From the 1941 book, Economic History of the United States.

EDITOR’S NOTE: The word “specie” is used throughout the text in relation to how big payments were made. In most cases, it means hard money or gold bullion.

Panics and the Business Cycle. In the account of the economic development during this period there has been frequent mention of the recurrent periods of boom, panic, and depression which swept over the business life of the country. This phenomenon in the widening scope and growing intensity of its reactions was comparatively new.

In colonial times there were occasions when certain sections suffered from a depression, generally owing to the fact that some important staple of the region was very low in price, as in the case of the tobacco-growing region. In other instances the outbreak of war, by interfering with some general pursuit and deranging the usual economic life, brought a similar reaction, often more widespread in effect, as seen in the depression following the Seven Years’ War.

Although similar causes were operative in the nineteenth century, it is clear that other factors must have entered in to bring about the marked development of this phenomenon that characterized that century of our history. Some explanation of these factors is therefore necessary.

At the start it must be stated that the phenomenon of the business cycle is none too well understood even today and there are widely conflicting theories as to its chief causes. Still it is possible to point out certain developments in the organization of industrial society and certain characteristics of our economic life which help to explain the rise of this disturbing phenomenon.

Among the developments in the organization of industrial society that played a part in this result, possibly first place may be given to those in the field of monetary and banking institutions which have been described in the preceding chapter. The use of money and credit in the business life of the country was rapidly increasing in importance; hence anything that seriously affected the soundness and stability of these instruments wrought all the greater disturbance.

Proper control of them—an extremely delicate and difficult problem—has not even yet been attained, and the abuses that resulted greatly accentuated the troubles that created the business cycle.

Another important cause was found in those changes in the organization of industry that made it more difficult to adjust supply and demand t a profitable price level.

In a frontier household economy no such problem exists; they produce only what they want. In a local economy the problem is relatively simple; needs are fairly easily determined and many commodities are only made to order.

But when markets widen and become national or international in extent, and the number of those producing for the market is much larger, this problem of adjustment is vastly more difficult. At the same time this widening of the market results in greater specialization and division of labor, which involve greater interdependence between various lines of business.

Thus the problems of conducting a business become more complicated and control more complex, and difficulties that beset one line of business spread out and react upon a growing circle of other lines of business until the whole country and even foreign countries become involved.

Still another development increasing the difficulties in adjustment of supply and demand arose from the changes in technological methods of production, the introduction of the factory system, and the spread of modern capitalistic industry.

One result was to lengthen the period required in the process of production. When we make machines to make machines to make still other machines and so on in order to get ready to produce a given commodity, it is necessary to plan for a much longer period ahead than when only simple tools and a small shop are used; meanwhile great changes in market conditions may occur.

A second result follows from the increased use of fixed and highly specialized capital. Once capital is put into this form of capital goods, it cannot be easily diverted to other uses to meet variations in the demand.

Also, the overhead cost representing interest on the capital so invested becomes a large item and the effort to reduce this cost per unit of product by increasing the volume of output often leads to overproduction and cutthroat competition involving heavy losses.

There were also certain characteristics in the economic life of the country that tended to accentuate the cyclical swings of business. Most important in its influence was the unprecedentedly rapid pace at which the country was developing. This tended to create a spirit of unlimited optimism and speculation, and the demand for lendable funds thus arising, led to the serious abuses in banking methods already described.

Another characteristic was the relatively important position in annual output occupied by a few great agricultural staples—those increasingly grown for sale and under a one-crop system. The marked fluctuations in the size as well as in the market price of these crops was a seriously disturbing factor in general business conditions.

Finally, may be mentioned the undeveloped state of the knowledge of economics and of business methods. Adequate statistical data as to business conditions was almost totally lacking; cost accounting did not exist and often even the simplest accounting was ignored. Fallacious economic notions were widely held.

Though this account of factors affecting the business cycle could easily be extended, it will at least suggest some of the more important causes underlying the series of panics that will now be briefly described.

The Panic of 1819

The panic of 1819 was in part a product of the readjustments in business following the close of the War of 1812 during which inflation had carried prices—already raised to a high level by the Napoleonic wars—to an abnormally high point; in part it was owing to a continued expansion of banking and great speculative activity in the years immediately following the return of peace.

