10 Moments That Made American Business

By John Steele Gordon

It has been 400 years since the European settlement began in what is now the United States. In that time a land occupied by a few million Neolithic hunter-gatherers has been transformed into the mightiest economy ever known, producing nearly one-third of the world’s goods and services. There are few economic sectors indeed, from agricultural exports to jet-aircraft production to entertainment, in which the United States does not lead.
In these four centuries of economic history, there have been many turning points that changed the future of American business. Some of these turning points were for the better, some for the worse, and some for both. Here are 10 of the most significance.
1-The Founding Father of the American Economy (1789)
Robert Morris, who had helped greatly in financing the revolution, turned George Washington down when the president offered him the post of secretary of the Treasury. Morris wanted to be free to speculate in land and other opportunities to make money. It was a poor decision on Morris’s part (he would en up in debtor’s prison), but it was very good for the country because Washington then turned to Alexander Hamilton. Still in his early thirties, Hamilton was both a genius and a prodigious hard worker. There was much work to do, because the national financial situation was desperate.
The old federal government under the Articles of Confederation had lacked the power to tax. Instead it was a dependent on requisitions from the states, and they were sometimes forthcoming and sometimes not. The massive debt left over from the Revolutionary War was unpaid, as was the interest due on it. The money supply was chaotic; it was a hodgepodge of foreign coins and “continentals,” the paper money issued by the Continental Congress during the war that depreciated rapidly traded at pennies on the dollar. In 1789 the United States was financially and economically, nothing more than a very large banana republic. / Hamilton had to accomplish four things to transform it:
(1) Develop a system of taxation to fund the government and establish a customs service to collect the tariff, destined to be the main federal tax; (2) organize a monetary and banking system; (3) refund and rationalize the national debt in ways that would gain the confidence of the marketplace; and (4) devise a mechanism to allow the government to borrow as necessary.
Hamilton accomplished all this in the first two years of his tenure. And though the Treasury was the biggest of the new government departments (it had 40 employees to the State Department’s mere 5), it was largely Hamilton’s work in both conception and political execution.
The results were astonishing. The American economy, which had been mired in depression for much of the 1780’s, revived wonderfully (helped, to be sure, by the outbreak of war in Europe). Federal revenues were a meager $3.6 million in 1792, the first year for which statistics were available, but by 1800 they topped $10 million. Government bonds began selling at a premium in Europe. The banking system grew rapidly, centered on the Bank of the United States, established by Hamilton under a federal charter, and its notes traded at par throughout the Union. For the first time since colonization had begun 200 years earlier, the United States had a reliable and convenient money supply.
Hamilton was fought, tooth and nail, by the developing political opposition under Thomas Jefferson, and parts of his program, especially the Bank of the United States, would later be dismantled (Hamilton’s shade might take comfort in the fact that his 1784 creation, the Bank of New York, the very first corporate stock to be traded on the New York Stock Exchange, continues to flourish). Still, thanks to Hamilton, the economy of the new nation was off the races and began the growth that has been the wonder of the world to this day.
2-Cotton Becomes King (1793)
Cotton was an expensive fabric at the end of the eighteenth century, despite the mechanization of the English cloth industry. In the new United States there was little cotton grown, except on the Sea Islands, along the coast of Georgia and South Carolina.
This long-staple cotton (now often called Egyptian cotton) requires a very lengthy growing season and sandy soil in order to flourish. Short-staple or upland cotton is much less demanding. It needs only 200 frost-free days, and any good soil will do.
Short-staple cotton had a big problem, however. Unlike Sea Island cotton, upland cotton’s seeds are sticky and deeply embedded in the cotton boll. While a field hand could pick perhaps 50 pounds of cotton a day, it took fully 50 pounds of cotton a day; it took fully 50 man-days to handpick the seeds from what amount of cotton fiber. As long as ginning – as removing the seeds is called - was this labor intensive, short staple cotton could not compete in the world market with other fibers.
Then a young man with a gift for tinkering named Eli Whitney changed that and the American economy and American history as well. After graduating from Yale in 1793, Whitney accepted a job as a tutor in South Carolina, and, after the job did not work out, he visited a friend in Georgia. There he saw cotton growing for the first time and heard how much the laborious ginning process limited demand.
As Whitney recollected, he immediately “stuck out a plan of a machine in my mind.” The machine was simplicity itself. Whitney took a wooden roller and studded it with nails. As the roller was turned, the nails picked up the cotton fiber from a compartment above and, when they passed through a comb, pulled the fibers through, leaving the seeds behind. A rotating brush then swept the cotton off nails into another compartment.
