In the decade after the Civil War, there burgeoned a robust economic expansion which raised America's economy to become the most powerful one in the world, an expansion effected by cultural, economic, and technological transformations, due in no small part to the inventive genius of Thomas Edison. With electricity and the steam engine, production on a massive scale was able to occur. The Bessemer process, a way of making steel from pig iron by burning out carbon and other impurities, also contributed greatly to industrial progress. In the South in places where General Sherman had been unsuccessful in his burning program, cotton production and shipments were again lucrative, and the expansion of the railway system linked the new areas of the West with the rest of the United States, then allowing for shipment of many products. Further, with this growth of industry, many people migrated to the cities in order to find work. The development of an infrastructure was met with enthusiasm by urban administrations as there was hope of accommodating the growing urban industrial efforts.
This period, then, was an extremely prosperous time in the American economy. Consequently, there were investments made in such things as railroad securities and bonds, with a substantial part of these investments coming from England; in fact, by 1869, European investors, who found a shortage a new investment projects in their own countries, held almost a billion dollars in American bonds. Indeed, financial institutions prospered.
Unfortunately, the great investments in transportation began to become troubled as the expansion of the railroads proved excessive. For many new destinations did not yield sufficient profits to repay the principal of loans. And, in the anticipated prosperity and flurry of investment, interest rates rose dramatically. As a result, by the start of 1873, Brooklyn Trust Company and other financiers who were smaller experienced difficulties in paying even their interests in new investments. Some periodicals of the time warned the public about unsettling indicators of financial problems:
We have no hesitation in saying that there is much in the present condition of our banks, much in the expansion of general credits, which urges caution and foretokens danger. (Cited in “Crisis of 1873” by E. Ray McCartney. Dissertation of Kansas State University, 1935)
By the fall of 1873, New York City investors in the high-risk railroad system were becoming unable to withdraw or transfer funds from their banks. Then, with the failure of Jay Cooke and Company, a near panic occurred. Of course, during this credit crisis, cash was unavailable to finance regular trade and commerce. Added to this problem, some with positions of power capitalized on the financial failures by withdrawing sums of cash before bank doors closed. In 1869, price manipulation was exercised by three wealthy investors, Daniel Drew, Jim Fisk, and Jay Gould, who plotted to purchase large amounts of gold and thereby push the price down. After this happened, they would buy more gold at the discount price which would result from others selling before prices went too low. Although the scheme failed, it demonstrated how a few Wall Street investors can affect the market.
Another financial issue was the fact the U.S. government had printed money and introduced it into the American economy during the Civil War and kept a certain amount of it circulating afterwards, resulting in an inflated currency that was not relative to the gold standard. This outdated currency system caused problems as cash would move to country banks during planting and harvest times. Certainly, the early harvest was a factor in the reserve failures of banks in the fall of 1873. Problems with government notes and bonds played a part, as well. Still another contributor to the 1873 financial crisis was the conversion of savings, or floating capital, into assets, or fixed capital. Before this year, the promise of developing technology had enticed many domestic as well as foreign investors as there was potential for these industrial advances to greatly increase profits as well as production. However, when foreign powers became embroiled in war and domestic money was spent, there was not enough capital left for investments. Such a shortage of floating capital, or assets that are movable, generated financial imbalance as holders of assets could not find buyers. Therefore, as production exceeded consumption, the country went into a financial crisis and the depression of 1873 occurred.
A run on banks in New York took place after Jay Cooke and Company, a concern that promoted the financing of railroad expansion, incurred financial problems and people began to feel that their money was not safe in the bank. Even country banks were affected since the resulting cash shortage interrupted the money flow necessary to the quick-paced transactions between farmers and the railroad companies that shipped their products. There were even more problems with the railroads as the banking crisis effected a halt to railroad expansion. This, then, reduced the production of steel, which then led to the laying off of steelworkers as well as railroad workers. Furthermore, based upon the standstill of investing, other factories had to lay off workers, so there was massive unemployment and the "Long Depression" of 1873-1878 took hold of America, a depression that strongly involved misuse of credit.
Describe the American financial industry during the decade after the Civil War.