The prices of imported goods, which had experienced much the most rapid rise up to 1815 (see chart on page 271), dropped very rapidly following the enormous influx of foreign goods on the return of peace and of course forced a decline in the price of domestic manufactures that had developed during the period of restricted imports.

On the other hand, the prices of the great domestic staples continued at a level almost as high as that reached in 1814 until 1817 and then, when the European demand was sharply reduced, dropped precipitately.

The maintenance of this high-price level for domestic staples for nearly four years after the return of peace was an important factor in sustaining the speculation in land that developed during these years, especially in the West, where, as a result of the tremendous influx of new settlers, the sale of public lands rose to nearly 3,500,000 acres in 1818, far exceeding any previous figure.

Though the effort to bring about a resumption of specie payments in 1817 forced some contraction among the banks, chiefly in the East, the first serious trouble appeared in the middle of 1818 when the United States Bank found itself in difficulties.

At the close of the year the falling off in the European demand for foodstuffs and cotton gave the final impetus to the ensuing precipitate drop in the price level of domestic commodities.

The gathering storm broke in 1819. Within a few months the price of cotton fell from 32 to 15 cents a pound; wheat fell from around $2 a bushel to $1.05; corn from 90 cents a bushel to 51 cents.

1820 brought a further drop in general prices till they reached the level prevailing just before the outbreak of the European wars in 1793. Thus the abnormally high level of prices, engendered by war and maintained for a period the length of which is unequaled in the nation’s history, finally came to an end.

The most acute distress was felt in the Middle Atlantic states and in the Ohio Valley, though the cotton belt was also hard hit. New England, at least the agricultural section, fared somewhat better.

Banks suspended, commercial paper paid 3 per cent a month, in some urban centers rents were almost cut in half, and in many sections farm lands suffered a still more drastic decline in value.

Never before had there been such widespread unemployment, one observer estimating the total at 500,000. In New York City in 1820, a tenth of the population was said to be receiving poor relief and for the first time the country was forced to consider the serious problem of urban pauperism.

Attempts to carry out the severe laws as to debtors, filled the prisons to overflowing.

As is always the case at such times, a widespread demand for relief arose and innumerable measures to provide this were advocated. The most extreme appeared in the West where the collapse of the land boom and the drop in prices left the large debtor class facing ruin.

To protect the debtors, stay and replevin laws were passed and the statutes governing imprisonment for debt modified. When a Kentucky court declared one of these laws unconstitutional, the legislature abolished the court and created a new one.

Another device was to create new banks to issue notes to make loans to these debtors. Kentucky, Illinois, and Tennessee adopted this device and Missouri created a loan office for the same purpose.

The debtors thus secured some relief but these notes soon depreciated, in Illinois to a quarter of their face value, so creditors and the public suffered. At such a time in the debt-ridden frontier community the legal rights of creditors received scant consideration.

In the West the depression lasted longer than elsewhere. By 1823 conditions were again about normal and there followed a decade marked by only moderate fluctuations in business. There was some financial pressure in 1825, chiefly a reaction from the English crisis of that year, and again in 1828 and 1831, but the boom in business and speculative activity that culminated in the next great panic, began about 1833.

In the years immediately following, a wild speculation in Western lands was the outstanding feature and was carried to a point unequaled in the country’s history. The rapid rise in the price of cotton increased the price of slaves and the cotton lands of the Southwest, and the advance in the prices of grain and livestock had a similar effect in the Northwest.

Urban sites shared in the general advance, notably in the newer places such as Chicago. This activity culminated in 1836 when the sale of public land rose to a figure double that for any other year on record.

Various factors furthered this speculative land boom. One was the extensive system of internal improvements, chiefly canals and railroads, then under construction, which it was obvious, would greatly enhance land values.

Another factor was the enormous expansion in the number of banks and the bank-note circulation in the years following 1832, providing easy facilities for buying land and accentuating the general rise in prices.

The transfer of government deposits from the United States Bank to the state banks, which resulted in a shifting of considerable sums to the West, furthered the expansion of bank credit in that section, and the prospective end of the United States Bank hastened the organization of new banks.

