Crony Capitalism in the Postbellum Economy

 

Crony Capitalism in the Postbellum Economy

            Charles Koch said that “Good profit can only result from creating value for the consumer. It is the manifestation of the entrepreneur’s respect for what the customer values.”[1] The postbellum economy of the United States existed between 1865-1900 and was volatile in the northern and southern regions. It was a time of great violence, uproar, contraction, rapid expansion, technology, robber barons, and corruption. These events created mixed value for the consumers in U.S. society, depending upon where they resided. While my future research focuses on the Soviet Union’s influence on Koch Industries, this piece focuses on two competing regions of the United States in the second half of the 19th century. Both regions experienced differing challenges as the south rebuilt their economy while northern economies contracted and expanded rapidly. It is necessary to understand this growth through their real wages and National Net Product. The NNP is useful in understanding the value of all products produced in the United States; this was a period of many innovative products; thus, it is worth noting. Finally, wages should be measured as they represent the living conditions of differing social classes.

             Dr. Deirdre McCloskey posits that the economic growth marked by the increase in real wages during the 19^th century comes from innovation. It is about creating cheaper ways to help people.[2] However, some of these innovations did not necessarily impact either the north or south in any significant way. Ulysses S. Grant and William T. Sherman both took advantage of the rail networks in 1864, but it was hardly sufficient for economic growth in the second half of the 19th century. Railroads on the percentage of distribution were minimal. The railroads accounted for less than 3% of change. Illinois, Iowa, Nebraska, and Kansas lost 75% of its land value, and there is a direct loss of arable land due to the absence of railroads is 1.8% of the Gross National Product.[3]

            Despite the Midwest's economic woes, the Northeast saw an explosion of new manufacturing processes such as the Bessemer Process. This new blast-furnace innovation led to Pittsburgh building one of the largest steel mills in the country.[4] It was these innovations that led to such high production in the Northeast economy. President Ulysses Grant also introduced tariffs that supported this new industrial economy in the north at the expense of the southern economy.[5] No matter how cronyism that took place in this new economy, it was capitalism nonetheless. 

            Improvement in the economy does not necessarily have to be measured by the Gross Domestic Product, but by living standards or by an increase in wages. Some newly freed slaves had the opportunity to exploit these new wages. Due to radical reconstruction policies, some newly freed were able to receive an education. Others became a part of the black bourgeoise.[6] Therefore, wages increased in this period. Unfortunately, many slaves faced discrimination and violence during the period of Reconstruction. Many did not find economic prosperity as exploitation was rampant in the new south through the sharecropper system. Before the Civil War, the south was dependent upon the slave plantation system. There was a need to fill that gap after the war by having integrated into the sharecropping system.[7] Many newly freed slaves did not find the same economic opportunity as their white counterparts, but possibilities were beginning to emerge, such as education and voting rights (no matter how suppressed). Arguably, the newly freed slaves may have been the most innovative in finding new ways to create wealth for themselves during the Gilded Age.

The New South was desperate to find new ways to improve upon its economy. Most of their infrastructure was ripped apart during the sanguine year of 1864 as Grant, Sherman, and Philip H. Sheridan tore up railways and destroyed manufacturing centers. However, cotton prices fell during the Panic of 1873, so an influx of people began moving to the cities to find work. Southern city centers could rebuild these manufacturing centers paving the way for a golden future.[8] Unfortunately, many southern states failed to exploit these new innovative business models as all too many still depended upon cotton. It is difficult to change business models and production, especially when there is high demand. The graph above presents the import of cotton from the U.S. economy, primarily from the southern American economy.[9] It is clear from this graph that the south did depend on that one product; however, they most likely did not think to diversify their economy in this period. It was too dependent upon cotton and the slave economy. When that system vanished, there was not another to fill it immediately.

