Ever since the first settlement of Europeans in the New World America has been a magnet for people seeking adventure, fleeing from tyranny, or simply trying to make a better life for themselves and their children. An initial trickle swelled after the American Revolution and the establishment of the United States of America and became a flood in the nineteenth century, when million of people streamed across the Atlantic, and a smaller number across the Pacific, driven by misery and tyranny, and attracted by the promise of freedom and affluence (Friedman 80: 1). The eastern shore of North America is a welcoming one. A broad coastal plain made for easy settlement. Peninsulas such as Cape Code and Delmarva, islands such as Long island, and the barrier beaches farther south provided shelter for the early sailing ships. This vast area was not uninhabited. There were approximately 250 languages being spoken in North America at the beginning of the European exploration, and about 2,000 in the Western Hemisphere as a whole. Even within languages, the people of North America were divided into many small, often mutually hostile tribes. Low-level warfare was chronic amongst these groups. Less than 1 percent of the arable land of eastern North America was used for growing food crops. Technologically the eastern Indians were Neolithic, using sophisticated tools but lacking metals. Once the Indians became used to the superior metal tools, cloth and firearms of the Europeans, the skills needed to use the raw materials at hand began to disappear. Before long, the Indians had no choice but to trade for what they needed on, losing their economic sovereignty. Once that was gone, their political sovereignty and the rest of their culture soon followed (Gordon 04: 5-6).

Fig. 1.1 Estimated Population of the American Colonies 1610-1780

	1610	1620	1630	1640	1650	1660	1670	1680	1690
Total	350	2,302	4,646	26,634	50,368	75,058	111,935	151,507	210,372
Negro			60	597	1,600	2,920	4,535	6,971	16,729
	1700	1710	1720	1730	1740	1750	1760	1770	1780
Total	250,888	331,711	466,185	629,445	905,563	1,179,760	1,593,625	2,148,076	2,780,369
Negro	27,817	44,866	68,839	91,021	150,024	236,420	325,806	459,822	575,420

Source: Series Z 1-19 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1168

On his return from discovering America Columbus brought tobacco back to Europe and in the next century the habit spread rapidly in the Old world, and the cultivation of tobacco had begun to spread around the Mediterranean Basin. The first permanent European settlement was founded by Captain John Smith in Jamestown on May 14, 1607 (Friedman 80: 252). Life was hard, starvation and hostile natives were constant threats. The local Indians of eastern Virginia were also addicted to tobacco but the variety they grew was not popular with the English colonists who preferred the tobacco produced by the Spanish in the West Indies. Then in 1612 a man named John Rolfe brought some seeds he had obtained in Trinidad and planted them. The grew abundantly in Virginia with the help of the local Indians and in 1616 he took the first commercial crop to England that was such a success they celebrated the first American Thanksgiving upon his return in 1617. (Gordon 04: 42)). By 1616 the Virginia Company had transported more than seventeen hundred people to Virginia and invested the staggering sum of 50,000 pounds in its enterprise on the Chesapeake. To make back their money the English turned to Nicotiana tabacum, tobacco. The first law passed by the first General Assembly of Virginia, July 31, 1619, twelve years after Captain John Smith landed and established at Jamestown the first permanent settlement in the New World, was in reference to tobacco. It fixed the price of that staple at “three shilling the beste, and the second sorte at 18d. the pounde:. Tobacco was already the local currency (Friedman 80: 250). King James loathed tobacco, which he regarded as an instrumentality of the devil, and he wrote and published a pamphlet entitled A Counterblaste to Tobacco. His subjects, however, paid no attention whatever to the royal opinion and smoking continued to increase in popularity (Gordon 04: 14-15). At first slaves were not very common, due to the short life expectancy of immigrants, it was more profitable to hire indentured servants. In 1650 there were only about three hundred slaves in Virginia, less than 2 percent of the population. It would be the 1660s before black slavery was even formally recognized in Virginia law, and as late as the 1680s, indentured servants far outnumbered slaves. The number of slaves doubled in the 1680s and doubled again in the next decade. (Gordon 04: 20).

Fig. 1.2 Value of Exports to and Imports from England by American Colonies and States 1700-1790

	1700	1710	1720	1730	1740
Imports	344,341	293,695	319,702	536,860	813,382
Exports	395,021	249,814	468,188	572,585	718,416
	1750	1760	1770	1780	1790
Imports	1,313,083	2,611,764	1,925,571	825,431	3,258,238
Exports	814,768	761,099	1,015,535	18,560	1,043,389

Source: Series Z 213-226 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1177

British law effectively forbade the establishment of banks in the colonies and also forbade the export of British coinage from Britain, to preserve its own money supply. With no banks, American colonies could not use banknotes. This left the colonies to create a money supply as best they could. Money is a commodity, no different from pork bellies, legal services, or computer keyboards except in one vital respect. Money, by definition, is a commodity universally acceptable in exchange for every other commodity. An amazing variety of items have been used as money at one time or another. Cowrie shells and beads have been the most widely used forms of primitive money. Metals, gold, silver, copper, iron, tin have been the most widely used forms among more advances economies before the victory of paper and the bookkeeper’s pen (Friedman 80: 250). Money serves two other functions besides acting as a medium of exchange. It is a unit of account, that is, the value of all other commodities is expressed in terms of money. And money acts as a store of value, a place to hold wealth temporarily between productive investments (Gordon 04: 43). With the English embargo on exporting coins, the new English colonies in America had to solve the problem of getting a money supply another way. In 1652 Massachusetts began minting its own coins despite strict laws forbidding anyone other than the royal mint to do so. The pine tree shilling, the first coin minted in North America, was produced for people who brought their own silver. The British did not suppress its production for thirty years. Other colonists turned to the Spanish dollar that probably accounted for half the coinage in circulation in the North American colonies. In New Netherlands and elsewhere the fur trading Indians used wampum as a medium of exchange and so too did their Dutch and English speaking customers. Wampum is beads made from the shells of the freshwater clams that abound in the local lakes and rivers, analogous to the cowrie shells used in Africa and Asia. In 1760 however, J.C. Campbell of New Jersey opened a factory for making counterfeit wampum, destroying the value of the genuine article (Gordon 04: 44).

