Alexander Hamilton, the new Secretary of the Treasury, saw better than anyone the need for industrial development. In 1791, while working on the Report on Manufactures that he delivered to Congress that same year, he founded the Society for Establishing Useful Manufactures (SEUM) with his colleague Tench Coxe. Thanks to their connections with investors, the first stock subscription sold out immediately, and they worked quickly to develop a waterpower site near the Great Falls of the Passaic River in New Jersey. They envisioned a state‐sponsored manufacturing town and called it Paterson, in honor of the sitting governor – who returned the favor by granting the new company a state charter for exclusive access to the falls, as well as a 10‐year tax exemption. Soon a cotton spinning mill was up and running, with plans for a major complex churning out a variety of products. Meanwhile, the spies they had sent to Britain collected valuable information that would help in the endeavor. They also hired some immigrants who claimed experience in factory life and operation.

Flush with capital, cozy with the local government, and likely overconfident, the SEUM took on too much too soon, with inadequate oversight. Hamilton hired Pierre L'Enfant, future architect of Washington, D.C., to design the factory town, and the Frenchman embarked on an extravagant, costly plan. Hamilton also packed the board with financiers who lacked industrial expertise, including chairman William Duer, who stole from the coffers when the Panic of 1792 squeezed his other investments. Misappropriation was rife, and underpaid workers resorted to stealing machinery. By 1796, his grand SEUM had collapsed into bankruptcy and all operations ceased.

Meanwhile in Rhode Island, an entrepreneur of a different sort mounted a similar attempt. In 1788, Moses Brown, one of the Brown brothers who led the rebellion against the British and helped build Providence into a flourishing port, was hoping to discover a new area of economic activity. The postwar loss of access to British colonial markets had severely diminished the general shipping trade, and he had already abandoned the slave trade. Rhode Island lacked the natural resources of other colonies, so unemployment was severe; hence its reliance on paper money. Eager to help his fellow citizens and open a new line of business for the next generation of Browns, Moses came out of retirement and tried to set up a textile factory.¹

He journeyed to New York, looking for skilled mechanics, but got nowhere until receiving a letter from Samuel Slater, an ambitious young Englishman who had worked in Richard Arkwright's pioneering spinning mill in England – and had memorized the designs of those machines. Brown jumped on the news and promised Slater not just a salary but a share in the profits. Slater had already arrived in New York, but Brown's generous offer convinced him to move to Providence. By 1790, Slater had set up a rudimentary spinning mill along the Blackstone River in Pawtucket, a village just north of Providence. The experiment worked well enough to convince Brown to build a bigger, complete factory on the same spot.

Once the mill was running, Moses Brown returned to retirement, leaving the mill to the firm of his son‐in‐law William Almy and his nephew Smith Brown. Unlike the SEUM, Almy & Brown went into manufacturing with no protections and no illusions. They saw the mill as simply a cheap source of yarn to resell to their commercial contacts, and they gave Slater only just enough capital to keep operating. He worked hard to build up the new mill, innovating in small ways, while Almy & Brown gradually and soberly built up a steady market for the yarn. Eventually the mill in Pawtucket did so well that Slater, tired of sharing profits with Almy & Brown, set off on his own. While still overseeing the Pawtucket mill, he attracted enough capital to build what became a series of textile factories in southern New England. Slater became the “father of the American industrial revolution,” while the hit Broadway musical Hamilton never mentions Paterson.²

The Competing Visions of Hamilton and Jefferson

At the dawn of the new republic, grand visions of how – and by whom – the newly independent economy would be developed jostled in fierce competition. Some, like Hamilton, sought to replace the English mercantile system with a homegrown version, with the federal government working actively to develop infrastructure through grants, charters, and privileges; support nascent manufacturing industries; and use tariffs and the financial system to encourage growth and a national market. But others, most notably Thomas Jefferson, felt that this national government‐sponsored development brought with it a risk of cronyism writ large. They feared that a homegrown elite would simply recreate the troubled experience under monarchy.

