The period between 1800 and 1863 in the United States was a time of dynamic economic transformation, marked by significant strides in financial infrastructure, a complex evolution of income distribution, and burgeoning efforts to address the pervasive issue of corruption. It was an era where the young republic grappled with the implications of rapid growth and sought to forge a stable, yet prosperous, society.
To begin our exploration, let us consider the economic landscape at the turn of the century. In **1800, the U.S. is likely more egalitarian in income distribution than in 1774, with declining urban-rural income gaps and skill premiums**. This is a crucial observation, suggesting a momentary shift toward greater equality after the Revolutionary War. While the new nation had suffered a substantial economic setback, with real per capita income dropping by an estimated 20% between 1774 and 1800 due to war damage, mortality, the collapse of foreign markets, hyperinflation, and a dysfunctional financial system, this hardship also resulted in a more egalitarian distribution of earnings. Specifically, the income gap between the richer urban coastal regions and the poorer rural hinterland narrowed, and there was a documented decline in the skill premium within urban areas. The richer South also lost much of its per capita income lead over the North. These forces collectively led to a more equal distribution of earnings in 1800 than in 1774. This initial egalitarianism, however, would be challenged by the very forces driving the nation’s “modern economic growth” in the coming decades.
The early 19th century witnessed the rapid development of America’s financial system. After the demise of the Bank of North America experiment, a new central bank, the First Bank of the United States, was established in 1791 as a “lynchpin of the Hamiltonian financial program”. This privately owned institution, with the government holding one-fifth of the shares, was intended to overcome the “scarcity of specie currency” by issuing paper money, and its notes were accepted by the federal government in taxes. Its establishment, however, “precipitated a grave constitutional argument,” with Jeffersonians arguing against its legality. Despite their hostility, the number of state banks escalated dramatically, from 28 in 1800 to 117 by 1811. The First Bank of the United States itself engaged in “massive temporary lending to the government,” leading to an inflationary rise in prices, and its expansion spurred the creation of 18 new commercial banks in just five years. The recharter of this bank was narrowly defeated in 1811, partly due to opposition from “hard money old Republican forces”.
The period immediately following the War of 1812 brought “chaotic monetary state with banks multiplying and inflating ad lib”. This “almost universal fraud within the banking industry” led to the establishment of the Second Bank of the United States in 1816, modeled closely after the first. Despite its intention to create a national paper currency, this bank, a private corporation with the federal government owning one-fifth of its shares, “launched a spectacular inflation of money and credit” from its inception. Outright fraud was “abounded at the Second Bank of the United States, especially at the Philadelphia and Baltimore branches”. This “huge expansion of money and credit” impelled a “full-scale inflationary boom throughout the country”. President Andrew Jackson, triumphantly re-elected in 1832 on an “anti-bank platform,” moved to disestablish the Second Bank of the United States as a central bank in 1833 by removing public treasury deposits and placing them in state banks, known as “pet banks”. This action, contrary to conventional historical belief, did not unleash wild inflation from state banks, as their reserve ratios remained consistent with prior levels. The Bank of the United States, however, continued to play a role in generating recessions and monetary crises, finally closing its doors in 1841 after engaging in cotton speculation and again suspending payments.
The period also saw initial, yet significant, steps toward addressing corruption and the undue influence of private interests. In the **1850s, important reforms addressed private influence on policymaking at the state level**. Much state legislative activity in the early 19th century consisted of passing “private bills to benefit specific people, firms, or groups,” rather than general laws. These special charters for corporations were seen as a source of “systematic corruption”. The “widespread adoption of general incorporation acts in the 1840s liberalized access to corporate charters”, allowing for “unlimited entry into corporate status via an administrative procedure”. This constitutional shift was explicitly designed to “cut away the roots of systematic corruption, by limiting the government’s ability to create economic rents through limiting entry and granting special economic privileges”. States also began requiring “bond referendums for borrowing and forbidding state and local investment in private corporations to prevent the classic case of systematic corruption”.
At the federal level, in 1853, the U.S. Congress adopted new rules to prevent members of Congress from acting as agents for private claimants, in response to worries about lobbyists. This first federal statute explicitly prohibiting bribery of Members of Congress was strengthened in 1862 due to “concerns over war profiteering,” though it was not very effective in securing convictions before the 20th century.
The country’s economic growth continued rapidly from 1800 to 1860, with American per capita incomes growing much faster than in Western Europe, reclaiming its income per capita lead over Britain by 1860. This period, however, also saw America’s “first great rise in inequality,” matching the widening income gaps seen since the 1970s. Income gaps widened “throughout the whole income spectrum,” including urban-rural income gaps, skill premiums, and earnings inequality. The “hollowing out” of the middle class began, as manufacturing technology replaced skilled artisans with less-skilled, lower-paid factory operatives. The “financial boom” of the era, marked by a significant increase in the number and capital of state-chartered banks, also contributed to rising inequality, disproportionately benefiting those holding financial wealth and skills.
As the Civil War loomed, the financial landscape shifted dramatically. 1863 saw the passage of the National Banking Act, tying national banks’ note expansion to their purchase of U.S. government bonds. This act, along with subsequent legislation in 1864 and 1865, “destroyed the previously decentralized and fairly successful state banking system” and replaced it with a “new centralized and far more inflationary banking system”. It monopolized the issue of banknotes in the hands of a few large federally chartered “national banks”. These national banks were “compelled by law to accept each other’s notes and demand deposits at par,” overriding the free market’s previous practice of discounting notes from shaky banks. This system created an “inverted pyramid of country banks expanding on top of reserve city banks which in turn expanded on top of New York City banks,” all built on a base of reserves that could include “inflated greenbacks as well as specie”. This effectively monetized the public debt, as the more government bonds banks purchased, the more new money they could create and lend. This move was greatly influenced by individuals like Jay Cooke, who would become the monopoly underwriter of U.S. government bonds from 1862 to 1873, except for one year. Cooke, a millionaire who had garnered immense political influence through his connections, played a major role in driving the National Banking Act through a reluctant Congress, using his advertising influence with newspapers to generate propaganda for the new system.
The period’s changes were not without their challenges, from the very real presence of many rats in Philadelphia in 1776, to the observation of rats appearing in San Francisco 10 years after the Gold Rush (1859). This seemingly minor detail is a stark reminder of the environmental and public health challenges that accompanied rapid urban and economic expansion, underscoring that even as the nation ascended economically, basic quality of life issues persisted and, in some cases, deteriorated.
In conclusion, the years between 1800 and 1863 were foundational for the United States, witnessing its emergence as a major economic power. The period began with a relatively egalitarian income distribution following the Revolutionary War’s upheaval, but quickly moved towards increasing inequality driven by rapid industrialization, urbanization, and a burgeoning, yet volatile, financial sector. Early attempts to curb corruption laid the groundwork for future reforms, even as new forms of systemic influence, exemplified by the national banking system’s link to government debt, took hold. This era set the stage for the profound economic and social transformations of the latter half of the 19th century.