The most intriguing of all colonial money occurred in Maryland and Virginia where they resorted to what economists call “commodity money” using tobacco. At various periods tobacco was declared the only legal currency. It remained a basic money of Virginia and its neighboring colonies for close to two centuries, until well after the American Revolution. It was the money that the colonists used to buy food, clothing, to pay taxes, even to pay for a bride. As money goes, so tobacco went. The original price set on it in terms of English money was higher than the cost of growing it, so planters set to with a will and produced more and more. As always happens when the quantity of money increases more rapidly than the quantity of money increase more rapidly than the quantity of goods and services available for purchase, there was inflation. One law after another was passed prohibiting certain classes of people from growing tobacco, providing for destroying part of the crop, prohibiting the planting of tobacco for one year. Finally, people took matters into their own hands, banded together, and went around the countryside destroying tobacco plants. The evil reached such proportions that in April 1684, the Assembly passed a law declaring that these malefactors had passed beyond the bounds of riot and that their aim was the subversion of the government. It was enacted that if any persons to the number of eight or more should go about destroying tobacco plants, they should be adjudged traitors and suffer death. Before the inflation ended about a century later, prices in term of tobacco had risen fortyfold. In 1696 Virginia clergymen were paid sixteen thousand pounds of tobacco a year in salary (Friedman 80: 250-252).

Fig. 1.3 American Tobacco Exported to England 1615-1695 and 1772 (in thousands of pounds)

	1615	1625	1635	1645	1655	1665	1675	1685	1695	1772
Total Exports	2.5	131.8	1,500	4,500	6,500	14,000	17,659	28,000	28,000	106,979

Source: Series Z 457-459 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1191

The tobacco currency vividly illustrates one of the oldest laws in economics, Gresham’s law, “bad money drives out good”. The grower of tobacco, who had to pay taxes or other obligations fixed in terms of tobacco, understandably used the poorest quality tobacco to discharge obligations and retained the best quality for export in return for “hard” money. Maryland in 1698 found it necessary to legislate against the fraud of packing trash in hogsheads that contained good tobacco on top. Virginia adopted a similar measure in 1705, but apparently it did not offer relief. The quality problem was somewhat alleviated when in 1727 tobacco notes were legalized. These were in the nature of certificates of deposits issued by the inspectors. They were declared by law current and payable for all tobacco debts within the warehouse district where they were issued. Despite numerous abuses of the system, such receipts performed the office of currency right to the eve of the 19^th century. The general principles of tobacco money in Virginia remain relevant in the modern era, though paper money issued by government and bookkeeping entries called deposits have replaced commodities or warehouse receipts for commodities as the basic money of the society. Rev. Weems, a Virginian writer, intimates that it would have done a man’s heart good to see the gallant young Virginians hastening to the waterside when a vessel arrived from London, each carrying a bundle of the best tobacco under his arm, and taking back with him a beautiful and virtuous young wife. And another writer, quoting this passage, goes on to remark, “they must have been stalwart, as well as gallant, to hasten with a roll of tobacco weighing 100 to 150 pounds under the arm” (Friedman 80: 251-252).

By the turn of the eighteenth century, the legislatures had established tobacco as the legal tender for paying taxes and public debts. Legislation set standards for minimum quality. In 1730 Virginia set up an inspection system, requiring planters to bring their tobacco to public warehouses where it would be inspected and warehouse receipts issued for its value. These warehouse receipts functioned in the same way as banknotes, although they fluctuated in purchasing power far more, being tied to a volatile commodity, tobacco (Gordon 04: 45). That did not stop them from issuing paper money in the form of bills of credit, promises to pay in the future. Because they were legal tender in payment of taxes and other government obligations, they circulated as money, although often at a discount from face value. The idea worked so well that it soon spread to other colonies in New England and to Pennsylvania, which issued its first paper money in 1723. Benjamin Franklin, in 1729 when he was only twenty-three, published a pamphlet entitled “A Modest enquiry in the Nature and Necessity of Paper Currency. He was soon rewarded with a contract to print future issues of Pennsylvania bills of credit and typically devised several means of foiling counterfeiters, some of them still in use to this day. Franklin, however, minimized the fatal flaw inherent in what economists call “fiat money” money that is money only because the government says it is money rather than being made of or backed by a valuable commodity (Gordon 04: 46).

Only 20 percent of all the royal governors in the whole of British America were American (Bernard 68: 89). As absentees the Earls of Orkney and Albemarle in succession held the governorship of Virginia for no less than fifty-seven consecutive years, from 1697 to 1754, during which time seven individuals came and went in the deputized office of lieutenant governor. The average duration of tenure of the fully appointed crown governors in the mainland colonies was five years, and of this period only the middle two or three years were effective politically, for a year or so was consumed at the start in consolidating power and an equivalent period of time was lost at the end when the incumbents were known as lame ducks (Bernard 68: 91). Politics in America were profoundly different from politics in England in that it operated at two levels, the level of the provincial governments and the level of the central government at “home”. Almost everyone who attempted to manipulate English politics to the advantage of political groups in the colonies found it necessary at one time or another to work through professional political brokers, lawyers, commonly, who commanded the recondite legal knowledge and the subtle political lore needed to thread the dark passages of English politics (Bernard 68: 92). The work of the British government was virtually restricted to preserving the constitution which meant doing nothing about home affairs and conducting foreign policy (Bernard 68: 104).

Most colonies sought to do no more than re-create, or adapt with minor variations, the forty-shilling freehold qualification that had prevailed in the county constituencies of England for 300 years. But if ownership of land worth forty shillings a years was a restrictive qualification in England, it was permissive in the colonies where freehold tenure was almost universal among the white population. Generalizing across the variety of statutory provisions and practices of the various colonies, it seems safe to say that fifty to seventy-five per cent of the adult male white population was entitled to vote – far more than could do so in England, and far more too, it appears, than wished to do so in the colonies themselves. Apathy in elections was common, in part because of the physical difficulty of travel to polling places; in part because of the lack of real alternatives in a society dominated by the sense that the natural social leaders of society should the political leaders; in part because of the lack, in certain periods and places, of issues that seemed properly determinable at the polls (Bernard 68: 87-88). Americans are famous for being practical people, preferring fact to theory, finding the meaning of propositions in results, regarding trial and error, not deductive logic, as the path to truth. “In no country in the civilized world, “ wrote Tocqueville in Democracy in America, “is less attention paid to philosophy than in the United States...The ideas of Americans are either extremely minute and clear or extremely general and vague” (Schlesinger 99: 52).

