War and Reconciliation

by Carole E. Scott

Copyright 1997-2001

Unlike the colonial and antebellum periods, in this period the roots of today are clearly evident.

"The political battles of the late nineteenth century were fought against a background of social, economic and cultural change. The population grew from 39.8 million in 1870 to 75.9 million in 1900, an increase of 25 per cent each decade. At the same time the nation experienced rapid urbanization and industrialization. The costs of these changes included heightened urban-rural tensions, growing hostility between capital and labor, increasing poverty and rising resentment against social inequalities. Although the Republican Party usually supported a high protective tariff, as a means of aiding American industry and securing full employment, while the Democrats favoured a tariff for revenue purposes only as a way of helping American farmers, politicians of the 1870s and 1880s, imbued with laissez-faire ideas, generally chose to ignore domestic social and economic problems.

By the 1890s," claims historian Edward Ranson, "social, economic and political discord had created a climate close to national crisis. Men of power and property even pondered the likelihood of revolution."

"There is a mysterious cycle in human events," said President Franklin D. Roosevelt. "To some generations much is given. Of other generations much is expected." The latter is certainly true of the Civil War generation. The cost of this war was horrific. Over 23,000 men were killed in the Battle of Antietam alone. Sometimes months after a major battle, the skeletons of men, many of whom were teenagers, were finally gathered up. Many died in agony; some unable to scream because their jaws had been blown off. Others writhed in agony, their intestines hanging outside their bodies, until they expired. Doctors sawed off limbs without anesthesia. Scores of farm boys died of childhood diseases contracted in camp. All our other wars put together hardly exceeded the deaths resulting from this war, one which, like no other, also physically devastated a good part of nation (The overwhelming majority of the physical destruction was experienced by the Southern states). Some major cities-- Columbia, Atlanta, and Richmond--were destroyed. Many factories, mills, and homes elsewhere were burned to the ground. Vast stretches of railroad tracks were torn up. (General William T. Sherman's men heated some tracks and wrapped them around trees.)

According to author James Reston, Jr., "Gen. William Tecumseh Sherman is considered by many to be the author of 'total war.' the first general of modern human history to carry the logic of war to its ultimate extreme, the first to scorch the earth, the first to consciously to demoralize the hostile civilian population in order to subdue its hostile army, the first to wreck an economy in order to starve its soldiers."

In 1860, the South accounted for a disproportionately small 8 percent of the nation's output of manufactured goods. Although manufacturing was stimulated by the demands of supplying the Confederate army and replacing goods that could no longer be imported, as was true of every other aspect of the Southern economy, for manufacturing the War was pretty much an unmitigated disaster.

The increasingly effective Northern blockade decimated the South's foreign trade. Initially, hoping to force England and France to recognize and support the Confederacy, no attempt was made to export cotton to them. Subsequently, little could be exported to them due to the blockade and loss, one by one, of the South's ports. While the loss of imported manufactured goods led to increased domestic production, this was ultimately offset by the destruction of many Southern businesses by invading Northern troops.

"Like passengers on a rollercoaster," says James L. Abrahamson, "Southern railroads rode a dizzying cycle of boom and bust.. They experienced initial prosperity, then almost total deterioration and destruction, followed by rapid postwar recovery." (The occupying Union army began building the South railroads after the war; then private Northern capital became available to rebuild the region's railroads.)

The only Northern industry to suffer greatly and permanently from the Civil War was the merchant marine, which had begun to decline once the clipper ships were began to become obsolete. The minuscule Confederate navy destroyed 239 Northern ships. To escape them, many Northerners switched to using foreign-flag vessels.

Southerners said they were fighting to preserve their states' rights. Some speculate that the slave-owning minority were fighting to preserve their slave property, while the majority were fighting to avoid having to compete with free blacks. (Southerners claimed Northerners were depriving them of their rights and exploiting them through centralizing power in the federal government that they were gradually coming to control..) Northerners claimed they fought to preserve the Union and/or to free the slaves. Some speculate that those in charge of the federal government supported keeping the South in the Union because they wanted to keep the tariff revenues collected in Southern ports. Also, some speculate Northerners feared that, if the South became an independent nation, she might become more self sufficient; thereby depriving Northern manufacturers, merchants, and shippers of business.

Economic historians James F. Willis and Martin L. Primack believe that, "in terms of loss of lives, the war was clearly America's most important military conflict." For the North, they think, it only caused a brief pause in economic growth, but the South experienced significant retrogression. (From 1859 to 1866, the agricultural output of the South declined 70 percent!)

The South financed the War primarily through printing money and borrowing. The combination of a rising money supply and falling supply caused prices to rise sufficiently to cause the velocity of money to rise, thus producing runaway inflation.

The North financed the War by levying a direct tax and the nation's first income tax and printing money, borrowing, and raising tariffs. It financed only 20 percent of its spending through taxation. With Democratic representation in Washington greatly reduced as a result of the absence of the representatives of 11 Southern states, the Republicans were able to raise tariffs to high, protective levels. This policy continued long after the War ended. The paper money the North issued to finance the War (Greenbacks) was, like the Confederacy's paper money, not redeemable in gold. The North, experienced inflation, but its level was well below that experienced in the South.

