Types of Economic Systems

There are essentially three basic kinds of economic systems.  If people do things because "it's always been done that way," that is a traditional economy.  You do it that way because people in the past did it that way. If the government tells businesses what to do, that is a command economy.  If people make whatever they want, and buy whatever they can afford, often with some government regulation of business, that is a market economy.

The Economic Transformation of the United States

The history of business in American is a story of the transformation of an agricultural economy, or one based primarily on farming, to an economy where capitalism, or private ownership of businesses, prevailed.

In the beginning, the English saw the colonies as a business investment. In short, the colonies existed for the betterment of the mother country. To the colonists in America, business was much more important than it was to those who lived back in England.

In England, one simply could not be both engaged in business, and call oneself a gentleman. To the aristocracy, the two were mutually exclusive. In America, however, business was the catalyst for the revolutionary changes that would come later.  From the time of settlement to the Revolution, the political and social ideals that later spurred the Revolution -democracy, independence and equality- grew from American involvement in business.
 

From Revolution to Reconstruction

During the 1800s business and industry developed in America in different ways, and much depended on geography.  Because of the easy access to natural power sources, the northern states were inclined to develop manufacturing and other factory-related businesses.  The Erie Canal further helped factory-made goods, and people travel westward, and eventually, railroads followed its path. With industry, came wealth, and power.  In comparison, the southern states tended to rely upon farming, creating an agricultural economy. As a result, cultural differences between northern and southern states increased, as ways of life diverged.

American government in the 19th-century officially endorsed a laissez-faire policy.  They kept their "hands off" of business, letting it run itself. The U.S. Government also tried to protect American manufacturers by passing protective tariffs, or taxes on imported goods. This made American goods seem cheaper, more affordable. The government also issued patents for new inventions, protecting the inventor from having ideas stolen.

Following the Civil War, industrialization in the United States advanced rapidly.  One reason for the dramatic economic transformation was that rural workers and immigrants moved into the cities at an amazing rate.  By 1880, over 25% of the entire population lived in cities.  But railroad expansion was the key to the rapid industrialization following the Civil War. 

The first railroad to connect the coasts was completed in 1869.  It connected the formerly remote rural settlements to distant urban markets, and brought settlers west in search of land.  With the country linked together like this, some businesses saw an opportunity to develop a national market emerge.  Nationwide department stores and mail-order catalog companies grew to accommodate the increased demand for finished goods across the nation.

Before the Civil War, most business was owned by individuals or were partnerships.  After the war, corporations became more popular.  To build capital, a corporation sells partial ownership in itself to investors, called stockholders, and shares profits with them. The advantage of a corporation, is that accountability is limited, because a corporation is recognized by state law as a separate person.  So, if a corporation goes bankrupt, it doesn't ruin the actual people involved, it just disappears. 

As similar business grew, they realized that they were competing with each other, and lowering everyone's profits.  Many of these companies formed agreements to join together and control their industry.  These cartels, as the trade groups became known, artificially lowered production to increase prices, and, with them, profits.  Sometimes, though, the cartels couldn't stand up to deep recessions, or downturns in the economy.

Thieves or Great Leaders?

With the incredible success of large corporations and trust, several crafty businessmen became unbelievably wealthy.  These ultra-rich capitalists gave the time period its name, the Gilded Age, because of their extravagant lifestyles. 

Some citizens thought they were the "Captains of Industry" because the men helped create the modern economy based on business and industry.  Critics called them "Robber Barons" because of the ruthless way these corporate executives tried to destroy all competition and keep wages low.  After the depression of 1873, many large manufacturers began to drive smaller companies out of business and take over those companies.  Sometimes corporations would join together, instead, forming a trust, completely controlling the production and sale of a product.  Gaining complete control of a market is known as having a monopoly.

To illustrate this, consider that Andrew Carnegie emigrated to America with almost nothing. He ended up one of the richest men ever, controlling most of American steel production in the early 1900s. John D. Rockefeller controlled almost 90% of oil-related business in the nation.  He was so powerful, he was able to force even the huge railroad companies to give him special rates.  John Pierpont "J.P." Morgan, an investment banker worked with Rockefeller to accomplish such amazing exploits.  As an example of their success, Morgan and Rockefeller, together in 1912, controlled over 100 corporations worth over $22 billion .  They would be worth over $400 billion in 2003 money.

The Government's Reaction
The Federal Government generally allowed business to operate freely.  Some of the abuses of big business, though, soon called for government intervention.  At first, states tried to regulate the railroads.  Then the Supreme Court ruled in Wabash v. Illinois (1886) that only the federal government has the authority to regulate railroads. 

A year later, Congress passed the Interstate Commerce Act (1887).  It established the first federal regulatory agency, and tried to stop railroad abuses and discrimination.  Change continued, and in 1890 Congress passed the Sherman Anti-Trust Act.  It allowed federal prosecution against any "combination in the form of trusts or otherwise, or conspiracy, in restraint of trade." Ironically, this law was used more against unions in its early days, than against "big business."  

It wasn't until the administration of Teddy Roosevelt that the federal government was successful in combating the growing power of trusts. Roosevelt argued that "trust-busting" would protect the farmers, workers and consumers being taken advantage of by huge mega-corporations.  He hoped that by regulating the offending companies, the economy of the entire country would benefit.