Still another factor was the inflow of foreign capital which was so great that, in spite of the much larger unfavorable balance of trade resulting from the increase in imports typical of a period of boom, specie came into the country in larger amounts than ever.

Some of this capital was directly invested in various enterprises but much of it went into the bonds of the various states which were being issued in abnormally large amounts, chiefly to raise money for constructing internal improvements or establishing banks.

All this simply added means to feed the speculative mania that seemed to dominate the country.

When the bubble finally burst in 1837 and the inevitable day of reckoning came, it produced one of the four most severe and prolonged crises in the country’s history, the others occurring in 1873, 1893, and 1929.

The Panic of 1837

Among the immediate factors that pricked the speculative bubble and precipitated the final crash, the most important was Jackson’s Specie Circular of July, 1836, which, with minor exceptions, forbade the acceptance thereafter of anything but specie in payment for public lands and so checked the land speculation carried on by aid of inflated bank-note issues.

Another setback came in the fall of that year when trouble developed in England partly owing to the previous drain of specie to the United States; three concerns which had been extensively engaged in extending credits to the United States became financially involved and had to contract.

The price of cotton then began to fall in the English market and this soon caused trouble among the cotton brokers and planters in the United States who were unable to meet payments coming due. Domestic difficulties were further increased by crop failures in 1835 and again in 1837 and 1838, which tended to decrease the farmers’ purchasing power, to delay payment of their debts, and to necessitate the importation of wheat.

Another disturbing factor was the law providing for the distribution of the surplus funds of the federal government to the states in quarterly installments during 1837. This necessitated the transfer of considerable sums from the government deposits in the Western banks to the East and forced the former to contract their loans.

The difficulties came to a head in May, 1837, when the banks in New York were forced to suspend; their example was at once followed by most of the banks in the rest of the country. In the ensuing reaction the New England states suffered the least; the worst effects were felt in Pennsylvania and the Southern and Western states.

In New York and most of New England the banks adopted a policy of severe contraction and favored the early resumption of specie payment, but elsewhere a policy of delay, extension of credits, and relief measures was favored. By the early part of 1839 specie payments had been generally resumed by the banks; but another reaction soon set in.

Since the middle of 1837 the United States Bank of Pennsylvania had extensively engaged in operations to keep up the price of cotton and in 1839 the situation again became acute. In October the bank failed and Philadelphia banks again suspended, followed by most of those in the South and West that had previously been able to resume.

The difficulties of the cotton belt became even worse than in 1837. From this time on it was simply a question of giving the process of liquidation full time to run its course.

Banks failed by the hundreds, unemployment spread through the industrial centers, and commodities rapidly fell in value till the price level reached one of the lowest points in the century. In New York City rents had fallen between 30 and 50 per cent by 1840. At the same time it was stated that in Mississippi, land and slaves had lost half of their value.

The usual crop of relief laws followed, chiefly in the states from Pennsylvania to the south and west.

Many states were unable to meet the payments due on their excessive bond issues and some fell back on repudiation.

Early in 1841, just after the Philadelphia banks had once more resumed specie payment, the United States Bank was again forced to suspend and its condition proved to be so hopeless that steps were taken to wind it up, the result being a total loss for its stockholders.

By 1842 the process of liquidation had fairly run its course and the country was in the midst of the dull period of depression that follows such a reaction.

People were much the sadder and somewhat the wiser for their disastrous experiments with reckless banking speculation and hastily undertaken internal improvements. The reaction led many states to adopt constitutional prohibitions against the use of state credit for internal improvements or banks and to make numerous reforms in their banking laws.

The fate of the United States Bank under its Pennsylvania charter practically put an end to the agitation for another such bank, and the disastrous experience of the government in the use of the state banks as depositories for its funds, led to the establishment of the Independent Treasury by an Act of Congress in 1840. A year later, when the Whigs came into power, this law was repealed, but in 1846 when the Democrats regained control, a very similar law was enacted.

In the Independent Treasury the government funds were at least safe and subject to more certain control than when kept in the state banks though, as will later appear, the resulting withdrawal of these funds from general use sometimes produced undesirable disturbances in the money market. Still, the establishment of this institution may be considered one of the gains resulting from the sad experiences of the panic.