Hamilton and Jefferson also had differing conceptions of who would drive this growth, with Hamilton believing that innovative national entrepreneurs with a large market would take the lead in pioneering new industries. Jefferson championed classic small business entrepreneurs such as artisans, mechanics, and yeoman farmers.³

Adam Smith, whose An Inquiry into the Nature and Causes of the Wealth of Nations (1776) was published the same year as the Declaration of Independence and Paine's Common Sense, made the case for laissez‐faire and the power of the “invisible hand” over government control. He argued in support of the colonies against England's mercantilist policies, and his ideas largely prevailed over time. Yet the basic needs of the new country and the competitive advantage that England had been developing in manufacturing weighed heavily on many, especially Hamilton.

With the Constitution providing only basic principles and a general framework, it fell to the initial Congress and executive to flesh out the new government. Led by George Washington and Hamilton, followed by Adams, the Federalists asserted broad federal powers, while the Democratic‐Republicans, under Jefferson and James Madison, promoted a countervailing sovereignty in the states. Federalists aimed to jump‐start development through federal intervention, which sparked worries of creating an aristocratic class of government‐sponsored incumbents. Democratic‐Republicans celebrated the right to compete in open markets free of quasi‐monarchical interference – though in doing so, they supported a legal status quo that usually favored local incumbency.

Federalists and Democratic‐Republicans agreed on some important institutions and provisions, such as the Patent Office to protect property rights to innovation, an important carryover from England.⁴ Similarly, Congress established a bankruptcy code to support risk‐taking, though the first act was only in place for a few years.⁵

Hamilton succeeded in convincing Congress to assume the debts incurred by the states during the Revolution in order to ensure the cardinal virtue of “property & credit.” The move both headed off dangerous state‐based currency plans, which were damaging creditors and deterring potential investors, and created a reliable market for federal government bonds. Such a market proved essential for channeling European savings into American development.⁶

But Hamilton made less headway in urging the government to foster and fund manufacturing enterprise through tariffs and subsidies. Would‐be entrepreneurs faced daunting obstacles, he wrote, including “the strong influence of habit and the spirit of imitation; the fear of want of success in untried enterprises; the intrinsic difficulties incident to first essays toward a competition with those who have already attained to perfection in the business to be attempted [referring to British manufacturers].”⁷ Hamilton wanted to protect these daring risk‐takers. But concerned about undercutting open markets and creating a privileged incumbency, Congress imposed only a modest tariff.⁸

Even as a select few were able to secure privileges at either the federal or state level, the rising middle class of artisans and small shopkeepers eventually jostled their way into opportunities as well. An important transition occurred in 1800 with the election of Thomas Jefferson to the presidency. Federalist John Adams was supported by the incumbents who had dominated trade with the British and had secured most of the privileges in the first years of union, so the transfer of power helped to prevent those incumbents from entrenching their position.⁹

Rather than undo the early Federalist building blocks for innovation, Jefferson's and subsequent Democratic‐Republican administrations concentrated on phasing out privileges at the federal level and shifting power to the states. State legislatures readily issued grants and charters, especially for infrastructure such as banks, turnpikes, and canals that required greater up‐front capital.¹⁰ Politically connected entrepreneurs combined pro‐development arguments with self‐interest, especially the Erie Canal, a state project begun in 1817 by Democratic‐Republican governor DeWitt Clinton and completed in 1825.¹¹

Jefferson did of course consummate the Louisiana Purchase in 1803, which along with the earlier Northwest Ordinance (1787) had led to rampant speculation and development. Moreover the expansionist policy of national infrastructure regained force under Madison after the War of 1812, with increases in tariffs and a rechartered federal bank. Nevertheless, the tension between national and state‐oriented development, as well as questions about the role of government involvement generally, would continue.

