As Orestes Brownson made clear in The American Republic, the Union victory in the Civil War marked the end of the conflict between Northern industrial and commercial capitalism, and Southern agrarian capitalism, and the beginning of the struggle between all forms of capitalism and its reaction, socialism. The development of both capitalism and socialism, as is now generally recognized, is an inevitable consequence of the lack of capital ownership on the part of ordinary people, and both are equally disastrous for anyone in the lower income group. As Irish economist George O'Brien noted,
"The dissolution of the monasteries in England and the confiscation of ecclesiastical land was followed by consequences of the gravest character to the condition of the poorer classes; . . . . it resulted in the encouragement of an individualistic and irresponsible conception of the functions of property, or in so far as it points to a revolutionary and socialistic spirit, displaying itself in a contempt for vested and prescriptive rights." (George O'Brien, An Essay on the Economic Effects of the Reformation. Westminster, Maryland: The Newman Bookshop, 1944, 11; originally published 1923.)
The genius of Abraham Lincoln and the Homestead Act of 1862 forestalled the conflict and the effects of the conflict between capitalism and socialism for a time. By the 1870s, however, the mismanaged monetary policy implemented to finance the war effort and the equally mismanaged corrective in the form of the National Bank Act of 1863 had combined to lock the United States into the swings of the business or economic cycle.
The economic cycle had been a characteristic of the economies of Europe since the Panic of 1825. The Panic, considered the first financial downturn caused by the operation of the financial system itself, resulted from increasingly concentrated ownership of capital in fewer and fewer hands. This funneled increasing amounts of income into the hands of people who could not consume it all, and caused a decrease in overall consumer demand relative to the productive capacity of the economy.
According to popular wisdom, the savings generated in this fashion were presumably reinvested to finance additional new capital. While this is true to a degree, most savings were already invested, and were not in the form of cash. The actual use of savings was (and remains) as collateral to secure bills drawn for the financing of new capital, and discounted either with suppliers of capital, or at a mercantile or commercial bank.
Excess cash (as opposed to the vast bulk of savings already in the form of investment) began to be funneled into the speculative stock market. This was nothing new. It had happened in the "South Sea Bubble" in the early 18th century, financing speculative companies, some of which sounded particularly shady even then, such as one formed for "undisclosed purposes"! Similarly, in the 1820s, a company was founded and a stock issue floated to recover the gold lost by the Egyptians when they pursued Moses and the Israelites into the Red Sea.
What was different in the Panic of 1825 — and which should cause serious alarm today — was the new importance of "sovereign debt" in the market, particularly the new issues of the recently established republics of Central and South America. A financial panic thereby afflicted not simply the wealthy who invested their surplus income in private speculations and the presumably safe government securities, but every citizen of a country that defaulted on its securities, or was unable to raise sufficient cash to keep the new country running until it could build up the tax base. Further, the massive investments in sovereign debt diverted people away from productive investment, especially when they believed themselves bound by existing accumulations of savings, which were determined by the degree to which consumption had been restricted in the past.
Prior to the American Civil War, most of the people in the United States were engaged in small business or small agriculture. The development of agriculture, industry and commerce developed at more or less the same pace. This, along with the fact that all three were typically small enterprises, spread out capital ownership and kept productive capacity and consumption capacity more or less in equilibrium. The various financial panics, especially "Hard Times" of the 1830s, were clearly due to factors other than the economic cycle.
There were some rich people with large business interests, but they did not set the tone for either society or the economy. The Civil War spawned the birth of big business. The new National Bank system was, along with the greenbacks (United States Notes), used to finance the war effort, not new ownership of capital. Private individuals financed the new capital during the war to expand existing industry and commerce by drawing bills on the present value of the future production and collateralized them with existing capital, virtually all existing savings having been drained out of the economy by the war effort. They naturally discounted the bills for their own benefit. This concentrated ownership of the new capital.
After the war the pace of industrial and commercial development accelerated at a tremendous rate. The Homestead Act spurred agricultural development, but not at the same frantic rate at which commerce and industry developed. This was due to two factors. One, agricultural development takes more time than industry or commerce. Given the agricultural technology of the 19th century, it could take three to five years for a farming or ranching operation to become financially feasible.
