THE ASCENT OF GERMANY AND THE UNITED STATES

IN THE EARLY nineteenth century public attention was riveted upon Napoleon Bonaparte’s armies carrying revolutionary ideas across the continent of Europe. But British industrialization gathering steam during the same years would be the more lasting revolution, building as it did on two centuries of advances in agriculture and trade. An integrated, modern economy was in the making. The benefits of Britain’s technical breakthroughs didn’t materialize into higher standards of living until well into the century, but the country’s prosperity was pretty evident. Almost two-thirds of its population had found jobs in manufacturing, retailing, or transportation, swelling the urban population. London became the glittering world capital of finance, trade, and fashion with a civil society enlivened by association meetings, demonstrations, the theater, and popular magazines, big and small.

Even shorn of its continental American colonies, Great Britain retained its preeminence as a seaborne power with colonies in the Caribbean, Canada, Singapore, Australia, and India. Contemporaries captured its global reach when they observed that “the sun never sets on the British Empire.” Industrialization was creating a new incentive for controlling raw materials that could be brought home to be worked up into finished goods. Its continental American colonies lost to an independent United States, Britain turned its attention to India, which enhanced the importance of its naval station in South Africa.

Yet this nineteenth-century chapter in the history of capitalism will not focus on British success but rather tell how Germany and the United States were able to pass Britain and take a commanding lead among world economies. It is in many ways a perverse tale, for Great Britain had established free trade and worked assiduously to bring other countries into the global commerce revolving around its banks and products. Germany and the United States fought the magnetic pressure Britain exerted by erecting tariffs to protect its industries, creating what Max Weber described as the “closed national state which afforded to capitalism its chance for development.”¹

Those who move into untrod territory rarely move straightforwardly. Without maps or visual cues, they wander about, running into cul-de-sacs and lingering around dry wells. Having gone where no one else has been, the innovator has less fear of competition. When others decide to follow the successful trailblazer, their trip is more direct. In the case of Germany and the United States, modernizing their agriculture and industry became part of a push to create a nation. Their forward motion announced that capitalism was not an English aberration but rather a new stage in world history. By the beginning of the nineteenth century people had begun to anticipate that there would be further changes, that the future would not mindlessly replicate the past.

The pressure Britain’s neighbors (and rivals) felt to follow its lead was acute, for that most ancient of political strengths, military power, now depended upon industrial capacity. First Britain’s challengers had to figure out how to get their hands on their marvelous machines, leaving them with little choice but to engage in industrial espionage. Societies that enjoyed sufficient isolation from the Western European center of wealth and war making could ignore British gains, and they did, unless they were drawn into the British Empire. Those closer could not.

Once Britain’s spectacular new machines could be seen, it was possible to imagine replicating them. Such an appropriation had haunted private investors as well as British officials, but theirs was too open a society to be very successful at keeping secrets. The steam engines that revolutionized old ways of making tools and spinning cotton attracted spies from France, Germany, even Britain’s quondam colonies in America. All these countries had the same task: to discover what was turning conventional artisanal shops into manufacturing plants of unprecedented productive power. Britain prohibited skilled workers to emigrate, but the French had actually persuaded close to a thousand factory operatives to emigrate over the course of the eighteenth century.² Nor could patented machines be exported legally, but the Germans smuggled in machines or bought them in Belgium. Americans with good memories inspected British plants and later copied them. Sometimes workers, slipping out of the country, duplicated in their new homes the lineups of machinery that had changed the face and pace of British manufacturing.

Many countries set up spinning mills, but England’s success, it turned out, involved more than machines. The dexterity and efficiency of English managers and workers had to be imitated as well. And that was a question of culture, something a good deal harder to copy. No other country came close to matching England’s output of textiles, the major product of the early Industrial Revolution. Even though wages everywhere else were considerably lower than they were in Great Britain, neither France nor Germany succeeded in exploiting that cost advantage. In 1811, 40 percent of all cotton spindles operated in Great Britain. Canada and the United States, which also had high wages, operated another 22 percent of the spindles, and the remaining 39 percent were spread through Germany, France, Russia, Belgium, Switzerland, Italy, Spain, Portugal, Austria, India, Japan, China, and Mexico! It was an amazing record, a triumph of machine design and worker expertise.³ During roughly the same period, 1780 to 1830, English population doubled while its total industrial output increased by almost 300 percent—an astonishing growth rate especially since much of that time Britain was at war with France.

The inventiveness that began with a crude steam engine in 1701 continued without pause in Great Britain. By 1851 Queen Victoria herself was ready to celebrate the ingenuity of her people. With Prince Albert as sponsor, a great exhibition of “the Works of Industry” opened in a stunning building made of glass on an iron frame. Inside the Crystal Palace, visitors could examine thirteen thousand contrivances gathered from the world’s collieries, docks, offices, kitchens, factories, and laboratories. The exhibition’s implicit heroes were the “inventors,” “artists,” and “authors” who emerged as new romantic figures. The more enduring impact from such an arresting display of the fruits of industry came from a new perception of time. It began to seem that all mankind had been moving inexorably toward great technological achievement. Contemporaries in the nineteenth and early twentieth centuries were still so dazzled by the marvelous machines of their era that they could not imagine that their forebears hadn’t been straining to get to the machine age as fast as possible.

History books began describing industrialization as a universal human goal. The past that used to enthrall Europeans, such as the glories of ancient Greece or the ardor of the Crusaders, slipped into the shadows. Writers treated those unlucky enough to have been born before the modern era with condescension. People spoke of industrialization as a destination, like a great city, toward which men and women had long been moving, even though they could no more anticipate what came after them than we can the events in the twenty-second century. This historical perspective didn’t fade until the late twentieth century, when writers began to refer to “postindustrialism.” Modernity having been reached, it became obvious that human life went on with new aspirations and concerns.

An inquisitive history of capitalism was slow to be written because inevitability hung over such transformations as those of horse-drawn railway cars in coal mines to railroad locomotives chugging across the world’s continents. People found a name for this unabating improvement. They called it progress. Earlier “progress” had just indicated going from one place to another, as in “progressing across the countryside.” Now it gathered new meanings. Progress flipped the value assigned past and future. Change no longer frightened; it confirmed progress.

Within twenty years of the Crystal Palace Exhibition Germany and the United States overtook the great pathfinder to take the lead in the insistent march of capitalism. The volume of American steam power passed that of Great Britain in 1850 and had far outdistanced it by 1870, with Germany following within a decade. To take the measure of steel production as another measure, the United States surpassed Great Britain in 1886; Germany did the same seven years later. Other indicators followed the same trajectory.⁴ And Germans and Americans did more than belch out smoke and steam. They started a new wave of innovations in chemistry, electricity, and internal combustion machines. For the first time the front-runner that had astounded the world for two centuries lagged behind—not just in productive capacity but in innovation. Latecomers to industry had the advantage of newer equipment and untapped capital. Their farms were still shedding workers to meet the labor needs of industrialists. It may seem a bit perverse to drop Great Britain just as it reached the zenith of its technological achievements, but this history is following the relentless revolutions of capitalism rather than cataloging its various successes.

Germany and the United States are so unalike that their economic successes clinch the larger point: Once the key elements of industrialization were exposed, they could be adapted to different settings and cultures. The successful economic trajectory of two such dissimilar countries cautions against relying on one formula for economic success. But passing up the pacesetter took some special gifts. The United States was an obvious contender for economic preeminence. During its colonial tutelage to Great Britain, colonists had shown an impressive capacity to fit their economic ventures into the larger scheme of European commerce. Independence liberated them from Britain’s prescribed channels, freeing their commercial smarts as well. Germany too possessed great assets for economic development if they could be dug out from the thick layers of tradition and inherited privilege. German strengths were both material and cultural: great natural resources, an educational system that fostered science and technology, and a work force proud of its skills and disciplined habits.