After about 1845 business conditions began to improve more rapidly. The Irish famine followed by the repeal of the English corn laws hastened the recovery in the price of foodstuffs. Cotton also began to rise. A panic in England combined with disturbed conditions on the Continent produced a brief setback in 1847-1848, but the effects were slight and soon passed.

There followed nearly a decade of great prosperity, one of the most prosperous in the country’s history and sometimes referred to as the “Golden Age.” The enormous output of gold from California added its stimulating influence to revive business activity, and this was supplemented by another period of rapid expansion in banking and bank credit.

As prices steadily advanced, especially after 1852, agriculture, manufacturing, and trade expanded. A new speculative boom in land developed in the West and the Southwest, though less extreme than in the thirties. As cotton rose, the price of slaves advanced to the highest point in our history, and a European crop failure in 1853 and the Crimean War, 1854—1856, increased the demand for foodstuffs.

Railroad construction was undertaken on an unprecedented scale, particularly in the North Central states where it hastened the advance in land values. Over $800 million was invested in this construction, a considerable portion coming from abroad as foreign capital, with renewed faith, again flowed into the country in large amounts.

The Panic of 1857

Signs of coming trouble first appeared in 1854 when there was a brief panic on the New York Stock Exchange, a tight money market, and numerous failures especially in the Ohio Valley region. This reaction checked the business expansion only temporarily and the speculative boom continued until the summer of 1857.

The panic that then occurred was very acute while it lasted, but its effects were felt most in financial circles rather than in the general economic activities of the country.

Financial difficulties in Europe appeared at the same time, but in this country the banks had so extended their credit that few were in a position to meet any considerable demand for specie.

The failure of the Louisiana sugar crop and the greater imports resulting, increased the outflow of specie at a time when country banks were withdrawing deposits from New York. Efforts to get the banks in New York to cooperate and extend their loans failed and in the struggle of each bank to save itself a sharp contraction resulted.

One of the chief causes of the trouble was the great amount of capital that had been put into railroads in regions where it would take time to develop a sufficient volume of traffic to yield an adequate return on the investment.

The practice of raising a large proportion of the capital required by the sale of bonds rather than stocks, which became common at this period, resulted in creating a fixed charge in the form of interest on the bonds; when the railroad’s earnings proved insufficient to meet this charge, the road faced bankruptcy and its securities suddenly dropped in value.

Many banks had become extensively involved in making advances to the railroads and soon found their assets tied up in non-liquid form, thus adding to the necessity for contraction.

The failure in August of the Ohio Life Insurance and Trust Company, which was really engaged in banking, was chiefly owing to this cause and started the trouble. Failures rapidly multiplied; money was scarcely to be had upon any terms; in October all the New York banks but one agreed to suspend specie payment, their action being at once followed by most of the banks in the rest of the country.

This action made a more orderly liquidation possible. Within a month, some fourteen railroads proved unable to meet their obligations, including such important lines as the Erie, the Reading, the Illinois Central, the Lackawanna, the Michigan Central, and the Michigan Southern.

The Western land speculation collapsed, railroad construction halted, imports declined, unemployment became widespread, and large mass meetings of the workers became common. The cotton belt suffered less than any other section in this panic as the price of cotton, owing to the short crops, remained fairly high; and in the Ohio Valley the difficulties were probably no worse than during the reaction of 1854.

Being primarily a financial panic it was the financial centers that experienced the most acute trouble; but, once the panicky stage had been passed, the skys cleared and the recovery was rapid. Between November and February, 1857-1858, most of the banks in the Northeast resumed specie payments and within a few months resumption was general.

Business quickly picked up and, from then until war seemed imminent, remained fairly prosperous.

The Rise of the Stock Exchange

Among the financial institutions that first became important during this period was the stock exchange. The need for this was due to the rapidly growing volume of securities and the advantages to be derived from a highly organized market where they could be most easily and efficiently bought and sold.

These securities came from two sources: (1) the bonds (at that time often called stocks) issued by the national, state, and local governments and (2) the bonds and stocks put out by the rapidly increasing number of business enterprises that took the corporate form of organization.