To facilitate borrowing, in 1863 the U.S. Congress established the National Banking System. Borrowing was facilitated because this Act, which authorized the issuance of national banking charters, based how much money a bank could create upon how much money it loaned the government. Also provided for was the elimination of the circulation of banknotes by state chartered banks by levying a prohibitively high tax on them based on the size of their note circulation. Initially the number of state chartered banks fell as a result, but by the end of the century their number was rising because they had made using checks popular enough to largely offset their inability to issue banknotes. (Some bankers wanted their banks to have state charters because state charters offered some advantages federal charters lacked.) The War destroyed the South's banking system, and its recovery--and, therefore, the region's--was handicapped by the lack of funds after the War to finance new banks and the region's inability to acquire many national bank charters.

The tax structure established in the North during the War encouraged businesses to consolidate because taxes were levied at each stage of production; therefore, by vertically integrating, the amount of taxes paid could be reduced. (A railroad would vertically integrate if it acquired a business that built railroad engines. It would horizontally integrate by purchasing another railroad company. There are other reasons to consolidate besides reducing taxes.) Consolidation was also encouraged by the fact that the government increasingly placed its orders with large firms because it found they provided better service. Because it led to the creation of larger firms, the Civil War promoted the organization of labor.

Obviously, the producers of arms and munitions prospered; so did canners and meat packers. The farm machinery industry was stimulated due to the loss of farmers to the army and the increased demand for farm output. (The South had no farm machinery industry to be stimulated by the loss of men and draft animals to the Confederate army.)

It has often been asserted that one consequence of this war was to transform an agrarian nation into an urbanized, industrial nation in which, for the first time, government policy played an important role. In 1927 the noted historians Charles and Mary Beard claimed that although it wiped out the assets of slave owners, this War assured the triumph of business enterprise. They believed the huge profits some Northerners amassed during the war were subsequently used to exploit the nation's natural resources. Furthermore, they believed, the War changed political and social arrangements in a way that favored industrialization.

However, in the 1960s, economic historian Thomas Cochran concluded that the War actually retarded  the nation's industrial growth! Others disagreed, but Willis and Primack agree and argue that it was not until almost 1885  that per capita commodity output reached the level an extrapolation of its trend from 1840 - 1860 produces, and economic historians Jeremy Atack and Peter Passell assert that the decline after the War "in agriculture's share of total output...reflects not the rapid growth of manufacturing but rather the pauperization of southern agriculture."

Until it was able to take New Orleans, the North dealt with the closing of the Mississippi River by shipping goods between the Midwest and Northeast by rail and canals. The negative impact of the War on Northern textile mills was mitigated by the fact they had a large stock of cotton on hand; some cotton was obtained from captured territory in the South; and some mills turned to producing woolen goods. Several bad crop years in Europe tremendously increased the demand for American wheat, and this took up much of the slack created by the loss of the cotton trade. The demand for the goods necessary to clothe and equip the ultimately huge Federal army caused business to boom for many other Northern businesses.

AGRICULTURE

In the North, farm prices advanced during the War, and farmers did well. Afterwards, however, the prices of farm commodities fell due to a sharp decline in European demand for them and the increased acreage put into cultivation in this country during the War. As a result, farmers had trouble paying off the debts they had taken on during the War in order to increase their output. Subsequently, farmers loss much of their former independence and distrust of paper money and increasingly looked to Washington for assistance and expansion of the money supply because it would raise prices; thus making it easier for them to pay their debts.

Agriculture did not cease to dominant the American economy until after the War, and it continued to be a very sizable component of the economy throughout the nineteenth century and into the twentieth. However, by 1880, in the North the value of the output of manufacturing and mining exceeded that of agriculture.

Although, due generally falling prices through the rest of the century after the War, farmers everywhere became increasingly dissatisfied with their lot, Southern farmers had greater reason to be dissatisfied. Much of the postwar expansion of output took place in the Midwest. Partly this was the result of improved transportation, the Homestead Act, and other federal land policies. Total farm output rose dramatically. Output per worker also rose, but much more slowly  in the South than in the rest of the country.

Farm tenancy increased throughout the nation. It increased more in the Midwest than in the East, but it increased the most in the South. Economic historians have put forth a number of explanations for this. Some say more men were getting on the bottom rung of the ladder leading to farm ownership. Others say more men were falling off the top rung, land ownership, to tenancy. It is obvious, of course, that due to their lack of capital, newly-freed slaves had to become tenants or sharecroppers. (The great majority of ex-slaves remained in the South.)

Competition from Western farmers and increased urbanization forced some Northeastern farmers to abandon their farms or switch to what we today call truck farming. Greatly increasing Western competition for Eastern farmers was the development of refrigerated (via ice) railroad cars.

Although the West's prairie was relatively cheaply cleared for farming due to the lack of trees, this imposed costs too, as building materials and fuel were, therefore, scarce. Where it was too dry in the West even for wheat, cattle were raised.

Agricultural prices tended downward throughout the last decades of the nineteenth century. Land and machinery costs, however, rose; so farmers were caught in a bind despite the fact that prices in general were also falling. Farmers were debtors, and debtors suffer in a period of falling prices.

Farmers complained bitterly about the railroads, claiming they practiced rate discrimination and the monopolization of middlemen functions such as the warehousing of grain. They tried to deal with their problems through political action and the forming of cooperatives.

