The Traditional Enterprise in Commerce: Specialization in Commerce

Even without the boom in cotton and textiles, specialization in commer- cial business enterprises certainly would have come to the United States in the fifty years after 1790. Before the Revolution specialization was already appearing in the distribution of goods in New York, Philadelphia, and other large towns. The distinction between merchants and shopkeepers was becoming clear. The former continued to sell at retail as well as at wholesale, but the shopkeepers sold only at retail, buying from the merchants rather than directly from abroad.9 By 1790, the merchants were also beginning to specialize in certain lines of trade. Specialization was coming, too, in manufacturing in New England, and possibly parts of the middle states, with the beginning of a domestic or “putting-out” system, and the first use of simple machines.10 Well before the 1790s, shoes, boots, and even furniture were being manufactured for the West Indian and other distant markets by entrepreneurs who “put-out” work into the homes of farmers and town dwellers. Nevertheless, the rapid reorientation and expansion of American commerce and the rapid development of specialized business institutions resulted directly from the new and unprecedented high volume of cotton exports and new machine-made imports.

The impact of cotton on American commerce did not become fully apparent until after 1815, although it had begun to make itself felt in the 1790s. The French Revolution and the Napoleonic Wars kept the older West Indian and European carrying trades booming until 1807. Then, for the next eight years, embargoes, trade restrictions, and wars shut down practically all trade except for a brief period in 1810 and 1811. The wars and wartime commerce overshadowed the rise of the brand new and profoundly significant cotton trade.

As the new cotton textile machinery in Britain went into production, Americans responded quickly.11 Cotton was first grown commercially in the United States in 1786. By 1793, the year Eli Whitney invented the cotton gin, annual exports were already 488,000 pounds. By 1801, they reached 20.9 million pounds, by 1807, 66.2 million, and by 1810 (the year when trade restrictions were temporarily lifted), 83.8 million. In 1815, 83.0 million pounds exported was valued at $17.5 million. By 1825, the value of cotton exports had risen to $37 million, and by 1840 to $64 million. Between 1821 and 1850, the United States provided over 75 percent of Britain’s annual supply of raw cotton. The volume and value of these exports contrast sharply with the modest expansion of the older crops, namely, tobacco, rice, sugar, and wheat. Exports of tobacco, for example, were valued at $8 million in 1815 and only $10 million in 1840.

Cotton brought commercial agriculture to broad regions of the south where, because of climate and soil, other staple crops were unable to grow. Moreover, cotton moved westward in the south a generation before wheat moved west in the north. As the cotton plantations in the lower Mississippi Valley were coming into production, they provided an important initial market to the farmers in the new western settlements at a time when the lack of transportation facilities made it costly to ship whiskey, hogs, horses, and mules to the east or to Europe.12

The spread of commercial agriculture in the south encouraged commer- cial specialization in the east. The unprecedented volume of the cotton trade helped to make New York the nation’s leading city and initiated the swift decline of the all-purpose general merchant.13 The cotton trade was handled increasingly by specialized firms that preferred not to take title to the goods (except when they wanted to speculate) and were instead paid for their services by fixed commissions. Because they had no control over the fluctuating prices set by the international forces of supply and demand, these and other merchants who were becoming specialized disliked the risk of taking title to the goods, preferring the more certain 5 percent commission. For the first time in the United States merchants began to sell much more on commission than on their own account.

The first cotton traders were new rather than existing merchants.14 In New York they were at the start agents of British textile firms who came to sell cloth and to make arrangements for obtaining raw cotton. They were soon joined by young men, many of them New Englanders, who began their business life in this trade. New Englanders also went to the south. There they and local merchants in the cotton ports and in the new towns in the interior—Columbia, Augusta, Macon, Montgomery, Jackson, and Natchez— became factors for planters who had recently cleared the land in the rich black belt of Alabama and Georgia and the bottom lands along the Mississippi River.

