The Republic for Which It Stands: The United States during Reconstruction and the Gilded Age, 1865-1896 (Oxford History of the United States)

by Richard White

Wholesalers, in turn, depended on credit advanced them by northern manufacturers or money borrowed from northern banks. Everything ran on cotton and credit. The Southern economy rose and fell with the worldwide demand for the crop. Rising cotton prices meant more cotton, but so too did falling prices, which necessitated more cotton to cover debts. Debt, credit, and cotton marched together across the South.

Cotton once again reigned as king, and cotton exports had again become critical to the larger American economy, but cotton’s kingdom remained a poor one. Some small farmers did well, operating shrewdly in the new environment. The Southern economy grew, and by the 1880s it was growing at the same rate as the North’s. But by every measure, the average Southerner was poorer, was less educated, and had fewer opportunities than the average Northerner.

Ultimately, the economic policies of the Southern Republican Reconstruction governments helped doom both those governments and Reconstruction itself in the South. Railroad subsidies meant debt, and debt meant increased tax burdens, which alienated the constituency Republicans hoped to lure into the party. New taxes added economic grievances to racism and created a toxic mix that fueled the political resistance to Reconstruction.

The failure to curb terror was more critical, but Radical economic policies created hostility within the very class—Southern yeoman farmers—that Republicans sought to attract and conciliate.

Republicans intended Reconstruction to spread free labor, contract freedom, and prosperity into the South and West, but they presumed that these things had been secured in the North. Abundant signs in the wake of the Civil War indicated they were right.

In aggregate these firms appeared to inhabit a Hobbesian world. From one decennial census to another, 60–80 percent of new firms in a manufacturing state like Pennsylvania disappeared, casualties of competition or lack of capital, or simply abandoned when partners quarreled or died.

What made Edison more than an improving mechanic found in thousands of American factories and shops was his desire to create entire systems that were new and unique.

Industry was becoming more capital-intensive, and the trend was accelerating in the 1870s as manufacturers switched to coal and steam, added machines, and built larger factories.

Parton, as liberals were wont to do, collapsed a messy competitive present into a natural law with an inevitable outcome. His law of modern business, in which large fish inexorably swallow small fish, should have yielded large corporations in every industry, but this was not the case.

Large firms had not yet become synonymous with corporations. Larger firms emerged in industries where they could pursue a strategy of replacing skilled labor with capital in the form of machines run by less-skilled workers.

A fundamental shift was transforming the economy: the rise of wage labor. As structural changes in the economy forced workers to accept wage labor not as a temporary state but a permanent condition, they resisted. Free labor depended on independence, and, as Lincoln had said, permanent wage labor signified “either a dependent nature which prefers it, or improvidence, folly, or singular misfortune,” but as the 1860s turned into the 1870s wage labor was becoming not a transitory stage in life but the norm.

Excluding farmers, wageworkers by 1870 outnumbered the self-employed. They did not sell the products of their minds and hands. They sold their hours and days.

In the early 1870s officials in the Massachusetts Bureau of Statistics of Labor began to link threats to the home and the wretched condition of the poor not to their moral failings or bad social influences but to the wage system.

Contract freedom provided no solution. Wages sufficient to support a family and home could not be left to the market, since a wage insufficient to support a wife and children endangered the home and the republic. Even the most ardent liberal advocates of contract freedom recognized that workers deserved a wage that allowed a man to support his family.

Such complaints reflected the assumption that the role of the economy was to produce homes and prosperity was necessary to sustain them. When men did not earn enough to support wives and children, the economy was failing.

In Chicago the city as well as the state government had enacted eight-hour-day laws, without providing mechanisms for enforcement or penalties for violating them. The issue ended up being decided on the streets. In May 1867 skilled workers turned to walkouts, demonstrations, marches, and moral suasion to induce employers to obey the law. Employers largely refused: in a nationalizing economy, they could not grant an eight-hour day and still compete with manufacturers outside Chicago who did not do so.

Competition lived at the ideological center of free labor, but by the 1870s both capitalists and workers grew leery of the costs of competition and less certain that it reliably yielded prosperity and progress.

These institutions—the House of Cooke, Fisk & Hatch, J. S. Morgan & Co., J. & W. Seligman & Co., Lehman Brothers, and Kuhn, Loeb & Co.—had first arisen to serve the state: selling government bonds and making loans. Many were creations of the Civil War. As bond issues became larger, investment houses created syndicates to split the risks, buying railroad bonds below par, and then reselling them to investors in the United States and Europe at a markup.