Through cooperatives farmers sought to reduce the cost of farm inputs by purchasing collectively and to raise the prices they got for their crops by collectively marketing them. By buying and selling collectively, farmers gained bargaining power and economized in terms of fixed transaction costs. Collectives made it feasible for farmers to hold enough off the market to raise price. (It would not benefit an individual farmer to hold his crop off the market because this would be too small a quantity to force price up.) Collectives were plagued, however, by bad management and achieved little success until the twentieth century. Some of their problems, however, were not self imposed. In Illinois, for example, grain dealers formed an association which pressured railroads and commission merchants to deal only the association.

In 1867, a secret fraternal society for farmers called the National Grange of the Patrons of Husbandry was formed. The first of several protest groups organized for the benefit of farmers beset by falling commodity prices, rising tenancy, and higher costs who were convinced they were being victimized by banks, railroads, and land speculators. By 1875, it had more than 850,000 members and wielded significant political power, particularly in the Midwest.

Farmers' prime enemy was the railroads, who they thought took advantage of them by charging more per mile for short hauls than long hauls. (Major cities were served by more than one railroad. The small towns were farmers loaded their commodities onto trains were not because, in order to reduce competition, railroads did not follow the same routes between the nation's larger cities. The absence of railroad competition in small towns enabled the railroads to charge higher rates per mile for shipping from these towns to big cities than between big cities.)

State laws regulating the railroads in the 1870s as a result of farmers gaining control of state legislatures and electing governors were called Granger laws.(In 1876, in Munn v. Illinois, the Supreme Court upheld the right of states to regulate the railroads.)

In the 1880s, farmers' groups and others formed what came to be called the Greenback Party. It was called this because it advocated the issuance of unbacked paper money called greenbacks. By 1890, there were three farmers' alliances: one in the North, one in the South, and one for black farmers.

In 1890, the farmers' alliances and labor unions allied and elected three U.S. senators and 52 congressmen, most of whom were from the South. In 1892, a new political party, the People's or Populist Party, the nation's most significant third party, was formed by a coalition of farmers, labor unions, and reform groups. The Populist Party platform called for: regulation of the railroads; regulation of other monopolies; lowering tariffs; the purchase by the government of farm surpluses; nationalization of the railroads and telegraph; the prohibition of subsidies to corporations; the free coinage of silver and the issuance of greenbacks; the abolition of the national banking system; and a subtreasury plan, that is, the deposit by the U.S. Treasury of its funds in banks throughout the nation. Overall, the Populist Party fell short of achieving its goals; however, many of its objectives were adopted by the Democratic Party.

After the depression of 1897, as a whole, farmers enjoyed a largely prosperous 20 years, and farmer discontent faded. The prices and income they received were relatively high compared to their fellow Americans. (Ever since then they have sought to replicate this situation.) This prosperity was due to favorable supply and demand conditions. The closing of the frontier meant no new farm lands were being added to the nation's supply. The number of farm labors was almost constant. Mechanization, better fertilizers and chemical sprays, and improved varieties of crops and livestock led to impressive productivity gains. Because, due to immigration, the nation's population was growing rapidly, the demand for their output was growing rapidly. Although hard times returned during the recession years of 1913 to 1914, the outbreak of War brought prosperity back because it increased Europe's demand for the output of America's farms. However, this increased demand in the absence of new farm land caused land prices to rise.

As was true in the antebellum period, the fortunes of Southern farmers differed significantly from that of their peers in the rest of the nation, but rather than doing better, they fared worse.

Historians used to claim that Southern agriculture wasn't very productive in the antebellum period. However, the opinion of many has changed in recent years, and today some claim that in 1860 per capita commodity output in the South was slightly above the North's, but while the North's rose by 9 percent during the War, the South's declined by 39 percent. They estimate that in 1860 total agricultural output in the South was 75 percent of the North's, while in 1870 it was worth less than 40 percent of the North's. In the West South Central Region per capita income before the War was well above the national average. In 1880, it was only 60 percent of the national average.

Atack and Passell and historian Gavin Wright are among those who pretty much agree that what happened after the War in the South was what was forecast in an 1860 public letter written by Joseph E. Brown, the governor of Georgia before and during the War. Brown said that if the slaves were freed, even if slave owners were not compensated for their loss--as happened-- money that still relatively wealthy Southerners would previously have invested in slaves would, instead, be used to buy land. They would, Brown said, soon buy all the lands in the South worth cultivating.

Poor whites, he said, would become tenants like they were in England, the New England States, and in the other old countries where slavery did not exist. Many freed slaves, too, he said, would become tenants, and they would have to begin life as free men miserably poor, with neither land, money nor provisions. Others would become day laborers for their old masters and come into competition with poor white laborers. This competition between blacks and whites would, he believed, reduce whites' wages.

Gavin Wright notes that before the War the South was not a low wage region. Afterwards, for the unskilled, it was, and unskilled whites' wages were depressed almost to the level of those paid blacks. (Discrimination enormously limited blacks' access to skilled occupations.) "Slavelords" who, he says, had sought before the War to maximize the value of the output of their slave workers, and, therefore, their value, after the War became landlords desiring to maximize the value of the output of their land. Because world demand for cotton, the most profitable crop for Southerners to grow, did not keep up with the expansion of output, returns from Southern agriculture were lower than in the rest of the nation. This held down what unskilled Southern workers could command in nonagricultural jobs.

Many Southerners blamed post-war Southern poverty on the destruction wrought by Yankee soldiers during the War and the exploitation of the region afterwards by Carpetbaggers and these Yankees' Southern accomplishes, Scalawags. However, historian Gavin Wright blames it on the demand for cotton  first falling and then stagnating. Roger Ransom and Richard Sutch blame it on a reduction in the supply of labor because African-American women and children worked less after the War than they had been forced to work before the War as slaves.