Although the distinction between commission and commercial houses is often not a clear one, the census figures suggest the importance of the commission business to the foreign trade.15 In the census of 1840, 381 commission houses and only 24 commercial houses were listed as engaged in foreign trade in Louisiana where commodities completely dominated. For New York (where the commodity trades were major) the division was 1,044 commission houses and 469 commercial houses; in Boston (where such trades were of much less significance), there were 241 commercial houses and only 123 commission houses. By 1840, too, the older, less specialized houses had come to concentrate on cotton or some other commodity and to trade on commission.

The first man in the chain of the new middlemen from the planter to the manufacturer was the cotton factor.16 He not only marketed the planter’s crop, but also purchased his supplies and provided him with credit. Relations between the two were close and personal. In purchasing supplies, equipment, and household goods for the plantation, the factor purchased locally and normally traveled twice a year to buy in New York and other commercial centers of the northeast. In marketing the planter’s crop in the impersonal international market, the factor sold directly to the agents of manufacturers or shipped on consignment to other middlemen in nearby river or coastal ports, or to others in New York and other coastal cities, and still others in Liverpool and continental ports. These middlemen, in turn, sold directly or on consignment to manufacturers in the United States as well as in Britain or often to yet another set of middlemen. In addition, the factor made arrangements for the transportation of the crop, the payment of insurance, storage, drayage, and, where necessary, the payment of duties, wharf fees, and the like. On all of these different transactions, he received a commission. And in the process both of buying and of selling, the factor usually made the credit arrangements.

The distribution system was also a credit network, with the credit based on the crop in transit. The cotton trade was financed largely by advances. Cotton moved in one direction and the advances against its shipment in the other. On the American side, as Harold Woodman, the historian of the factor, has written: “Anyone with cotton on hand could easily get an advance from the merchant to whom he chose to consign it, be that merchant in the interior, in the port cities, or in the North, or in Europe.” On the British side, a commission merchant in 1833 stated that it was virtually impossible to get goods on consignment without giving advances.17 These advances were usually from two-thirds to three-fourths the value of the current crop. The providing of advances did, therefore, carry a certain risk, for if the price fell during transit, as it often did while the annual harvest was being completed, the house providing the advance might have to sell at a loss.

The credit system, a complex one, relied on traditional instruments: the promissory note and the bill of exchange. Planters, factors, or river or coastal port merchants were rarely paid in cash but in promissory notes or bills of exchange payable in 60, 90, or even 120 days at 7 or 8 percent interest. If the advance was given before the delivery of the crop, it was made in the form of a promissory note, which was often renewed if it became due before the actual sale was transacted. If the payment was made at the time of delivery, it was made in the form of a bill of exchange, drawn on the house providing the credit. Such transactions were further complicated by the need to convert pounds sterling into dollars. A simple sale, involving two middlemen, could give rise to as many as four different transactions and four different bills of exchange. Woodman provides a revealing example from the correspondence of William Johnson, a Mississippi planter, and his factor, Washington Jackson & Company of New Orleans:

In the 1844-1845 season, Johnson had the New Orleans firm sell part of his cotton in Liverpool through Todd, Jackson and Company, the Liverpool branch of the firm. After shipping his cotton to New Orleans, Johnson drew on Washington Jackson and Company, thereby creating a domestic bill for discount. The New Orleans firm reimbursed itself for this advance by drawing on the Liverpool house after shipping the cotton there, thus creating a second bill for discount. When a sale was made in Liverpool, Todd, Jackson and Company sent a sterling bill for the proceeds over and above the advance drawn upon them. The New Orleans firm sold the sterling bill to a bank for local currency and then authorized Johnson to draw another bill to cover his returns over the advance he had drawn originally.18

It was in providing advances and in discounting bills of exchange that the older resident merchants came to play their most important role in the new cotton trade. Some, indeed, soon became specialists in finance. Those with the largest resources became, through the financing of the cotton trade, the most influential businessmen of the day. They were, for the most part, British business houses in Liverpool and London. They stood at the end of the long chain of credit stretching from the banks of the Mississippi to Lombard Street.