The Race to Get Ahead

At the end of the 18th century, opportunities were everywhere. With British restrictions removed, American merchants were free to compete in global trade, particularly in China, and in whaling. The Western frontier beckoned and fortunes such as John Jacob Astor's in fur trading were beginning.¹² A series of regrettable policies removing many Native Americans to lands west of the Mississippi River encouraged settlement.¹³ Moreover, new technologies and the harnessing of steam power meant that more innovation and commercial manufacturing possibilities were well underway.¹⁴ Finally, a swelling immigrant population (and expanded slave trading in the South) offered additional resources to help tackle the opportunities, while also themselves constituting a growing market. The country's population more than doubled from 3.9 million in 1790 to 9.6 million in 1820 and 31.5 million by 1860. Gross domestic product grew by a remarkable 3.7% per year from 1800 to 1850.¹⁵

In Salem, Massachusetts, Elias Derby dispatched ships for India and China and grew by 1800 to become the nation's “first millionaire.” But just like the Hancocks before the Revolution, he could not entrench his position. Soon the upstart Crowninshield family had jostled its way into the field, with help from the shifting legal system as well as opening new markets such as the first seagoing pepper trade.¹⁶ Like many, this rivalry also manifested itself in politics and the desire for influence. The Derbys were staunch Federalists, while the Crowninshields had thrown their hat in with the Democratic‐Republican party, the northern contingent of Jefferson's supporters.

The rise of new entrepreneurs could be seen in all parts of the economy. In Philadelphia, French immigrant Stephen Girard replaced Robert Morris, whose failed speculation landed him in debtor's prison, as the country's foremost financier. Girard purchased the impressive building of the First Bank of the United States, which was set up with Hamilton's support in 1791, after its 20‐year charter expired in 1811. Girard became one of the wealthiest men in the country and was critical in financing the government during the War of 1812. Local banks also sprouted up to support growth.¹⁷

Americans were also inventing, but amid entrepreneurial currents, even patents were no guarantee of success. The Constitution had clearly provided for the protection of patents and copyrights, but enforcement in the early days of the Republic was difficult and competition abounded. When Eli Whitney registered his cotton gin in 1793, he expected to profit through the gristmill model of charging farmers a percentage of the processed commodity. But Whitney lacked the capital to build enough gins (short for “engines”) to meet the enormous demand for this momentous new technology. Nor did he invest in perfecting the device. In the face of Whitney's passivity, patent infringement was inevitable, and the early Republic lacked the enforcement power – or will – to protect Whitney's property by itself. After only four years of operation, his firm went out of business.

Despite Whitney's mixed success, the pace of innovation continued. The country generated the most patents per capita in the world between 1810 and 1845, and much of this activity came from upstarts.¹⁸ According to one study, between 1820 and 1845, fewer than 20% of issued patents were to the children of professional or large landowning families, and about 40% of all patentees had at most a primary school education.¹⁹ The cost of obtaining a patent was lower in the United States than elsewhere.

Ironically, Whitney's failure in commercializing the cotton gin helped spawn another unique American feature, that of interchangeable parts. Such was the entrepreneurial culture that Whitney parlayed his fame as an inventor into a second career as a maker of low‐cost muskets, with a federal contract in 1798. This innovation helped speed innovation and efficiency, as incremental changes quickly found their way into the marketplace and economies of scale from specialization could be achieved. Interchangeability also democratized the economy by lowering the capital requirements for new market entrants. The “American System of Manufacturing” was taking root.²⁰

All of this activity resulted in significant increases in growth and productivity. It also led to quickened cycles of creative destruction. In transportation, for instance, early chartered companies had built roads, but the newer canals were increasing the range and lowering the cost of transportation. The Erie Canal cut costs by 75% and the time for transport by two‐thirds. Steam power similarly increased in use, with over 2,000 engines in operation by 1838, up from a handful in the 1780s.²¹ By the 1840s, railroads would be creating yet another set of changes.