In 1730 it was written in the New York Gazette that the even balance of authority resulting from the mutual dependence of the several parts of the English constitution is the most complete and regular constitution that has ever been contrived by the wisdom of man. A free government cannot but be subject to parties, cabals and intrigues. Parties are a check upon one another, and by keeping the ambition of one another within bounds, serve to maintain the public liberty. Opposition is the life and soul of public zeal which, without it, would flag and decay for want of an opportunity to exert itself. It may indeed proceed from wrong motives, but still it is necessary. Not have the administration any reason to repine at it or to wish it at an end since whatever motives it may have proceeded from, it has proved of service both to them and to the public, even contrary perhaps to the design and intent of the authors of it. There can be no liberty without faction, for the latter cannot be suppressed without introducing slavery in the place of the former. Regard for liberty has always made me think that parties in a free state ought rather to be considered as an advantage to the public than an evil. Because while they subsist I have viewed them as so many spies upon one another, ready to proclaim abroad and warn the public of any attack or encroachment upon the public liberty and thereby rouse the members thereof to asset those rights they are entitled to by the laws (Bernard 68: 127).

Fig. 1.4 Tax Collections in America under Difference Revenue Laws 1765-1774 (in pounds sterling)

	1765	1770	1774
Total	17,383	33,367	27,995
Sugar Act	14,091	30,910	27,074
Stamp Act	3,292	---	---
Townshend Act	---	2,727	921
Navigation Act	2,964	1,828	672

Series: Z 611-615 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1200

By the mid-eighteenth century the political system, that had always been troubled and contentious, became explosive. It invoked both the deeply bred belief that faction was seditious, a menace to government itself, and the fear that the government was corrupt and a threat to the survival of Liberty (Bernard 68: 105). Starting in the 1760s King George III of Britain had imposed a number of onerous and unpopular laws and taxes on the American colonies including the Sugar Act and Currency Act of 1764; Stamp Act and Quartering Act of 1765, Tea Act of 1773 and 4 Intolerable Acts of 1774 (Sanders 09: 2.1). As early as 1767 American politics had entered a new phase. By then the train of events that manifestly led to Independence were clearly visible – Stamp Act, Townshend Duties, the Boston Massacre. The stamp tax was not a crushing tax; the Townshend duties, were withdrawn and the Boston Massacre was the result of a kind of urban riot common throughout the century, the Tea tax would have eliminated taxes on India Co. Tea lowering the cost of tea. These events were incendiary, it was resentment of the economic oppression of colonialism that led to the overthrow of constituted authority and, ultimately, to Independence (Bernard 68: 159) In response to this “taxation without representation” orators protested and many of the colonies wrote letters to Parliament and on December 17, 1773 a group of colonists dressed as Mohawk Indians threw three shiploads of tea into the Boston harbor and later Boston harbor was sealed off to punish the rebellious residents. In 1774 fifty-six delegates from twelve of the thirteen colonies met briefly in Philadelphia for the First Continental Congress and drafted a Declaration of Rights and Grievances ruling Parliament unconstitutional (Sanders 09: 2.1).

Fig. 1.5 Tea Imports from England by American Colonies 1761-1775 (in pounds)

	1761	1765	1770	1775
Total Tea Imports	56,110	518,424	110.386	22,198

Source: Series Z 473-480 Historical Statistics of the United States: Colonial Times to 1970. Vol. 2 pg. 1192

The Founding Fathers had no doctrinal commitment to the unregulated marketplace. They were not proponents of laissez-faire. Their legacy was rather that blend of public and private initiative known in our own day as the mixed economy (Schlesinger 99: 223). Early American corporations were quasi-public agencies, chartered individually by statute. They were granted franchises, bounties, bond guarantees, rights of way, immunities and other exclusive privileges to enable them to serve specified public needs. In many cases state governments bought shares in corporations and installed their representatives on the board of directors (Schlesinger 99: 225). The key insight of Adam Smith’s Wealth of Nations of 1776 is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another. The price system is the mechanism that performs this task without central direction, without requiring people to speak to one another or to like one another. The price system enables people to cooperate peacefully in one phase of their life while each one goes about his own business in respect of everything else (Friedman 80: 13). The price system works so well, so efficiently, that we are not aware of it most of the time. Prices perform three functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product – distribution of income (Friedman 80: 14). If we will, from building a society that relies primarily on voluntary cooperation to organize both economic and other activity, a society that preserves and expands human freedom, that keeps government in its place, keeping it our servant and not letting it become our master (Friedman 80: 37). Where does the government enter into this picture? To some extent government is a form of voluntary cooperation, a way in which people choose to achieve some of their objectives through governmental entities because they believe that is the most effective means of achieving them (Friedman 80: 27).

II. First Bank of the United States

The Founding Fathers were reared in an anti-party tradition. The eighteenth century had little use for parties. In France Rousseau condemned those “intriguing groups and partial association which by nourishing special interests, obscured the general will” (Schlesinger 99: 257). The American experience exemplified the anti-party philosophy. There were no parties in the colonial assemblies or in the Continental Congress or under the Articles of Confederation. The Constitution made no provisions for parties. Condemned by the Founding Fathers, unknown to the Constitution, political parties imperiously forced themselves into political life in the early years of the republic. Their extra-constitutional presence rapidly acquired a quasi-constitutional legitimacy (Schlesinger 99: 258). The parties as national associations were a force, against provincialism and separatism. At the same time, they strengthened the fabric of unity by legitimizing the idea of political opposition. Parties performed an equally vital function within the national government by supplying the means of overcoming one of the paradoxes of the Constitution –the doctrine of the separation of powers (Schlesinger 99: 259). British reformers are as dissatisfied with the fusion of powers as American reformers are with the separation of powers (Schlesinger 99: 307). The first decennial census of the U.S. population was taken in 1790, as required by the Constitution, in order to obtain the population counts needed for Congressional apportionment (Campbell, Lennon 90).

Fig. 2.1 Area and Population of the United States 1790-1850

	1790	1800	1810	1820	1830	1840	1850
Land Area (square miles)	864,746	864,746	1,681,828	1,749,462	1,749,462	1,749,462	2,940,042
Population	3,929,214	5,308,484	7,239,881	9,638,453	12,866,020	17,069,458	23,191,876
Per square mile	4.5	6.1	4.3	5.5	7.5	9.8	7.9

Source: Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 1. Pg. A-8

After the Revolution, the American economy was in profound recession. The country’s products were largely excluded from the British Empire, where most of its traditional markets had lain. Its currency, to the extent that it even amounted to a currency, was nearly worthless, its government’s debts were unpaid and un-payable. The importance that the Washington administration, which took office on April 30, 1789, placed on dealing with the financial situation confronting the government under the new Constitution can be judged by the numbers. While the newly created State Department had five employees, the Treasury had forty. A tax system had to be created, the debts from the Revolution had to be funded, the customs had to be organized to collect the duties that were to be the government’s main source of revenue for more than a century, the public credit had to be established so that the federal government could borrow when necessary. The theoretical monetary system devised by the Continental Congress under the Articles of Confederation had to be implemented. Thomas Jefferson, in his “Notes on the Establishment of a Money Unit” advocated not only using the dollar but making smaller units decimal fractions of the dollar, and the United States, in 1786, became the first country in the world to adopt a decimal system. Jefferson advocated coinage of a half dollar, a fifth, a tenth, for which he coined the word dime, a twentieth and hundredth of a dollar, for which he borrowed the word cent from Robert Morris’s scheme. In 1785 Congress declared that the “monetary unit of the United States of America shall be one dollar.” But the next year Congress, while adopting the cent, five-cent, dime and fifty-cent coins advocated by Jefferson, decided to authorize a quarter-dollar coin rather than a twenty-cent piece (Gordon 04: 68-70).