For the United States the push to advance economically became an intrinsic part of its emerging national character. Americans celebrated their enterprise and efficiency as a way to differentiate themselves from decadent, feudal Europe. Bereft of any strong aristocratic traditions, they valued audacious qualities, often exaggerating the grip of the dead hand of the past on countries abroad. At the first census of 1790, a population of almost four million men and women, mostly young and inured to work, lived on the edge of the most fertile land on the globe. On their way to this national domain, they would discover coal, iron, gold, and oil in great abundance. That first census also counted more than three-quarters of a million enslaved persons. The value of slaves soared with the invention of the cotton gin, which made profitable the short-staple cotton grown throughout the region. Any hopes spawned by the ideals of the Revolution that slavery might decline throughout the South died.

In 1789 the United States adopted a constitution designed to create a single nation from its thirteen semiautonomous states. In that same year Germany was more a name than a country. It referred geographically to more than three hundred separate kingdoms, principalities, and municipalities, including Austria. For the United States nationalism abetted economic development while in Germany the task of modernizing the many different German economies supplied the means for creating a nation. Americans suffered from having been colonies, accustomed to playing a subordinate role to the mother country. Germany bore the burden of fragmentation long after its neighbors—England, France, Belgium, the Netherlands, Russia, Spain, and Portugal—had acquired strong national identities. Nationalism resonated through the nineteenth century. Different as they were, both the United States and Germany embarked on nation building. This drive gave to economic endeavor a moral, romantic, and aesthetic appeal.

German nationalism owed a lot to the French Revolution and its Napoleonic aftermath. Napoleon had honed the revolutionary army into a mighty military force. He reformed institutions wherever he conquered, carrying his modernizing impulses along as his army marched across Europe in the first decade of the nineteenth century. He erased the Holy Roman Empire, which had tied together a loose confederation of German-speaking Central European states since 800. He formed in its place a confederation of thirty-nine states, including Austria. Napoleon’s legacy and the name of that small town in the Austrian Netherlands where he met defeat would long be remembered.

After Waterloo, a coalition of European powers met in Vienna and created a peculiar entity called the Concert of Europe. The French Revolution’s excesses had been so frightening that even former enemies cooperated to defeat Napoleon. The exhausted, participating countries in the concert basically used diplomacy to shuffle lands around to achieve some kind of balance of power. A century of hostilities made peace seem worth a few sacrifices. The British succeeded in getting the others to condemn the slave trade, but the major purpose of the concert was to calm the Continent down. There was no returning to the past, so the job of conservatives was to maintain the status quo that they had established. They blamed the radical ideas of the Enlightenment for fomenting the French Revolution. To them, the rallying cry of “Liberty, fraternity, and equality” represented an attack on religion, the family, and standing authorities. The lesson was clear: People needed an iron glove, and the hand within it had best be one attached to a distinguished heritage. The postrevolutionary conservatives didn’t want to replace one set of ideas for a better one; they wished to eliminate ideas from politics altogether. Far better to rely on customs and customary habits of obedience.

On the other side of the learning curve, European liberals cherry-picked those novelties from the creed of the French Revolution that fitted well with their notion of reform. They detested Napoleon’s megalomania but applauded his rationalization of the law. They championed natural rights and added to them a commitment to free trade and economic development. They also supported a broader suffrage to counteract the influence of the aristocracy newly empowered by Napoleon’s defeat. Round two of the confrontation between stalwart defenders of the status quo and enlightened representatives took place in Germany. Only now it wasn’t a contest between two sets of ideas but rather arm wrestling between liberals and the aristocrats who had engineered the Congress of Vienna.⁵ Germany, especially the kingdom of Prussia, which gained two cities and the iron-rich Ruhr Valley, came out of this extended European trauma very much on the winning side. Still, like Italy, “Germany” represented an agglomeration of duchies, principalities, and independent cities.

Economic Development and German Nationality

It was crystal clear that the separate German states suffered economically from being a crazy quilt of states rather than a group under a national blanket. The 350 German principalities lacked uniform weights and measures, excise duties, road rights-of-ways, and commercial practices, not to mention currencies, banking institutions, and toll-free transportation. Rather than promote commerce, the autonomous cities acted as administrative centers for either the church, a university, or a princely court. Armies, especially in Prussia, commanded a large proportion of public funds, and everywhere administrative costs were bloated. While improvements in British agriculture steadily raised the people’s standard of living throughout the eighteenth and nineteenth centuries, impoverished serfs still did the farming in most of Germany.⁶

The French had eliminated the old feudal dues that bore down on their peasantry in one spectacular night of legislation. Ending serfdom in Germany took a lot more time—in 1807 for Prussia, but not until 1832 in Saxony. In Prussia 65 percent of workers still tilled the soil, so restructuring rural landholding was tantamount to transforming the entire society. Looking enviously at agricultural gains in England and the Netherlands, where only 40 percent tilled the soil, Prussian landlords began to think that free labor might improve agricultural output. The government passed laws freeing all serfs while compensating landlords for their loss of income from fines and rents. The reform gave the land of those serfs who didn’t have enough to farm effectively to the landlords as well. It will not shock modern readers to learn that landlords, who controlled the government, took hundreds of thousands of acres from these newly freed serfs, who were left to fend for themselves as agricultural laborers.⁷

When the transition from serfdom to free labor was complete, southwestern Germany retained its tradition of small farms. Even in Prussia, the number of farms doubled, going from fewer than a million in 1816 to more than two million in 1858. Those former serfs with enough land to farm worked for themselves while the great Prussian estates were now worked by landless workers. Not until the end of the century did harvest yields markedly increase.

German urban centers were hardly more advanced than the countryside. Guilds suppressed competition and retained the capacity to repel innovations until well into mid-century. Formidable obstacles prevented people, products, and ideas from moving about through these many jurisdictions. Only a common language and the memory of having once been together in the Holy Roman Empire supported the dreams of a united Germany, but that was enough for the leaders of Prussia, whose military made it the likely champion of unification. Prussia had the coal, iron, investors, and political will to sponsor economic development. Its leaders realized that the road to nationhood lay through commercial development even though the Junker aristocrats loathed the urban middle class that dominated commerce. Nothing for it; they needed wealth to maintain their army and its esteemed military traditions.

The potential for a great German nation centered in the kingdom of Prussia, which was bigger than the next three largest states of Bavaria, Hanover, and Westphalia put together. In a fascinating contrapuntal action between economic and political incentives, Prussia lured more and more German states into the Zollverein, the uniform, commercial union that it had started in 1817. Some entrepreneurs benefited from an expanded internal market and protection from foreign competition, but other regions suffered from competition, which their local tariffs had mitigated. Yet year by year the Zollverein grew, helped by Prussia’s willingness to make financial sacrifices to gain the admittance of major states in the south. Economic improvements held out hope of herding the diverse German states into one national fold.

A new concept helped nudge German unity forward. Once economies had been viewed as strong or weak, but now, with England setting a fast pace away from former levels of productivity, people started talking about advanced and backward economies.⁸ It was a startlingly new way of thinking about economic activities. Previous economies had simply involved the repetitive, age-old tasks of feeding the people, producing useful objects, and making their exchange possible. Economies now were expected to develop or bear the onus of being backward. “Backward” had a different ring from “traditional.” The idea of backwardness exacerbated competition among Austria, Prussia, Russia, France, and England. This linear view of history as a progressive movement is so familiar to us that we can easily miss its initial impact. Before, military might have mattered most, especially in Germany, the ground for so much warfare. The high cost of maintaining a military establishment made the state’s economic development critical to sustaining a position in the international order. With Great Britain continuing its industrial ascent, wealth creating and power exerting became ever more entwined.

Germany’s large domestic market provided the stimulus for development. The great river arteries of the Rhine, Oder, Weser, and Elbe carried most of the commercial traffic with canals aiding navigation. Steamships appeared in the 1820s, followed by more canal building, but the most transformative invention for nineteenth-century Germany was the railroad. Not the horse-drawn wagons on rails that had been used in coal mines for a long time, but locomotive-driven railroads that pulled loads up and down hills, across great plains, and right onto the loading docks in port cities. All it took was laying down track, preferably with standard dimensions. Perfected by the English in 1830s, the railroad shrank the distances between places, people, and products, as measured by time, much as had lateen-rigged ships three centuries earlier. In Germany, as in the United States, canals became important complements to railroad transportation.