After the War, Southern land owners sought to maintain the old system of working the land by simply paying ex-slaves to work as they had before the War. Through state legislatures, the courts, violence, and intimidation were employed to try to keep the former slaves from bargaining with various potential employers and thereby raising their wages. However, the ex-slaves did not want to work in gangs as they had before the War. They wanted to have farms of their own, and, ultimately, they got what they wanted. Since they lacked the money needed to buy land, they became tenants and sharecroppers, as did many white farmers. 

The more successful of the landless farmers were tenants, while the rest were relegated to sharecropping. A few managed to save up enough money to buy their own land. Tenants owned their own tools and paid rent, while the sharecroppers were supplied tools by the landowner and paid him for the use of his land by turning over a portion of the crops they raised. In light of this change in the labor system, it is not surprising that average farm size declined in the South. In the rest of the nation it rose. Sharecropping was much more common among ex-slave farmers than white farmers. However, the economic well being of the ex-slaves appears to have exceeded what it had been under slavery.

The reconstruction of the South engineered by Radical Republicans (called Black Republicans by Southern whites) was a failure. Political equality for blacks; preventing the regaining of political control by the planter aristocracy; and providing for blacks' economic independence through development of the Southern economy went largely unachieved.

After the War, African-American children received education denied their parents. There was, however, little demand in the South for well educated blacks because whites would not employ them in jobs requiring much education. While initially the Southern states spent about the same amount of money per pupil for both races, by the early 1900s what was spent on black pupils had fallen well below what was spent on whites. The political power the ex-slaves gained after War and used to benefit themselves economically was gradually chipped away and segregation imposed.

Through debt peonage some ex-slaves and some whites, too, were relegated to a life similar to that of a slave. (Landless farmers whose crops sold for less than they had borrowed to plant and harvest them fell into debt which some of them were unable to ever work their way out of. ) One consequence of debt peonage was that after the War there was a significant reduction in the South's output of food production per person. This was the result of the fact that land owners demanded that sharecroppers plant cotton. Cash tenants planted more cotton, too, for the same reason: it was a ready source of cash. As a result, cotton dominated Southern agriculture more after the War than it had before. (The ratio of cotton to corn output between 1850 and 1890 more than doubled.)

Some economic historians argue that many landless farmers were victimized by merchants who had local monopolies in part due to the fact only they knew these farmers well enough to extend them credit; therefore farmers had to buy for them, and, as a result, these merchants profited. Others argue that the high interest rates these merchants charged for credit purchases was necessary to cover the high losses from engaging in this risky business.

Although the mechanical harvesting of cotton did not take place until after World War II, iron and steel plows, mowing machinery, threshers, grain binders, and grain planters were invented in the 1840s and 1850s, and high wheat prices and a shortage of labor caused their widespread adoption in the 1850s. After the war the mechanization of farming grew, particularly in the West where farms were large and flat and, therefore, economies of scale were obtainable, and machinery became larger, stronger, and more efficient. (Lack of mechanical harvesting equipment and family farming limited how large a Southern farm could be.)

BUSINESS

In 1860, the United States ranked number two in manufacturing. Great Britain ranked number one. By 1900, the United States had out distanced the British and accounted for 30 percent of the world's manufacturing output.In 1860, the U.S. produced only 1.6 thousand tons of steel. By 1900, it was producing 7.2 million tons! Playing a major role in this achievement was technological innovation and the introduction of scientific management by Frederick Taylor, father of time and motion studies, in the 1880s. A major technological innovation in an industry very important in this period, the iron and steel industry, the Bessemer process, came from England. In 1881, Thomas Edison's company installed the first electric lights in New York. In the 1890s, George Westinghouse solved the problem of transporting electricity long distances by developing alternating current. (Edison used direct current.) It was not, however, until 1900 that electricity became the dominant source of power. (Previously it was steam.)

During this period the United States' comparative advantage shifted away from agriculture and towards manufacturing. Therefore, the relative composition of its exports and imports to shifted towards increased exports of manufactured goods and imports of raw materials. Until under a Democratic president (Woodrow Wilson) they were lowered, a policy of high, protective tariffs was followed. (A protective tariff's main objective is to reduce import competition for domestic industry. A revenue tariff's main objective is simply to generate revenue for the government.)

During this period, the United States acquired several colonies, but although there are possible economic gains arising from the acquisition of colonies, most historians seem to believe that non-economic motives promoted imperialism in the United States. (American settlers in Hawaii, however, had an economic motive for over throwing the native government and asking to be annexed to the United States, and it was to avoid a tariff that protected American sugar growers.)

Although manufacturing grew more slowly after 1860 than before, the introduction of mass distribution and mass production fundamentally altered the structure of industry and the nature of the manufacturing firm. Essential to these developments were innovations in transportation and communication. (The telephone was introduced in this period.) "The railroad and the telegraph provided the means for market coordination. For the first time, manufacturers were assured of a smooth and continual inflow of raw materials at the back door and outflow of finished goods through the front gate with almost instantaneous updates on demand conditions. Inventories were sharply reduced, and cash flow increased," observe Atack and Passell. The more capital-intensive methods of production the relative abundance of natural resources and shortage of labor led American industry to adopt increased average firm size. (Labor scarcity leads to the use of capital-intensive methods of production. Industry received much less government aid than did transportation. The main thing the government did for industry was provide protective tariffs. 