Both the northern and southern economies struggled with new challenges after the Civil War. Nonetheless, the U.S. economy rose at one of its fastest rates in history, with real wages, wealth, and GDP all increasing rapidly.[10] President Ulysses Grant, rightfully blamed for corruption in his administration, did find some success during his presidency. From 1869 to 1879, the National Net Product grew at a rate of 6.8%.[11] Trains were not necessarily beneficial to the Midwest; robber barons found ways to exploit different people groups. Tariffs hurt the southern economy, and their old masters exploited slaves. Cronyism was apparent in 19th century America, but this development influenced later business leaders that sought to improve their workers' value. Many great entrepreneurs today find that creating value for their workers has a positive outcome on production.

Bibliography

Brown, Thomas J. Reconstructions New Perspectives on the Postbellum United States. Oxford: Oxford University Press, 2006.

Calhoun, Charles W. The Presidency of Ulysses S. Grant. Lawrence: University Press of Kansas, 2017.

Kaza, Greg. "ANDREW CARNEGIE: AN ECONOMIC BIOGRAPHY." Quarterly Journal of Austrian Economics 19, no. 3 (2016): 302-306.

Kirkland, Edward C. Industry Comes of Age; Business, Labor and Public Policy, 1860- 1897. Chicago: Quadrangle Books, 1967.

Koch, Charles. Good Profit. New York: Crown Business, 2015.

Lance, Davis. Review of “Railroads and American Economic Growth: Essays in Econometric History.” By Robert Fogel. Economic History Association (2003). https://eh.net/book_reviews/railroads-and-american-economic-growth-essays-in-econometric-history/.

McCloskey, Deirdre. “What Caused the Economic Boom of Wealth?” 2020. 3:18. https://canvas.liberty.edu/courses/48885/pages/watch-what-caused-the-economic-boom-of-wealth?module_item_id=5099764.

Reidy, Joseph P. From Slavery to Agrarian Capitalism in the Cotton Plantation South: Central Georgia, 1800-1880. Chapel Hill: University of North Carolina Press, 1992.

Riello, Giorgio. Cotton: The Fabric that Made the Modern World. New York: Cambridge University Press, 2013. 

U.S. Bureau of the Census. Historical Statistics of the United States. Series F1–F5, 1976.

 

 

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[1] Charles Koch, Good Profit, (New York: Crown Business, 2015), 244.

[2] Deirdre McCloskey, “What Caused the Economic Boom of Wealth?,” 2020, 3:18, https://canvas.liberty.edu/courses/48885/pages/watch-what-caused-the-economic-boom-of-wealth?module_item_id=5099764.

[3] Davis Lance. Review of “Railroads and American Economic Growth: Essays in Econometric History,” by Robert Fogel, Economic History Association (2003), https://eh.net/book_reviews/railroads-and-american-economic-growth-essays-in-econometric-history/.

[4] Greg Kaza, "ANDREW CARNEGIE: AN ECONOMIC BIOGRAPHY," Quarterly Journal of Austrian Economics 19, no. 3 (2016): 303.

[5] Charles W. Calhoun, The Presidency of Ulysses S. Grant, (Lawrence: University Press of Kansas, 2017), 482.

[6] Joseph P. Reidy, From Slavery to Agrarian Capitalism in the Cotton Plantation South: Central Georgia, 1800-1880, (Chapel Hill: University of North Carolina Press, 1992), 214.

[7] Thomas J. Brown, Reconstructions New Perspectives on the Postbellum United States, (Oxford: Oxford University Press, 2006), 12.

[8] Joseph P. Reidy, From Slavery to Agrarian Capitalism in the Cotton Plantation South: Central Georgia, 1800-1880, 215.

[9] Giorgio Reillo, Cotton: The Fabric that Made the Modern World, (New York: Cambridge University Press, 2013), 257.

[10] Edward C. Kirkland, Industry Comes of Age; Business, Labor and Public Policy, 1860- 1897, (Chicago: Quadrangle Books, 1967), 401.

[11] U.S. Bureau of the Census, Historical Statistics of the United States, Series F1–F5, 1976.