Harold C. Livesay
Andrew Carnegie and the Rise of Big Business

(part of the Library of American Biography, edited by Oscar Handlin)

LIvesay says Carnegie’s lifetime “spanned two worlds, before and after mechanization,” and as a result “his actions continuously manifested an ambivalence rooted in his double exposure to the old world” of peasant Scotland and the new world of industrial America. Carnegie’s business innovations and understanding of increasing returns to scale and demand elasticity were modern, but “his attitudes towards politics, society, culture, and...even the ownership structure of his business exhibited the old world ideas he had absorbed as a boy in Scotland.” (13) Carnegie brought “cost control, low prices, low profits, and high volume” to American business, Livesay says, which turned “America into the world’s richest society.” (189) Livesay makes the contradictions in Carnegie’s character into metaphors for American history.

Banks: Capital or Credit

Howard Bodenhorn
A History of Banking in Antebellum America: Financial Markets and Economic Development in the Era of Nation-Building

Bodenhorn focuses on the capital formation function of banks -- I’m more interested in their transactional nature, as facilitators of exchange and sort-term credit. Seems like their might be two ways of looking at banks, and thinking about their role in antebellum America. One believes that growth was based on “capital deepening”: the accumulation of assets that were devoted to investment rather than consumption. The other believes that growth was based on overextension -- on basically living beyond your means, and juggling credit as best as you can to keep the foreclosers at bay.

Bodenhorn says “by 1820...banks became better known, more reputable, more established, and therefore more trusted,” presumably convincing more people (whether as shareholders or depositors) to put their money in banks (8). This is capital deepening, a supply-side argument: growth happened when banks began to accumulate enough money to lend to industrialists or invest. But then, growth has to await savable surpluses. This does not seem to have been the case in Western NY.

Maybe it’s a regional difference. Maybe the upstate banks (and the businessmen who declared themselves to be bankers so that they could
write their own notes rather than running around the county looking for currency) were taking advantage of an earlier “deepening” of the type Bodenhorn describes, that took place in Boston, Philadelphia, and New York. “Bank-supplied currency,” he says, “performed [a] dual role as both a medium of exchange and a store of wealth” (9). But since banknotes were a claim on assets (always provided you didn’t claim them, as noted elsewhere), they were basically debt. And the rest of the paper circulating as money was out-and-out debt: promissory notes. So it’s borrowing (even if only in the form of drafts written against shipped -- but not received -- products) that drives the money supply. Even the ability to take your note and deposit it at a neighboring bank, and then draw against that deposit, suggests that capital formation, at least in the sticks, is based on credit.

Bodenhorn says Hugh Patrick called these competing views “demand-following” and “supply-leading,” but the way he uses them is not exactly what I was talking about. In the “demand-following” model, “financial intermediaries were passive agents, permissive of growth” (11). The economy grew, and when people needed banking services, bankers appeared to supply them. The “supply-leading” model, on the other hand, says “the creation of financial institutions and the supply of financial services must arise prior to the demand for them” (13) How does this happen? Bodenhorn suggests a compromise, in which the banks arise “prior to the development of a modern manufacturing sector” (14). Agricultural growth enriches people, who then put their money in banks where it becomes available to new industrial enterprises. As proof, Bodenhorn cites New York’s bank commissioners, who said in 1835 that banks were “among the most useful and powerful agents in developing the resources and stimulating the industry of the country” (15). “Banks, it seems clear,” he concludes, “were attributed leadership status by contemporary Americans.” But bank commissioners would be expected to say that. Even if they were completely sincere, they were bureaucrats, not entrepreneurs. It would be completely natural for them to put the cart before the horse.

I don’t really see a big difference between Patrick’s two models of banking. In my mind, they’re both “supply-side,” because they both focus on the role of the bank. Bodenhorn says there was about $41 million of specie in the US economy in 1820, but half of it was tied up in bank reserves. There were $36 million in bank notes, and $27 million in deposits (which are also considered liabilities of the banks, because they can be drawn against, 16-17). So “Of the $83 million in currency chasing goods around the economy, about 76 percent of it was bank-supplied” (17). But in spite of this, Bodenhorn insists that “Money creation by banks, however important it may have been, was incidental to their most fundamental task--that of intermediating between borrowers and lenders, savers and investors” (18). The rest of the book focuses very tightly on this intermediary function, which makes it less useful for my needs.