Financiers such as Gould and Cooke—the investment bankers, brokers, and speculators of the postwar economy—were the people whom Americans referred to as capitalists. They distrusted them because they were alien to the world of free labor. They did not work with their hands; they did not make things. Capitalists justified the rewards they reaped by the risks that they took rather than the work they did. Without their willingness to risk their fortunes, so the argument went, there would be no progress, no jobs for workingpeople, and no prosperity.

If Gould and Fisk cornered the supply of gold, they could hold merchants for ransom. Those involved in the import-export trade would have to choose between paying Gould an immense premium and bankruptcy. In the process, Gould threatened to derange American trade.83

Until the 1890s, the corporate form dominated only one sector of the American economy—railroads—which were considered common carriers, equally open to all, on public highways.85 As corporations and railroads became virtually synonymous in Gilded Age America, railroads became materially ubiquitous even as their corporate structure rendered them mysterious and opaque.

The value of corporations, too, depended in part on their profits and appreciation of assets. But since the chief assets of the railroads were paper bought and sold on financial markets, the ability to control and manipulate the value of that paper became a new way to make money, very large amounts of money. In the long run, the value of that paper depended on the profitability of the corporation, but in the short run insiders could profit from unprofitable companies. Rather than indicating a profitable corporation, rising stock values might indicate the diversion of borrowed money to dividends.

Because insiders controlled information that influenced the price of a railroad’s securities, they used this information to manipulate values. Those with inside information became a corporate class. They dominated Wall Street, the boards of corporations, and the banks.87

Northerners, among them Horace Greeley and Cornelius Vanderbilt, put up Davis’s bail. The most influential Northerners had lost their appetite for prosecuting him. They would either create a martyr or, if they failed to convict, cast doubt on the northern version of the war. The judge in the Davis proceeding suspended the trial indefinitely, and Davis went free. Henry, born in New Jersey and nineteen at the time of his arrest, received a sentence of ten years. Sending poor men to prison while the powerful walked fed a Gilded Age romanticization of criminals like Jesse James.

The Liberal Republicans wanted an ideological party in an age when American political parties were not ideologically consistent. Both Democrats and Republicans comprised voters who spanned the ideological spectrum on economic and social issues.

Issues were never the whole issue. The Republicans were for an activist federal government, a homogeneous citizenry with contract freedom guaranteed by the nation, and government stimulation of the economy. The Democrats remained the party of no: they wanted a small federal government, local control, and free trade. These broad general stances, however, were inflected by region, and they were only partly what made people Democrats or Republicans.

Politics remained as much about identity as issues.

Native-born northern whites were heavily Republican, unless they had been Copperheads during the Civil War; native-born Southern whites were heavily Democratic, unless they had been Unionists or were small farmers who hated the planter class. African Americans were understandably Republican. Catholic immigrants, particularly the urban Irish, were Democrats. Protestant evangelicals were overwhelmingly Republican in the North, but their zeal for prohibition, Sabbatarian laws, and eradicating all but the English language in schools and public life could drive some nonevangelical Protestants, particularly Germans, to sit out elections or occasionally to vote for the Democrats.

Once forged, and nourished through upbringing, association, and patronage, party loyalty formed part of a person’s quotidian identity. Those who betrayed their party were regarded as lesser men or not men at all.

It soon became apparent that Grant did not know what to do with the tremendous victory he won in 1872; he alienated many of his friends in an attempt to conciliate his enemies, both liberals and Southerners.

Without any clear method or intent, he created a court that would help eviscerate the legislative base of Reconstruction. He mostly elevated mediocrities to the bench, although Morrison Remick Waite, who became Chief Justice (succeeding Salmon P. Chase, who died in 1873) was competent, even if little known outside of Republican Party circles.

Many of the 1872 elections in the South ended up disputed, with clear evidence of fraud and corruption involving Southern railroads and Republican politics.

The scandal implicated the leadership of the Union Pacific railroad, including Congressman Oakes Ames, and it snared Schuyler Colfax, the sitting vice president of the United States; Congressman James A. Garfield, James G. Blaine, the speaker of the House; and a bevy of leading senators and representatives. Some would be ruined; most would only be tainted. It took a heavy load of scandal to sink a Gilded Age politician.

The Crédit Mobilier scandal produced two congressional investigating committees—one in the House and one in the Senate—that dominated American attention in the spring and summer of 1873 and never let the Grant administration find open water.

