The expansion of trade in the first decades of the nineteenth century caused business enterprises to specialize in the financing and transportation of goods as well as in their marketing and distribution. Specialization in finance and transportation, unlike that in distribution, led to an important institutional development: the growth of incorporated joint-stock companies. Merchants continued to use the partnership as the legal form for shipping and financing ventures, as they did for their trading firms. Only when they found it advantageous to pool large amounts of capital to improve financial and transportation services by setting up banks, turnpikes, and canals did they turn to the corporation. At first they looked on the corporation as the proper legal form for what they considered to be “private enterprise in the public interest.”32 They used it to provide essential specialized ancillary services to support their profit-making commercial activities. When the pooling of local capital in a corporation was not enough to provide these services, the merchants did not hesitate to seek funds from public sources.
Specialization in finance was a natural concomitant of specialization in other commercial activities. As trade expanded, the older resident general merchants often turned to finance. The alternative was to specialize in trade with more distant regions, particularly China, India, and the East Indies, where the low volume of trade and high value of goods made it possible to continue the old patterns of commerce. For some years after the War of 1812 the Perkinses, Forbeses, and Lees of Boston, and the Griswolds, Howlands, and Grinnells of New York continued to reap profits from these more exotic trades. For most general merchants the old ways were no longer rewarding. They suffered from the same experience as the Browns of Rhode Island. As James B. Hedges has recorded: “The story of the shipping interests of Brown and Ives from 1815 to 1838 is anti-climactic, a doleful story of gradual decline and decay.”33
For many, the more profitable alternative was to concentrate on finance. John Jacob Astor, Nathaniel Prime, Stephen Girard, Samuel Ward, the Browns of Providence, and the Browns of Baltimore were resident general merchants whose business increasingly became that of granting credit to and discounting exchanges for other merchants.34 Later, even successful specialized merchants like Trotter carried on such banking activities. And by the 1820s younger men were entering business as specialized private bankers and brokers. Fitch & Company of New York, Thomas Biddle & Company of Philadelphia, and Oelrich & Lurman of Baltimore were from their beginnings specialized banking enterprises rather than general mercantile firms.
The most powerful financiers in the American economy after 1815 were, however, those same men who had once held the most influential partnerships in trade: moving cotton out of and, to a lesser extent, finished goods into the United States. These were the enterprises that provided the credit advances so essential to the financing of the cotton trade. As Britain was the center of finance and had greater capital resources, these firms were British rather than American. At first they were Liverpool enterprises, including such firms as Cropper, Benson & Company; Crowder, Clough & Company; Bolton Ogden & Company; and Rathbone & Company.35 After 1820, leading London firms like Baring Brothers and the three W’s (Thomas Wilson & Company, George Wildes & Company, and Thomas Wiggins & Company) entered the trade. The only American-based firm to become one of the leading Anglo-American merchant bankers was the Browns of Baltimore, and this firm’s Central partnership was housed in Liverpool.
With the merchants and merchant bankers financing interregional and international movements of trade, the incorporated bank served local needs. By pooling of local capital in state chartered banks, businessmen increased sources for long-term loans, based on mortgages, securities, and even personal promissory notes (if the latter had the additional signature of a co-maker). In the United States early commercial banks became, therefore, more providers of long and medium capital needs than sources of short-term commercial loans. As one British commentator noted in 1837 about American banks: “Their rule is our exception, our rule their exception. They prefer accommodation paper, resting on personal security and fixed wealth, to real bills of exchange, resting on wealth in transition from merchants and manufacturers to consumers.”36 In addition state chartered banks issued bank notes which became the standard circulating medium in the United States. This was because the United States government issued almost no paper money until 1862 and only a limited amount of coin and because bills of exchange were not as abundant as they were in Europe where they served as the basic medium of exchange. Banks provided other services. They were relatively safe places to deposit funds. Their stock could be purchased as an investment at a time when investment opportunities in other than land and nonliquid assets were limited. Finally, by incorporating a bank, local merchants were able to turn over the day-to-day work in providing specialized financial services to a full- time salaried employee, who usually had the title of cashier.
