the first incorporations performed by the federal government since 1816, when the Second Bank of the United States was incorporated. Thirty years of Jacksonian rhetoric against monopolies and monsters were thus discarded. For another, Congress thereby found its way round the ban on any new government-sponsored business enterprise. Transcontinental railroads were held to be of the utmost national importance, but even they could not justify the mortgaging of the national credit (an exceedingly wise principle, in view of the immensely erratic economic performance of these railroads when at last they were in operation). Instead, Congress tempted investors by making lavish grants of land along the lines of the proposed roads. Funds raised by selling such land, or by borrowing against the security it provided, were supposed to pay for laying the tracks. The whole operation of carrying the rails across the continent was so risky, so difficult (the golden spike at Promontory Point, Utah, which linked the Union Pacific rails going west with the Central Pacific ones going east was not driven until 1869), that the enterprise might have had to wait for many years more without the land grants. Nevertheless, those grants (131,000,000 acres in all) were another immense boon to speculators, making the West the province of New York, as a Senator from Wisconsin complained at the time; and they added vastly to the resources of Wall Street and the other financial centres of the East, centres already much strengthened by the wartime banking acts, which gave the big banks enormous advantages over smaller or newer ones. Only the big banks could service the national debt which the war was rapidly increasing, and they exacted a high reward for doing so.
The war does not seem to have accelerated economic growth; if anything, it was a plateau between the giddy expansion of the fifties and the post-war boom. Indeed at first it seemed as if business forebodings would come true and the war be a check to prosperity. It took Northern industry many months to adapt to the needs of the army and the navy, and meantime it had lost its market in the South. But soon the United States industrial machine showed its capacity as a wartime producer for the first time. Profits were enormous, even allowing for wartime inflation, in part because wages did not rise nearly so rapidly as prices. Nor was the war allowed to interfere with the plans of certain individuals. The new resource, petroleum, had been produced commercially at Oil Creek, Pennsylvania, for the first time in 1859; the young John D. Rockefeller soon afterwards took his first step towards empire by merging five refineries. The war ended in a victory which seemed as much a vindication of American industrialism as of American nationalism; and the process of conversion from war to peace proved a new stimulus to business, as the federal government settled its contracts and as returning veterans looked for goods on which to spend their pay, their savings and their pensions: in this way some $700,000,000 was pumped into the economy. The boom continued until 1873. Andrew Carnegie, a railroad man, who was already making $50,000 a year at the war’s end, was now drawn to steel as irresistibly as Rockefeller to oil: first the Bessemer and then the open-hearth processes were making the metal a plentiful and cheap commodity for the first time in history. The railroads, which had earlier sustained the demand for iron, were still building frantically, and now stimulated steel; steel-making in turn stimulated demand for coke. When Carnegie of Pittsburgh joined forces with Henry Clay Frick, who controlled the processing of coke in Pennsylvania and the fields where the right sort of coal could be mined, another great industrial empire began to take shape. The headlong expansion of the American population (thirty-one million in 1860, fifty million in 1880, sixty-three million in 1890) bred an equally headlong expansion and proliferation of demand. It seemed that nothing could fail. All that was necessary was to exploit the resources of the continent to the utmost, and there was a rapidly burgeoning class of geologists, engineers and other technicians to show how to do it.
In the long run such greedy calculations would be amply justified; meantime difficulties arose. Purchasing power was increasing at a great rate, no doubt, but there were still too many people – poor, pinched or simply parsimonious by tradition-who could not be customers for the industrialists’ wares. The great firms of mail-order catalogues (Montgomery Ward, Sears Roebuck) carried the good news of cheap, diversified products far and wide, to isolated farms, small towns and Southern plantations (or what was left of them); the railroads made it easy to fill orders from these catalogues rapidly; but still demand did not quite keep up with production. American capitalism was not organized to adjust to such a condition. Competition was the fiercely affirmed law of its life. Everyone with a little money plunged into the market, hoping to get richer quickly by finding a business which would crush its rivals; towns, as we have seen, competed for the favours of the railroads; inventors rushed to the patent office with their new devices and then hurried to find capitalists to manufacture and sell them; eager adventurers, like the notorious Jay Gould, looked ceaselessly for opportunities to make money by outsmarting other manipulators of the stock exchanges; politicians exacted enormous favours, for themselves and their constituencies, from the businessmen, especially the railroad kings (who complained about it bitterly), in return for charters and subsidies and rights to mine for minerals on public lands. The fact that there was never enough capital for all the projects that were launched ought to have ensured investors an ample return on their money, and those who managed to hold on to their investments and did not fall victim to the many fraudulent prospectuses that circulated, not to mention other, even less honest practices that were common, eventually reaped their reward. But it took time, and the limited though ever-expanding market for industrial goods, services and processes, coupled with the shortage of capital, inevitably created tensions and contradictions. The search for funds meant that investors were regularly promised far higher returns than a company could earn for years to come. This tended to reduce the soundest concerns to the condition of speculative gambles, and, far worse, to produce permanent instability on the stock markets, where only rogues like Gould or his associate Jim Fisk could thrive.
The uncertainties of the economy were such that no one quite knew when, from being a winner, he might suddenly plunge into loss. Thus, the federal government tried steadily, in the decade after the Civil War, to return to its old modest scale and get out of the business of economic management; the culmination of this trend came in 1875 when an Act was passed undertaking to make the paper currency, the ‘greenbacks’ (originally issued to finance the Civil War), convertible into gold on 1 January 1879. This anti-inflationary measure no doubt played its part in bringing on the depression that persisted, with ups and downs, for twenty years. At any rate many people of the time thought so, and found their business calculations thrown out. Or there was the panic of 1873, which broke out when the great financier Jay Cooke, who had marketed the government’s loans during the war, suddenly went bankrupt. He brought down thousands with him in his fall. Even the richest were not safe: Cornelius Vanderbilt, ‘the Commodore’, lost an immense amount of money – it would have crippled anyone else – in his unsuccessful attempt to buy control of the Erie Railroad in 1868. He was beaten by the machinations of the men he was trying to dislodge from management, Gould, Fisk and David Drew: they issued more than 850,000,000 worth of ‘watered’ stock5 and thereby kept control of a majority of Erie shares; but this device increased the indebtedness of the railroa
d by nearly 400 per cent, for the money raised by selling watered stock, though no doubt useful to the sellers, did not equal the nominal value of the shares or the returns that the purchasers exacted, and above all was not necessary for building up the railroad itself (not that Gould would ever do anything so quaint as to invest a penny, if he could help it, in engines, rails, safety devices or stations).6 In these circumstances it is not surprising that railroads frequently crashed (Erie went bankrupt in 1893) for their earnings could not meet their debt charges. Not even the greatest escaped: in 1893, besides the Erie, the bankrupts included the Northern Pacific, the Union Pacific and the Atchison, Topeka & Santa Fe. The managers rather relished such disasters, which freed them to run trains instead of paying shareholders, but it was hard luck on the shareholders just the same.
