#82 The National Bank Act & Industrialization (The End of Laissez-Faire part 5)

Read Part 4 of this Series

Author’s note:

This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.

The National Bank Act
Jay Cooke is later instrumental in pushing forward the National Banking Act. Cooke’s investment banking firm receives from the Treasury Department a sole monopoly on underwriting federal government bonds (a huge amount of which were used to pay for the war effort), this monopoly on government bond issue lasted until the 1870s.

These are the ways in which politics and business connect. Cooke pours money into Chase’s political career. Chase becomes secretary of treasury and grants Cooke a banking monopoly.

Cooke was a master of public relations (a novel concept for the time). He hired an army of propagandists pushing government bonds on consumers as wonderful patriotic investment opportunities, for which he profited immensely.

Cooke was a driving force in the push to outlaw state bank notes. The National Banking Act was passed in 1863 & 64, granting a monopoly to “national banks” on the issuance of physical bank notes. Prior to this, any bank could issue paper money payable in specie upon demand. Under this system no bank dared expand their paper money supply much beyond that of their specie reserves for fear of being liquidated. There was very little monetary inflation under this system because it kept itself in check.

Every bank was chartered by the state prior to the National Bank Act, however, National banks under the new regulations had to be chartered by the Federal government. Originally there were a large number of small state banks spread out across the country, however national banks were required to be very large and were concentrated mostly in Wall Street. These powerful North Eastern banks were afforded the ability to pyramid their banking operations on top of the US monetary system and government bonds.

Government debt as collateral allowed these banks the special monopoly privilege of expanding their own money and credit by holding government debt. For every ~$1000 of government debt they held, they could increase their own institutional money and credit by as much as ~$5000.

The state banks then pyramided on top of this national bank system, however they could no longer issue their own paper money certificates as they had previously. It is important to note, that from the time the National Bank Act was passed during the civil war and onwards, expansion private sector money and credit was directly linked with the expansion of Federal Government debt.

All of the member national banks had to buy their government bonds from the one sole underwriter of government debt…that man was Jay Cooke, and that privilege was one he carefully orchestrated for himself through successful political lobbying.  You can see how this was likely an exorbitantly profitable position for him to find himself.

But Cooke did not stop there, in addition to Cooke & Company’s monopoly on underwriting government debt, Cooke also owned and operated several National banks under this system as well. Following the end of the Civil War, Cooke emerged as the top investment banker (richest) in the United States. He was a devout Republican and took great pride in the Republican administration.

There is a long held (and incorrect) view that the Civil War was responsible for the launch of industrialization in the United States, this is historically inaccurate. Bad economists like to give credit for innovations of the private market & capital accumulation to windows broken by government, however, the Civil War greatly retarded the growth of industrialization.

There is little time and extra capital, in war, to devote to improving technology. Industrialization in the US truly began in the 1850s around the same time as the railroad boom began. Iron & cotton textile manufacturing increased by 2/3rds over this decade and interchangeable parts began to make their way to market.

Prior to the 1850s, machines were maintained by craftsmen who custom fitted and built parts and pieces as required. Machine made interchangeable parts significantly reduced the lifetime input costs of capital goods and made the majority of goods far cheaper and more efficient to produce. However, mass production did not truly emerge until the 1910s & 1920s and was perfected by the automobile pioneer Henry Ford.

Most notably these parts were emerging in the arms and armament market, however, these innovations occurred prior to the civil war and no new innovations occurred during the war. In fact, the development of Bessemer steel (which already already surpassed the US in England at the time) was delayed until after the war ended due to the lack of time and capital for retooling for steel making operations. Prior to the emergence of Bessemer steel, the majority of metalworking was done with iron.

Productivity began to fall throughout the civil war, as capital goods tend to break down during wartime and the opportunities to replace and maintain them is often delayed until the war is over.

Value Added by Manufacturing (national income added by manufacturing in Dollars)
1849 to 1859 – 76% increase
1859 to 1869 – 25% increase [civil war]
1869 to 1879 – 82% increase

Pig Iron Production (approximately 50% used in rail road production)
1850 to 1860 – 20% increase
1860 to 1865 – 1% increase [civil war]
1865 to 1870 – 100% increase
1870 to 1880 – 130% increase

Raw Cotton Consumed in Manufacturing
1850 to 1860 – 47% increase
1860 to 1870 – 6% decrease [civil war]
1870 to 1880 – 48% increase

These same trends (a retarding effect on production during the war) can be observed across the majority of important economic metrics of this time period. Such as farm machine production, construction, and various other indexes of business activity.

Read Part 6 of this Series