At the same time, an industrial or commercial enterprise could become financially feasible in months, on occasion days, where agriculture required years. Western folklore and written history are replete with stories of someone's wagon breaking down in the morning and starting a store or a blacksmith shop by the side of the trail or a river crossing, or making a gold strike, and by nightfall a tent city springing up, complete with boarding houses, saloons, and restaurants, even theaters. "Hell on Wheels," the rolling towns consisting of gambling dens and whorehouses that accompanied the railroads as they moved west, could open for business in minutes at "End of Track," with towns built up around them in less than a week.
Consequently, productive capacity consistently outpaced consumptive capacity due to the concentrated ownership of the rapidly expanding commercial and industrial base, throwing the economy out of equilibrium. Making the situation worse, the new large commercial and industrial enterprises could obtain all the financing they wanted at the state banks and the National Banks by discounting bills, but the small farmer, homesteader and businessman were locked into the existing pool of savings for financing development.
Because the policy of the federal government was to deflate the paper currency to reestablish parity with gold and restore the "faith and credit" of the United States, there was insufficient money and credit to finance small enterprises at the same rate as the large enterprises. Making matters worse, farmers and small businessmen had taken out loans during the war when prices were high and money in the form of the inflated greenback currency was plentiful, and were now forced to repay the loans when prices were falling and money was scarce.
The result was the Panic of 1873, which began in Europe as a result of German Chancellor Prince Otto von Bismarck's financial machinations intended to weaken the Austro-Hungarian Empire (after dealing what he thought was a death blow to the French Empire in the Franco-Prussian War) and make the new German Reich the top political and financial power in Europe. The Panic spread to the United States and caused a depression that lasted until 1879.
Twenty years later many people blamed the depression and subsequent financial troubles of the country on the Coinage Act of 1873, the "Crime of '73." This explanation, while it entered conspiracy lore, fails to take into account the fact that the business failures that triggered the panic in the United States had next-to-nothing to do with the shift to the gold standard, and everything to do with the lack of consumer demand to sustain the rapidly expanding railroads and other industrial and commercial expansion.
In response, both populism and socialism got a kick start. Both originally clearly differentiated, populism was strongest in the South and the West, where you had the tradition of ownership. In the East, with its growing population of propertyless workers, socialism was strongest. As the understanding — and fact — of small property began to erode rapidly hard upon the heels of the drying up of capital credit for small development, populism began in many cases to be another form of socialism.
In order to promote socialism or save capitalism (depending on how we want to look at it), American intellectuals began using the vague decision in the Slaughterhouse Cases to redefine property. Capitalist apologists argued in favor of the absolute exercise of the previously limited exercise of property, and acted to limit ownership to (in Walter Bagehot's words) a chosen people. (Bagehot's emphasis.) Those inclined to socialism argued against private ownership or control, claiming that no one should be able to own the means of production as private property, and thereby enjoy the result of the phenomenal increase in productive capacity made possible by technological advances.
Things reached such a pitch that by 1891, when Pope Leo XIII issued his encyclical Rerum Novarum ("On Labor and Capital"), his strictures about the importance of ordinary people owning capital — based solidly on the philosophy of Aristotle and Aquinas — were taken by many people as dangerous innovations, and rejected by both capitalists and socialists! In an argument you find repeated even today, the head of the Catholic Church — an institution that bases its legitimacy in part on the claim that it has never altered the truths that have been granted to it — was accused even by faithful Catholics of inventing an entirely new truth about private property.
The tipping point, however, came in 1893, with the Panic of 1893 and the Great Depression of 1893 to 1898. Serious weaknesses were revealed in the financial system. In response to the stress resulting from the changes in the economy with the drying up of opportunities for ordinary people to own landed capital with the effective end of the "free" land available under the Homestead Act, populism completely failed to address the underlying causes of the situation. Populism's failure, even under the inspired leadership of William Jennings Bryan, led to the development of widespread acceptance of "the conspiracy" as a way of explaining things. It also led to the first widespread demands that the government take over control of the economy for the common good.