The German states sprawled across the center of Europe between the modernizing West of France, Belgium, and the Netherlands and the backward East of Russia, Poland, and the Balkan states still part of the Ottoman Empire. German railroads connected these halves of Europe. Their construction prompted the repair of decaying overland trade routes and stimulated the economies of Germany’s neighbors—always a sound policy if a country has something to sell. The Zollverein expanded, as more German principalities chose to join, coinciding with a speculative boom in railroad building.⁹ As so often happens with technology, one fruitful area stimulated another; railroad building supported German mining, metallurgy, and machine making. In France railroads radiated out from Paris; in Germany they linked industrial centers.

Unlike most underdeveloped countries today—to use the twentieth-century term that has replaced the unkind adjective “backward”—Germany had the capital to build railroads. Private bankers like the Rothschilds and Mendelssohns were a major source of investment funds. That they were Jewish firms enabled conservatives to inject the poison of anti-Semitism into discussions of economic problems. Other prominent private banking houses belonged to Huguenots. From a social standpoint bankers could be seen as outsiders, but their branches and connections in Amsterdam, Brussels, Paris, and London only enhanced their capacity to finance German industrialization. In this early period financial institutions were critical. Capital was not in short supply, but it was dispersed through a population untutored about investments.

It was imperative to Prussia to exclude Austria from any new arrangement so that it could dominate the future German nation. Otto von Bismarck, the great architect of the German nation, adroitly deployed the Prussian Army against Denmark, Austria, and France in a series of short wars that secured unification of Germany on his terms. By 1871 there was a new German Empire with the king of Prussia as emperor. The waxing Hohenzollern dynasty had pushed aside the waning power of the Hapsburg Empire, now reduced to Austria and Hungary. Once unification was achieved, Germany became the industrial giant of Europe. Bismarck had triumphed with his policy of “iron and blood” against what he rather dismissively called the “speeches and majority decisions” of his liberal opponents.

Germany had extracted a large indemnity payment from France in addition to taking Alsace-Lorraine as a victory prize from the Franco-Prussian War. The acquisition of the iron-rich Ruhr Valley triggered a large internal migration from the overpopulated eastern parts of Germany to the industrial West. The consequent prosperity created an exuberance that proved propitious for economic development. Again cultural differences proved influential. Germany’s population, for instance, proved more mobile than that, say, of France, where partible inheritance kept younger sons at home waiting for a share of their parents’ property. Germans also began crossing the Atlantic, to build new lives in the New World. Germany and Ireland accounted for 80 percent of the nine million immigrants who came to the Americas, mainly the United States, in the middle decades of the nineteenth century.¹⁰

Private Initiative in the United States

In the United States the elaboration of a commercial society took place under remarkable, and remarkably different, circumstances. Commercialization worked interactively with democracy to accelerate national development. Americans had paid dearly for their revolution in blood and debts, but 1789 brought to an end a long period of economic distress. Revived prosperity promoted the construction of roads, the extension of postal services, and the publishing of newspapers. The United States soon printed more newspaper issues than any other country in the world, regardless of size. The establishment of the new government under the Constitution coincided with this economic turnaround.

Treasury Secretary Alexander Hamilton thought Adam Smith’s idea that an economy could regulate itself crazy. Perhaps this was because Hamilton knew that it had taken his authority and expertise to convert the revolutionary debt into an asset. This he accomplished by consolidating all the IOUs held against the state and federal governments. He then issued “stock” to pay them off and dedicated specific taxes to fund the interest on these issues. Investors quickly bought up the debt. Thanks to Hamilton’s fiscal prowess, the United States became a safe place to store money. Most Europeans who bought Hamilton’s stock invested the earned interest in the country’s many private ventures. You could say that the United States became the financial community’s first emerging market. At the same time, the European war that the French Revolution triggered put a premium on American foodstuffs. Its shippers became neutral carriers for the belligerents.

Competition and obstacles, if not overwhelming, have proven a great stimulus to economic development. Northerners, who since the seventeenth century had worked hard to find a niche in the world market, developed the institutions and personal traits that propelled capitalism while the planter elite of the staple-producing South rested on its laurels, or more precisely, on its handsome profits, first from tobacco and rice and then from cotton. The planters spent lavishly to maintain a genteel way of life and hid, as best they could, the harsh realities of their dependency on slave labor.

Owning slaves acted as a kind of insurance policy for their masters. Jefferson inherited 135 slaves when his father-in-law died in 1774, among them Elizabeth Hemings and her 9 children. When Jefferson died fifty-two years later, he owned more than 70 Hemingses. The value of slaves soared after Whitney’s cotton gin made profitable the crop of the short-staple cotton that could be grown all over the South. Rarely has an invention come at a more opportune moment. Textile mills were proliferating in Great Britain and elsewhere. Southern specialization intensified their demand for foodstuffs, lumber products, and manufactured goods that the North could supply. Producing cheap shoes and clothes for slaves became a start-up venture for many a bootstrap entrepreneur.

Against the measurable wealth that slave labor created must be placed the immeasurable loss to the South of cultural capital in skills not learned, investment opportunities left undeveloped. Even less tangible was the enormous drain of the region’s moral resources from defending a social system that others found increasingly indefensible. All of the northern states had found ways to gradually abolish slavery by 1801, and the U.S. Constitution provided for a ban on slave imports from Africa after 1808. With the expansion of the South’s frontier, the price demanded for enslaved persons in the domestic market doubled within a decade. Soil exhaustion in Virginia and Maryland made it very tempting for planters to sell their stock in human beings.

The domestic slave trade represented the one great entrepreneurial activity in the South. With eastern land worn out from the overcropping of cotton, frontier openings became bonanzas. The biggest losers in this new era of southern expansion were the African Americans whose opportunities for manumission practically disappeared once their value rose. Men, women, and children were wrenched from kith and kin and force-marched to western Georgia, Alabama, and Mississippi, carrying the institution of slavery deeper into the continent. Before railroads arrived to promote long-distance trade, the internal slave trade represented the most important interstate commerce, a fact rarely mentioned in American history textbooks. By 1820 more than a million African Americans had moved beyond the boundaries of the original states to Alabama, Mississippi, and Louisiana.¹¹

When Jefferson came into the presidency in 1801, he worked swiftly to democratize Hamilton’s accomplishments, dismantling the Federalist fiscal program, reducing taxes, and cutting the size of the civil service. The United States got the best of two worlds with Hamilton’s and Jefferson’s economic programs. Hamilton dismissed the notion that ordinary people could use their money wisely and thus ignored the most protean element in the economy, but he won the confidence of investors at home and abroad. Jefferson, on the other hand, distrusted financiers and wanted to liberate working-class white men from the condescension of their superiors. His belief in limiting government power also had roots in the slaveholders’ determination not to be harassed by the federal government.

Rejecting Hamilton’s guidance of the economy from the center, Jefferson freed money and credit from national control and left it to the states and private corporations to supply the country with competing banks.¹² For the next half century the states, shorn by the Constitution of the power to block economic developments, took the lead in promoting them. They built an infrastructure of banks, roads, and canals while offering bounties, licenses, and charters for promising and unpromising ventures alike.¹³ It is rather ironic that the judge whom the Federalists had appointed at the last minute to monitor the newly elected Jefferson, Chief Justice John Marshall, wrote stellar decisions against state-conferred monopolies and other breaches of contract that enhanced the scope of free trade and promoted commerce based upon competition rather than privilege, another Jeffersonian goal.

If the Constitution laid the bedrock of America’s liberal society, the free enterprise economy raised its scaffolding. After its ratification, a new economic order took shape, erasing most traces of the one dominated by Great Britain. The elimination of imperial control over land and credit enabled thousands of operators to act on their plans with the financing of high hopes. Jefferson’s commitment to decentralizing governmental power dispersed opportunity to rural America, which had the abundant brooks and streams to be converted into waterpower, the principal source of energy for American manufacturing for some decades. Fortuitously this centrifugal movement of initiative was accompanied by successful efforts to join the parts of the Union by roads and canals and, still later, telegraphy and railroads. Congress also promoted informal unity with its expanding postal service and underwrote the mailing costs of the country’s proliferating newspapers.

