Credit and Speed
In 1830, the Baltimore Ohio railroad ran its first steam engine west from Baltimore Maryland toward the Appalachian Mountains. Over the next 30 years, rail lines would connect most major cities east of the Mississippi River, transforming the speed of commerce. Before rail, land transportation was so slow and difficult that it cost the same amount to transport one ton of goods 30 miles over land as shipping that same ton from America to England.1 Railroads slashed the cost and reduced the time to move inland goods to coastal or foreign markets.
Fourteen years before the Baltimore Ohio, in 1816, Congress chartered the second Bank of the United States (BUS). The daughter far exceeded the mother in mismanagement. For example, in 1818 the second BUS held 2.36 million in gold specie but had loaned out a staggering 21.8 million.2 The bank created over 19 million dollars out of thin air, lending much of this unbacked new money to state and regional banks who themselves extended credit in the form of new paper currency far beyond their ability to redeem in specie.3 In 1819, the second BUS, sensing it was overextended, called in the loans from the state banks who, in turn, called in the loans from the people. This triggered the first of many massive busts which followed the booms — the same cycle we endure today. This panic did not destroy the federal or state chartered banks, but instead hurt the individuals seeking land and business loans. As historian William Gouge put it: “the Bank was saved and people were ruined.”4
In the first essay in this series we saw how the first BUS and the permanent debt-backed financialization it instituted laid the foundation for the demise of agrarianism. Public debt — the funding of government through indebting the people — is only the first chapter of this story. This essay will demonstrate that unbacked paper-money created from thin air and lent to the people created a tendency in Americans to extract rather than steward the vast resources of the new continent. This tendency blinded them from seeing the destruction they were causing to their independence and the country’s future prosperity.
This era is known historically as the birth of the market economy. The combination of unbacked paper-money and speed of transportation accommodated a shift in how goods sold and how men worked. For example, it became more financially efficient to ship wheat and hogs from the West and cotton from the South than to maintain production of these commodities in the North East. It also became more financially efficient for a man to exchange his time for paper-money and buy his basic needs from the market rather than to produce his basic needs in the agrarian model. Melvyn Stokes in The Market Revolution in America explains the shift: “a largely subsistence economy of small farms and tiny workshops, satisfying mostly local needs through barter and exchange, gave place to an economy in which farmers and manufacturers produced food and goods for the cash rewards of an often distant marketplace.”5
Efficiency Creates Blinders
The real fuel to the engine of the change was the unbacked paper money supply. The paper money in circulation came from regional and state banks that borrowed from the second BUS and issued loans to the people. Picture a pyramid turned on its head. The tip of the upside down pyramid is the meager gold held in a vault and the loans are the building blocks moving upward and outward from that narrow tip. The bankers’ logic was, and continues to be, that not every depositor is likely to arrive on the same day expecting redemption of their physical gold.
All this additional credit “stimulated” economic growth, but not in the direction of independence or self-sufficiency. Easy credit had, and continues to have, the effect of concentrating capital. This is how it happens: those who are able to get the newly created money first can exchange that money for commodities and labor on par with the value of the original money supply. As the new money moves from the source — both directionally and geographically — it loses its exchange value since there is so much more now in circulation. This gives those who first receive the credit time to create a pseudo monopoly before the value of their money diminishes.
Those furthest away from the new money — family units, rural craftsmen, and farmers, who are the last to gain access to the new money supply — experience the opposite effect. Once in their hands, the unbacked paper money offered considerably less purchasing power than it did to the original borrower. These families had to either produce more or consume less to stay ahead of the devalued currency. In most cases, this now required family units to spend their working days apart, as fathers had to leave and find work — often toiling for the very men who borrowed the new money supply and began the cycle of devaluation. This, in turn, created a more unskilled population as fathers left the home for work and no longer taught their children a trade or skill. These children would have to enter a factory setting as unskilled workers where the efficient division of labor would keep them separated from opportunities to develop the integrated skills necessary for economic independence.
The overall effect of these changes was that the values and attitudes of the people were altered. They developed a “market behavior”6 where interactions became more impersonal and “community gave way before individualism and competitiveness.”7
Albert Brisbane, who wrote much against the factory model in New England, likened the new efficient factories to a system of lords and surfs: “The great bankers and merchants will be the rulers, like the barons of old; the hireling masses, the serfs.”8 He pointed out that the monopolizing force of concentrated capitol drives all artisans away. It was not that employing people for wages was a wrong. The immorality in the system lay in the fact that the men with first access to unbacked paper money, could then control the time and wages of those with no access.
It wasn’t only the enterprising businessmen close to the banks who benefited from this debt-backed economy. The government continued to grow as it sold bonds which were the peoples’ burden to pay. Between 1820 and 1839, the public debt of the State governments collectively rose from 12.8 mil to 170 mil.9 The Federal and State governments had no reason to curb the public debt since paper wealth continued to flow to them in spite of the loss of a largely independent and self-sufficient class of people.