On September 11, 1789 Alexander Hamilton was confirmed by the Senate to be the first Treasury Secretary. To fund the government Congress passed the Tariff and Tonnage Acts, that imposed a duty of 6 cents a ton on American ships entering U.S. ports and 50 cents a ton on foreign vessels, in the summer of 1789. But, second only to slavery, the tariff would be the most contentious issue in Congress for the next hundred years. With funding in place, Hamilton’s most pressing problem was to deal with the federal debt, most of which had fallen into the hands of speculators who had bought it for as little as 10 percent of its face value. On January 14, 1790 Hamilton submitted to Congress his first “Report on the Public Credit” which called for redeeming the old debt on generous terms and issuing new bonds to pay for it, backed by the revenue from the tariff (Gordon 04:72-73). The other part of Hamilton’s fiscal policy was the establishment of a central bank, to be called the Bank of the United States and modeled after the Bank of England as directed in his “Report on a National Bank”. Hamilton expected the bank to carry out three functions. First it would act as a depository for government funds and facilitate the transfer of them from one part of the country to another. Second, it would be a source of loans to the federal government and to other banks. And third, it would regulate the money supply by disciplining state-chartered banks (Gordon 04: 76). Hamilton proposed a bank with a capitalization of $10 million, much larger than the combined capitalization of the three state banks of $2 million. The government would hold 20 percent of the stock of the bank and have 20 percent of the seats on the board. The secretary of the treasury would have the right to inspect its books at any time. The bill passed Congress with little trouble. Thomas Jefferson and his allies James Madison and Edmund Randolph, the attorney general, argued that the Constitution gave Congress the power only to pass laws “necessary and proper for carrying into Execution the foregoing Powers.” The sale of stock was a resounding success, the bank was very profitable and the three state banks in existence in 1790 became twenty-nine by the turn of the century, and the United States enjoyed a more reliable money supply than most nations in Europe (Gordon 04: 78-79)

Fig. 2.2 National Wealth 1774-1807 (in millions of dollars)

	1774	1784	1794	1800	1807
Total Wealth	600	850	1,950	2,400	2,518

Source: Series A 1 Historical Statistics of the United States

In 1791 the federal government enacted an excise tax on distilled spirits. This was, of course, unpopular with the numerous producers of rum and whiskey, although they could, and did, pass the tax on to their customers. In July 1794 opposition to the tax flared into insurrection, and five hundred armed men burned the house of General John Neville, who was the regional inspector of the excise. On August 4 President Washington issued a proclamation ordering the rebels to disperse and militia to muster. When negotiations failed, Washington ordered thirteen thousand troops into western Pennsylvania, whereupon the rebellion melted away and two leaders were captured and convicted of treason, before Washington pardoned them. Today the so called Whiskey Rebellion is remembered mostly for being the only time in American history that the commander in chief has taken the field with his troops (Gordon 04: 99) Road construction after the Revolutionary war was an important economic development. Previously roads and Indian tracks were deeply rutted and often strewn with destroyed wagons. In the early part of the nineteenth century a Scottish engineer named John McAdam would perfect the technology of road building using layers of stone and gravel. The Philadelphia-Lancaster Turnpike was an immediate financial success for the company that built it, and this resulted in many turnpike projects getting under way. In 1802 the act of Congress that created the state of Ohio set aside funds from the sale of public lands for road construction. In 1811 a road from Cumberland, Maryland, on the Potomac, to Wheeling, in what is now West Virginia, on the Ohio River was authorized. The Cumberland Road would eventually extend all the way to Vandalia, Illinois, a distance of nearly five hundred miles (Gordon 04: 100). The need for canals to help develop the country and reduce the cost of many commodities in the New nation was obvious. By 1790, the no fewer than thirty canal companies had been charted in eight of the thirteen states (Gordon 04: 103).

Fig. 2.3 All Real and Personal Property in the United States (Exclusive of Louisiana Territory) 1805 (in millions)

Total Valuation for 1805	2,505.5
1 million habitation and apparel for 6 million each $360	360
39 million acres of lands averaged at $6	234
150 million acres of land adjoining cultivated land averaged at $3 ½	525
451 million acres, residue, averaged at $2	902
Carriages and livestock $70 per family	70
Turnpike, canal and toll bridge stock	15
10,000 mills valued not less than $400	4
1 million slaves averaged at $200	200
Products on hand for export	26
Stock in trade	150
Public buildings, churches, arsenals, dock yards etc.	19.5

Source: Table 1 Historical Statistics of the United States

A real stock exchange was established in Philadelphia near the headquarters of the Bank of the United States in 1792. In New York a group of twenty-one individual brokers and three firms signed an agreement, called the buttonwood Agreement because it was, at least according to tradition, signed beneath a buttonwood treat, today more commonly called a sycamore outside 68 Wall Street. In it they pledged “ourselves to each other, that we will not buy or sell from this day for any person whatsoever any kind of Public Stock, at a less rate than one quarter per cent Commission on the specie value, and that we will give preference to each other in our negotiations”. The new group formed by the brokers was far more a combination in restraint of trade and price-fixing scheme than a formal organization, but it proved to be a precursor of what today is called the New York Stock Exchange (Gordon 04: 79). In 1817 the New York stock exchange was formally established. Wall Street had been growing quickly but New York needed a stock exchange like Philadelphia had since 1792. On February 25, 1817 several leading New York brokers met and drew up a constitution that was, in fact, nearly identical with the constitution of the Philadelphia exchange. There were just twenty-eight original members of the Board of Brokers, who soon changed their name to the New York Stock and Exchange board. They rented the second floor of the Bank of New York headquarters at 40 Wall Street for $200 a year, including heat. They changed their name in 1863 to the New York Stock Exchange (Gordon 04: 111-112).