Eager for farms of their own, a never-ending stream of Americans pushed west with confidence that they had a right to the land. Acquisitions from native tribes had to be bought, negotiated for, or wrested from those tribes that had lived there for centuries. Then the adjective “hostile” became linked to the word “Indians.” Newspapers characterized the Native Americans’ tenacious fight to save their ancestral hunting grounds as examples of savagery. The invaders justified their intrusion on the ground that the indigenous people had failed to improve the land or at least improve it in the European manner. Capitalism with its steady promotion of development gave a kind of specious justice to Americans’ advance into the wilderness. Skirmishes and set battles between the invaders and defenders continued throughout the settlement of the Ohio and Mississippi valleys.

Nothing could hold back the tide of land-hungry men and women from the land that Americans had appropriated rhetorically much earlier. They called their first legislative body of 1774 the Continental Congress. When George Washington formed his first cabinet fifteen years later, he said that he wanted men “disposed to measure matters on a Continental Scale.” After the War of 1812, Congress gave its veterans 160-acre bounties in land lying between the Illinois and Mississippi rivers. The westward movement of families away from eastern centers of authority and refinement accelerated. When land offices opened on the frontier, sales soared. Most veterans sold their patents to land speculators in eastern cities. Frontier communities sprouted up like daisies in a summer meadow. By 1815 annual sales of the national domain had hit $1.5 million and more than doubled four years later.¹⁴ Producing food became the great enterprise of Americans. Moving onto better and better land throughout the century, American farmers finally reached California, whose lush Central Valley remains today one of the world’s greatest exporters of cotton, vegetables, cattle, poultry, nuts, and fruits.

American geographic mobility astounded foreign visitors, who wrote home about the undulating train of wagons snaking their way to Pittsburgh, whence they could raft down the Ohio. To these visitors, American society offered an ever-changing visual landscape as people moved, roads were graded, land was cleared, and buildings were raised in a reconfiguration of the material environment that went on without rest. Ordinary men had never before had such a chance to create their own capital. With cheap land, easy credit, and ready markets at home and abroad for their crops, they flourished. Some would break in new land and then sell it at a considerable profit when others moved to the area. Access to land meant maximizing family labor. One Ohio pioneer, finding that his hundred-acre farm did not offer “full employment” for his sons, plunged all his savings into buying enough land to absorb their full working capacity. Farmers not only thought in terms of capitalizing their labor but considered their sons’ labor in those terms as well.

Although much of the land in Ohio was poorly drained, most chroniclers of the frontier remarked on its astounding yields. The returns from selling cotton abroad helped settle international debts, but the northern frontier pushed economic development toward building towns, hundreds of them. Four million families started new farms between 1860 and 1920. Farm mortgages became more common when state legislatures after the Civil War pushed mortgage rates below 12 percent.¹⁵ Farming has been romanticized over the years, but many contemporaries considered farm work drudgery. One New Englander bemoaned the fact that there had been no factory jobs when as a boy he had to apprentice himself to a farmer. Some sons and daughters—particularly those with a scholarly bent—voted with their feet to leave the family farm and seek out jobs as schoolteachers, another expanding field.

With few exceptions, entrepreneurs came from outside the circle of wealthy colonial families. Drawn from a growing middle class distinguished by its work ethic and openness to new ideas, they borrowed from friends and family, invested their own sweat equity, and sank or swam with regularity. With such volatility, “panics” and “busts” came every score of years. The human loss in dollars and disappointments was significant, but the young economy was resilient enough to snap back. The lifting of colonial restrictions on manufacturing unloosed as well Yankee ingenuity. In the generation born after the Revolution many a poor boy discovered his talent for making clocks, buttons, industrial wire, textiles, shoes, hats, pianos, vulcanized rubber, and steam engines of various kinds. Eli Whitney, who invented the cotton gin, also originated the principle of interchangeable parts in manufacturing when he got a contract to build rifles for the army. Specialization offered commercial opportunities to whole communities. Wethersfield, Connecticut, for instance, annually sent to market one and a half million onions.¹⁶ Levi Dickinson invented a broom from corn. By 1833 the townspeople of Hadley, Massachusetts, were producing half a million brooms a year. One English traveler noted that he had never “overheard Americans conversing without the word DOLLAR being pronounced.” It didn’t matter, he said, whether the conversation took place “in the street, on the road, or in the field, at the theatre, the coffee-house or at home.”¹⁷

The market’s opportunities came in new guises to new participants. The digest of patents put out by the first patent commissioner reveals the full sweep of commercial imagination. Because America’s patent law was cheap and easy to acquire, ordinary people took advantage of its protection. As rural towns got connected to the national market through a system of roads, canals, and railroads, patent applications dramatically increased. Scores of ordinary Americans patented devices in metallurgy, chemical processes, hydraulic implements, machine tools, and household conveniences. Others only dreamed of inventions, like the pamphleteer who conjured up for his readers two-hundred-foot-high sails stretched across the length of a mile to capture and convert wind into power equal to two hundred thousand men!¹⁸

After 1834 the U.S. Patent Office scrutinized applications for novelty and usefulness. While this move diminished the number of patents granted, it also proved a boon to unknown and underfunded inventors whose success in getting a patent acted as a vote of confidence in the invention.¹⁹Every idea that found material expression in a novel artifact proved just how wrong were the old-timers who invoked the past to predict that the world already had too many clocks, steam engines, stoves—you name it. Novelty, usually experienced as a break with the expectation of how things ought to be, became the most constant feature in the lives of Americans. After so many centuries of resistance to change, new products in the nineteenth century sometimes caught on just because of their novelty.

Freed from British restrictions, American merchants sent ships up the California coast, across the Pacific, and into the Indian Ocean. Elias Hasket Derby, America’s first millionaire, made his money opening up markets in Russia and the Orient. Americans boat designers and shippers had the pleasure of beating out the English with clippers built along the New England coast. New York’s Black Ball Line dominated the passenger and mail routes of the North Atlantic. Pushing the rivalry a bit further, American merchants began sending their clippers to China to deliver tea to the London market, prompting a great China race.

Alexis de Tocqueville, author of Democracy in America, saw enough of the economy to predict its upward trajectory. “Independence,” he wrote, “gave a new and powerful surge to their maritime genius…. Today it is Americans themselves who carry home nine-tenths of the products of Europe. It is again Americans who bring three-quarters of the exports of the New World to consumers in Europe.” Having noted that, he went on to explain how Americans could beat out Europe in shipping costs: “It’s not because their ships were cheaper which they weren’t. The wages of seamen were even higher,” he stressed, going on to say, “[O]ne would seek in vain the causes of this superiority in material advantages; it is due to purely intellectual and moral qualities.”

The European navigator ventures on the seas only with prudence; he departs only when the weather invites him to; if an unforeseen accident comes upon him, he enters into port at night, he furls a part of his sails, and when he sees the ocean whiten at the approach of land, he slows his course and examines the sun. The American neglects these precautions and braves these dangers. He departs while the tempest still roars at night as in the day he opens all his sails to the wind; while on the go, he repairs his ship, worn down by the storm, and when he finally approaches the end of his course, he continues to fly towards the shore as if he already perceived the port. The American is often shipwrecked, but there is no navigator who crosses the seas as rapidly as he does. Doing the same things as another in less time, he can do them at less expense.²⁰

The profits from grain and cotton crops spread rapidly through the states, filling thousands of pockets with just enough money to finance new ventures whether it was moving to a good teaching post, starting a store, working up an invention, buying supplies for a frontier stake, venturing a cargo to the West Indies, buying a slave, or making a strike for one’s own freedom from enslavement. From an accountant’s point of view, young Americans were poor, reckless, and debt-prone; but a risk-taking genie had been let out of the bottle of parental constraint, and not all the prudence of the ages could stuff it back in. The democratic practices that rapidly, if unexpectedly, followed the establishment of the American Republic redounded to the benefit of young people. With the British gone and the colonial upper class deprived of its hold on political power, ordinary people could choose their own life goals and usually pursued them in the economy that Jefferson and his successors chose to leave unregulated.

Still, the United States, like most of Germany, was economically primitive by any modern standard. Until the end of the 1820s only those living on the nation’s rivers could be sure of long-distance transportation and then only in one direction. Roads did not go very far inland and were impassable in rainy months. Most people lived in very simple houses, often of their own construction. Enslaved families crowded into barracks-like cabins. Olive Cleaveland Clarke, who grew up in western Massachusetts, remembered being seventeen before she saw her first carpets. She had to visit Northampton to make an acquaintance with a piano.²¹ Musical instruments were scarce. Chester Harding, who later made a career of portrait painting, had never seen a picture of any sort until he was twenty-five. The Netherlands in the seventeenth century could boast of two million works of art.