Why? Because I don’t think that’s what the guys I’m studying in upstate New York were up to. Maybe it’s just a case of emphasis, but I really see the banks’ role as providing a circulating medium without which
deals can’t be done. Bodenhorn admits that “a fractional reserve system [was] a cheaper way to provide a given volume of money than...a pure specie basis,” but he ignores the huge impact this would have in areas where money was tight (18). Especially after the Specie Circular in 1837, when all the hard money was either in eastern cities or on the frontier, the need for money in the middle (the farmland) was extreme. A fractional reserve system allows banks to inflate the currency. It also speeds up the velocity of money, because paper can be handed from buyer to seller to supplier to next seller much faster than bags of gold. And faster money (higher velocity of transactions) is the same as more money. Then there’s all the notes and drafts that are being endorsed from one hand to the next (not even counted in Bodenhorn’s $83 million -- he specifically set aside credit between individuals on p. 16). So the actual comparison ought to be between $41 million of gold and silver on the one hand, held by hoarders or moving very slowly and heavily through the economy; and something like $60 to $100 million of paper on the other, issued by banks and merchants, speeding its way from hand to hand, making transactions happen every step of the way. Looked at this way, what’s the most important role of antebellum banks?

The other big difference between these models of capital formation, which focus on banks as either conduits of wealth from holders to users, or as creators of a money supply that enables trade, is that in the first one, the rich get richer, by definition. The wealthy stop hoarding their assets and put them into play in the market by handing them over to bankers to lend or invest. But in the second model, it’s not so clear. Millers “on the make”
* write notes against shipments of flour to market, and discount them at their local bank, then hand those notes to the next batch of farmers who show up with wheat. Yeah, this is credit -- but it’s not the “freeing up wealth for capital investment” thing Bodenhorn is talking about. The bold may have a fighting chance, even if they start with less of a “hoard.” Bodenhorn suggests that “Bank credit...influenced the pace of industrialization” when it “freed mercantile and industrial capital for fixed investment” (107). Ultimately, his argument hangs on the relative importance of “fixed” vs. “working capital.” While this importance varies significantly with time and place, it seems to me that the much greater volume of “working capital” transactions in the antebellum economy (due in part to the smaller nature of machinery, plant and equipment in antebellum industry but also to the sheer number of credit transactions enabling all trade in a cash-poor farm sector) argues for recognition that in many cases, it wasn’t the bankers’ awakening of old money from its slumber, but their creation of new money, that made America grow.

*Why is it that people who are generally well-disposed towards business and entrepreneurs, still allow themselves to look down their noses and say that everybody in Jacksonian America was “on the make”? Is it because this was the moment when outsiders, people with no social standing or wealth, first got involved in “making money”?

Banks and Kinship

Lamoreaux, N. R. (1986). "Banks, Kinship, and Economic Development: The New England Case." The Journal of Economic History 46(3): 647-667.

Lamoreaux challenges “scholars [who] have seen the persistence of traditional social institutions, and especially kinship-oriented business, as major impediments to economic development.” (666) Using an approach that looks somewhat like the Zeitlin/Ratcliff Chilean kinship-network argument of
Landlords and Capitalists (albeit with a positive spin), Lamoreaux argues that “Early banks in New England functioned not as commercial banks in the modern sense but as the financial arms of extended kinship networks.” (647)

“Scholars who have explored the relationship between banks and economic development have assessed the banking system in terms of what theoretically are its two major functions: to provide an adequate money supply and to serve as an intermediary between savers and investors.” I’d add one more function, which I think was behind Rockoff’s approach: as an intermediary to safeguard and insulate urban investors’ wealth (money stock) from direct contact with rural entrepreneur/borrowers (money flow). But I completely buy her argument that it’s the personal connections and kinship groups that are key here.

In 1800 there were 17 state-chartered banks in New England, with capital totaling $5.50 million. By 1850, this number had increased to 300, and the capital available for loan to $62.87 million. Ten years later, 505 New England banks controlled $123.56 million. (chart, 651) Capital during this period came to banks not primarily through deposits, but through investment, as first the founders and later a wider range of local people bought shares. Lamoreaux disagrees with Rockoff: even if initial capital “was largely fictitous...deposited only to satisfy legal requirements and then immediately withdrawn in the form of loans...sales of new shares to outsiders gradually transformed capital stock to a legitimate source of funds. (653-4) This may be true, but does it avoid the point that by getting in cheaply and then controlling subsequent paid-in capital, bank owners gained an incredible degree of economic power?

In the long run, institutional investors like insurance companies, savings associations, and trustees of large estates contributed the majority of bank capital. In many cases, these institutions were part of the same kin networks that initially owned, and continued to run the banks. “Members of kinship groups generally held large blocks of their banks’ stock at the time of formation.” (655) The percentage of bank stock held by the initial owners tended to decrease as the banks grew, but “the groups often retained their dominant positions on the banks’ boards of directors...because other stockholders rarely took an interest in the institutions’ affairs.” (655-6) And these same “kinship groups...often dominated the boards of the institutional investors that purchased their banks’ stock.” (657)

