- Historic Sites
10 Moments That Made American Business
How a debt-ridden banana republic became the greatest economic engine the world has ever known
February/March 2007 | Volume 58, Issue 1
It has been 400 years since European settlement began in what is now the United States. In that time a land occupied by a few million Neolithic hunter-gatherers has been transformed into the mightiest economy ever known, producing nearly one-third of the world’s goods and services. There are few economic sectors indeed, from agricultural exports to jet-aircraft production to entertainment, in which the United States does not lead.
In these four centuries of economic history, there have been many turning points that changed the future of American business. Some of these turning points were for the better, some for the worse, and some for both. Here are 10 of the most significance.
Robert Morris, who had helped greatly in financing the Revolution, turned George Washington down when the President offered him the post of Secretary of the Treasury. Morris wanted to be free to speculate in land and other opportunities to make money. It was a poor decision on Morris’s part (he would end up in debtor’s prison), but it was very good for the country because Washington then turned to Alexander Hamilton. Still in his early thirties, Hamilton was both a genius and a prodigious hard worker. There was much work to do, because the national financial situation was desperate.
The old federal government under the Articles of Confederation had lacked the power to tax. Instead it was dependent on requisitions from the states, and they were sometimes forthcoming and sometimes not. The massive debt left over from the Revolutionary War was unpaid, as was the interest due on it. The money supply was chaotic; it was a hodgepodge of foreign coins and “continentals,” the paper money issued by the Continental Congress during the war that depreciated rapidly and traded at pennies on the dollar. In 1789 the United States was financially and economically, nothing more than a very large banana republic.
Hamilton had to accomplish four things to transform it: (1) develop a system of taxation to fund the government and establish a customs service to collect the tariff, destined to be the main federal tax; (2) organize a monetary and banking system; (3) refund and rationalize the national debt in ways that would gain the confidence of the marketplace; and (4) devise a mechanism to allow the government to borrow as necessary.
Hamilton accomplished all this in the first two years of his tenure. And though the Treasury was the biggest of the new government departments (it had 40 employees to the State Department’s mere 5), it was largely Hamilton’s work in both conception and political execution.
Whitney’s first crude gin immediately allowed a single laborer to do in one day what had previously taken him 50.
The results were astonishing. The American economy, which had been mired in depression for much of the 1780s, revived wonderfully (helped, to be sure, by the outbreak of war in Europe). Federal revenues were a meager $3.6 million in 1792, the first year for which statistics are available, but by 1800 they topped $10 million. Government bonds began selling at a premium in Europe. The banking system grew rapidly, centered on the Bank of the United States, established by Hamilton under a federal charter, and its notes traded at par throughout the Union. For the first time since colonization had begun 200 years earlier, the United States had a reliable and convenient money supply.
Hamilton was fought, tooth and nail, by the developing political opposition under Thomas Jefferson, and parts of his program, especially the Bank of the United States, would later be dismantled (Hamilton’s shade might take comfort in the fact that his 1784 creation, the Bank of New York, the very first corporate stock to be traded on the New York Stock Exchange, continues to flourish). Still, thanks to Hamilton, the economy of the new nation was off to the races and began the growth that has been the wonder of the world to this day.
Cotton was an expensive fabric at the end of the eighteenth century, despite the mechanization of the English cloth industry. In the new United States there was little cotton grown, except on the Sea Islands, along the coast of Georgia and South Carolina. This long-staple cotton (now often called Egyptian cotton) requires a very lengthy growing season and sandy soil in order to flourish. Short-staple or upland cotton is much less demanding. It needs only 200 frost-free days, and any good soil will do.
Short-staple cotton had a big problem, however. Unlike Sea Island cotton, upland cotton’s seeds are sticky and deeply embedded in the cotton boll. While a field hand could pick perhaps 50 pounds of cotton a day, it took fully 50 man-days to handpick the seeds from that amount of cotton fiber. As long as ginning—as removing the seeds is called—was this labor-intensive, short-staple cotton could not compete in the world market with other fibers.
Then a young man with a gift for tinkering named Eli Whitney changed that and the American economy and American history as well. After graduating from Yale in 1793, Whitney accepted a job as a tutor in South Carolina, and, after the job did not work out, he visited a friend in Georgia. There he saw cotton growing for the first time and heard how much the laborious ginning process limited demand.