Life expectancy was not high in the nineteenth century, age forty-five for those white women and men who successfully made it to age twenty. For African Americans, the picture was much bleaker, life expectancy dropping as low as thirty-five. White women in 1800 bore an average of seven children; enslaved women, nine, each delivery posing a threat to the mother’s health.²² Such high fertility made for a youthful nation, with 58 percent of America’s population under twenty in 1820, compared with 44 percent in 1899 and 27 percent today.²³ Wages, good by European standards, were far from bounteous when the cost of living is factored in. Food, clothing, and shelter took 80 percent or more of a worker’s wages for the typical sixty-hour workweek.²⁴ In Europe food alone could eat up 60 percent to 80 percent of a family’s weekly budget, depending upon the harvest. But people take their bearings from what has gone before them, not from future, unimaginable standards of living. And what Americans in the first half of the nineteenth century experienced was the steady improvement of their material environment: acres brought under the plow, steam engines applied in ingenious ways, rivers and streams dammed and sluiced to power mills, with miles of canals and roads cut through the wilderness.

Technology in Germany and the United States

The United States and Germany borrowed the technology in the basic industries of textile making and locomotive design from Great Britain. Using British designs as launching pads for innumerable modifications and ancillary inventions, both countries proved adept at perfecting the inventions that they acquired from Great Britain, as well as from Belgium and France. John Jervis’s work on the railroad is exemplary of the process. Britain’s locomotives didn’t do well on sharp curves, so Jervis reconfigured them in a kind of inventive dialogue with his British mentors. By 1836 American manufacturers had stopped importing locomotives from Great Britain because they had domestic ones to buy. Similarly iron production got under way in the United States in the 1830s with blast furnaces that had to be redesigned from British models in order to make use of Pennsylvania’s abundant anthracite coal. In the 1840s Americans got 80 percent of their pig iron from Great Britain; by 1856 domestic production had overtaken iron imports.²⁵

Germany’s abundance of coal, iron, and accessible capital translated quickly into railroad mileage. By mid-century the number of operating railroad miles had become a good indicator of economic development. Britain had close to ten thousand miles laid; Germany came next in Europe with 58 percent of that total; France with 29 percent, Austria-Hungary with 19 percent, and Italy and Russia with less than 1 percent.²⁶ The United States already had almost nine thousand miles, a figure that was to treble in the next ten years. Originally, the most efficient American lines were those private companies built because politicians guided publicly financed railroads to their home districts, however remote.²⁷ Unlike European countries, the United States had hundreds of miles of sparsely populated areas to cover in order to join the Pacific and Atlantic coasts. The American government became a major sponsor of railroad construction, providing incentives in land grants to railroad companies. Real estate speculations abounded as building the transcontinental railroad became awash in graft. Despite this, laying railroads became an important adjunct to nation building for both Germany and the United States.

By the last three decades of the nineteenth century the United States and Germany had nurtured the innovations that picked up the beat of economic development. Constant innovations didn’t come without cost, because every improved device rendered obsolete its predecessor. Prodded by the lure of stronger sales and higher profits, backers of incessant inventiveness hurt established industries and firms. The early-twentieth-century Austrian economist Joseph Schumpeter captured the essence of capitalism, with his “creative destruction” of the old by the new.²⁸ Rarely has anyone so precisely hit the nail on the head, implying the consequences associated with both “creative” and “destruction.” Less catchy is the economists’ take on this, “early obsolescence,” a phrase meant to indicate that commercial objects don’t grow old; they just become obsolete when they are replaced by something better. Retrospectively we can see that innovation pushed the relentless revolution of capitalism, yet why or how one country or region grabbed the technological lead remains a bit obscure.

Telegraphy offers a fascinating example of the Ping-Pong game of adaptive inventions. In the closing years of the eighteenth century, two French brothers, Claude and Ignace Chappe, contrived to send signals that could be transformed into words through semaphore relaying stations placed ten to fifteen miles apart. In 1837 an English instrument maker, Charles Wheatstone, devised and patented an electric telegraphic system using five needles to point to letters of the alphabet. He conducted experiments in electricity, optics, and acoustics of sufficient excellence to earn him a professorship at King’s College, London, despite his lack of formal education. Wheatstone had been drawn to telegraphy through his efforts to measure the velocity of light. Two years earlier Samuel Morse, building on the work of another American, demonstrated that signals could be transmitted by wire, using electric impulses from a sending apparatus connected by an electric circuit to a receiver that operated an electrical magnet that produced marks on paper. From this, Morse composed his famous code of dots and dashes representing letters of the alphabet.

Although Morse quickly gave a public demonstration of his telegraphy, its transition from model to mechanism took another five years and a subvention from Congress. Morse’s telegraphy eventually became the one most widely used, but not before Germany’s Ernst Werner von Siemens, founder of the great electrical engineering corporation, developed a telegraphic system based on Wheatstone’s that Eastern European countries adopted. All these successes in telegraphy came amid dozens of failed efforts, sunk by the technical problems of transmitting messages through space.²⁹ Contemporaries found something magical about transmitting messages in seconds. Soon telegraphy became an integral part of running a railroad. Its signals speedily shuttled information about arrivals, departures, and breakdowns across continents; its poles lined the roadbeds, vivid evidence that the space dividing people was collapsing.

Siemens came to telegraphy through his military post in the artillery workshops of Berlin. In Germany, he oversaw the laying of the first submarine lines and received credit for saving the town of Kiel from an advancing fleet when the Germans were fighting the Danes. In 1845 his patented machine delivered the message that the German Assembly had voted in favor of a German emperor. Morse’s first message was also political: The Whig Party had nominated Henry Clay for president. More famous was the biblical quotation that the young daughter of a friend had suggested for a message: “What Hath God Wrought!” Thirty-three years later, in 1877, God wrought something even more portentous, the telephone.

For both Germany and the United States, the railroad became the most effective nation builder and spur to economic growth. It also dramatized for all to see that speed modernized how people thought and behaved, effectively dividing premodern and modern epochs in human history. Train stations created new public spaces. They were frequently the largest buildings in towns; in cities architects designed them to be temples to progress. German conservatives bemoaned the fact that riding on railroad would breach the walls separating social classes. And of course they did. Manufacturers dispersed throughout Germany became railroads’ first beneficiaries and their most powerful sponsors. They saw the enormous advantages in simultaneously reducing transportation costs and widening the market for their products. Laying track rapidly connected German manufacturers with the producers of food, timber, and iron ore. Germany’s unification in 1871 only intensified the synergy of political and economic development. With Germany’s incessant railroad building, its mileage surpassed first France, then Belgium and had drawn even with Great Britain by 1875.

Because of the very backwardness of Germany, railroad building jump-started the economy by joining hundreds of local markets to a universe of commerce. Railroads gave regional manufacturers a chance to reach the larger, more complex market of a united Germany and its international trading partners. Railroad building stimulated considerable demand for iron products as well. Railroads were the first big business in both countries and, for many years, its only big one. In the United States, railroads were seen as so essential to national unity that the federal government lent its army engineers to lay out the first routes. West Point was in fact the major engineering school in the country at the time. Once railroads were established, maintaining them called for continuous experimentation to improve road beds and rails. Unlike the secrecy surrounding the steam engine, information about railroad construction and operations flowed easily across national borders. Civil engineers shared their findings and visited one another’s countries, sometimes on their own, sometimes sponsored by their governments.³⁰ They wrote reports; they published pamphlets.

The Role of Banks

Even more important in the history of capitalism were the size and permanence of the investment in railroads. A measure of the railroads’ central importance to an economy can be gleaned from the fact that in 1865 the New York Central Railroad alone had assets equal to one-quarter of all American manufacturing wealth. The substantial capital that constructing railroads required changed the operating strategies of their owners because their assets were much greater than the cost of running the roads. The fixity of capital in railroad lines made retrenchment ineffective. Railroad investors had to devise strategies to stimulate uses to spread the fixed costs over more freight and passengers.³¹ They strove to keep the volume of traffic as high as possible or to recoup capital costs through higher fares. The fixed capital in plants and the adjustments that it entailed represented the new constraints of industrial capitalism. The equation of time with profit became crystal clear; the expensive equipment had to be kept in productive use.