Yet all this debt and paper money growth made men blind to the destruction of natural resources. Jesse Buel, a New England farmer and publisher, and Wilson Flagg, a contemporary of Buel’s who documented the changes as factories replaced farms, both warned that the loss of people on the land and the destruction of soil fertility would lead to the deterioration of overall wealth. Buel wrote A Farmer’s Companion in 1839 as an apology for the agrarian life. He writes:
“It [farming] does not, we admit, afford that prospect of rapid gain, which some other employments hold out to cupidity, and which too often distract and bewilder the mind, and unsettle for life the steady business habits of early manhood; yet neither does it, on the other hand, involve risks, to fortune and morals — to health and to happiness — with which the schemers and speculators of the day, who would live by the labor of others, seem ever to be environed.”10
Buel didn’t make the connection between public debt and the “schemers and speculators” but he did understand that something had changed in his lifetime that was driving people from the land to the factories. He concludes his thoughts with: “our independence was won by our yeomanry, and it can only be preserved by them.”11
Flagg extends Buel’s thoughts on wealth by writing: “The great fallacy of the present is that of mistaking the increase of our national wealth for the advancement of civilization.”12 Both writers distinguished between primary and secondary wealth. Primary wealth refers to the resources of the natural world, including the creativity and work capacity of mankind. Secondary wealth refers to something like paper money — an arbitrary token to which men ascribe value. The resources of primary wealth can be either degraded or enhanced depending on the value men ascribe to their exchange rate into secondary wealth. Agrarian work done for self-sufficiency tends to increase primary wealth since a long-term generational view guides work and the scope of tools used. What Buel and Flagg were witnessing was the conversion of the primary wealth of the natural world for the secondary wealth of unbacked paper money. Since paper money moves so fast, the pace of the ecological rhythms that create primary wealth could not keep pace with the greed-driven speed of secondary wealth. The market economy, pushed forward by the drive for secondary wealth, blinded its participants to the extractive nature at its core.
This isn’t to claim that all agrarian practices were conservation-focused. Many early farming practices degraded the natural capital of the land to an extent. However, when resource extraction is done for subsistence, the scope of the effects are naturally lessened. But, unbacked paper money changed the incentives and as a result the size of the tools able to extract the vast primary wealth of the new world.
Counter Movements
Two interesting movements endeavored to raise families from the vortex of this new economy. One was an in-system movement that gained the the stamp of approval from Congress and the other was a more organic movement aimed at reawakening a love of nature and pastoral landscapes.
In the 1840s and 50s George Henry Evans, active in the worker’s movement, called for free land and an end to rampant land speculation. He claimed land was as ubiquitous a right for mankind as air and water. He envisioned urban workers homesteading land and working for themselves. Influential politicians picked up his call and soon the Homestead Act of 1862 passed Congress. This Act gave up to 160 acres to an individual, provided he lived on and improved the land. But it was too little too little late for the working class and only served to expand the extractive practices brought on by public debt. Most who took advantage of the Homestead Act were farming families who had worn out their farms in the East and were looking for new opportunities further West. The urban poor, it seemed, were no longer the enterprising immigrants of Crevecoeur’s day, who had sought independence. Those who now filled the cities of the Eastern seaboard were integrated into a system that seemed to absorb ambition into a collective force for driving the financialized market economy forward.
At the same time, Romanticism emerged and offered an emotional appeal to return to a way of life far gone. The romantic writers tried to imbue farmers with love for nature, encouraging them to reject a desire to gain mastery over nature for economic gain. They lamented the vast acres being cleared to grow commodity crops when the yield of those crops was economic gain rather than self-sufficiency. They perceived that the market economy was a road leading to industrial despotism. Thoreau, chief among these writers, pointed out that “Ancient poetry and mythology suggest, at least, that husbandry was once a sacred art; but it is pursued with irreverent haste and heedlessness by us, our object being to have large farms and large crops merely.”13 Unfortunately their enemy was often mis-identified. Where they pointed fingers at the farmers and factory owners, they should have looked beyond to the politicians and bankers who maintained the public debt and created paper money from thin air.
Extraction Replaces Subsistence
The writers of this era, who warned against the resource extraction from the soil as well as the romantics, were silenced by the paper-money incentives: it was just more financially efficient to push West and mine virgin soil than care for the existing land. This model worked in this era because America had vast natural resources ready made to be converted into paper wealth. To almost every participant, it appeared that the wealth would never end.
As financialization took over the nation, the drive to increase production on cash crops narrowed the ecological diversity characteristic of areas where the economy and long-term production were once tied together under agrarianism. Again, it wasn’t that all agrarian farming practices were regenerative (as we think of it today), but because the focus of agrarianism was independence rather than economic efficiency/profit, the incentives didn’t push for the mining of the soil. Agrarianism develops a sense of permanency to place, and this changes the way people view the natural world around them — imbuing a desire to preserve rather than overuse. People rooted on the land have responsibilities to the place they live. Traditional agrarianism cannot be operated by absentee owners. The cow needs to be milked, the garden weeded, and the shop tended to. These responsibilities go hand in hand with independence.
What Comes Next:
The next essay in this series, published in two weeks, will dig deeper into the use and scope of the industrial tools following the Civil War. One might argue that the war itself was a outcome of public debt and money printing — the Union had to be held together so that the market economy and all the paper wealth generated therefrom could be maintained. The era following the war brought tools unprecedented in scope and ability. It was the era where machines replaced human labor to the extent that men became shaped and defined by their tools.
Melvyn Stokes and Stephen Conway, The Market Revolution in America, (Virginia: University Press of Virginia, 1996), 2.
Murry Rothbard, A History of Money and Banking in the United States…, (Auburn: Ludwig von Mises Institute, 2002), 86.
Murry Rothbard, A History of Money and Banking in the United States…, 87.
Ibid., 90.
Melvyn Stokes and Stephen Conway, The Market Revolution in America, 1.
Ibid., 27.
Ibid., 28.
Edwin Hagenstein, Sara M Gregg, and Brian Donahue, American Georgics, (New Haven: Yale University Press, 2011), 116.
Murry Rothbard, A History of Money and Banking in the United States…, 101.
Edwin Hagenstein, Sara M Gregg, and Brian Donahue, American Georgics, 68.
Ibid., 66.
Ibid., 81.
Ibid., 147.
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Are there particular industries that you view as significantly worse than others? Such as investment banking, oil+gas, industrial livestock, etc?