In the major ports, the volume of trade was large enough to permit the rise of another type of specialized enterprise—the brokerage house. Not attached to any specific set of clients, it brought together buyers and sellers of cotton for a commission.19 The basic distinction between the broker and the factor was that the former did not, as did the latter, buy or sell on his principal’s account or, more precisely, did not make contracts in his own name that were binding on his principal. The broker’s function was to help factors or other merchants or manufacturing agents obtain the cotton necessary to fill out a shipment or order and dispose of odd lots after the completion of a major transaction.

As the farming frontier moved west across the mountains into the Mississippi Valley, a somewhat different network evolved to move pro- visions (corn, pork, and whiskey), some cotton, and then wheat and other grains from the west to the south and east. Where the soil was tilled by many small farmers rather than a few large planters, the country store- keeper took the place of the plantation factor as the first businessman on the chain of middlemen from the interior to the seaport.20 These store- keepers, the economic descendants of the pre-Revolutionary Scottish factors in Virginia and of the storekeepers scattered in the interior of colonial Pennsylvania and New England, marketed and purchased for the farmer much as the factors did for the planters. They differed from the factors, however, in that they bought and sold primarily on their own account.

In the early years of western settlement the outgoing crops and the incoming goods moved along different routes. Tobacco, hemp, lead, and produce went down the river to and through New Orleans to the east and the finished goods came westward across the mountains to Pittsburgh and then down the Ohio. Storekeepers, and at first even farmers, accompanied their crops south. In a short time, however, they made arrangements with commission merchants in New Orleans and other river ports —Cincinnati, Louisville, St. Louis, Memphis, and Nashville—to receive their crops and sell them, or to forward them to other merchants, to provide advances, and to send payments.21 The storekeepers, like the plantation cotton factors, went east normally twice a year to purchase their stocks of finished goods, coffee, tea, sugar, and other staples. There they had to work out complex arrangements for the transportation of their goods west and for their warehousing, drayage, and loading at the different transshipment points along the way. The western storekeepers were soon relying on credit more from the eastern wholesalers from whom they purchased their supplies than from the commission houses through which they sold their produce.

With the opening of the Erie Canal in the mid-1820s and the completion of the Ohio and Pennsylvania canal systems in the next decade, a new trade sprang up, creating still another string of middlemen to handle the transactions and transshipments involved in moving the crops. Prior to 1830, little wheat had been raised in the Mississippi Valley. Tobacco, hemp, provisions, horses, and mules, rather than wheat and flour, were the region’s major exports. Then, since the canal provided a shorter route through a cooler part of the country (wheat and flour sent via New Orleans often rotted or soured), production expanded. In 1839 Cleveland received 2.8 million bushels of wheat and flour, or 87 percent more than New Orleans.22 In the same year, New York received three times as much wheat as New Orleans.

The pattern of specialization in the grain trade followed that of the provisions and cotton trades, yet because of its smaller volume before 1840, it was less systematized and specialized than that of cotton. Cleveland, Buffalo, and other lake ports, including the new village of Chicago, became transshipping centers similar to New Orleans and the other cotton ports. As in the cotton trade, advances and the discounting of notes on goods in transit came to play critical roles in financing the movement of crops. Western millers, storekeepers, local merchants who built warehouses, and occasionally the farmers themselves consigned their grain or flour to commission houses and more specialized freight forwarders in the lake ports, particularly Buffalo. In return they received advances which they usually discounted for cash. The Buffalo merchants, in turn, sent grain to the millers of Rochester, or grain or flour to New York merchants—such as Eli Hart & Company; Suydam, Sage & Company; or Chouteau, Merle & Standford—who had previously provided advances. Whenever the final purchase was not designated, the shipment was sent on to a commission house or appointed agent in the east for final sale.23 That agent might ship it on consignment to a commission house in Liverpool or Rio de Janeiro for sale on the foreign market. These merchants shipping overseas obtained funds for advances from international merchant banking houses such as the Barings. The grain trade differed from the cotton trade, however, in that it marketed primarily in the United States and therefore was financed by American rather than British capital. Moreover, the trade had hardly been fully established before it was radically transformed in the 1850s by the coming of the railroad and the telegraph. The cotton trade, on the other hand, continued to operate relatively unchanged for several decades.