The role of these banks (despite the public-service rhetoric they employed to get their corporate charters during the early period, when incorporation implied quasi-governmental public status) was to “become engines to supply insiders with capital.” (657) “Even a prudent businessman,” Lamoreaux says, “might find himself in financial difficulty.” (658) The panic of 1837 and depression of 1839 had certainly proven that point. An emergency might force him to “convert illiquid assets into cash to pay off debts.” A friendly bank could “prevent distress sales of assets by accepting notes to balance accounts.” (659) After spending so much of his time in New York City, observing this process, is it any surprise that my upstate merchant started his own bank? Especially since, in the words of the 1854
Bankers Magazine, “where business is constantly and rapidly expanding, the younger class of business men who are entitled to bank facilities, equally with their older brethren, cannot have their wants fairly supplied without the occasional establishment of new banks. The old circle of customers use the existing banks to the extent of their capacity, and keep their door shut against the new men.” (663)

This raises questions that were apparently understood by bankers in the 1850s. Lamoreaux answers that “although the system of group-dominated banking doubtless resulted in some degree of favoritism in credit markets, the situation was remarkably fluid. Up-and-coming groups were able to build financial empires that rivaled those of the oldest, most established merchant families in the region.” (664) But even with no barriers to entry, is this what we’d call a “credit market?”

One thing that does seem certain, though, is that these banks facilitated a particular type of economic development. “Could kinship groups have tapped the community’s savings without their aid?” Lamoreaux asks. “The market for securities of manufacturing corporations in early nineteenth-century New England was extremely narrow,” she says. Even the Boston Associates failed to raise enough capital, and were forced to borrow. “The market for bank securities was much wider...because the diversified enterprises of the kinship groups permitted them to pay high and steady dividends and thereby draw out the community’s savings in a way that most individual ventures could never have done.” (665) “Without banks,” she concludes, “kinship groups would have been forced to depend largely on their own resources to finance investment.” (666)

Even if New England’s financial system allowed relatively free entry into banking, and banks allowed a slightly wider public to participate in a diversified portfolio of investments that would otherwise have been restricted to the very rich,
was the concentration of economic activity in the hands of these “kinship groups” a good thing? Lamoreaux mentions in the first few pages of her article that lawsuits across New England challenged the “insider” ways in which these chartered corporations behaved. Even banking commissioners admitted “an almost uniform departure from the original design of banks in this respect.” (651) Although it involves counterhistorical speculation, it might be useful to ask what alternatives there may have been to simply accepting the inevitability that “kinship groups” should gain access to the “community’s savings” to finance business ventures for their individual benefit. To what degree is this a free choice, made by empowered individuals (investors and later depositors) acting in their own best interests, and to what degree is the public’s range of choices limited by laws and social conventions that allow incorporation, interlocking control, and that regulate the terms and conditions of credit? (along these lines, do usury laws actually benefit established banks, by lowering the incentive for individuals to loan money to each other at higher -- risk-appropriate -- rates of interest?)

Merchants and Manufacturers

Glenn Porter and Harold C. Livesay
Merchants and Manufacturers: Studies in the Changing Structure of Nineteenth-Century Marketing

Their thesis is that “Changes in distribution played at least as important a role in the story of our economic past as did changes in production.” (1) No one who’s studied the history of transportation would think this point needed to be made again -- but apparently the shelves of business historians are “groaning with the weight of volumes dealing with...manufactured goods.”

This is interesting, although of limited use to me, because they specifically exclude ag. products from their study. Even so, their finding that “the all-purpose merchant...was the key man in the American economy in 1815...the channel through which agricultural products flowed to market, and he supplied manufactured goods and imported raw materials to city craftsmen and country storekeepers.” (15-16) And, for my purposes, he supplied country manufactures to the urban and international markets.

They briefly mention drug jobbers, who “depended on extensive trade with the interior to provide a wide market area with a sufficient volume of trade to insure success.” (29) These jobbers began as general merchants, in Porter and Livesay’s model, and then specialized in response to increasing volumes and competitive pressures. The jobber “had to maintain a large inventory of goods...[and] be prepared to ship goods in small lots on short notice” and extend credit to their rural retailers. “Storekeepers...relied on their suppliers to act as bankers and urban agents for them.” (29) And, because the majority of drugs initially came from England, drug jobbers usually had extensive foreign connections.

Porter and Livesay say merchants were much more successful than manufacturers in obtaining bank credit in the early nineteenth century, because “merchants usually
were the banks. An analysis of the directors and officers of the banks of New York, Philadelphia, and Baltimore in 1840, 1850, and 1860 reveals that more than two-thirds of the officials were or had been merchants.” (72) This was probably even more the rule in smaller communities, where merchants would have been the main investors as well as the main customers of local banks.