Whitney’s first crude gin immediately allowed a single laborer to do in one day what had previously taken him 50 days. In other words, it reduced the cost of ginning cotton by 98 percent.
The economic utility of this device was so obvious that the first gin Whitney built was stolen. And while he patented an improved model the next year, he was not able to enforce the patent, as any competent carpenter could build a cotton gin in an afternoon out of readily available materials. Whitney would realize only a few thousand dollars from his epochal invention.
But if the effect of the cotton gin on Whitney’s personal finances was relatively modest, its effect on the economy of the country can hardly be overstated. In 1793 the United States exported only about 488,000 pounds of cotton, less than one percent of total world production. The next year / the total more than tripled to 1.6 million pounds and by 1801 exports reached almost 21 million pounds. Southern cotton soon began supplying New England’s rapidly growing textile industry as well, greatly fueling this country’s nascent Industrial Revolution.
The Deep South, especially in Alabama’s Black Belt and the rich alluvial soils of the Mississippi Delta, turned out to be an ideal place in which to grow cotton. Production doubled on average in every succeeding decade, as more and more land was devoted to the highly profitable crop, until it reached two billion pounds in 1860. By 1830 the United States was producing half the world’s cotton; 20 years later it was 70 percent. Cotton would be the single most valuable export of the United States until the 1930s.
But while Whitney’s invention made ginning much less labor intensive, cotton was still a highly demanding crop, requiring about 70 percent more labor than corn to produce a good yield. Fortunately there was a ready supply of low-cost laborers; unfortunately they were slaves.
Slavery had been on the wane in the United States since the middle of the eighteenth century, as the idea that it was morally wrong began to spread. Vermont had been the first place in the Western Hemisphere to outlaw it, and most Northern states quickly followed suit. In 1787 the Northwest Ordinance forbade slavery north of the Ohio River. In the South, while there was little political push to abolish slavery, manumission became a fashionable. George Washington freed his slaves in his will, as did many other planers of his generation.
But with the birth of the “Cotton Kingdom,” the demand for slaves increased sharply, and the price of a good field hand with it. The slaveholders, who made up about 5 percent of the Southern population but had disproportionate political power, found themselves possessed of an ever more valuable capital asset in their slaves. As a consequence they became more and more resistant to abolition in any form.
Slaveholding areas that were too far north to grow cotton, such as Virginia and Maryland, began to supply the burgeoning demand for slaves in newly opened areas in the Deep South. Between 1790 and 1860, 835,000 slaves were “sold south,” at an incalculable cost in human misery as families were broken up.
While cotton enriched the country economically, it greatly deepened the political divide between North and South. Had Eli Whitney invented the cotton gin only a decade later than he did, the quickly growing abolitionist movement might have had enough time to gain irresistible momentum.
In that case, the curse of slavery could have been lifted from the land decades earlier than it was and the most terrible war in American history avoided. But, of course, we can never know that.
3-The Emancipation Proclamation of the American Economy (1824)
The steam engine designed in England by Thomas Newcomen in the early eighteenth century and greatly improved by James Watt in the 1760s was the first new source of work-doing energy since the windmill, invented a thousand years earlier. In 1807 Robert Fulton, financed by his partner Robert Livingston, built the world’s first practical steamboat, remember as the Clermont.
Livingston was a member of one of the New York’s most politically influential families, and he had persuaded the New York state legislature to grant him and Fulton a monopoly on steamboat navigation in New York waters – provided they built a boat capable of traveling four miles an hour. When the Clermont averaged four and a half miles on its first trip from New York City to Albany, the monopoly was theirs. By 1812 they had six boats plying New York waters, which the state defined as running up to the high-tide mark in neighboring states.
Needless to say, entrepreneurs in nearby states who saw opportunity up to the high-tide mark in neighboring states who saw opportunity in steamboats didn’t like the monopoly. Nor did the passengers who had to pay higher fares because of it. In 1819 one of these entrepreneurs, Thomas Gibbons of New Jersey, decided to do something about it.
Gibbons put a steamboat on the New York – New Brunswick run, the first leg of the fastest route to Philadelphia. As captain he hired a young man in his twenties named Cornelius Vanderbilt.
Vanderbilt would tie-up whatever pier seemed to be free of New York authorities and then disappear into the city until just before departure time in order to avoid being arrested. The authorities did not dare seize the boat itself, knowing that New Jersey would quickly retaliate by seizing the first monopoly steamboat it could lay its hands on.