The Charter of the Bank of the United States had a term of twenty years and was due to run out in 1811. By that time there were more than a hundred state banks in operation. The Bank of the United States, headquartered in Philadelphia, had opened branches in New York, Boston, Baltimore and Charleston, the major American ports, within a year of its creation. By 1810 it also had branches in Washington, New Orleans, Savannah, and Norfolk as well. Its interstate branches and its monopoly on deposits of the federal government made it by far the most powerful bank in the country and the only one whose notes were accepted at par everywhere. James Madison, who had opposed its creation was president, he recognized the bank’s utility both as agent for the federal government and as a provider of a uniform national currency. His secretary of treasury, Albert Gallatin, also pushed hard to have the bank’s charter renewed. The charter was due to expire on March 4, 1811 and the Madison administration submitted a bill to renew it for twenty years on January 24, 1811. Madison however did not push hard enough, nor keep members of his administration in line, and when his vice president George Clinton of New York, broke a tie vote in the Senate against the bank bill, the measure died. It was the most significant independent political, nearly the only one, in the history of the vice presidency. Most of the branches were re-charted by the states where they were located and the headquarters were sold, building, furniture and all to Stephen Girard, a Philadelphia merchant (Gordon 04: 116-117). With the extinction of the Bank of the United States, state banks proliferated, more than doubling in the two years after 1811. Most issued banknotes. Adam Smith had estimated that a bank could safely issue banknotes in the amount of five times capital, and some states restricted banknotes to three times capital, but other states placed no such limits (Gordon 04: 121).

III. Second Bank of the United States

The Madison administration wanted a new central bank. Madison vetoed one bill in 1815 on technical grounds, but signed a bill sent to him in 1816, chartering a Second Bank of the United States for twenty years (Gordon 04: 121). In 1819 President Madison appointed Biddle to the board of directors of the Second Bank of the United States and in 1823 he became president of the bank, after the first president, William Jones resigned after an investigation of his speculation of bank stock. But while the Second bank of the United States, headquartered in Philadelphia like the first one, would after a shaky start, be a stabilizing influence on the American monetary system, it would never have the power to control it that the first bank had. Some states had sound banking laws. Missouri, admitted to the Union in 1821 and Indiana, admitted to the Union in 1816, had single, state-owned, many-branched central banks of their own, a system that worked well. Louisiana (1812) closely regulated its commercial banks and had a wide reputation for sound banking. Illinois (1818) on the other hand, had an equally wide reputation for flimflam, fraud and failure among its banks. Bank failure became endemic in this era. Fully half the banks founded between 1810 and 1820 had failed by 1825. Hundreds more sprang up (Gordon 04: 122).

Fig. 3.1 National Wealth 1825-1880 (in millions of dollars)

Year	Wealth	Year	Wealth	Year	Wealth	Year	Wealth
1880	43,300	1865	20,820	1851	7,981	1838	4,900
1879	41,437	1864	19,809	1850	7,135	1837	4,759
1878	39,430	1863	18,838	1849	6,918	1836	4,612
1877	37,579	1862	17,906	1848	6,707	1835	4,470
1876	35,794	1861	17,013	1847	6,501	1834	4,333
1875	34,074	1860	16,160	1846	6,302	1833	4,200
1874	32,420	1859	15,200	1845	6,109	1832	4,071
1873	30,831	1858	14,252	1844	5,922	1831	3,946
1872	29,308	1857	13,318	1843	5,739	1830	3,825
1871	27,851	1856	12,396	1842	5,563	1829	3,708
1870	26,460	1855	11,488	1841	5,392	1828	3,594
1869	25,253	1854	10,591	1840	5,226	1827	3,484
1868	24,086	1853	9,708	1839	5,066	1826	3,377
1867	22,958	1852	8,838			1825	3,273
1866	21,869

Source: Series A 2 Historical Statistics of the United States 1970

No one, had more influence on shaping the Democratic Party and its economic philosophy before Franklin Roosevelt than Andrew Jackson. Indeed, the modern Democratic Party coalesced around Jackson’s extraordinary political personality. Jackson believed in pushing the locus of power down to the social scale and had a deep-seated dislike of inherited privilege and what Jackson called “the money power” which is to say banks, especially large, well-established and powerful ones. Jackson had been born very poor and had no intention of dying poor. Andrew Jackson represented a revolution in American politics. He did not have much formal education, but studied law in a law office and was admitted to the bar in 1887, he then became a land speculator and acquired hug tracts of land, he was then a general in the Indian war. He fought no fewer than three duels, killing at least one of his opponents. To Jackson real money was specie, gold and silver coins, paper money and what commercial paper, bills of exchange, promissory notes, bank checks, and such, were a form of fraud (Gordon 04: 124). Andrew Jackson’s first order of financial business was to pay off the national debt. The national debt, which had stood at over $80 million 1792, had been reduced to only $45 million by 1811. The War of 1812 had then caused the debt to soar to more than $125 million by 1815. The high tariff generated large surpluses after the war and by the time Jackson reached the presidency, it stood at $48,565,000 (Gordon 04: 125). Jackson wanted to rid the country of debt for two reasons. The first was that debt was bad in and of itself. The second was to prevent a moneyed aristocracy from growing up around the administration. To achieve his goal Jackson was perfectly willing to sacrifice internal improvements such as roads saying when the money was paid off there would be plenty of money for improvements. By the end of 1834 Jackson was able to report to congress the State of the Union message that the country would be debt free on January 1, 1835 and have a balance on hand of $444,000. Chief Justice Roger B. Taney not that it was “the first time in the history of nations that a large public debt has been entirely extinguished”. It remains the only time to this day (Gordon 04: 125).

Fig. 3.2 Federal Budget and Debt 1820-1839 (in thousands of dollars)

Year	Revenues	Expenditures	Balance	Debt	Year	Revenues	Expenditures	Balance	Debt
1820	17,881	18,261	-380	91,016	1830	24,844	15,143	9,701	48,565
1821	14,573	15,811	-1,238	89,987	1831	28,527	15,248	13,279	39,123
1822	20,232	15,000	5,232	93,547	1832	31,866	17,289	14,577	24,322
1823	20,541	14,707	5,834	90,876	1833	33,948	23,018	10,930	7,012
1824	19,381	20,327	-946	90,270	1834	21,792	18,628	3,164	4,760
1825	21,841	15,857	5,984	83,788	1835	35,430	17,573	17,857	38
1826	25,260	17,036	8,224	81,054	1836	50,827	30,868	19,959	38
1827	22,966	16,139	6,824	73,987	1837	24,954	37,243	-12,289	337
1828	24,764	16,395	8,369	67,475	1838	26,303	33,865	-7,562	3,308
1829	24,828	15,203	9,625	58,421	1839	31,488	26,899	4,589	10,434

