This paper examines the economic history of the United States from the Reconstruction era following the Civil War through the early 21st century, with a central focus on the role of central banking — culminating in the establishment of the Federal Reserve System in 1913. The paper traces key turning points including the collapse of the Southern agricultural economy, the industrialization of the Gilded Age, the banking panics of the late 19th century, the Great Depression, World War II, the Cold War economic boom, and the rise of the internet economy. Throughout, it argues that the presence or absence of a central bank has been a defining force shaping each era of American economic life.
The economic history of the United States since the Reconstruction period following the Civil War has varied through epochs of both prosperity and despair. Analysis of the trends that influenced — and were made manifest during — this time period reveals the interrelation of several events, people, agencies, and structures that have had a significant impact on the economics of this country. The chronological development of the United States' monetary history began well before the Civil War and has always revolved around the controversy surrounding the development of a central bank.
Although the charter for the Bank of the United States — originally conceived by Alexander Hamilton in 1791 — had expired in 1837 largely due to Andrew Jackson's refusal to renew it, the lack of such a financial institution, and its eventual re-establishment, proved highly influential in the economic history of this country. This paper demonstrates that the measures the United States was forced to employ without a central banking system, as well as the measures it was able to effect once it implemented one in 1913, have had a powerful influence on the disparate economic climates throughout the country's history.
Although speculation exists that the actual reason behind the waging of the Civil War was to re-establish a central U.S. bank, the fact remains that there was no such institution both before the war and during the period of Reconstruction immediately afterward, which spanned approximately from 1865 to 1877. During this particular time period, the economy of the United States was still divided between the war-ravaged Southern agricultural system — which was badly failing following its defeat — and a fledgling industrial system in the Northern states. In addition to the huge losses of arable land destroyed by Union troops during combat, the Southern agricultural economy, which had been dependent upon slave labor to thrive, was virtually without employees to work the land and generate financial profit. The output of traditionally lucrative crops such as tobacco, cotton, and sugar plummeted during Reconstruction.
Politically, the effects of the abolition of slavery and the various Reconstruction Acts were in large part a barrier to the Southern economy, which had previously been a significant contributor to that of the United States as a whole. While Northern Reconstruction efforts sought to enfranchise new freedmen with social measures that included the right to vote and rights of citizenship, the Southern states faced the arduous task of rebuilding their economy — without a central U.S. bank to support it. As one historian observed: "The collapse of the movement for southern independence involved the failure of every bank of issue and stamped every dollar of the circulating medium of the Confederacy as worthless. Banking enterprises had to be rebuilt from the foundation" (Anderson, 1943, p. 1).
In response to the severity of these economic issues, attempts were made by many Reconstruction partisans to redistribute land in the South to former slaves. Although many of these measures met with little or varying degrees of success, the final solution would be far less radical than those proposed by "fire-eater" Republicans such as Charles Sumner, Benjamin Wade, and Thaddeus Stevens. Sharecropping was widely adopted throughout the Southern states, incorporating a system in which a plantation remained under a single owner while portions of it were leased to tenants — either African American or Caucasian — who shared the profits with the owner. The outcome of these measures and the slow process of revitalizing independent banking institutions in the South was that the United States' economy shifted away from the agricultural small-farmer nation that Thomas Jefferson had envisioned, toward an industrial nation led by developments in the North and West, driven in large part by the expansion of the railroad and the influx of immigrants.
The United States' economy became increasingly based on industrialization during the turn of the 20th century. Several factors account for this trend, including the development and expanded use of the railroad, which not only allowed nationwide access to resources and personnel for industry, but also became an industry unto itself — some of the first monopolies and trusts were built around the lucrative profits of railroad business. The production of steel similarly fueled growing industrialization, providing a firm foundation for construction and generating its own substantial industry. Additionally, the immigration waves of Eastern and Southern Europeans — primarily Italians and Jews — provided the country with a steady source of labor to carry out the industrialization process.
A significant social and economic consequence of the Gilded Age was that the country's agricultural sector became increasingly marginalized. The shift toward industry created recessions and banking panics in 1893 and 1907, during which farmers were the most severely affected. In direct response to these difficult economic periods — occurring within what was otherwise a generally prosperous era in American history — the Populist Party was formed, and from its legacy arose the age of Progressivism. The Populist Party directly championed the agricultural concerns of farmers, while the Progressive Party, created in the early 20th century, sought to stem the tide of corruption spreading through both industry and politics.
The outcome of these political attempts to preserve economic integrity and restrain the power of large business was the implementation of the Federal Reserve System in 1913. Despite being divided into 12 regional sections, it still constitutes a centralized bank, as a single chairman oversees all of its various segments. The creation of this national monetary authority had a number of substantial effects across economic and other areas of American history. With a central money supply, inflation and deflation could be more readily managed — or caused — simply by expanding or contracting the money supply. It is also noteworthy that the United States' imperialist ambitions began in earnest shortly after the creation of the Federal Reserve, as evidenced by the country's entry into World War I in 1917. The economic influence of wartime mobilization proved so significant that similar enterprises would be repeated in the coming decades: "Over four million Americans served in the armed forces, and the U.S. economy turned out a vast supply of raw materials and munitions" (Rockoff, 2008, p. 8).
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A thorough analysis of the various epochs in the history of the U.S. economy demonstrates that the founding of a central bank — the Federal Reserve System — has had a substantial impact on the disparate economic climates of this country's history. An equally thorough analysis of the constitution of that central bank, detailing how it operates, who runs it, and where its initial funding originated, would be required to fully understand why these events unfolded as they did. Several theories abound regarding the ownership of this particular financial institution, and some have linked it to some of the oldest banking interests in the world. Such an examination, however, cannot be encompassed within a survey of U.S. economic history and requires its own separate analysis. The findings of such an inquiry would doubtlessly bear upon the present and future development of the U.S. economy.
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