The rise of specialized commercial enterprise to handle the flow of agricultural products out of the interior to the east and Europe was paralleled by a comparable specialization of enterprise to bring finished goods and staples into the coastal ports and thence to the interior. After 1815, imports of manufactured products—dry goods, metals, hardware, and drugs—grew to an impressive volume. The expanding economy also increased the demand for coffee, tea, sugar, and molasses, products that grew in tropical or semitropical countries, and wines and spirits that were produced in Europe.24 Before 1815 many of the commission houses which exported cotton also imported a wide variety of goods from Europe and the West Indies. But as the new patterns of trade evolved, they tended to concentrate on cotton exports and a smaller variety of more specialized imports.25 In importing standardized goods, they increasingly gave way to the specialized importer who purchased directly in Europe and sold to local manufacturers, retailers, and wholesalers. Importers differed from exporters, since they often took title to goods, rather than selling them on consignment or commission.

The experience of Nathan Trotter of Philadelphia provides a good example of the new specialized importer.26 When Trotter joined a family partnership in 1802, the firm was still importing and exporting a wide variety of goods. During the Napoleonic Wars the partnership concentrated on importing from Europe dry goods, felt, leather, and metals, much of which was reshipped and sold to the West Indies and Latin America. The firm also shipped sugar, molasses, rum, and coffee to the United States and to Europe. Then, in 1816, when Nathan Trotter took over the firm, he began to concentrate on importing a single line of goods —iron, copper, and other metals. These he purchased directly in Britain and northern Europe. As domestic tariffs appeared, raising the price of metals, he began to buy in the United States. He sold some of the more finished goods to local retailers and jobbers. But the largest share of his trade went to traditional artisans (blacksmiths, tinsmiths, and coppersmiths), to artisans who were beginning to specialize in making a single line of goods (stoves, grates, furnaces, lamps, gas fixtures, and steam engines), and to new types of craftsmen (roofers and plumbers). Elsewhere in the metals trade, Trotter’s story was paralleled by that of Anson G. Phelps, James Boorman, and Joseph Johnson in New York, and David Reeves and Alfred Hunt in Philadelphia.27

In the years after 1815a new type of specialized middleman appeared in the eastern seaports. This was the jobber who, unlike the importer, pur- chased at home and who, more than the importer, sold his goods to plantation factors and storekeepers from the south and west. Jobbers were, in the words of an 1829 report of the New York state legislature, “an intermediate grade of merchants, between the wholesale and import-ing merchants and the retail shopkeepers.”28 They “purchased largely at auctions, at package sales, or wholesale importers, and in other such ways that they can obtain merchandise in reasonable ways.” They then broke down large lots into smaller more varied ones, to meet the needs of local retailers and of country storekeepers and plantation factors who made semiannual purchases in their shops.