The need for such services was strong enough to bring the incorporated bank quickly to all parts of the nation. The first was the Bank of North America in Philadelphia chartered in 1781. In 1790, six more banks were operating in the major American ports: New York, Philadelphia, Boston, Baltimore, and Charleston. In 1791, Congress approved Alexander Hamil- ton’s proposal for a federally chartered bank with headquarters in Phila- delphia and branches in the larger towns. The chartering of banks boomed in the 1790s and again after the charter of the First Bank of the United States expired in 1811. Between 1811 and 1815 the number increased from 88 to 206.37 With the expansion of the economy after 1815, the number jumped again. In 1816 alone, 40 banks were chartered, and by 1820 there were 307. In the late 1820s and the early 1830s, a period during which the Second Bank of the United States was providing excellent services, the number leveled off. In those two decades, however, local banking business had expanded enough to encourage the opening of even more specialized financial institutions in the United States, including savings banks and trust companies.38
By 1830, the Second Bank of the United States was not only providing high quality local banking services but also operating on a national and indeed international scale. For a brief period it competed most successfully with the merchant bankers in the financing of the flow of domestic and international trade. It did so because it was the only commercial institution to have a number of branches—twenty-two located in all parts of the country by 1830. No other financial institution operated on this scale. Merchant bankers often had interlocking partnerships but these partnerships rarely operated in more than three commercial centers. Merchant bankers continued to handle their business in distant ports almost wholly through correspondents, other merchants who were paid by commission.
Nicholas Biddle, who became the Second Bank’s president in 1823, fully appreciated the value of using its branches to finance American trade. He realized that the branches provided an administrative network that permitted the transfer of funds and credit throughout the country by means of a series of accounting transactions between branches controlled and supervised by the Philadelphia headquarters. He indicated how this was accomplished when he described the activities of the New Orleans branch to a congressional committee in 1832.
The course of the western business is to send the produce to New Orleans, to draw bills on the proceeds, which bills are purchased at the various branches, and remitted to the branch at New Orleans. When the notes issued by the several branches find their way in the course of trade to the Atlantic branches, the western branches pay the Atlantic branches by drafts on their funds accumulated at the branch at New Orleans, which pay the Atlantic branches by bills growing out of the purchases made in New Orleans on account of the northern merchants or manufacturers, thus completing the circle of operations. This explains the large amount of business done at that branch.39
Foreign exchanges were handled in much the same way. Payments made by the British and Europeans for American cotton and other commodities were deposited, normally with London merchant bankers, and became the source of funds and credit for American merchants purchasing goods abroad. The Second Bank is an early and highly successful example of the administrative coordination of monetary flows. Such coordination permitted Biddle to increase the bank’s domestic exchange business from $1.8 million a month in 1823, to $5.02 million in 1828, and $22.6 million in 1832. At the same time, the bank came to dominate the nation’s foreign exchange business.40
The Second Bank was, however, short-lived. Its concentrated economic power and its role as the federal government’s banker made its activities and even its very existence a major political issue. In 1832, Andrew Jackson vetoed a bill to recharter the bank in 1836. The veto, which probably helped to re-elect Jackson to the presidency, assured the end of the Second Bank of the United States. After its demise in 1836, merchants, particularly the more specialized merchant bankers, continued to finance the long-distance trades. The state incorporated banks continued to serve local communities and domestic trade, increasing in number from 506 in 1834 to 901 in 1840. The Barings, the Browns, and a small number of lesser survivors handled the financing of a major portion of American imports and exports after the financial panics of 1837 and 1839 destroyed several of the British merchant banking houses, including the three W’s.41
The history of insurance companies in the United States parallels closely that of the state incorporated banks. By pooling resources in an in- corporated insurance company, resident merchants, importers, exporters, and a growing number of specialized shipping enterprises were able to get cheaper insurance rates. At the same time, salaried employees of the new insurance firms (appraisers and inspectors) could concentrate on the more technical and routine aspects of the business. Again, as in the case of banks, the insurance companies provided a source for long-term loans, primarily based on mortgages, and their stocks were held as investments. Their number grew quickly. The first American company to insure ships and their cargoes was incorporated in 1792. By 1800, there were twelve marine insurance companies in the United States and by 1807, forty.42 As in the case of the banks, the numbers leveled off in the 1820s, with New
York supporting around twenty and other ports a somewhat smaller number. Nearly all these companies handled only the business of local shippers and ship owners. Fire insurance was slower in developing. Until the great New York fire of 1835, fire insurance was written on a small local scale, often by marine insurance companies. As for life insurance, scarcely a handful of firms operated in the United States before the mid- 1840s, when the first mutual life insurance company was formed. Only after the country began to industrialize and urbanize rapidly did the issuing of life insurance become a significant business.