Source: Series Y 352-357 and Y 493-504 Historical Statistics of the United States 1970

In regards to the Second Bank of the United States, it was not an issue in the presidential campaign of 1824, when Jackson won a plurality of the popular vote, but lost in the House of Representatives to John Quincy Adams, or in 1828, when Jackson won a smashing victory over the unpopular Adams. The President of the Bank Biddle voted for Jackson in both elections. But hardly had Jackson entered the White house than his hatred of banks, especially large, powerful ones, manifested itself in his first message to Congress as president. He raised the question of re-chartering the Second Bank of the United States a full seven years before its charger was due to expire. By 1832, when Jackson ran for reelection, it was clear that he intended to kill the bank. Biddle fought back as best he could. Many congressmen enjoyed good relations with the bank and Biddle pressed them to pass a bill re-chartering the bank for fifteen years before congress adjourned for the summer of 1832. Congress finally passed the re-charter bill and prepared to adjourn, but Jackson issued a blistering veto message that was as much a campaign speech as an act of statecraft. He argued that the bank was a monopoly and favored the rich and powerful over the ordinary citizens of the country. Further, despite Supreme Court rulings to the contrary, he declared it unconstitutional. Congress was unable to override the veto (Gordon 04: 128). When Jackson won a landslide victory that November, the Second Bank of the United States, although it had four years left on its charter, was at best a dead man walking. Nor was Jackson content to simply allow the charter to expire. He began to withdraw federal deposits and move them to what his opponents soon dubbed “pet banks” (Gordon 04: 128)

Although there was a brief dip in 1834 when the Second Bank of the United States called in its loans, prosperity was widespread and the number of banks in the country increased from 329 in 1829 to 788 in 1835. The face value of banknotes tripled and outstanding loans quadrupled (Gordon 04: 127-128). With the national debt paid off and the government running large surpluses, government revenues increased by 150 percent between 1834 and 1836, in part due to greatly increased land sales, Jackson convinced Congress to give it to state governments for improvements. The prosperity however didn’t last long after Jackson. In the Panic of 1837, faced with having their government deposits withdrawn the pet banks began to call in loans and a wave of bank failures swept across the west and rolled eastward. The Bank of England raised interest rates to prevent an outflow of gold. Wall Street plunged, interest rates, once 7 percent a year, were 2 or even 3 percent a month. The American economy began to slide into a deep depression. By early fall, 90 percent of the nation’s factories were closed. Federal revenues fell by half. Andrew Jackson’s successor, Martin van Buren, had to suffer the political consequences of the longest economic depression in the nation’s history, that didn’t reach bottom until February 1843, seventy-two months after it began. Van Buren's remedy--continuing Jackson's deflationary policies--only deepened and prolonged the depression. Declaring that the panic was due to recklessness in business and overexpansion of credit, Van Buren devoted himself to maintaining the solvency of the national Government. He opposed not only the creation of a new Bank of the United States but also the placing of Government funds in state banks. He fought for the establishment of an independent treasury system to handle Government transactions. As for Federal aid to internal improvements, he cut off expenditures so completely that the Government even sold the tools it had used on public works (Gordon 04: 130).

The first half of the nineteenth century was a story of industrialization and progress. As cities grew in size in the first decades of the nineteenth century, the problem of supplying the inhabitants with water and disposing of sewage increased. In the early years of the century the affluent had rain barrels or cisterns, fed from their rooftops, but the rest had to haul water from the nearest well. This water was often grossly contaminated from the sewage from privies and the chamber pots that were emptied into the streets. Although not understood at the time, this was the source of the frequent epidemics of such diseases as yellow fever and cholera that ravaged American cities at this time. Philadelphia was the first city to build a modern water supply that could be piped into houses and allow waste to be disposed of through sewers. In 1832 the first houses in America to be built with bathrooms were supplied by this system. New York, surrounded by salt water, had a far more difficult technological problem to deal with. Nonetheless, after building a forty-five mile long aqueduct to bring water in New York opened the Croton System on July 4, 1842. The miracles of daily piled one upon the other in the first decades of the nineteenth century – railroads, telegraph, newspapers, heating, lighting, running water – inducing a mood of optimism and a belief in progress that had not been known before (Gordon 04: 166).

Believers in aristocracy and socialism share a faith in centralized rule, in rule by command rather than by voluntary cooperation. They differ in who should rule, whether an elite determined by birth or experts supposedly chosen on merit. Both proclaim, no doubt sincerely, that they wish to promote the well-being of the “general public” that they know what is in the “public interest” and how to attain it better than the ordinary person (Friedman 80: 97-98). Alexis de Tocqueville, the famous French political philosopher and sociologist, in his classic Democracy in America, written after a lengthy visit in the 1830s, saw equality, not majority rule as the outstanding characteristic of America. He wrote, “the aristocratic element has been feeble from its birth…The democratic principle, on the contrary, has gained so much strength by time, by events, and by legislation, as to have become not only predominant but all-powerful. There is no family or corporate authority. America, then, exhibits in her social state a most extraordinary phenomenon. Men are there seen on a greater equality in point of fortune and intellect, or, in other words, more equal in their strength, than in any other country of the world…There is a manly and lawful passion for equality which incitement to wish to be powerful and honored…But there exists also in the human heart a depraved taster for equality, which impels the weak to attempt to lower the powerful to their own level, and reduces men to prefer equality in slavery to inequality with freedom.” (Friedman 80: 130-131).

IV. The Democratic and Republican War Party

Shortly after the Revolution began, so too did the abolition of slavery. Vermont, in declaring its own independence from Britain in 1777, also abolished slavery, becoming the first place in the Western Hemisphere to make the practice illegal. Other northern states soon followed. Even New York, with nineteen thousand slaves in 1790, about 5.5 percent of the population, began gradual emancipation in 1799 and had freed all its slaves by 1827. The Northwest Ordinance of 1787 forbade slavery north of the Ohio River. In the South, manumission became fashionable, and many planters, George Washington among them, freed their slaves upon their own deaths. The Constitutional Convention, in 1787, found it necessary, in order to reach agreement, not only to forbid outlawing the slave trade prior to 1808, but to make that clause un-amendable. But by 1808 public opinion, even in the South, had swung so against the trade that Congress abolished it as soon as it legally could so do, on January 1 of that year. Abolishing the slave trade and actually suppressing were two different matters, however. The invention of the cotton gin changed things. After 1793 the price of a slave ratcheted upward. A slave who would have sold for $300 before the cotton gin was selling for $2,000 and more by 1860. The slave holders, possessed of an increasingly valuable asset, became more interested in preserving their “peculiar institution” and as tobacco became less important to the economy of such states as Virginia and Maryland, they began to sell surplus slaves south so that between 1790 and 1860 some 835,000 slaves were sold south. While slavery was found throughout the South, it was not widely spread among the population. In 1860, while the white population of the South was more than eight million, there were only 383,637 slave owners and only 2,292 held more than a hundred slaves. But slavery had become bound up with the very identity of the South and its way of life (Gordon 04).