As the quotation suggests, the rise of the jobber was closely related to the use of auctions in the marketing of imported goods.29 Auctioning began on a large scale when the British dumped their textiles in New York and, to a lesser extent, other ports upon the reopening of transatlantic trade at the end of the War of 1812. In Philadelphia and Boston established merchants were able to restrict the use of auctions by means of local and state ordinances. In New York similar attempts failed. The extensive use of auctions during the 1820s helped to make New York a mecca for the country trade and brought a concentration of jobbers to that city. Although used primarily in the marketing of textiles, auctions became employed in the other basic trades as well. During the decade 1821-1830 auction sales in New York City amounted to $160 million or 40 percent of the value of that port’s total imports and one-fifth of the value of the entire nation’s imports. In 1820, for example, out of a total of $10.4 million worth of goods sold at auction in New York, $7.0 million were textiles ($0.7 million of which were American made); $1.9 million groceries, hardware, and drugs; $1.0 million teas, silks, and chinaware from distant seas; and $0.4 million wines and spirits largely from Europe.80 In the 1830s and 1840s jobbers began to rely less on auctions and began to purchase more directly from agents of manufacturers, at first buying from domestic and then foreign producers.

A check of city directories emphasizes how predominant specialized business enterprise had become by the 1840s in the marketing and dis- tributing of goods in the eastern ports. It also shows in which trades the jobber had become most influential. For example, Dogget’s Directory for New York City in 1846 indicates that the number of specialized business enterprises was highest in dry goods and groceries, with 318 establishments in the first and 221 in the second. China, glass, and earthenware came next with 146, hardware with 91, drugs with 83, wines and spirits with 82, silks and fancy goods with 74, and watches with 40.81 There were more jobbers than importers in dry goods, groceries, china, glass, and earthenware, and about the same number in drugs and wines and spirits. On the other hand, importers continued to dominate the hardware, fancy dry goods, and clothing trades. All 40 watch dealers were importers. A quick and relatively superficial check of directories in other cities indicates that, until the 1850s, jobbers and importers—that is, wholesalers who took title to their goods instead of selling on commission—were concentrated in the eastern ports of New York, Philadelphia, and Baltimore. In these many ways the specialized impersonalized world of the jobber, importer, factor, broker, and the commission agent of the river and port towns replaced the personal world of the colonial merchant. Cotton had paced the transformation. The massive exports of the new crop provided payments for greatly expanded imports of manufactured goods and of foods and beverages that could not be grown or produced in this country. The flows in and out of the nation and across the ocean came to be handled by a network of specialized middlemen. Nearly every plantation, farm, and village in the interior came to have direct commercial access to the growing cities of the east as well as to the manufacturing centers of Europe. The output of millions of acres moved every fall over thousands of miles of water. Dry goods from Manchester, hardware from Birmingham, iron from Sweden, the teas of China, and the coffees of Brazil were regularly shipped to towns and villages in a vast region which only a few years before was still wilderness.

This quickly created continental commercial network was coordinated almost entirely by market mechanisms. Goods produced for other than local consumption moved through the national and international economy by a series of market transactions and physical transshipments. The cotton, as it traveled from the plantation to the river ports (Memphis, Natchez, Huntsville, Montgomery, and Augusta), to the coastal ports (New Orleans, Mobile, Savannah, Charleston), to the northeastern ports (New York and Boston), to the continental ports (Liverpool, Le Havre, Hamburg), and finally to the cotton textile manufacturers in New England, old England, and the continent, required at the very least four transactions (between planter, factor, manufacturer’s agent, and manufacturer), and often several more. And it passed through at least four transshipments and often several more. Provisions from the west moved south and east through a similar network. Grain from the northwest also went through a comparable number of transactions and transshipments as it traveled from the farmer to the country store, to the interior town, river, or lake port, to the eastern seaport, and then sometimes overseas. The flow of finished goods involved similar sets of buyers, sellers, and shippers in European cities, American seaports, and river towns. The granting of credit and the making of payments required a still different and even more complex set of transactions and flows.

In the agrarian economy of the first decades of the nineteenth century, the flow of goods was closely tied to the planting and harvesting of the crops. The merchants who carried out the commercial transactions and made the arrangements to move the crops out and finished goods in did so in order to make a profit on each transaction or sale. The American econ- omy of the 1840s provides a believable illustration of the working of the untrammeled market economy so eloquently described by Adam Smith.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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