The Gilded Age: 1866-1889

The Gilded Age witnessed the creation of a modern industrial economy with a national transportation and communication network. In addition, the corporation became the dominant form of business organization and a managerial revolution transformed business operations. Industrial production and per capita income rose sharply and the United States grew in economic power second only to Great Britain. Heavy industry, railroads, steel, oil, sugar, meatpacking, agriculture, machinery and coal mining financed by capital from the nation’s financial market on Wall Street dominated the economic landscape. New access to the American West and its natural resources supplied the raw materials for economic and corporate expansion while the completion of the rail system enabled the massive export of resources.

Technology, mechanization and innovation drove increases in productivity, allowing corporations to produce more goods with fewer resources in less time. Changes in factory design increased the rate of production while undercutting the need for skilled labor as unskilled labor was able to perform simple and repetitive tasks under the direction of skilled foremen and engineers. In turn, skilled labor and engineers were drawn to machine shops which grew rapidly. Both the number of unskilled and skilled workers increased and their wage rates grew. Engineering colleges were established to supply the growing demand for expertise. Railroads, which tripled in mileage between 1860 and 1880, invented bureaucratic corporate structures using middle managers and set up specific career tracks for their employees. For example, young men were hired and promoted internally until they reached the position of locomotive engineer, conductor or station agent. The concept of career tracks spread from the railroads to other skilled blue collar jobs and for white collar managers and expanded into finance, manufacturing and trade. Smaller businesses also thrived and together with the labor force employed by large business, a new middle class developed, especially in the Northern cities.

Americans had a strong sense of civic virtue and were often shocked by scandals in corrupt state governments and cities controlled by political machines where payoffs to secure government contracts was common. A widespread belief that government intervention in the economy inevitably led to favoritism, bribery, kickbacks, inefficiency, waste and corruption led to pressure for a free market with low tariffs, low taxes, less spending and a Laissez-Faire (hands-off) government. Many business and professional people supported these goals although there were often calls for high tariffs to insulate American workers from low wages in Europe. The period was also marked by long work hours and sometimes hazardous working conditions which led to led to the beginning of the Labor Movement despite strong opposition from industrialists and the courts. Labor activists and agrarians focused their attacks on monopolies and railroads, arguing they were unfair to the common man. Overall, Republican and Democratic political platforms remained remarkably constant during this period, however, Republicans often complained that high tariffs benefited industrialists more than their employees who, even at the time, were regarded by many as being exploited.

At times economic growth was interrupted by financial panics, most notably, the Panic of 1873 and the Panic of 1884. The Panic of 1873 was precipitated by the bankruptcy of the Philadelphia banking firm, Jay Cooke & Company, a major financier of railroad expansion, on September 18, 1873. It came right on the heels of a number of economic setbacks including the Black Friday panic of 1869, the Chicago fire of 1871, the outbreak of equine influenza in 1872 and demonetization of silver in 1873. The failure of the Jay Cooke bank set off a chain reaction of bank failures and temporarily closed the New York stock market. Factories began to lay off workers. Between 1873 and 1875, 89 railroads went bankrupt and a total of 18,000 businesses failed. Historians record that the panic led to the Long Depression which the National Bureau of Economic Research records as the longest-lasting contraction in U.S. history. At 65 months, this period eclipses the Great Depression’s 43 month contraction. In the case of the United States, the Long Depression is more myth than fact as the period was marked by deflation but not falling production and the GDP grew throughout the period except in 1874. The Panic of 1884, a relatively short downturn, occurred when a depletion of gold reserves in Europe led New York City national banks to reduce investments in the rest of the country and call outstanding loans. As a result, the Marine Bank of New York, Penn Bank of Pittsburgh, the investment firm, Grant & Ward, and more than 10,000 small firms failed.

Despite the economic panics and recessions, the CEPPI Index records a period of excellent performance. Inflation was non-existent as prices fell on average 2.3% per year. Budget deficits were also non-existent as the government ran surpluses averaging .7% of GDP. Most importantly, GDP growth averaged a very strong 4.5% per year with economic contractions over 1% occurring only in 1874, 1883 and 1888. The average CEPPI score was Good, 97.5, and the period ranks 4th out of 14 economic periods examined.