The Crédit Mobilier investigations indicated how much was wrong, but Congress did little about it. The Crédit Mobilier only deepened Congress’s disrepute.

On May 9, 1873, the stock exchange in Vienna crashed. The financial carnage in Vienna spread to Berlin, because Germans had helped create the Austrian boom by investing gold that had flowed as reparations from Paris to Berlin following the Franco-Prussian War. Germany suffered when Austria went bust.23 Gold was one commodity circuit; wheat formed another. It connected Vienna to London and ultimately to New York and Chicago and the prairies beyond. The Austro-Hungarian economy depended on its exports of wheat to Britain. Around 1871, however, British grain purchases tilted toward North America as the immense investments Americans had made in railroads and western farms took effect.

Few Americans outside of New York’s financial markets initially noted the Austrian crash. More noticed the Bank of England’s response. Uncertain where panic would strike next, the British sought both to curtail the reckless borrowing that had brought Austria to its knees and to increase the gold reserves of the Bank of England. The Old Lady of Threadneedle Street raised her discount rates—the amount charged other banks for short-term loans—thus effectively raising interest rates across Europe and North America. The discount rate jumped from 4 percent at the beginning of May to 9 percent by November.

Nervous Europeans were bad for American railroads. Americans funded the bulk of their railroad expansion, but the British, as well as the Germans and Dutch, had also invested heavily.

Once worried investors could get better and safer returns in England, however, money began to flow back across the Atlantic and trouble loomed. The situation looked serious in 1872. By 1873 it looked dire. As the usual financial stringency of the fall harvest season approached in the summer of 1873, Vienna seemed uncomfortably close to New York City. American railroads lacked the revenue to pay both expenses and interest, and without access to fresh capital, they would fall into receivership.

In January 1873 Congress voted to demonetize silver, except for minor coins. Only Senate and Treasury insiders and William Ralston, the California banker, noted the bill’s passage. The United States would issue no more silver dollars, keeping only a trade dollar (often called “the China dollar”) for commerce with silver-standard countries, which basically meant China. Silver would no longer be a legal standard within the United States; bimetallism was over. Largely ignored at the time, the law would eventually be damned as the “Crime of ’73.” It reverberated through American politics for the remainder of the century.

Only later, when antimonopolists and soft-money advocates recognized silver as the inflationary option to the gold standard in a deflationary world, would they retrospectively demonize it and lay responsibility at the feet of Eastern and European bankers.

With the movement of Europe onto the gold standard, a large amount of European silver, no longer needed by European treasuries, as well as bullion from new discoveries flooded commodity markets, depressing the price of silver.

The act demonetized silver, thus preventing a rush of European silver into American markets, but it also created a government market for American silver by authorizing silver trade dollars to be used in the China trade. These would be produced at the San Francisco Mint, giving Comstock silver an immense price advantage over silver that had to be shipped from Europe. The act killed two birds with one stone, discouraging European imports while creating a protected market for American silver.

The Panic of 1873 was the financial crisis that erupted in the United States in the fall. Secretary Richardson responded timidly. He released some greenbacks, but mostly he substituted gold standard homilies for the cash Cooke and other bankers and financiers were desperately trying to raise.

Like their white working-class contemporaries, the freedpeople were great savers. The American saving rate was staggering, an estimated 24 percent of the gross national product by the 1870s.

As they had in good times, the railroads led the way in bad times. They carried the economy over a cliff. The press labeled the Panic of 1873 a railroad depression. Twenty-five railroads defaulted on their debts in the first few months after the crash. Seventy-one followed in 1874 and another twenty-five in 1875. By 1876 roughly half of the railroad companies had gone into receivership.

Reliable statistics on the scale of the downturn do not exist. It appears that the loss in industrial output—around 10 percent—may have been less than in both earlier and later depressions, and agricultural output may have declined little or not at all, but these numbers conceal a deeper problem that would plague the economy for the remainder of the century. Because farmers responded to lower prices by producing more, agricultural output did not shrink. But more crops on the market led to falling prices and deflation, which meant the farmers would pay back the cheap dollars they had borrowed with more expensive dollars.

Needing to pay back money they had borrowed and invested in plants and machinery, they continued to produce, even with prices falling.

Output, and gross domestic product, could remain remarkably high even as incomes and profits fell and labor suffered.

The Society for Improving the Condition of the Poor estimated that 25 percent of New York City’s workers were unemployed during the winter following the Panic. The next winter, their estimate was one-third.