Growing WealthLarge projects require more money than most individuals can command, and the big commercial banks are only located in big ports, supporting shipping. This makes it difficult to launch ambitious new ventures elsewhere. As a consequence, larger enterprises are typically financed by small groups of private investors, pooling their resources to get the business started. Investors own private shares in the company, and divide the profits. Commercial banks mostly transfer money from one account to another, to 'settle' all the paper transactions involved in routine business. The first investors to raise significant private capital are ship owners and merchants. |
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Real Cities Now that Britain's former iron grip on colonial shipping has been thrown off, Americans have free access to all the major ports of Europe, India and even China. This allows importing all the elements required to build the kind of manufacturing base pioneered by the British. With its unsurpassed harbor, New York has blown past Philadelphia to become the premier city in America, with 200,000 residents. Brooklyn is still a separate city from New York, with its own extensive dock facilities, which will allow it to grow to become the country's third largest city within 30 years. Washington DC has been built on former swampland to become the new nation's capital, but the only government buildings, so far, are the Capitol and the White House. | |||||||||
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Scarce Capital Textile mills are America's first truly big commercial ventures, adapting the British model to the American landscape. The chart at lower left shows that commercial banks control most investment capital, but the new mills require greater startup funding than such banks can normally provide. America's first textile mill is built in Rhode Island by Samuel Slater, who turns to a local merchant for financing. The first fully integrated textile mill (last item in the chart at top right) requires startup capital equal to that of an entire bank. The same chart shows that the most ambitious investments, like the Erie Canal (funded by the state of New York), and the Lowell Mills (funded by private investors) require funding equal to the entire working capital of 12 such banks. | |||||||||
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Paper Money Most money in America is paper currency, issued by private and state banks, and used locally (top left). The First Bank of the United States is given only a very limited role when it opens in 1791, and closes after 20 years when its charter expires. After this, state and private banks issue their own banknotes, with no regulation, and no limit on the amount of new paper currency that can be issued. This makes banking highly profitable, but creates incentives to print too much new money. The Second Bank of the US is created in 1816, with a much broader function, and much more capital. It issues its own banknotes (lower left), which effectively put an end to the era of unregulated money creation (chart at top right). | |||||||||
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Expanding Corporate Model Back in 1810, few business ventures are large enough to require outside investors. Most are started by single individuals, or are local infrastructure projects tied to local needs, like bridges. By 1830, however, textile mills are appearing from Maine to North Carolina, needing large capital investment to purchase all the required equipment. Commercial banks, turnpikes and steamship lines are also turning to the corporate model, which enables funding from a larger group of initial investors, who receive ownership shares in proportion to their contribution. By 1850, large-scale operations, like insurance companies and railroads, need even larger pools of potential investors. Private stock offerings for new start-up businesses are becoming more common. | |||||||||
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Boom and Bust Banks make money on interest they receive from the money they lend out. They keep a small amount of gold and silver in their vaults (see chart at right), but generally float loans far in excess of the actual money they have on hand, especially to land speculators. When economic conditions suddenly worsen, sometimes because of distant European wars, customers may attempt to withdraw their deposits all at once. To raise cash, the banks start 'calling in' their loans by demanding immediate repayment, which aggravates the economic downturn. Real estate loans often can't be paid back immediately, and some banks can't honor all the withdrawal requests. The seven-year Panic of 1837 results in the failure of 200 banks. | |||||||||