The final decades of the 19th century in the United States, from 1873 to the turn of the century, reveal a nation grappling with the immense consequences of its rapid industrialization and westward expansion. It was a period marked by significant shifts in financial structures, persistent economic cycles of boom and bust, and a sharpening of social and class tensions, even as powerful interests began laying the groundwork for a more centralized economic future. To truly understand this era, we must look beyond the surface of what was presented as inevitable progress and examine the underlying forces at play.
By 1873, the total number of state banks increased to 1,330, with deposits totaling $789 million. This growth was a testament to the state banks’ resurgence after initially contracting under the shock of the National Banking Acts. Although the National Banking System of 1863-65 had aimed to monopolize banknote issuance in federally chartered “national banks” by placing a prohibitive 10% tax on state banknotes in 1865, state banks found a way to flourish again by keeping deposit accounts at national banks. This allowed them to become a “fourth layer of the national pyramid of money and credit”, subordinating themselves to the national banks but still expanding significantly as deposit-creating institutions. This layered system contributed to the overall pyramiding of bank money, laying the groundwork for potential instability.
The National Banking Acts of 1863-64 stipulated that national banks were “compelled by law to accept each other’s notes and demand deposits at par”, effectively creating a controlled, centralized system for banknote issue. The expansion of banknotes and deposits was directly tied to the amount of state government securities the bank had invested in and posted as bond with the state, meaning “the more public debt the banks purchased, the more they could create and lend out new money”. This effectively “monetized the public debt”.
The period from 1873 to 1896 was a global period of falling prices (deflation), attributed by some to the spread of the gold standard, but actually due to the Industrial Revolution and increased productivity. Orthodox economic historians often perpetuated the “myth” of a “great depression” during the 1870s due to falling prices and alleged monetary contraction. However, the truth, as revealed by economic data, points to an “extraordinarily large expansion of industry, of railroads, of physical output, of net national product, of real per capita income”. From 1869 to 1879, real national product grew at 6.8% per year, and real product per capita rose at a phenomenal 4.5% per year. Even the supposed “monetary contraction” was a myth; the money supply actually increased by 2.7% per year during this time. This “prosperity” existed because costs were falling alongside prices, preventing a squeeze on profits. The falling prices were a natural consequence of the Industrial Revolution and the “phenomenal advance of productivity”, which meant an “increase of production and economic growth so great as to swamp the increase of money supply”. This demonstrates that falling prices do not inherently equate to economic depression, a common modern misconception. The pattern continued from 1879 to 1896, with “phenomenal expansion of American industry production and real output per head”, even though prices continued to fall by over 1% per year.
Despite this underlying economic growth, the era was punctuated by significant social and labor unrest, fueled by the inherent instability of the financial system and the widening gap between rich and poor. The period after the Civil War was characterized by “a series of expansions and contractions of the money supply leading directly to economic booms and busts”. The panics of 1873, 1884, 1893, and 1907 were “in large part an outgrowth of reserve pyramiding and excessive deposit creation”. For working people, these economic downturns meant immense hardship. The panic of 1873, for instance, which was triggered by the bankruptcy of Jay Cooke’s House of Cooke, led to numerous bankruptcies and a leveling off of the money supply. The period’s “chaotic” development, driven by the profit motive, led to “recurrent booms and slumps”.
The concentration of wealth and power was undeniable. While the “rags to riches” narratives of Horatio Alger were popular, a study of executives in the 1870s showed that “90 percent came from middle- or upper-class families”. Much of this fortune building occurred “legally, with the collaboration of the government and the courts”. Railroads, in particular, benefited from massive government subsidies, receiving “25 million acres of public land, free of charge, and millions of dollars in bonds” between 1850 and 1857. Corruption was systematic, with railroad men using “money, shares of stock, free railroad passes” to influence legislation. The Credit Mobilier scandal of the 1870s, involving the Union Pacific Railroad, was a “giant sinkhole of fraud and corruption”, with shares sold cheaply to Congressmen “to prevent investigation”. J.P. Morgan, who would later dominate financial markets, even profited from selling defective rifles to the army during the Civil War, a deal upheld by a federal judge as a “valid legal contract”.
Against this backdrop of concentrated wealth and financial volatility, labor struggles intensified. The year 1877 saw “mass unrest” across Maryland, Pennsylvania, Illinois, and Missouri in response to railroad wage cuts, with striking workers from multiple industries protesting. This period also witnessed a significant increase in the use of strikebreakers, often recent immigrants “desperate for work, different from the strikers in language and culture”. This exploitation led to bitter feelings and fragmentation within the working class. The “Flour Riot of 1837,” which saw 50,000 people (one-third of New York City’s working class) without work, and 200,000 living in “utter and hopeless distress” due to economic crisis, serves as a pre-Civil War example of such unrest.