In the early years of the republic, merchants regarded transportation companies as they did financial institutions. They were primarily vehicles for providing services vital to the furtherance of their commercial activities. The incorporation of turnpike and canal companies made possible the pooling of capital required to improve overland rights of way. And when the capital pooled by incorporation was not enough to complete the new overland rights-of-way, American businessmen quickly turned to local, state, and national governments for the necessary funds. On the other hand, they rarely suggested that the government operate the common carriers that used the turnpikes and canals. These enterprises continued to be operated by individuals and partnerships but not by corporations.
In the colonial period, the only common carriers (that is, enterprises specializing wholly in transporting goods and passengers, with services available to any user) were a small number of ferries, stagecoaches, and wagon lines. The stagecoaches, carrying passengers and mail, but very little freight, ran on the most informal schedules. The wagon lines were even more unscheduled. Teamsters, usually located in country towns, picked up loads from storekeepers and brought them to the larger ports. There the teamsters waited until the city merchant had a r.eturn shipment to their home towns. This method continued to be used until the early 1830s even in Philadelphia, a city whose large hinterland was served by the best turnpike system in the nation.
As the roads were relatively few and travel over them a bone-shaking experience, most passengers and nearly all freight moved by water. The most impressive growth of common carriers came, therefore, in the development of shipping lines on waterways. During the colonial period, there were no common carriers on water routes except for an occasional ferry. Merchants who owned or who had shares in ships often “rented” space to other merchants. The former, however, were under no obligation to carry another merchant’s goods and did so only when they themselves had no need of the space. Moreover, in the eighteenth century, ships did not follow any specific schedules or ply between two termini. They normally moved between regions, such as between New England or the middle colonies and the West Indies or between these colonies and Great Britain or southern Europe. Within these areas the ships went from port to port as trading opportunities appeared.43
As the transatlantic trade expanded, ships became “regular traders” running between ports, say New York and Liverpool, or Philadelphia and London.44 And as ships became regular traders, merchants began to meet their carrying needs by chartering rather than by building or purchasing vessels. They were soon relying on the services of a regular ship’s agent or husband who owned and operated several vessels.45 The ship’s husband made arrangements with merchants, received and loaded cargoes, laid down the ship’s route, and arranged for payment of customs and port duties. These services were developed so swiftly and so effectively for the cotton trade that by the 1820s the leading mercantile firms handling the flow of cotton to Liverpool owned no ships of their own.46
The step from the regular trader to the scheduled packet line came quickly. In January 1818, a small number of close associates in the cotton and textile trade who owned four regular traders decided to operate them between New York and Liverpool on a regular schedule departing on stated days and at stated times. This enterprise, the Black Ball Line, soon had its imitators. By 1822, two other packet lines were running between New York and Liverpool and the year before one had started between Philadelphia and that British port. Within a short time, sailing packet lines appeared on coastal routes south from New York and Philadelphia, to Charleston, Savannah, Mobile, and New Orleans, and north to the New England ports. The merchants who started these lines soon became shipping specialists, or else they sold their interest in the lines to specialists who owned and operated these sailing ships.
Steamships were not used on the high seas until the 1840s. On rivers, lakes, and bays they ran from the beginning on regular routes and, when carrying passengers, on some sort of schedule, although unscheduled tramps became common on the Mississippi.47 Because the steamboat was a new and patented invention, the early lines were less the promotions of merchants and more those of inventors and their financial backers. The country’s first steamboat line was set up by inventor Robert Fulton and his financial supporter Robert Livingston after the successful trial run of the Clermont on the Hudson in 1807. For some years, the two were able to maintain a monopoly in New York, but they had no success in preventing competition on the western waters, where one of their boats made its first run from Pittsburgh to New Orleans in 1813.
After 1815, the number of steamboats on the western rivers grew swiftly, from fourteen (totaling 3,290 tons) in 1817 to sixty-nine (totaling 13,890 tons) just over three years later. Even before 1824, when the Supreme Court in the case of Gibbons V. Ogden brought to an end the Fulton-Livingston monopoly, steamboats had appeared on Long Island Sound and other eastern sounds, bays, and rivers and, to a lesser extent, on Lake Erie. After the court’s decision, steamboat lines boomed in the east. One of the most aggressive operators was Cornelius Vanderbilt, who had been Gibbons’ captain on a New York to New Brunswick line before and during the famous case. As canals came to be built in the 1820s and 1830s, similar canal boat lines, powered, of course, by horses and mules rather than by steam, came into being.