Continuous process technologies led manufacturers to bypass independent wholesalers, as by controlling the distribution of their output they could eliminate costly interruptions in the production process by eliminating interruptions in the distribution of what they produced. They did this by dealing directly with large retailers. (Small retailers continued to be supplied by independent wholesalers.) Brand name merchandise and new types of retailers: department stores, chain stores, and mail-order houses, appeared during this period. The one stop shopping department stores offered and the elimination of the need to even go shopping by mail-order houses reduced the total cost to consumers of making purchases: price of the merchandise plus other costs incurred in acquiring the merchandise plus the opportunity cost of the consumer's time. Chain stores (several stores under common ownership) saved retailers money by enabling them to buy in larger lots and, therefore, at a lower price per unit. Competition often forced them to pass part of this saving on to consumers. In order to reduce competition and, therefore, be able to charge higher prices, more and more businesses turned to product differentiation. In short, modern marketing began to appear during this period.

In this period, the term, competition, was often preceded by the words "ruinous" or "cutthroat". To reduce competition industry resorted to pools, trusts, holding companies, and consolidation.

Companies getting together and deciding what prices they would charge and dividing up the market among themselves is called pooling. Another way for firms in an industry to act pretty much as a monopoly was to form a trust. Turned over to the trust would be the voting stock of each company. Control over several companies could also be obtained by forming a holding company. A holding company is a company that owns the stock of other companies. (This has most often been done in the electric utility industry. The pure holding company doesn't produce goods or services: all it does is own the stock of companies that do or other holding companies that do.)

"By 1913," writes economic historian Jonathan Hughes, "the world had come to recognize in the great American entrepreneurs a social force that had changed the world. The greatest entrepreneurs, or at least those who made the most money, had organized the huge new American industrial economy, root and branch, into vast companies under unified managements that were capable of expansion and diversification. A company like Carnegie Steel was in a dozen different industries: building bridges and skyscrapers, mining and shipping ores by lake steamers, operating railroads. Men such as Pierpont Morgan were the financial organizers and controllers of economic activities that ranged from coal mining to banking."

Critics call men like Carnegie Robber Barons. However, to economist Joseph A. Schumpeter, they were heroes. The disruption caused by competitive battles between the entrepreneurs characterized as robber barons are, he believed, the necessary price of progress. Responding to consumer demand, men like McCormick, Deere, Vanderbilt, Huntington, Stanford, Harriman, Hill, Frick, Morgon, Belmont, Mellon, and Rockefeller served the public's interests by providing new products, services, ideas, and technology. Progress was these profit-seeking risk takers' gift to society.

TRANSPORTATION

The railroads played a major role in the economic development of the nation in the second half of the nineteenth century. It grew from 35,000 miles of track in 1865 to over 242,000 in 1900. By 1897, there were five transcontinental railroads. The coming of the railroad enabled the Midwest to develop heavy industry and become the nation's industrial heartland. Much of the profit in railroading came from building them. (The Credit Mobilier, the construction company that built the Union Pacific was the center of a scandal during the Grant administration.) A good bit of money, too, was made promoting and manipulating railroad stocks and bonds.

Because of the huge amount of capital required to build a railroad, railroads were incorporated businesses. Much of money needed to finance the railroads was obtained by issuing bonds (long-term debt securities). Long-term money from bonds and stocks was needed because it would take a good while for a railroad to turn a profit. Bonds could be issued because of the many fixed assets (land and buildings) railroads had to have in order to operate. Because of their importance to their economy, states, cities, and towns gave them land; granted them tax concessions; guaranteed their bonds; and purchased their bonds. After 1860, the federal government gave railroads over 130 million acres of land and lent them $64 million (worth a lot more then than now!)

The railroads stimulated the economy in three ways: primary or direct; secondary; and tertiary. The first involves the actual building of the railroads. The second refers to the railroads' stimulation of the iron and steel industry. The third refers to their stimulating of the economy in general by such things as reducing the cost of transporting goods and people.

The railroads provide excellent examples of backward and forward linkages. By creating a demand for the output of the steel and iron industries, railroads illustrate backward linkage; that is, the creation of suppliers. By providing an entrepreneur a market adequate to justify the establishment of , say, a grain elevator to store farmers' grain, is an example of a forward linkage.

Just as in recent years economic historians have questioned just how valid were the grievances of farmers in the latter part of the nineteenth century, some of them have questioned whether the railroads were as important to economic development as they have long thought to have been. (To estimate their importance, one historian has taken a counter factual approach, that is, he estimated what the country would have been like if the railroads had not existed.)

About one-tenth of the capital invested in the railroads in 1900, it is estimated, was provided by the various levels of government. A great deal of the money invested in U.S. railroads came from private sources abroad, mostly from Great Britain. However, many Western and Southern railroads were controlled by "Eastern money interests".

Price discrimination, such as the short-haul, long-haul discrimination already discussed, was common. Large shippers received lower rates than small shippers. Prices were higher for those shipping from places served by one railroad. John D. Rockfeller's Standard Oil Company is infamous for demanding and getting rebates from railroads it provided an enormous amount of business to based on how much of his competitors' oil the railroads hauled. Through the formation of pools, railroads were able to raise their rates. (This refers to several railroad companies getting together and agreeing on a common set of rates.) Competition was also reduced by consolidation, that is, combining several smaller railroad companies into a giant one.