The impact of railroads upon the overall economy went from transportation to production to finance. Through the first half of the century Germany’s fate had been closely tied to the prejudices and preferences of the landed aristocracy, which preferred to invest in mortgage bonds and government annuities rather than commit their considerable funds to industrial ventures. It took new institutions to meet the heavy capital demands of railroad construction. By mid-century investment banks had appeared in Cologne, Berlin, and Leipzig. They concentrated on industrial investment, giving German finance a different cast from that of either France or England.³² Railroads also became integral to the business plans of others—not just manufacturers but farmers as well, all of whom were highly sensitive to rate schedules or any shenanigans that might be used to raise rates. Railroads quickly became a kind of public utility, making them vulnerable to government regulation.

The capital in capitalism needed its own institutions to entice savers to investment in new ventures and enable them to guard against the risk of losing their money, once invested. There was sufficient capital in Europe to finance industrialization if it could be mobilized. This is where banks came in. Banks played a critical role in funneling capital into industry by turning savers into investors. Expanding to mutual companies that accumulated the savings of ordinary people, they performed a great service by luring cash out from the mattress and into the hands of business borrowers, who then paid interest to the savers. Usually everyone benefited except when banks failed, as they sometimes did, taking these small accounts down with them. While rarely initiating ventures, banks acted as catalysts once development began. Of course channeling other people’s money created opportunities for fraud and speculation, an inseparable, if less respectable, twin to enterprise.

Banks floated bonds that allowed governments to cover extraordinary expenses. Insurance companies sold policies to people to guard against future loss from death and accidents like fires and the sinking of a cargo ship plying the waters of the Pacific, Atlantic, or Indian Ocean. Modern statistics gathering came out of these risk management efforts. Industrial workers in England formed friendly societies to collect money to be paid out to their members or their families in the event of mishaps. When they sought information from the government about the frequency of industrial accidents, Parliament intervened, claiming its authority to be the sole institution to gather such information. Statistics got its start here in the early nineteenth century.

The importance of political and religious support of enterprise can’t really be appreciated except in contrast with places where that support didn’t exist. In the Muslim world Koranic injunctions hindered the formation of corporations and the inheritance of partnerships. Deaths could dissolve partnerships and pools of capital without the legal instrument of incorporation.³³ Being unable to bequeath a firm’s shares often made it impossible to maintain businesses. Unlike Muslim countries, Europeans developed financial institutions especially for handling investment money.

German banks began as private institutions, becoming joint-stock companies later. As so-called universal banks they offered a range of financial services from extending short-term credit to taking deposits, discounting bills, selling insurance, and handling mortgages while underwriting and trading in securities.³⁴ Britain industrialized at the leisurely pace of a pathbreaker. Most of its financing came from personal savings and the shrewd reinvestment of profits. Both England and France had central banks, but the German regional banks proved to be just what was needed for them.

Napoleon had created the Bank of France in 1800. Established by merchant bankers outside the inner circle of financial officers, the Bank of France had a monopoly on issuing notes and refused until the 1860s to establish branches outside Paris.³⁵ After banking restrictions were lifted in 1848, financiers formed the Crédit Mobilier, but it didn’t really help French industry much because French investors preferred to send their money overseas for more exotic investments than those near home.

Between 1871 and 1911, the British annual rate of savings was 12 to 15 percent; Germany had an even more impressive rate of 15 to 20 percent. Savings were important because they created a pool of capital that enabled businesses, in Thornstein Veblen’s words, to expedite their “quest of profits,” a wry observation that well captures the restlessness built into capitalism.³⁶ Those enjoying that momentum didn’t appreciate efforts to slow it down that often put industrialists and bankers, especially in France and Germany, at odds. Nobody, it is said, loves his banker. Certainly many a business resented its bankers’ insistence upon rationalizing procedures in accounting, borrowing, and personnel policies.³⁷

Americans started two stock exchanges in Philadelphia and New York in the 1790s, two decades after British brokers had formally established “the Stock Exchange” to replace their informal gatherings in coffeehouses and on the streets. Although dealing primarily in government issues, the stock exchanges in London, Antwerp, Amsterdam, Paris, Lyon, and Marseille became cosmopolitan oases where men of many different nationalities, from Armenians and Jews to Swedes and Frenchmen, conducted business cheek by jowl. Thomas Paine wrote that commerce “cordializes men,” introducing a neologism that never caught on. Voltaire caught the spirit of the exchange when he wrote that “there the Jew, the Mohammedan, and the Christian transact together as though they all profess the same religion, and give the name of infidel to none but bankrupts.”³⁸Railroads did usher in a more complex stock exchange in the United States when Wall Street began trading railroad stocks and bonds. Not until the end of the nineteenth century did trading in corporate stock become the main activity in stock exchanges around the world. Mindful of the rowdiness of brokers, governments kept a close eye out to ensure order.

In the 1850s the world economy got a phenomenal boost when James Marshall discovered gold at the site of a sawmill he was building in 1848. Nine days later the United States signed the treaty that ended the Mexican-American War and gave the nation California. The volatility of a gold find in an area not yet outfitted with the clothes of government produced a unique situation. Fortune hunters sped to California from the west coast of South America, Hawaii, Australia, Tahiti, and China. Those coming by water took one-third the time of Americans coming from the East Coast. Within 4 years California had attracted a quarter of a million immigrants from twenty-five countries. Most actual miners were Chinese. Both Great Britain and France dumped convicts into the boiling cauldron of San Francisco. At the same time, indigenous men and women died in great numbers at the hands of the lawless and racist newcomers.³⁹ More gold was dug up in the 1850s than all places put together in the previous 150 years. Lubricated by an influx of gold that increased the world’s currency sixfold, world trade almost tripled. Gold surpassed silver as the standard currency. More countries adopted the gold standard as finds in Australia, Alaska, and South Africa bulked up the gold supply.

Every country has its own financial history. In America, the Bank of the United States, the country’s only central bank, fell victim in 1836 to Andrew Jackson’s determination to strangle “the monster bank.” It could never be said that a central bank was necessary to economic development since the United States saw phenomenal growth without one. The vibrancy of the economy sustained this rickety monetary structure. Only the exigencies of paying for the American Civil War got Congress to support a network of federally chartered banks that could issue notes in 1863. The provision that the banks had to deposit their cash reserves in New York City consolidated that city as the country’s financial center. Prior to the war, banks—hundreds of them—had supplied the nation’s currency by issuing notes, giving counterfeiters a field day. The North issued greenbacks that depreciated almost as fast as had the continental notes that paid for the American Revolution. By war’s end the greenbacks and war borrowing amounted to half the annual gross national product! Taxes had paid for only a fifth of the crushingly expensive war. The war’s burden continued when widows’ pensions became the largest expenditure in the national budget.⁴⁰

From Thomas Jefferson at the beginning of the century to William Jennings Bryan at the end, many American leaders have articulated their fellow citizens’ unease with the invisible part of the economy: the money that circulated, the savings that went into banks, the borrowed capital that financed enterprises. The greenbacks actually proved a blessing to those who wanted to stabilize the currency and have a federal bank. When the government offered to redeem them for gold in 1879, few took up the offer. The old American faith in credit extension and soft money reasserted itself. Any correction of the fiscal mess would bring hardship, and the majority of entrepreneurs wanted to avoid pain. Currency expansion was the promoters’ slogan whether by adding silver to the country’s legal specie or by issuing more bank notes. Quite reasonably most investors were counting on the country’s sunny economic prospects. Mark Twain captured the spirit of the early 1870s in the character of Colonel Beriah Sellers. Moving from small-town America to New York City, Sellers bragged to friends that he had arrived in the city penniless and now owed half a million dollars. Like many actual Americans, Sellers expected his creditors to keep him afloat.⁴¹

Like most wars, the American Civil War accelerated the pace of change. For decades cotton exports had dominated the American economy, orienting northern agriculture and industry toward southern consumption. The Union army’s demand for uniforms, tents, rifles, wagons, and foodstuffs soon took the place of cotton. This new market acted like a catalyst in the industrialization of the economy. After the war the party of Lincoln became the party of nascent industrialists. Economic opportunity burgeoned in the West as well. A 1913 law put in place the Federal Reserve Banks, which consolidated federal power over the currency.⁴² These diverse experiences suggest that while mobilizing capital was important, how it was done was less so.