Apparently the first attempt at any organization among the individuals dealing in securities occurred in New York in 1792, when a group of those who had been accustomed to gather about a buttonwood tree in Wall Street, agreed upon a fixed commission charge.

Early in the next century the American Stock Exchange was organized in Philadelphia, then the financial center of the country; in 1817 the New York Stock and Exchange Board was formed.

At the start, the securities dealt in consisted of government bonds and the stocks of banks and insurance companies, the first railroad stock being listed in 1830. By this time New York was rapidly forging ahead of Philadelphia as the financial center of the country and its stock exchange quickly assumed the preeminent position that it has held ever since. Boston was the only other city where there was a considerable market for securities during this period.

During the thirties the increase in railroad securities and the speculative boom greatly augmented the volume of trading on the stock market and the newspapers began to give much more attention to the subject than formerly. From then on, railroad securities became more important and dominated those traded in on the exchange in the decade preceding the Civil War.

National, state, and local bonds were next in importance and there was a growing volume of trading in the stocks of banks, insurance companies, gas and coal companies. There was also considerable trading in Boston in the stocks of the New England textile manufacturing corporations and later, during the fifties, in those of copper-mining companies.

The development of the stock exchanges by providing a highly organized market for these securities, even though attended by the evils of manipulation and gambling, was of advantage in the ways in which any market is useful, particularly in increasing the mobility of private capital.

The Development of Insurance

Another important development among economic institutions during this period was in the field of insurance. In the colonial period, marine insurance was the only form of insurance generally available and it was not until the nineteenth century that fire and life insurance were really introduced. Of these two forms, fire insurance was the one that was then recognized as more important and grew most rapidly.

In the early years, many marine-insurance companies—for by this time companies rather than groups of individual underwriters were dominant—began to provide insurance against fire. Up to the time of the great New York fire in 1835, most of the companies organized to insure against fire were local in character.

Since the danger of so concentrating their risks was shown by the failure of most of the New York companies at that time, the period that followed brought many reforms. The expansion of the territory covered, furthered by the general adoption of the agency system, scattered the risks and at the same time, through increasing the volume of insurance carried, lessened the likelihood of overwhelming losses in any year by giving a broader basis for the play of the law of averages.

The unsound financial management of many companies led to a demand for state supervision and control and resulted in state legislation governing such matters and the creation of state insurance commissioners or departments. Another gain came through the adoption of methods designed to lessen fire risks and losses.

In the largest cities, paid fire departments began to be maintained in place of the voluntary service theretofore used, and the fire-insurance companies adopted measures to lessen the fire risks of the property insured.

From the beginning, the insurance companies were generally organized either as stock companies where the profits went to the small group of stockholders or as mutual companies where the profits in one form or another were returned to the policyholders and thus reduced the cost of their insurance.

During this period there was a marked growth in popular favor of the mutual plan.

There also appeared at this time a group of mutual companies that confined their business to one class of risks. Farmers’ mutuals began about 1820; by 1850 there were over 100 in existence, mostly in the Northeastern states and doing a small local business.

The first factory mutual was organized in 1835; half a dozen more had been formed by 1860. Their risks were confined chiefly to textile mills and by careful attention to precautions against fire, they were able considerably to reduce the cost of their insurance.

The absolute necessity of property insurance to provide security and stability for business and financial transactions, as well as to protect individuals against loss of home and personal property, is so generally accepted today that one wonders how people could have got along before such facilities were provided; yet it took time to convince people of this need. Such rapid progress in this respect was made during this period that by 1860 it was estimated that about $3 billion of fire and marine insurance was in force in the country.

The general recognition of the desirability of life insurance developed much more slowly. The security of business transactions commonly was much less dependent upon the life of individuals so there was little pressure from business to secure such protection; since the immediate advantages inured chiefly to the family, the provision of this safeguard was left to the decision of each individual.

At the opening of the nineteenth century there was practically no regular life insurance in the country. A few people held annuities; sometimes those going to sea insured their lives for the trip; one company, the only business corporation to do so before 1800, may have written half a dozen life-insurance policies.

