American capitalism and the role of government

Noam Maggor, Senior Lecturer in American History at Queen Mary University of London, examines the beginnings of American capitalism.

Noam Maggor

Senior Lecturer in American History

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Noam Maggor

Senior Lecturer in American History

18 Oct 2021

Key Points

We often associate the rise of American capitalism with the stories of private entrepreneurs. However, government policies were key to industrialisation.
Many crucial government policies in the United States are made at the level of individual states.
The American development model focuses on fostering economic development rather than offering a social safety net.

Stories of American capitalism

When we think about American capitalism, we often associate it with the great tycoons of the 19th century: J. P. Morgan, John D. Rockefeller, Andrew Carnegie, Cornelius Vanderbilt and the others. This is how historians have traditionally narrated the history of American capitalism. The great entrepreneurs had visions of industrial progress; they took on some of those ideas and implemented them.

Some historians have thought about these stories in positive terms, so these were heroic individuals who carried the American economy forward. Other historians were much more negative in their portrayals. They thought about these men as opportunistic, as corrupt, as people who became overly powerful and corrupted the virtues of the American Republic. Historians have taken different positions on this debate about those key individuals.

Nevertheless, the question that often got lost in these stories about the great entrepreneurs, corporations and businessmen is why America industrialised in the first place. For much of the 19th century, the United States was an agrarian society. It was initially a slave society, exporting cotton. In many ways – and we now appreciate this more and more – it looked more like Cuba, Brazil and other places in Latin America where economies grew quickly in the 19th century but mostly relied on the export of minerals and raw commodities to Europe.

From slave society to industrial society

Photo by Everett Collection

When you think about this history of how the United States transformed itself – how it reinvented itself from its origins as a slave society to become the largest industrial society in the world with the largest manufacturing economy by the end of the 19th century – some of these older narratives that emphasised the entrepreneurs, the tycoons and the business visionaries become a lot less persuasive. We begin to think about American institutions, the American political system and American government policies. We think about what they facilitated in the context of the United States that institutions in other parts of the world did not facilitate nor nurture.

The focus shifts away from private market forces, investors, financiers, bankers and merchants – people who were fairly happy with the older commercial economy that increased in the 19th century – to questions about what ultimately generated this massive boom in industrialisation, particularly in the late 19th century. This forces us to put government policies at the centre and to see them as much more formative to the trajectory of American capitalism than we traditionally have assumed.

The role of government policies

As the United States moved away from its origins as an exporter of agricultural commodities and quickly became a large industrial and manufacturing economy, it did so under tariff protections. At that point, the United States abandoned its former commitment to free trade and enacted protectionist tariffs to help American manufacturers compete against British, German and other European competitors.

This was, however, just the tip of the iceberg. This was only the beginning of what the US government and state institutions were doing in this period to nurture American manufacturing. The American West is an excellent example of immense government activism: removing the indigenous populations, surveying and mapping Western territories, privatising them, bringing them to market. In a way, the US government took on a lot of the initial investment to figure out where the useful minerals were, where the valuable places were to dig and to extract resources.

A political vision of development

Photo By Everett collection

The federal government took on a lot of that initial expense. It then privatised a lot of those territories. It provided immense land grants and subsidies and protections to railroad corporations to penetrate these territories in the West. At that point, the West was relatively sparsely settled. It did not make sense from a market perspective to build a lot of this infrastructure and move into those territories. However, it became a political priority for the government to develop those territories. Therefore, the government put in a lot of the incentives and a lot of public resources behind infrastructure projects in those Western territories.

Essentially, all of the initial infrastructure in the United States was created by public institutions, by either the federal government or the individual states, going back to the Canal Age and the early stages of railroad construction. Even later on, all of this construction was either directly funded or heavily subsidised by public authorities who had visions of development.

They wanted to develop the economy, and they saw that private entrepreneurs would not step into some of these territories on their own accord. Nobody thought that a place like Michigan or Illinois was a good place to build railroads in because it was sparsely settled, and there was hardly any economic activity there. Therefore, government authorities had to formulate a vision of development and subsidise some of the initial stages before private entrepreneurs were willing to risk their private capital to build up their own ventures.

Federal versus State power

Conventionally, the federal constitution constrains what the federal government is authorised to do. This is a battle that we’re still fighting, for example, in connection with Obamacare: does the federal government have the authority to step into a particular region, State or industry and regulate it? However, the States had much more expanded powers to intervene in the economy, which is why a lot of the crucial government policies in the United States played out on the level of individual States and not on a federal level.

The politics of many of those States also tended to be a lot less insulated from democratic pressures. The federal government had several layers built-in that insulate it from popular demands and pressures, such as the Electoral College or the Supreme Court. On an individual State-level, a lot of the constituencies – farmers, workers, miners – had direct access to the halls of power, the public arenas where policy was being enacted. Therefore, they gained a lot more leverage to push back against some of the business interests in the State.

Negotiating with the public

Ironically, those are the States in which private corporations had to negotiate with local populations. They had to strike deals and make concessions to the demands of the population, which is why in those places we see a lot of investment in public education and public infrastructure. We see progressive taxation, a lot of antitrust activity, like going after monopolies and a lot of regulation.

If you only look at the federal level – and this has been the challenge and the problem for historians – it seems like most of the economy of the United States was unregulated. The doctrine of laissez-faire is a legacy of the late 19th century. When you move to the State-level, you see a lot of regulation. You see a thicket of constraints and regulations and taxes that were being imposed on private interests. Instead of being concentrated in the hands of investors, a lot of the resources bled into other parts of society – different regions – which also helps explain why they soon diversified economically.

The automobile industry

Photo by AR Pictures

The most iconic accomplishment of this form of American industrialisation, primarily in the Midwestern belt, is the emergence of the automobile industry. This is an industry that didn’t emerge as the product of capitalist visionaries who came in and built it up. It’s very different from mining and other more extractive industries.

This industry is indigenous to the Michigan area. Henry Ford is most associated with this industry, but he’s simply the face of what was a kind of ecosystem of many mechanics and other people tinkering in their garages, coming up with new technologies and ultimately generating this product that we associate with American modernity.

The American model of development

The development model that emerged in the late 19th century and early 20th century is a model that fit the United States as a frontier economy: an economy that first emerged as an exporter of agricultural commodities, primary goods, and was able to drive a massive process of industrialisation through those policies.

This development model is unique. It was successful at fostering technological innovation, at promoting a model of grassroots industrialisation and manufacturing. However, it was less successful at fostering a welfare State. It is a State that’s very focused on driving economic development, and less so on offering welfare protections for workers, social security or healthcare. Those types of issues were the ones that often got marginalised in that system. It was much more focused and oriented toward promoting the welfare of Americans by fostering economic development rather than offering them a social safety net.