While Vanderbilt played cat and mouse with New York authorities, Gibbons went to court, and eventually, in February 1824, the case was heard in the U.S. Supreme Court. / Gibbons’s lawyer, Daniel Webster, argued that because the Constitution’s interstate commerce clause, which gives congress the power to “Regulate Commerce…among several states,” was both sweeping and exclusive, the monopoly was unconstitutional as a state encroachment on federal power.
A unanimous Supreme Court agreed. Today this is taken for granted, but at the time it was a breathtaking expansion of federal power. The decision was greeted with public jubilation, and for good reason. Thanks to competition, fares quickly fell on average by 40 percent, and in just two years the numbers of steamboats working New York waters increased from 6 to 43.
The long-term effects were even more profound: States stopped granting monopolies to influential local citizens, as they all were now presumptively unconstitutional, while other barriers to interstate commerce fell as well.
In his classic work The Supreme Court in United States History, Charles Warren calls Gibbons v. Ogden the “Emancipation Proclamation of American Commerce.” That is not an exaggeration. With the decision, the United States became the world’s largest truly common market, its goods free to move throughout vast territories unhindered by parochial concerns and regulations.
And the timing could not have been better. The power of steam to move goods cheaply over long distances, merely hinted ay by the steamboat, was soon to grow by orders of magnitude. The railroad, beginning less than a decade thence, would make an integrated national economy a reality. Thanks to Gibbons v. Ogden, American businessmen would be able to take full advantage of it, and did they ever.
4-Clinton’s Ditch (1825)
The cost of overland transportation had been a limiting factor in the world economy since time immemorial. Any material with a low value-to-weight ratio, such as food stuffs, that can’t be sold in those markets at a price anyone would pay. This meant that national economies were fragmented into an infinity of local ones.
Until the Industrial Revolution, there was only one way to reduce these transportation costs: build artificial rivers. By the end of the eighteenth century England was well laced with canals, greatly facilitating industrialization as factories could sell their goods profitably throughout the entire country.
But the new United States was 10 times the size of England far less developed eastern seaboard from the fertile, resource-rich, and rapidly growing West. Settlers west of the Appalachians had no choice but to send their crops down the Mississippi to market.
Along the whole great chain of mountains that stretched from Maine to Alabama, there was only a single gap – where the Mohawk River tumbles into the Hudson near Albany – at which a canal was even theoretically possible.
The idea of building a canal to connect the Hudson with the Great Lakes there had been around for many years but always dismissed as hopelessly impracticable. Even Thomas Jefferson thought the idea “little short of madness.” DeWitt Clinton, however, did not. Born into a prominent New York family (his uncle had been governor of New York and then Vice President under James Madison), Clinton would be the mayor of New York City and governor of the state for most of the first quarter of the nineteenth century. A shrewd politician, he built public support for the canal and pushed it through a reluctant state legislature.
One can understand the reluctance, for the project was huge by standards of the day. At 363 miles the Erie would be by far the longest canal in the world. It would require moving, largely by hand, 11.4 million cubic yards of earth and rock – well over three times the volume of the Great Pyramid of Egypt – and building 83 locks in what was still a semi-wilderness. The budget, seven million dollars, was about equal to one percent of the gross domestic product of the entire country. Nonetheless, when the federal government refused to help, New York decided to go it alone. It was a gigantic roll of the economic dice, but one that paid off beyond even Clinton’s dreams. The Erie Canal put the empire in the Empire State.
The canal was success even before it fully opened, as traffic burgeoned on the completed parts, helping fund continuing construction. When it was finished in 1825, ahead of schedule and under budget, traffic was tremendous from the start. It is not hard to understand why. Before, it had taken three weeks and cost $120 to ship a ton of flour from Buffalo to New York City. With the canal, it took eight days and cost $6.
With the opening of the Erie Canal, New York became the greatest boomtown the world has ever known. The population of New York had been increasing by about 30,000 every decade since 1790, with 123,000 inhabitants in 1820. By 1830, however, New York’s population had reached 202,000; by 1840, 313,000. It was 516,000 in 1850 and 814,000 in 1860. Development roared up Manhattan Island, at the astonishing rate of / about two blocks a year.
Thanks to the Erie Canal, by the 1840s New York’s financial market was the largest in the country. In that decade the telegraph began to spread quickly, allowing more and more people to trade in the New York market, which has dominated American financial activity ever since.
Even so, perhaps the greatest consequence of the Erie Canal was that its success made the country far more receptive to other projects of unprecedented scale and scope and encourages its entrepreneurs and politicians to think big. The result was a still-continuing string of megaprojects – the Atlantic cable, the Brooklyn Bridge, the Panama Canal, Hoover Dam, the interstate highway system, the Apollo missions – that have marked the economic history of the United States and shaped the national character.