Fig. 4.1 Slave and Free Population in the United States 1790-1870

Year	Slaves	Free Blacks	Total Black	% Free Blacks	US Population	% black of US
1790	697,681	59,527	757,208	7.9%	3,929,214	19%
1800	893,602	108,435	1,002,037	10.8%	5,308,483	19%
1810	1,191,362	186,446	1,377,808	13.5%	7,239,881	19%
1820	1,538,022	233,634	1,771,656	13.2%	9,638,453	18%
1830	2.009,043	319,599	2,328,642	13.7%	12,860,702	18%
1840	2,487,355	386,293	2,873,648	13.4%	17,063,353	17%
1850	3,204,313	434,495	3,638,808	11.9%	23,191,876	16%
1860	3,953,760	488,070	4,441,830	11.0%	31,443,321	14%
1870	0	4,800,009	4,800,009	100%	38,558,371	13%

Source: Wikipedia

Worried over their growing minority status, and enraged over the attempt of the North to force emancipation upon Missouri when it applied for admission as a slave state in 1819, white southerners for the first time threatened secession during the debates that resulted in the Missouri Compromise of 1820. The heart of the compromise was the drawing of a line through the Louisiana Purchase territory that prohibited slavery north of the latitude 36°30′ and allowed it to the south. President Andrew Jackson forced the Nullifiers to back down, but of greater concern in the 1830s to southerners anxious over the future of slavery was the sudden emergence of an abolitionist movement in the North. When northern congressmen rallied behind the Wilmot Proviso in 1846 in an effort to bar slavery from any territories gained in the Mexican War, southerners formed their own sectional bloc and forced the ultimate defeat of the proviso. The congressional Compromise of 1850, permitted California to enter the Union as a free state. The remaining land won in the Mexican War was divided into the territories of Utah and New Mexico with no conditions placed on the status of slavery. In 1854, the Kansas‐Nebraska Act reopened the entire controversy. In order to gain essential southern support for his bill organizing the remaining Louisiana Purchase territory north of 36°30′, Democratic senator Stephen A. Douglas of Illinois had to revoke the Missouri Compromise restriction on slavery. The ruling of the Supreme Court in the Dred Scott decision of 1857 that Congress had no constitutional authority to prohibit slavery in the territory further polarized sectional attitudes, and northern Democrats led by Douglas lost the trust of the southern wing of the party when they joined Republicans in blocking the admission of Kansas as a slave state. The decade came to a close with abolitionist John Brown's unsuccessful raid against the federal arsenal at Harpers Ferry, Virginia, in October 1859, for which he was hanged.

The Republican Party grew out of the conflicts regarding the expansion of slavery into the new Western territories. The stimulus for its founding was provided by the passage of the Kansas-Nebraska Act of 1854. That law repealed earlier compromises that had excluded slavery from the territories. The passage of this act served as the unifying agent for abolitionists and split the Democrats and the Whig party. "Anti-Nebraska" protest meetings spread rapidly through the country. Two such meetings were held in Ripon, Wis., on Feb. 28 and Mar. 20, 1854, and were attended by a group of abolitionist Free Soilers, Democrats, and Whigs. They decided to call themselves Republicans-because they professed to be political descendants of Thomas Jefferson's Democratic-Republican party. The name was formally adopted by a state convention held in Jackson, Mich., on July 6, 1854. In the 1854 congressional elections 44 Republicans were elected to the House of Representatives and several were elected to the Senate and various state houses. In 1856, at the first Republican national convention, Sen. John C. Fremont was nominated for the presidency but was defeated by Democrat James Buchanan. Two days after the inauguration of James Buchanan, the Supreme Court of the United States handed down the Dred Scott v. Sandford decision, which was denounced by the Republicans. The split in the Democratic party over the issue of slavery continued, and in 1858 the Republicans won control of the House of Representatives for the first time.

The second Republican national convention in 1860 resulted in the presidential nomination of Abraham Lincoln. The Republican platform pledged not to extend slavery and called for enactment of free-homestead legislation, prompt establishment of a daily overland mail service, a transcontinental railroad, and support of the protective tariff. Lincoln was opposed by three major candidates-Stephen Douglas (Northern Democrat), John Cabell Breckinridge (Southern Democrat), and John Bell (Constitutional Union party). Lincoln received almost half a million votes more than Douglas, but won the election with only 39.8 percent of the popular vote. Pushing the constitutional doctrine of states' rights to its logical extreme, the secessionists held that individual states retained ultimate sovereignty within the Union and could peacefully leave the Union the same way they had entered it through special state conventions. South Carolina took the lead on 20 December 1860, and within six weeks seven states from the Lower South left the Union. Delegates from these states set up the provisional government of the Confederate States of America at Montgomery, Alabama, in February 1861 (Levine 1992).

The American Civil War was the largest war fought in the Western world in the century between the Battle of Waterloo, of June 18, 1815 and the outbreak of World War I on August 1, 1914. Spread across half a continent, the troops moved by railroads and commanded by telegraph, the people informed by large-circulation newspapers, it was the first great conflict of the industrial era. Because the Civil War was far more like the great conflicts of the twentieth century than such earlier struggles as the Napoleonic War, both sides faced demands on their government finances and the economies that supported them that no nation had faced before. The fact that the North, with a far larger economy and a government fiscal system already in place, played no small part in the war’s eventual outcome. Because of the depression that had started in 1857, the federal government had been operating in deficit since that time. In 1860 the national debt stood at $64,844,000 and the Treasury was nearly depleted. Since the demise of the Second Bank of the United State, the federal government had financed deficits mostly by borrowing from other banks. To raise the money needed to fight the war they sold bond directly to citizens. This was successful and by May 1864 the government was actually raising money as fast as the Navy and War Departments could spend it, $2 million a day. The Northern bond sales caused a breathtaking rise in the national debt that had stood at 93 cents per person in 1857, before the depression hit, eight years later it stood at $75 per person. Before the Civil War the United States government had never spent more in a single year than $74.2 million in 1858. In 1865 alone it spent $1.297 billion, the first time in history that any nation had a billion dollar budget. Since the Civil War the federal government has never spent less tan $236.9 million in 1878 (Gordon 04: 193-194).