A slightly greater interest in life insurance developed during the first three decades of the nineteenth century, though short-term insurance or annuities were most in favor. Private underwriting by individuals was abandoned during this time, but most of the companies that issued life insurance or annuities were engaged chiefly in some other form of insurance or in the trust company business.

The first commercial company to engage exclusively in life insurance and annuities was organized in Pennsylvania in 1809. During the thirties many such companies were organized and considerably more interest in life insurance developed, but the real growth of the business can scarcely be said to have started until the following decade.

From then on until 1860 important developments took place and some of the largest companies of today date back to these years.

Life-insurance companies were divorced from other forms of insurance or the trust company business; companies organized on the mutual or participating basis soon surpassed the stock companies in importance; insurance for life instead of for a short term or an annuity rapidly grew in favor, soon constituting by far the greater portion of the business; and considerable progress in actuarial science made it possible to place the business on a sounder financial basis.

The Census of 1860 estimated that there were then 47 life-insurance companies with policies on 60,000 lives for a total of $180 million. Though this is probably an underestimate, it is clear that even then life insurance was just beginning to win popular support; its advantages in promoting saving and in distributing more evenly the burdens resulting from death so that they fell with less severity upon a family were still but slightly appreciated.

Capital and Its Accumulation

With the growth of roads, canals, and railroads, the increased use of machine methods of production, the rise of factories, and the expansion of trade, capital was steadily becoming a more important and essential factor of production. A rapid increase in the available supply was therefore necessary, not only to further the economic development of the country but also to enable the people to supply their wants more economically.

Such an increase was the more desirable since capital was scarce in the United States as compared with the countries of western Europe. Consequently an understanding of the factors that affected the accumulation of capital during this period is important.

The accumulation of capital within a country, as previously pointed out, depends:
(1) upon the amount of the annual output of wealth that can be saved
(2) upon the proportion of this fund that is actually saved—this depending upon the effective desire of accumulation.

That there was an enormous increase in the annual output of wealth in the country during this period, the preceding account of our economic development makes plain; although a much greater population had to be supported by this output, there can be no question but what the output increased more rapidly than the population.

This result was owing to all the developments in science and the organization of industrial society that tended to increase the efficiency in the production of economic goods or services. Thus the savable fund grew.

Yet not all of the amount that could be saved over and above what was necessary to maintain existence was saved; there was an increased per capita outlay for consumers’ goods; the actual standard of living of most people rose. In spite of the resulting greater deduction from the savable fund, a larger amount was actually saved. This was due to a desire to save more as well as to the larger savable fund.

This increased desire to save was a product of many factors only a few of which can be mentioned. The spread of education increased people’s foresight and their desire to safeguard their future by provision against a rainy day. At the same time it served to increase their wants, and led to saving in order that in the future they or their children might enjoy a higher standard of living.

The maintenance of peace and order and the greater safeguarding of property rights, by increasing the assurance that those who saved would enjoy the fruit of their abstinence, stimulated thrift. The absence of any serious and prolonged war added to the sense of security at the same time that it minimized the waste of wealth that war involves. In time of peace the country was content with an outlay for purposes of defense that might well arouse the envy of the people of Europe with their burden of armament and military service.

Finally, the development of financial institutions such as savings banks, trust companies, and insurance gave an impetus to saving, not only by providing places of safekeeping, but by paying interest on the funds saved and helping to direct investments into lines where they would be more secure and profitable.

In addition to the capital accumulated from our own output of wealth, the available supply was also increased by the funds brought by immigrants and by the inflow of foreign capital seeking to obtain in a country where capital was relatively scarce a higher rate of return than was generally available in Europe.

As the credit of the nation and of the states improved and the great future development of the country became assured, more and more such capital flowed into the country for permanent investment, to say nothing of the short-time mercantile credits or loans extended to American importers.

In the earlier years much of this capital was invested in land, government bonds, or stock of the two United States Banks; some went into canals and manufacturing establishments. In the twenties foreign banking houses began to establish branches in this country. In the early thirties a large amount of foreign capital was invested in the state bonds then being issued so freely, but the financial collapse of many of the states that soon followed ended this for the time being.