In 1887, Congress created the Interstate Commerce Commission (ICC) to regulate the railroads. The legislation creating it was desired by Eastern shippers who wanted an end to discrimination; some railroad companies that preferred regulation to what they considered to be competitive anarchy; and investors, particularly the English, who wanted to put an end to mismanagement and fraud in the sale of railroad securities. In 1897, the Supreme Court declared the ICC did not have the power to set rates. By that time, too, the ICC no longer opposed pools.

After the United States entered World War I, the government took over the railroads. After the War, they were returned to their owners.

LABOR

In Europe labor unions were aided by a class consciousness that didn't exist here because of the ease of moving from one class to another. Unlike in Britain, no labor-dominated political party ever arose here, and socialist thought was less important.

Labor unions, the first of which was formed in Philadelphia in 1786, did not become strong in this country until the twentieth century. The first labor organizations in this country were both weak and local in character. Obstacles to organizing workers was the patriarchal attitude of employers and the usual close relationship between employees and employers arising out of the small number of employees in the typical firm; antipathy between skilled and unskilled workers; hostile judges; hostility between workers arising out of immigration (native versus foreign and ethnic hostilities); public alarm arising out of labor violence and socialist and anarchist labor leaders, many of whom were immigrants; and the division of authority between the federal and state governments. Organized labor did not become a strong economic and political force, until the age of mass production and the closing of the frontier.

Although labor unionism became an established fixture by the end of the nineteenth century, in 1900 only one percent of the labor force belonged to unions. Two different types of unionism were tried during the nineteenth century: 1) reform groups aiming to eliminate or control capitalism and 2) business unionism that accepted and sought to work within the capitalistic system. The former was depended upon political action; the latter did not. Although both types of unionism continued into the twentieth century, before 1900 business unionism was dominant and has remained so. Two different types of union organization were also tried: 1) unions that included both skilled and unskilled workers (industrial unions) and 2) unions that only included skilled workers (craft unions). The former did not achieve long-lasting success until the twentieth century.

Like mass production, national unions did not become feasible until improvements in transportation and communications created mass markets. The first successful national union was a union of typographers formed in 1859. The National Labor Union formed in 1866 broke up in 1872 due to conflict over women, blacks, and direct political action. In 1869, another national union, the Knights of Labor, begun as a secret, lodge-type organization open to nearly every type of worker, was founded in Philadelphia. It both rose and fell rapidly. Initially opposed to strikes, it grew rapidly after conducting successful railroad strikes, but workers lost confidence in the Knights when they did not get the 8-hour day and lost a later railroad strike. In 1886 the Knights failed to induce the craft unions to combine with them. Instead, they organized the American Federation of Labor. The Knights faded rapidly after this.

Beginning in the depressed years of the 1870s and continuing into the 1880s there were several violent clashes between labor and management. The Knights and labor unions in general got a bad name with much of the public after the Haymarket Riot (1886). Subsequent violence during the Homestead (steel workers) and Pullman (railroad workers) strikes further contributed to anti-union sentiment. (The Pullman strikers were led by Eugene V. Debs, who later became a socialist and ran for president numerous times.) Companies hired men from the Pinkerton Agency (the private firm which served as Abraham Lincoln's secret service turned to union busting after the War) to deal with strikers; governors called out the militia; and cities called out the police. Both sides were sometimes guilty of initiating violence.

The most radical labor union formed in this period was the International Workers of the World (IWW, Wobblies) , founded in 1905. It was an industrial union dedicated to the overthrow of capitalism. Its objective was to form a union to which all workers would belong, and it advocated both strikes and sabotage. Ultimately, it hoped to overthrow the capitalistic system. When it opposed the nation's entry into World War I, it roused the government's ire, and this led to its demise.

Contrasting sharply with the Wobblies was the American Federation of Labor, a national craft union, that was long headed by its first president, Samuel Gompers, an immigrant cigar worker. Gompers was a proponent of what came to be called business unionism. The business of the AFL was higher wages, shorter hours, and improved working conditions. By the end of World War I the AFof L accounted for 80 percent of the nation's union members.

 Management gained an important weapon against strikes in 1890 with the passage of the Sherman Antitrust Act. Although the intent of Congress in passing this law was to rein in big business by outlawing trusts: "Every contract, combination in the form of trust or otherwise...is hereby declared to be illegal," says this Act, its first major application was during the Pullman strike of 1894 when the federal government used it as the basis of its authority to send troops to Chicago to move the mail, which had been halted by the strike. In 1908, the Supreme Court declared in the case of the Danbury, Connecticut hatters boycott of hats that the hatters union was a combination in restraint of trade. In 1914, however, lobbying by the unions succeeded in getting Congress to pass the Clayton Act Amendment to the Sherman Act labor that exempted unions from the Sherman Act's provisions. In 1916, another important union objective was achieved when Congress passed the Adamson Act. This Act mandated the eight hour day for railroad workers and pay for time and a half for overtime. Unions experienced further gains during World War I when, in order to achieve labor peace in order to further the war effort, the government supported labor unions' organizing efforts.