A narrative account of a subject like capitalism tends to focus on the key developments that advanced progress or unblocked obstacles halting forward motion. It needs to be stressed that much happened in capitalism’s history that did neither. Falling from view are the millions of dollars, pounds, francs, and marks along with untold man-and woman-hours that went down the ratholes of ill-conceived projects. Their presence reminded investors that innovation was never risk-free, but success was frequent and conspicuous enough to keep the flow of investments coming. What capitalism needed above all was capital, not just the nest eggs of inventors and their friends and family but freshets of cash from those who didn’t want to produce anything except a return on their money.

The Benefits of Incorporation

Nothing revolutionized industrial finance more than the legal form of incorporation that gave limited liability to the owners of enterprises. Incorporation had long existed as a means for giving cities or charities a specific and largely autonomous scope of power in perpetuity. We still have incorporated residential areas. Pooling capital through partnerships operated superbly when the right participants came together, and still does. Partners usually wrote contracts that enabled each to break up the enterprise in deference to the vicissitudes of life. This ease of dissolution acted as a significant drawback to the long-term growth of a company.⁴³ As the name suggests, incorporation created an artificial person who paid taxes, could sue to collect debts in the company’s name, or could less happily be sued. The corporation could borrow money and sell shares in the company to members of the public to raise money. This meant that records were open to shareholders’ scrutiny, though access became more restricted as companies grew in size. Management often had controlling shares of stock in the nineteenth century, but incorporation enabled a separation between investors and managers. It also had the advantage of locking in large sums of money. And because they are artificial, corporations could exist forever, removing the threat of inopportune dissolution that partnerships carried with them.

There was a downside. Corporations cost money in fees from lawyers and the government. Once gained, the privilege could be enjoyed free, a gift from the government and its people to private persons. The separation of shareholders from managers, celebrated in the lore about corporations, sometimes invited irresponsibility, if not outright corruption. High-flying corporate heads could fiddle with the books, contract with their own firms, or pay dividends out of capital instead of earnings. Worse they could sell new shares of stock to pay dividends, amounting to Ponzi schemes.⁴⁴ Still, corporations became popular among American and British entrepreneurs. General incorporation laws in the nineteenth century made it easier and cheaper to turn private companies into public incorporated entities than it had been. This was particularly the case in the United States, where the states chartered thousands of limited liability companies. They far outnumbered those in Great Britain until halfway through the nineteenth century.

A bad experience in the eighteenth century had led the British Parliament to pass the so-called Bubble Act, restricting incorporation. Limited liability companies became popular there after 1856, although family firms were common well into the twentieth century.⁴⁵ Even more encouraging to enterprise were the liberal bankruptcy laws, which favored business borrowers over their creditors—that is, making money over having money. When industrial incidents, such as a flying spark from a railroad engine, ignited a farmer’s haystack, the farmer had a difficult time winning a tort case against the railroad company. Laws, and even more emphatically judges, were loath to punish employers when their workers were hurt on the job. American law, much as it differed from state to state, usually came down firmly on the side of enterprise.⁴⁶

Since the whole world is not composed of investors and entrepreneurs, the concept of limited liability did not always charm those who weren’t either. The principal complaint was avoidance of personal responsibility through the creation of an artificial entity. There was also a deep-seated suspicion of speculation and paper profits implicit in buying and selling something as seemingly unsubstantial as a share in a company expressed on a piece of paper. Lightly regulated until the end of the nineteenth century, corporations then became more subject to legislative and judicial restraint. Shareholders and managers insisted that corporate taxation represented double taxation since shareholders paid taxes on their dividend income.

The desideratum of investors was to protect their investments while receiving a regular and robust return. Easier said than done; the investor was at the mercy of his or her own ignorance about the business involved. On the other side of the investing equation, those who actually developed new applications of technology wanted investors who willingly took risks and left the operational details to them. The railroad builders’ voracious appetite for funds put pressure on the normal pools of capital. Necessity became the mother of invention. Financiers came up with debentures, long-term fixed-rate loans that operated much like government bonds. Another stratagem was to issue vendor shares to the suppliers and contractors of mining or railroad companies in lieu of cash. And then there were preferential shares that gave their holders the first crack at returns before dividends were paid to the holders of common shares. One of the great scams of American economic history was another Crédit Mobilier, this time an American company organized in 1867 to extract profits from railroad construction by inflating costs, which were assumed by government subsidies, which in turn paid for bribing members of Congress, which held off investigations until the presidential campaign of 1872.

A great deal of attention has been given to the excellence of the English and American corporation as a vehicle for capitalist expansion, but for small and medium-size enterprises, the costs could be discouragingly high. So much so that at the end of the nineteenth century, German legislators introduced a new business form, the private limited liability company in which partners could write legally enforceable contracts that specified the terms of the partners’ relationship. This eliminated the principal drawback of partnerships, the unexpected incapacity or irresponsible acts of a partner. The private limited liability company found a happier home in France and Germany with their civil code legal systems than in Great Britain and the United States, where the common law, favoring individual rights over state concerns, prevailed. So uncongenial was this type of partnership to common law countries that it was not available to entrepreneurs until 1907 in Great Britain or in the United States until the second half of the twentieth century.⁴⁷

German industrialists and their bankers coalesced into a new class, not the gentry elite or the urban, professional middle class but one composed of industrial giants and their lucky associates who had been made millionaires. They were willing to raise the money for railroad projects; they supplied the cargoes to be shipped out as well as the new customers for the freight coming in. They mined coal and fabricated iron ore just as the European machine industry heated up. This global economy promoted specialization and an international division of labor. If the Junkers, who still dominated politics, sneered at these new men, they did so privately because most Germans saw these big industrialists as public-spirited men contributing to the great cause of strengthening the German Empire.⁴⁸ Where enterprise became a kind of national pastime in the United States, in Germany it was confined to a class still inclined to admire aristocratic tastes.

The Protracted Depression of 1873

The year 1873 proved to be a bad one in the history of capitalism. A depression began that lasted in some areas for another twenty-six years! One of the problems with the free enterprise system comes from its dispersed decision making. With individuals and private companies acting on what they calculate as their best interest, it’s hard to know what’s going on generally. No one, as it were, is in charge. Prices and rates deliver information, but the causes behind the decisions that produced those particular prices and rates have to be interpreted. When things are going well, there’s little incentive to explore the meaning of market behavior. Only when things go sour do people clamor for explanations. In 1873 the challenge was greater.

Efficiencies in production outpaced effective demand. That is, there were more goods than people ready to buy them.⁴⁹ In what you might call the adolescence of capitalism, trouble spots could gather like black clouds before a summer storm. People called them slumps, the word itself conveying an image that things would soon right themselves. Not so this time. A stock market crash in Vienna and the failure of a major bank in New York marked the beginning of two decades of economic instability. Added to the manufacturers’ inventory problems were bounteous harvests from America, Argentina, and Russia. Low grain prices wiped out thousands of those farmers throughout Europe who were still following traditional methods. Even French and English agriculture tanked.

The crisis of 1873 proved the integration of world markets when downturns in the United States and Europe plagued economies in South Africa, Australia, and the West Indies. The cumulative impact of long-term developments kicked in to prostrate most Western economies. America’s output increased in the last decades of the nineteenth century, but prices stagnated. Most industrialists had worked hard to keep wages low, inadvertently impoverishing potential buyers of their goods. Conservative attitudes toward the importance of thrift contributed to the problem. Still dominated by an aristocratic ethic, upper-class Europeans looked down upon the spending of ordinary people, especially if the display of their purchases threatened to blur the lines between people of refined taste and their social inferiors. Today we would just say that a trade glut caused the excess of goods over purchasers, but we would be wrong. There was also a cultural lag.