American railroad securities began to be dealt in on the London Exchange about 1838, and, in the heavy inflow of foreign capital in the fifties, a large amount was invested in the railroads. Much the greater portion of this capital came from Great Britain but France and thrifty Holland contributed some. How large a sum these more permanent investments amounted to cannot be determined with any accuracy but it is estimated at nearly $200 million by 1850 and about twice that in 1860.

In these ways, as time went on, the supply of capital in the country was steadily increased. As the net savings of each generation were added to the amount inherited from the preceding one, every succeeding generation had a larger supply of capital to aid it in producing economic goods to supply its wants.

It has been estimated that in the decade of the fifties the average annual addition to the national wealth was about $33 per capita or $180 for the typical family. Some of this was used to add to the supply of consumers’ goods; a portion was simply a product of the increased value of land, only a part of which was due to capital spent in improving the land itself.

A considerable portion of this annual increase went to augment the nation’s supply of capital goods. The total national wealth of the country in 1790 has been roughly estimated at $552 million or $171 per capita for the free population. Of this total almost two-thirds represented buildings and real estate and the remainder was about equally divided between slaves and other personal property.

By 1860 the estimated national wealth subject to taxation had risen to over $16 billion or $590 per capita for the free population. This increase in the per capita wealth, even after allowing for the higher price level of 1860, meant an enormous increase in the economic resources of the nation and a marked advance in the material well-being of the people.

The Mobility and Distribution of Capital

In addition to the gain represented by the increased supply of capital there was also a gain from the developments that tended to promote greater efficiency in the use of the supply of available capital. Although all the advances in technological and business methods furthered this result, particular mention should here be made of the ways in which the development of financial institutions was of aid.

The greater the mobility of an agent of production—that is, the ease, economy, and freedom with which it can be moved from one place or use to another place or use—the greater the likelihood that it will be employed in the most productive manner.

Of the four agents of production, lendable capital is most easily moved from place to place, business management comes next, and labor third; land is practically immobile. Even free capital seeking investment does not move with perfect freedom; people may hesitate to invest in enterprises at a great distance or may be unwilling to enter lines of business with which they are not familiar.

In this country the supply of capital was more abundant in the populous and wealthy states of the Northeast than in the South or West; in England, France, or Holland it was more abundant than in this country. Thus anything that tended to make lendable capital more mobile, so that it flowed into this country from abroad or within this country, moved readily to the sections where it was scarce, tended to increase its productivity and thus to increase the nation’s income.

This result was furthered by the development of many of the financial institutions already described. The rise of the banking system, in spite of its many defects, gave greater freedom and economy in the movement of lendable funds and helped to direct their investment towards sounder and more profitable enterprises. The same was true of the funds gathered by insurance companies.

The development of the corporation as a form of business organization and the rise of stock exchanges providing a ready market for securities gave greater latitude and freedom to investors. The maintenance of social order and provisions for the protection of property rights, increased people’s willingness to invest at a distance, and the improved facilities for communication, especially those for securing credit information, had the same effect.

Usury laws fixing the maximum legal rate of interest existed in most states, but they had little effect.

Though justifiable if intelligently drawn up to protect the ignorant and poor who borrow chiefly for consumption purposes, such attempts to fix the price of capital borrowed for investment are certain to fail; for if the market rate of interest is above the legal limit, either the law will be evaded or, if actually enforced, capital is so mobile it will go elsewhere and thus increase its scarcity.

The failure of these laws made capital more mobile, though the devices sometimes used for evasion were responsible for certain banking evils.

Along with the increase in wealth and capital, the individual accumulations of private capital grew in size. In colonial times land and trade had been the chief sources from which large fortunes arose. During this period, the growth of urban real-estate values became a more important factor in such accumulations.

On the other hand the field of foreign trade somewhat declined in importance, partly because it became a less important factor among economic pursuits and partly because the decrease in various risks previously attending it brought greater stability and less chance of large, though occasional, profits.

New sources of large fortunes appeared with the growth of manufacturing, mining, railroads, banking, and speculation. Such fortunes further increased the disparity between the very rich and the poor. At the same time the growth of private wealth tended to give its possessors a relatively greater influence in the political and social as well as in the economic life of the time.