Fig. 4.2 Individual Income Tax Collections 1863-1895 (in thousands of dollars)

Year	Amount	Year	Amount	Year	Amount	Year	Amount
1895	77	1874	139	1870	37,776	1866	72,982
1884	56	1873	5,062	1869	34,792	1865	60,979
1881	3	1872	14,437	1868	41,456	1864	20,295
1876	1	1871	19,153	1867	66,014	1863	2,742

Source: Table III Series Y 360-373 Historical Statistics of the United States: Colonial Times to 1970. Bicentennial Edition. Vol. 2. Pg. 1091

In August 1861 the first American income tax was passed by Congress at the behest of then Secretary of Treasury, Salmon P. Chase, who would rule it unconstitutional ten years later from the Supreme Court. It taxed all income, “whether derived from any kind of property, rents, interests, dividends, salaries, or from any trade, employment or vocation carried on in the United States or elsewhere, or from any source whatever”. It originally called for a tax of 3 percent on incomes of more than $800, then a middle class income, rising to 5 percent on incomes of more than $10,000, a very comfortable income. In 1864 the income on taxes in excess of $10,000 was doubled to 10 percent. Virtually everything else was taxes as well. Stamp taxes were imposed on legal documents and licenses, excise taxes on most commodities. The tax on liquor reached $2.50 a gallon, when the price, untaxed, would have been about 20 cents. The gross receipts of railroads, ferries, steamboats, and toll bridges were taxed. Advertising was taxed. The tariff was sharply increased. Altogether the federal government raised fully 21 percent of its revenues by taxation. The South, with its less developed and cash poor economy was able to raise only about 6 percent of its revenues by taxation (Gordon 04: 194).

To finance the war effort both North and South were forced to print money. The consequences of issuing large quantities of what economists call fiat money, money that is money only because the government says it is money, are inevitable and were as well known then as now. The first thing to happen is that Gresham’s law kicks in – good money, gold and silver, disappears into mattresses as people hoard it, while they spend the money perceived to be less valuable or trustworthy. The second thing to happen is that inflation takes off. As printing press money flooded the Southern economy, inflation increased more than 700 percent in the first two years of the war alone. The North resorted to the printing press as well. With congressional authorization the Treasury began issuing greenback, so called because they were printed in green ink on the reverse. By 1965 the country had issued $450 million in greenbacks, amounting to about 11 percent of federal spending in those years. While there was inflation it was kept to a manageable 75 percent or so. Although the federal government had no hesitation in paying its bills with greenbacks, and requiring people to accept them by making them legal tender, the federal government itself did not accept them in payment of taxes. Taxes and international trade had to be paid in gold (Gordon 04: 197).

During the Civil War industrialization expanded exponentially. The demands of what became the largest army in the world and navy second only to Britain fueled the increase in production. So did the tariff, which caused imports to drop dramatically. In 1860 American imports had been valued at $354 million, two years later they were only $189 million, despite a quickly expanding economy. The difference was made up by American manufactures. In 1859 there had been 140,433 manufacturing firms in the United States, a decade later there would be 252,148. The domestic production of iron railroad rails went from 205,000 tons in 1860 to 356,000 five years later to 620,000 tons in 1870. The process for canning condensed milk patented in 1856 sparked a boom in the food processing industry (Gordon 04: 201). During the entire colonial period there had been only 7 companies incorporated in the British North American colonies. But in the last four years of the eighteenth century 335 businesses incorporated in the new United States. Between 1800 and 1860 the state of Pennsylvania alone incorporated more than 2,000. The corporation had numerous advantages over partnerships. Partnerships ended with the death of a partner, whereas corporations could last forever. Most important, corporation can sue, and be sued and buy, own, and sell property as an entity. Chief Justice John Marshall described the corporation as “an artificial being that was invisible, intangible and existing only in contemplation of the law.” Corporations can also merge (Gordon 04: 229).

V. Progressive Era

After the war, as a result of the new taxes and industrialization the government ran a string of twenty-eight straight surpluses beginning in 1866. In the prosperous year of 1882, government revenues ran ahead of outlays by a staggering 36 percent. By the turn of the century the huge Civil War debt had been cut by nearly two –thirds of in absolute dollars, and as a percent of GDP had dropped more steeply still, from about 50 percent to well under 10 percent. The Civil War income tax had been cut in 1867 to a uniform 5 percent on incomes more than $1,000. Three years later the rate was reduced again, and in 1872 the tax was eliminated altogether (Gordon 04: 272). The expansion of the American railroads after the Civil War was nothing less than extraordinary. With 30,626 miles of track in 1860, the United States already had a larger railroad system than any country in the world. By 1870 it had 52,922 miles, in 1880, 93,262 miles, in 1890, 166,703 miles. In 1900 it had 193,346 miles, a more than six-fold increase in forty years. While the annual value of manufactured goods in the United States increased by seventeen times between 1865 and 1916, the annual freight ton-mileage of the railroads increased by thirty-five times. By the turn of the century the railroads tightly knitted together an economy that was fully national in scope, and nearly every town of any size was served by a railroad. The major cities were usually served by several (Gordon 04: 235).

The greatest success story of this time was that of Andrew Carnegie who came from a poor family and worked his way up in the railway business and by 1880 Carnegie Steel Company dominated the steel industry. While the late-nineteenth century economy was built by steel, it was increasingly fueled by oil (Gordon 04: 247). The prevailing practice in the most dynamic of industries at the turn of the century was not the rule of law but the rule of cliques of “robber barons” along with smaller time shady operators who manipulated the law to their own selfish ends with impunity (Starobin 2009). In 1859, the year Edwin Drake drilled the first oil well American production amounted to only 2,000 barrels. Ten years later it was 4.25 million and by 1900 American production would be nearly 60 million barrels. In 1870 a firm named Rockefeller, Flagler and Andrews formed a new corporation, Standard Oil. Capitalized at $1 million, at the time of its incorporation it owned 10 percent of the country’s oil refining capacity; by 1880 it would control 80 percent of a much larger industry. As Standard Oil tightened its grip on the oil industry prices dropped as the company hoped to maximize profits by increasing demand (Gordon 04: 256). When the Supreme Court ruled in, Wash Railway v. Illinois in 1886 that states had no power over railroads that were carrying goods across a state lines, the fight to regulate the railroads moved, to Washington. After a year of intense political wrangling Congress established the Interstate Com