The merchant’s value as a financial expert declined during and after the Civil War,” the authors say. The proliferation of greenbacks allowed a “switch from credit to cash [that] virtually eliminated the merchant’s role as credit consultant and guarantor of payment.” (129) “The financing of transactions became the province of specialized agencies that evolved from private banks and brokerage houses...In 1850 it would have been difficult to find a producer not dependent on his distributors for capital; sixty years later one declared, ‘the manufacturer who needs the jobber as a commercial banker is a weak manufacturer.’” (129-30)
I think the point they miss, is that there wasn’t a hard border between manufacturing and merchandizing. Like the brothers whose papers I’ve been reading, many of these early manufacturers were also merchants...and bankers.

Bankruptcy made the middle class?

Edward J. Balleisen
Navigating Failure: Bankruptcy and Commercial Society in Antebellum America

Balleisen focuses on the 1841 Bankruptcy Law, “partly because it coincided with and emanated from powerful transformations in the scope and character of American capitalism.” (4) He agrees with Bushman and Lamoreaux that commercial acitivity was more universal and widespread than some of the “market revolution” historians would grant, but concedes that “financial panics, like the ones in 1837 and 1839 that precipitated tens of thousands of commercial insolvencies” not only “unleashed an upsurge of political support for a comprehensive federal bankruptcy system,” but also helped push some members of the growing middle class away from an ethic of entrepreneurial risk-taking and self-reliance, toward a desire for financial security in salaried employment. (5)

“To a great extent,” Balleisen says, “the relationship between failing antebellum proprietors and their creditors resembled a game of cat and mouse.” (84) Since anyone could fail, maybe we could extend the group -- especially in light of the fact that only recently had a transition been made from an older system of credit between family members, neighbors, and friends, to an impersonal credit market. Naturally, “Debtors sought to hide their true circumstances from the holders of claims against them,...[and] creditors...did their best to pounce on whatever assets the debtors possessed.” (84-5) This seems especially apparent in the case of the rural merchants I’m studying, who seem to have credit relationships both in the family/community and outside it. It might be interesting to see if they behave differently, depending on the creditor’s status in their local network. It might also be interesting to look at the way these relationships change over time. These guys, after all, were creditors as well as debtors.

“In addition to resuscitating the entrepreneurial exertions of myriad antebellum bankrupts and fostering considerable social flux,” Balleisin says “general releases from debt contributed to the mutability and dynamism of the nineteenth-century economy. Along with the culture of privately negotiated compromises, antebellum bankruptcy discharges increased the pool of entrepreneurs who actively sought to make their fortune by extending the reach of commercial exchange, inventing new products, or developing new marketing techniques.” (198) In other words, the ability to get out from under a failed business encouraged people to experiment and overextend, to reach for the brass ring of personal enrichment because the price of failure had been reduced. It encouraged entrepreneurs who took risks, which means it penalized prudent, conservative, old-fashioned, and especially cash-based businessmen. It allowed a small group of unusually aggressive players to keep trying until they won (whether by learning from their failures or simply by finally getting lucky), while it pushed their wiser, more prudent competitors to the sidelines. Balleisen doesn’t dwell on this, but it’s the dark side of the “perpetual search for profitable innovation that constitutes a defining characteristic of modern capitalism.” (198)

For some failed entrepreneurs, though, Balleisen says “encounters with insolvency led them away from business ownership altogether.” There was “a substantial class of bankrupts who either could not resume independent business careers [even as artisans] or chose not to accept the risks associated with doing so...Many of these individuals walked away from the scenes of ongoing financial wreckage, seeking a different and less hazardous means of securing a living...Their efforts link the experience of antebellum bankruptcy to the rise of a salaried urban middle class.” (201) The result, Balleisen says, was a “burgeoning class of clerks, bookkeepers, and agents [who] could not only take consolation in their enjoyment of relative economic stability but also lay claim to a version of republican independence--one in which the most fundamental ‘autonomy’ rested not on the responsibilities of self-employment, but on freedom from both the most severe forms of subservience and the degrading precariousness of irretrievable indebtedness.” (219) “Despite the substantial contrast between these responses to personal legacies of insolvency,” he says, “they worked together to help usher in a new economic order structured around large, bureaucratic corporations, rather than small-scale producers and purveyors of goods and services. In part, post-bellum America’s world of trusts and tycoons rested on a foundation of pervasive individual failure.” (227) One way of looking at this would be to say, “well, alright. They lost their nerve and handed over the reins to their economic ‘betters’ in return for security. In return, they got to live quiet lives as modern consumers in the suburbs.” Another perspective, though, might be that changes in the legal system allowed bad money (and behavior) to drive out good, specifically because the bad actors were absolved of their responsibility when they failed. The risks were socialized, the rewards privatized. And 170 years later, here we are...


Bushman, “Markets and Composite Farms”
Lamoreaux, “Accounting for Capitalism”
Protestant Ethic, 58-75
Capitalism, Socialism, and Democracy, 81-6
E.M. Gibson, “Going into Business,” 1855
Asa Greene, Perils of Pearl Street, 1834