In building these canals, and the turnpikes as well, Americans increas- ingly relied on state funding.48 The early turnpikes in New England and the middle states were built and maintained by private corporations. But those constructed somewhat later in the south and west, and also in Pennsylvania, were state funded and often state maintained projects. The few canals built before 1820—the Middlesex Canal connecting Boston and the Merrimack and the Blackstone connecting Providence and Worcester being the most important—were also privately financed and maintained. It was only after the completion in 1825 of New York’s great Erie Canal connecting the eastern and western waters that canal construction became popular in the United States. Then the merchants of the other Atlantic ports began to insist on having their own connections with the west. In the west, businessmen wanted to connect the lakes with the Ohio and Mississippi rivers. Far too costly to be financed by local capital, even if pooled through incorporation, the new canal systems of Pennsylvania, Maryland, Virginia, and Ohio were financed almost wholly by the states and the port cities. Their operation then became managed by representatives of these political bodies. Only a government had the credit rating needed to raise the required funds; for their ability to pay interest on their bonds was based on the power to tax, as opposed to private corporations, which depended merely on anticipated profits from providing rights-of-way. The one significant exception to public construction was the system of canals built in eastern Pennsylvania to transport anthracite coal to the tidewater. However, the private corporations carrying out these projects were able to attract investors on the basis of the natural resources they controlled, rather than from expected toll profits.
Again except for the coal canals, the private corporations building and maintaining the canals and turnpikes rarely operated the transportation lines that used them. The states never did. The stage and wagon lines using the new turnpikes differed little from those of colonial days; and the canal boat lines ran in much the same fashion as did other shipping enterprises. Some held to schedules; others moved when they had full loads.
The first canal lines were organized by merchants who needed the facilities to transport their goods. But they quickly came to be owned and operated by specialists. The freight forwarders were (writes Harry Scheiber of those on the Ohio canals) “men engaged in the transportation business only, including small-scale operators of one or two boats as well as owners of large fleets, maintaining regular through-freight arrangements with the Erie Canal, Pennsylvania Mainline and river boat lines.”49
These specialized ancillary enterprises—the merchant bankers and the incorporated bank; insurance, turnpike, and canal companies; the ship’s husbands; the scheduled shipping lines; and the freight forwarders—all facilitated the flow of goods through the economy. They made it easier for the merchants to specialize in handling one set of products and functions and to carry out their specialized tasks more efficiently. They helped to create at that time one of the world’s most effective “transaction sectors,” to use a term of Douglass North. The number of transactions, the volume of goods moved, and the speed and distances carried were as great as any in history.50 The efficiency of this sector must have played an important role in maintaining the per capita income of Americans at a time when the population was growing fast.51 It must have been critical in sustaining the continued economic development of the country in the decades before 1840.
Nevertheless, by modern standards the movement and distribution of goods were hardly efficient. Many transactions and transshipments were required to move a single shipment from the producer to the ultimate consumer. The flow of goods was slow and its pace irregular. The move- ment of goods still depended on the vagaries of wind and weather. A sailing ship could leave on schedule but one could never predict the precise time of arrival. A transatlantic voyage might take from three weeks to three months. Droughts and freshets delayed shipments along rivers and canals in the summer, spring, and fall. Winter freezes stopped movement of goods completely for several months in all but the southern parts of the country. Snows isolated even the largest cities for days, and heavy rains kept smaller interior towns and villages mud-bound for weeks.
Of even more significance, the movement of goods still relied, as it had for centuries, on wind and animal power. The traditional transportation technologies offered little opportunity for improvement. By 1840 the speed of a stagecoach, canal boat, or sailing ship, or the volume carried by these facilities, could not be substantially increased by improving their design. By 1840 steam power was just beginning to be used in overland transportation. (The nation’s first railroads only began to go into operation in the 1830s.) And steamboats were still used only on quiet rivers, bays, and lakes. They were not yet technologically advanced enough to be employed in the coastal or transatlantic trades. In 1840, well over 90 percent of the Post Office’s mail routes were still dependent on the horse.52 New technology had not yet lifted the age-old constraints on the speed a given amount of goods might be moved over a given distance. Such constraints, in turn, put a ceiling on the volume of activity a commercial enterprise was called upon to handle.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.