In 1892, for the first time since the Civil War, a Democrat, Grover Cleveland, was elected president. The Democrats also captured Congress. However, within a few weeks of Cleveland taking office, the country fell into a depression. Shortly before the election the violent Homestead (Pennsylvania) strike took place. Public soup kitchens called Cleveland Cafes opened, and a small army of the unemployed called Coxey's Army marched on Washington. Labor and capital were at each other's throats, and in 1894 the very violent Pullman strike took place. Although Cleveland was a "hard" money man, many Democrats, like the Populists, were advocates of free silver. (Western mining interests wanted limitations on the coinage of silver removed because it would increase their revenues. Farmers support was due to the fact that it would increase the money supply, and this would raise the prices of the crops they grew.) Cleveland was unable to keep his promise to lower tariffs. Cleveland was replaced by Republican William McKinley.

BANKING AND FINANCE

What was national about the banking system created by the 1863 National Banking Act was which level of government granted these banks their charter, because due to the fact that these banks had to obey state laws, some of them could not even establish branches, much less operate in more than one state. This was the result of the fact that many state put geographical limits on where banks could establish physical facilities. This Act provided the nation with its first uniform currency, as all these banks notes looked alike except for the different bank's names on them, as by the late 1870s all state banknotes had ceased to circulate.

The fiat money (money because the government says it is; not because it is redeemable in specie) called greenbacks issued to finance the War circulated at a discount, that is, at less than par with specie. To redeem the geenbacks the government had issued to finance the War and to retire the huge debt it had run up in financing the War required, the Treasury decided, that the price of gold fall. This meant that the price level would have to decline. To achieve this required a contraction of the money supply. Businessmen and farmers resisted this policy. (Specie redemption resumed in 1879.) This issue became a major political issue.

It was a rise in gold supplies due to the discovery of gold in the West in the 1840s and 1850s that had led to the driving of silver from circulation. This was what caused silver's market price to be high relative to the price in gold the U.S. mint paid for silver. The driving of silver from circulation forced the government to print fractional paper money so people could make change. (People also resorted to using postage stamps to make change.)

Then came the discovery of big silver deposits and the resulting decline in the price of silver and the passage in 1873 of legislation that became known as the Crime of '73. This legislation caused the government to switch to minting sliver dollars that, like the dime and fifty cent piece, contained so little silver that their value as specie was well below their value as money. (Silver dollars became token money, rather than specie money.) This was done, say economic historians Gary M. Walton and Hugh Rockoff, because some "farseeing officials feared an increase in the supply of silver that would flood the mint, increasing the money supply, raising prices, and thus delaying resumption" of specie redemption (of paper money)..

Then huge, new deposits of silver were discovered in the West, and this and Europe going on the gold standard caused the market price of silver to decline. Because the U.S. mint would pay more than this for silver, silver miners wanted to sell silver to the mints. However, due to the 1873 legislation, the government would only buy the amount of silver it needed to mint the silver coins it believed the country needed. Silver miners and those hurt by the falling price level were outraged and pressured Congress into passing legislation requiring the government to buy at the prevailing market price. This silver was then to be used to mint silver dollars. The Treasury was also required to issue silver certificates: paper money redeemable in silver. (Gold redeemable paper money was called gold certificates.) In 1900, the nation adopted the gold standard.

Over the entire nineteenth century the price level was pretty stable. However, there was substantial inflation in the teens and during the Civil War, and after the Civil War the price level trended downward. Those harmed by this trend, including farmers, who said industrial prices fell less rapidly than did the prices of agricultural commodities, explained this via the quantity theory of money, that is, they said it was due to there not being enough money in circulation: money supply times the velocity of money equals the average price per transaction times the number of transactions. Some argue, however, it was substantially due to the rapid rise in output per worker.

"The basic defect in nineteenth-century America banking structure," claims economic historian Albert W. Niemi, Jr., "was an inability to adjust the money supply and credit conditions to conform to sudden changes in economic conditions." What was expected to eliminate this problem was created in 1913 when President Woodrow Wilson signed the Federal Reserve Act, which created the nation's first true central bank. This Act had as its purpose "...to provide for the establishment of Federal reserve banks, an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." This bank would make the currency elastic by adding to and reducing banks' reserves in line with the needs of trade. It was due to Populist influence that the 12 initially almost autonomous regional banks was created, rather than, as was true of central banks in the rest of the world, one bank with branches.

At its inception, the Federal Reserve System (Fed) had only one tool of monetary control, and that tool was discounting: the lending of reserves to banks with some of the securities the banks had acquired by making loans loans serving as security for the Fed's loans to them. This lending was called discounting because what the Fed loaned was less than the value of the securities securing the loan. The Fed made these loans by adding to banks' deposits with the Fed. (The U.S. Treasury also held a deposit at the Fed into which it deposited the funds it collected and on which it wrote checks; thus, the Fed served as the federal government's fiscal agent.) Each Federal Reserve Bank set its own discount rate, that is, the interest rate it charged its borrowers.

Unlike the Banks of the United States, which were jointly owned by private investors and the federal government, the Fed was and is privately owned. Its owners are commercial banks who are called member banks. Although it is privately owned, the government names the members of governing board. It's unusual structure is the result of compromises made in order to get the support of those members of Congress who were fearful that the Fed would become the powerful monopoly monster Andrew Jackson pictured the Bank of the United States as being.