This period saw farmers, both black and white, engaging in agrarian rebellion. The crop-lien system in the South forced farmers into debt, leading to “little more than a modified form of slavery”. The Farmers Alliance, starting in Texas, sought to counter this by forming cooperatives and advocating for monetary reform, such as the “sub-Treasury plan”. This sentiment of unity, though perhaps not universally held, reflected a potential for shared struggle against common economic oppressors. The Populist movement, which grew out of the Farmers Alliance, aimed to challenge corporate power and advocated for changes like greater currency circulation.
The 1890s in the U.S. saw big business interests try to establish high prices and reduce production via mergers, which generally collapsed due to new competition. This was part of a larger trend in which powerful financial houses like J.P. Morgan & Company “tried desperately to establish successful cartels on the free market”. Their efforts in railroads and industrial corporations during the late 19th century repeatedly failed “from internal competition within the cartel and from external competition by new competitors eager to undercut the cartel”. This reality made it clear to these business interests that “the only way to establish a cartelized economy” and ensure their dominance would be “to use the powers of government to establish and maintain cartels by coercion”. This intellectual shift involved redefining “monopoly” from government-granted privilege to “big business or business competitive practices” like price cutting, thereby allowing regulatory commissions to “subsidize, restrict, and cartelize in the name of ‘opposing monopoly'”.
This desire for controlled stability and cartelization led to a significant movement for monetary reform. In January 1907, Paul Morates Warberg (Warburg) immigrated from Germany and began agitating for European central banking in the U.S. Warburg, from the firm of Kuhn, Loeb, and Company, quickly became a leading voice for a central bank, emphasizing the superiority of European banking models over the decentralized American system. He argued that the U.S. financial system was too “isolated” and lacked the “centralization of financial responsibility” needed to manage the economy effectively. He specifically criticized the “inelasticity” of the money supply, arguing that banks were unable to expand money and credit sufficiently, especially during recessions.
To overcome public suspicion of “Wall Street and banker control”, the movement for a central bank sought to present itself as a “broad-based grassroots movement”. This strategy was exemplified by the Indianapolis Monetary Convention. In August 1897, the executive committee of the Indianapolis Monetary Convention selected members for its own monetary commission, with George Foster Peabody playing a leading role. This commission, though presented as a “spontaneous grassroots outpouring of small Midwestern businessmen”, was, in truth, an effort to “mobilize the nation’s leading businessmen into a mighty and influential reform movement”. George Foster Peabody, an “eminent New York investment banker” with ties to the Morgan interests, served as the crucial “liaison between the Indianapolis members and the New York financial community”. This “intellectual shell game” was designed to secure public consent for a system that would ultimately benefit big financial interests by imposing “a cooperative commonwealth for the alleged benefit of all”. The commission, heavily influenced by academics and economists, advocated for a broadened asset base for national banknotes and, explicitly, for a central bank with a monopoly on banknote issuance. Key figures like Lyman Gage, a Rockefeller ally and then Secretary of the Treasury, worked closely with this movement, even attempting to operate the Treasury as a central bank by “pumping in money during recessions”.
The drive for central banking was a bipartisan “progressive” movement that aimed to transform the American economy from one of “roughly lazair to one of centralized statism”. It was an attempt by “big business interests” to achieve by “coercion” what they could not achieve by market competition: “to establish and maintain cartels”. The objective was to ensure their “continued economic dominance and high profits”. The Gold Standard Act of 1900, while seemingly just about gold, was actually the “opening gun” for more fundamental banking reform, making it easier for national banks to issue notes and operate in smaller towns, thereby expanding bank credit. This legislative care was seen by reformers as insufficient, leading to continued calls for a “further remodeling of the national bank system” to allow for “more and greater expansion of bank credits and the supply of money”.
In summation, the period from 1873 to the end of the 19th century was characterized by a sophisticated interplay of economic forces and political maneuvering. While the nation experienced unprecedented real economic growth and declining prices due to industrial advancements, the inherent instability of the financial system led to recurring panics and widespread social discontent. Attempts by big business to control markets through mergers were often thwarted by competition, pushing them toward a new strategy: using government power to cartelize and centralize the economy. This quest for control found its expression in the growing movement for central banking, a movement carefully orchestrated to appear as a public good, even as it sought to consolidate the power of the financial elite and reshape the very nature of American capitalism.