When the price of silver began to fluctuate wildly in the 1870s, the awkwardness of using both silver and gold as currency became apparent. Great Britain had maintained a single source of value, gold, to settle accounts, and Germany, the Scandinavian countries, France, Belgium, the Netherlands, and the United States followed suit in the 1870s. Now each country’s currency—mark, franc, pound, dollar—had a fixed exchange rate with gold. If a German investor sent two hundred marks to the United States, he or she could be sure exactly how many dollars it would be worth. The gold standard proved to be an invisible taskmaster, nanny, jailer, and seer. It influenced everything from imports and exports to the price of wages. If a country ran a trade deficit, gold left the country, causing a drop in the domestic purchasing power, which in turn hurt sales. Manufacturers had to lower costs to gain back customers. They generally did this by pushing down wages.⁵⁰

The gold standard underwrote a new intensification of global trade, greatly aided by telegraphy, international business news, and improved oceanic transportation. People became more confident that their money would be fairly exchanged in other countries; they started investing abroad, especially in the United States, now the largest economy and also the land of the best opportunities for high returns on capital. Argentina and Egypt also benefited from the endless search for the best investment. The speculation that had buoyed Germans before the depression of 1873 began came to a halt. Still, the forward momentum of pent-up entrepreneurial energies proved stronger than the depression’s brakes. By 1880 the German economy was again in ascendance. But the 1880s and 1890s were also decades of hardship.

Midwestern American farmers almost threw a spanner into the new regime when they began railing against the new specie tyrant. Suffering from low prices in the 1890s, they blamed the fixed exchange of the gold standard for their woes. They advertised a list of the people’s enemies, starting with the British financial elite, followed by international bankers in general. They found a champion in the Democratic Party’s standard-bearer William Jennings Bryan, who brought delegates to the party’s convention in 1896 to their feet with his dramatic injunction to the money masters: “You shall not crucify mankind upon a cross of gold.” Things were touch and go until the Republicans triumphed over these renegade populists in the fall presidential election.

Though we rarely think of it this way, the United States too was undergoing a process of unification in the 1870s.⁵¹ The American Civil War—no eight-month romp like the Franco-Prussian War—had taken a terrible toll in lives, property, and peaceful pursuits during the four years between 1861 and 1865. By 1870 the last of the southern states had been readmitted into the union, and the North was ready to call it quits on reconstructing the states that had joined the Confederacy. Turning toward the West, in 1871 Congress passed the Indian Appropriation Act, which made Native Americans national wards and nullified all previous Indian treaties. The Civil War had interrupted the efforts to integrate California into the nation; four years after Appomattox, the Central Pacific tracks joined those of the Union Pacific from the east. A gold spike attached the two at Promontory Point, Utah. The transcontinental railroad connected the two coasts of the United States, pulling in all the sparsely settled places in between. The victorious North was ready to impose its national vision upon both the South and the West.

With the Civil War behind it, the United States could turn toward developing the vast tracks of unoccupied land acquired in 1803 in the Louisiana Purchase and through the treaty that ended the Mexican-American War in 1848. Meanwhile its urban population had been exploding. Total population grew twelvefold between 1800 and 1890 while those living in cities increased an astonishing eighty-seven times. Gustavus Franklin Swift helped forge economic ties across the continent with his invention of refrigerated railroad cars. Now the cattle ranging over the grazing lands west of the Mississippi River could be driven to Omaha, Kansas City, and Chicago to be slaughtered and their dressed meat shipped to the densely populated, urbanized East. In a society where almost everyone could afford to eat meat, refrigeration furnished the missing link between supply and demand.

Prosperity in the second half of the century, if not steady, still brought positive improvements in wages, public health, and food costs. The United States has long been viewed as the paradigmatic capitalist country. Its persistent economic advance has been laid to the favorable ratio of people to land, the absence of a feudal past, the rich endowment of just the right mineral resources needed in industry, and the hardworking, disciplined young men and women issuing from America’s family-owned farms.

Washington Irving coined the phrase “the almighty dollar” in the 1820s. A century later President Calvin Coolidge famously announced: “The chief business of the American people is business.” The insight buried in that rather banal observation should not be dismissed. There were very few competing values or career options in the nineteenth century. The father of Henry and William James, who was independently wealthy, bemoaned the fact that people in his country always asked him what he did for a living, an inquisitiveness that sent him sailing back to Europe.

In capitalism, the cumulative private decisions of participants exercised coercive force throughout the economy. Denied the protection of monopoly control, the most efficient operators forced the less efficient to imitate them or retreat from the active management of their resources. Capitalist activity was not dependent upon any particular person, region, or family. If one passed up a moneymaking opportunity, another would see the potential gain in it. This is an optimal assessment that has to be balanced against the fact that capitalist wealth also created rich opportunities for graft such as the bribing of politicians by the builders of the American transcontinental railroads.

At the beginning of the century the United States had fewer than four million people, almost all of whom lived on the Atlantic shelf on the North American continent. They had shared a common history for a very brief period. Germany, like the United States, was composed of disparate parts in 1776, but those disparate parts shared a history going back to the time of Charlemagne in the ninth century. Americans loved novelty; Germans feared it. The American practiced religious toleration; Germans had fought bitter wars over differences within the Christian faith. Germans accepted authoritarian politics; Americans celebrated the weakness of their political institutions. Still, Germany almost equaled the American economic record without its “exceptional” advantages.

Nothing undermined the dominance of inherited wealth more than this capitalist principle of the interchangeability of participants. A son who depleted his family’s fortune created opportunities for someone else more attuned to making than to spending money. Unlike an aristocracy, capitalism didn’t depend upon the virtue, prudence, or boldness of anyone’s progeny for growth. Americans accepted and admired these capitalist imperatives. Germans were less convinced of their virtue. Throughout the nineteenth century engineers and manufacturers struggled against the contempt of upper-class Germans toward parvenus, a word with hardly any meaning in the United States.⁵² But it didn’t really matter because impersonal forces would maintain capitalism’s momentum once enough key players had jump-started the development process. Americans more easily took risks in keeping with the entrepreneurial spirit of capitalism, but Germans had a disciplined tenacity that contributed to their country’s successful economic development.

Along with the obvious advantages of being a first mover in economic development like Great Britain, there came some distinct disadvantages that rivals might exploit. Britain had a heavy investment in its trailblazing textile industry, but success made its entrepreneurial class timid. English investors looked elsewhere for opportunities. The United States and Germany benefited from this. They could move into new industries and tap the pools of capital, looking for promising new investments. Nation building, important to both countries throughout the nineteenth century, acted as a catalyst for economic development. America had a pervasive entrepreneurial spirit and a vast continent lying ready for cultivation. In Germany a rising class of industrialists was ready to integrate economically the nation that the aristocratic Junkers had brought into being. Both countries were rich in the natural resources vital to railroad building and heavy industry. Their citizens proved to be amazingly adept at copying and modifying English inventions. More important, they soon started innovating in chemistry, electricity, and automobile making. In retrospect, their surpassing Great Britain seems almost overdetermined. The British economy didn’t decline; it simply lost its relative position while maintaining an impressive level of productivity, as the Dutch had earlier.⁵³ The mystery is why France did not step up to the mat.⁵⁴

The relentless revolution of capitalism kept up a fast pace during the nineteenth century. The size and scope of enterprise had penetrated every continent. As the twentieth century began, the philosopher Max Weber called capitalism an “iron cage.” If people really wished to live as their forebears had, they could find a way, but fewer and fewer wanted to live that way. Behind the bars of the iron cage, products and services expanded. Life expectancy increased; improvements in public health enhanced the quality of life. Quite naturally people would like to have it both ways: enjoy the fruits of the enormous wealth that capitalism created but without suffering the loss of old ways of life.

At the end of the nineteenth century scarcity in capitalist countries was just beginning to yield to abundance. With this cushion, the capitalist world was poised to demonstrate just how wasteful, rapacious, and indifferent to the long-run consequences of its habits could be. In the ratcheted-up use of fossil fuel, that essential element in economic development, capitalist aggressiveness would pass beyond the earth’s surface to its life-sustaining atmosphere. We still might have it both ways if we could build in restraints without killing the goose that laid the golden egg of prosperity.