WORLD WAR I

On the eve of World War I in 1914 the federal government was vastly smaller than it is today. Its outlays accounted for less than two percent of the nation's Gross National Product (GNP), and the top rate of the new individual income tax was less than seven percent, and 99 percent of the people owed no income tax. (In 1913, the Sixteenth Amendment that gave Congress the power to "lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration," was passed.) The federal government's civilian employees, most of whom worked for the Post Office, accounted for about one percent of the labor force. In the armed forces were less than 166,000 active duty personnel. The federal government did not regulate the securities markets, agricultural production, or labor/management relations. It did not set a minimum wage. Social security did not exist.

World War I began in 1914, but the United States did not enter it until 1917. Initially we were neutral, but soon we began to favor the Allies. By 1916, we began preparing to enter the fray.

In contrast to the Civil War, during World War I the federal government attempted to take over direction of the economy, and some concluded by War's end that the nation's economy would work better if the government continued to play a major role in directing it. Those who believed this got their chance to put this belief into practice during the administration of President Franklin D. Roosevelt (Democrat), who was elected to the first of four terms in the depths of the Great Depression (1932) . Prior to Roosevelt's election, his predecessor, Herbert Hoover, established a Reconstruction Finance Corporation that mirrored the World War I's War Finance Corporation. (A Republican, Hoover, who managed food relief in Europe after World War I, believed in substantial government management of the economy.)

"With U.S. entry into World War I, the federal government expanded enormously in size, scope, and power. It virtually nationalized the ocean shipping industry. It did nationalize the railroad, telephone, domestic telegraph, and international telegraphic cable industries. It became deeply engaged in manipulating labor-management relations, securities sales, agricultural production and marketing, the distribution of coal and oil, international commerce, and the markets for raw materials and manufactured products. Its Liberty Bond drives dominated the financial capital markets. It turned the newly created Federal Reserve System into a powerful engine of monetary inflation to help satisfy the government's voracious appetite for money and credit. In view of the more than five thousand mobilization agencies of various sorts--boards, committees, corporations, and administrations--contemporaries who described the government's creation as 'war socialism' were well justified," claims Robert Higgs.

Like earlier wars, this one was substantially financed by inflationary money creation and borrowing. There was also new, progressive income tax and a tax on corporate profits. By 1919, total war expenditures amounted to about 25 percent of GNP. "...The strategy of pursuing mobilization with money creation, inflation, and progressive income taxation was a blueprint for income redistribution favoring the wage-earning population," observes Jonathan Hughes.

Labor stoppages rose from 1204 in 1914 to 4450 in 1917. This greatly concerned a government entering a war. To bring down the number of strikes, the state and federal governments took different tacts. While some states passed "work or fight laws," and the federal government sometimes threatened workers with the draft, in 1917, Congress passed the Espionage Act which provided for punishment for anyone interfering with the production or shipment of war goods, however, strikes aimed at obtaining better wages or other conditions of employment were permitted. Men engaged in "productive" work were exempted from the draft.

The Lever Food Control Act of 1917 gave the government the right both to take over factories and settle labor disputes, which it typically settled by granting union recognition and raising wages. Under this Act fuel supplies could be controlled and output and prices set. A federal War Labor Board was created to mediate labor/management disputes. In 1918, a War Industries Board given the authority to set production priorities in manufacturing and to set prices and coordinate government purchases. Several quasi-public corporations were set up to acquire or produce various items considered important to the war effort. Also passed in 1918 was the Sedition Act, which imposed criminal penalties on all forms of expression critical of the government or its mobilization of resources for the war. (This landed Eugene V. Debs in jail. Author Upton Sinclair was arrested for reading the Bill of Rights at a rally, and many aliens were peremptorily deported.)

The War opened many jobs to women that were formerly barred from. However, after the War they were forced out of most of them. With immigration cut off, Northern factories sought black workers, and there was, for the first time, a mass outmigration of blacks from the South were, due to discrimination in hiring, except in farming they had little hope of substantially improving their economic position. 

Sample rooms at the Smithsonian Institution illustrate how by the early 1900s industrialization had brought about a substantial increase in the average standard of living.

References

Edward Ranson, Electing the President, 1896 (1996)

James Reston, Jr., Sherman's March and Vietnam (1984), p. 6.

Martin L. Primack and James F. Willis, An Economic History of the United States (1989), p. 196.

Jeremy Atack and Peter Passell, A New Economic View of American History (1994), 373.

William W. Freehling and Craig M. Simpson (Eds.), Secession Debated, Georgia Showdown in 1860 (1992), pp. 145 - 159.27.

Gavin Wright, Old South, New South (1986), pp. 33 - 34; 56 - 60; 67 - 70.

James L. Abrahamson, "The American Home Front: The Civil War"

Jeremy Atack and Peter Passell, A New Economic View of American History, (1994, )471.

Jonathan Hughes, American Economic History (1990), 414.

The Republican Party rose in the 1850s out of the ashes of the Whig Party. (Unlike Northern Whigs, Southern Whigs became Democrats.) The Republican Party had so little support in the South due to its support of high tariffs and its opposition to slavery that it became the largely one party region it was to return to after Reconstruction and remain until well after World War II. (During Reconstruction the disinfranchisement of former Confederates and the registering of ex-slaves who voted Republican enabled both white and black Republicans to get elected governor, Congressman, and state legislator. (Women could not vote or hold office.)

Sources

Albert W. Niemi, Jr., U.S. Economic History (1980), 202

Jonathan Hughes, American Economic History (1990), 437

Gary M. Walton and Hugh Rockoff, History of the American Economy (1994), 374

Robert Higgs, "War and Leviathan in Twentieth-Century America" (1996)

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