Even the most substantial American fortunes could not afford to remain static, as prosperous markets soon became crowded. Capital had to move quickly to support the next big thing. Over the first half of the 19th century, the savviest merchants shifted their wealth from traditional shipping and commerce into manufacturing and railroads. In 1814, Francis Lowell and other Boston merchants built up the country's first integrated textile mill, financed largely by the capital of an earlier generation of sea captains and merchants.²² The mill took raw cotton through the entire textile process, from spinning and cording all the way to finished cloth, dramatically changing the profitability of that crop. Several decades later, when the market for textiles began to decline, the capital shifted elsewhere, including railroad securities and western development.

A scurry was underway locally and nationally, with incumbents seeking to secure their positions and upstarts trying to capture a share of the fast‐developing market. People had to hustle amid the shifting economic landscape, but the booming marketplace gave everyone an opportunity, especially the emerging “middling sort.” By 1800, Benjamin Franklin's Autobiography, the inspirational story of a resourceful, self‐made man that became America's paradigm, had become a bestseller. “Their Revolution told them that people's birth did not limit what they might become,” wrote Washington Irving.²³

Visitors picked up on the entrepreneurial mood. Alexis de Tocqueville, who came from France in 1831, reported that Americans were upstarts to the marrow of their bones. It was “difficult to describe the rapacity with which the American rushes forward to secure this immense booty that fortune proffers to him … Before him lies a boundless continent, and he urges onward as if time pressed and he was afraid of finding no room for his exertions.” This energy grew out of ambition, but also an innate optimism and spirit of adventure. “The desire of prosperity has become an ardent and restless passion in their minds, which grows by what it gains.”²⁴

Tocqueville was convinced that the leading cause of this striving was the openness of the government. “The democratic institutions of the United States, joined to the physical constitution of the country,” explained “the prodigious commercial activity of the inhabitants. It is not engendered by the laws, but the people learn how to promote it by the experience derived from legislation.”²⁵ That sense of relative equality, or at least no fixed hierarchy, fostered the entrepreneurial spirit.

Not just foreigners recognized something was afoot. Ralph Waldo Emerson touted American individualism and today is often cited – incorrectly – for coining the memorable phrase “build a better mousetrap and the world will beat a path to your door.” Emerson's celebration of self‐reliance and observations such as “man is born to be rich” made him a patron saint of sorts for American entrepreneurs of the era.²⁶ His assistant Henry David Thoreau, the son of a Concord pencil maker, was as rebellious as any entrepreneur, but ironically decided to abstain from the commercial frenzy altogether and live in the woods.

Balancing Property and Competition

During this period, the legal and institutional framework proved adept at supporting economic growth. Chief Justice John Marshall was the pivotal figure in establishing the national government's authority in the early era. Marshall was a Virginian and a cousin of Jefferson, though they disliked one another. Appointed by John Adams as the fourth chief justice in the country's history, he fell squarely in the camp of the nationalists, and his decisions reflect a bias toward nation‐building, a large nationwide marketplace, and secure property rights, while limiting local roadblocks and populist challenges. America's unicorns owe much to Marshall.

Overall, however, the judicial system maintained the balancing act between property rights and the right to compete. Marshall's Court initially tended to the former in order to promote investment. Meanwhile the more populist states favored both: the right to compete, as seen in laws against primogeniture and liberal rules on debt collection and paper money, and property rights at the local level. Together they worked to encourage a nouveau riche class to challenge the social dominance of the older elite.²⁷ The states still tolerated a great deal of local cronyism, but the trend was now to give ambitious upstarts a chance.

The supremacy of the Constitution was particularly important in securing contracts and safeguarding corporations at the mercy of state governments that tried to take them over or restrict their activities. In Trustees of Dartmouth College v. Woodward (1819), the Court ruled that legislatures must respect existing charters, even those granted under colonial rule, a critical step in ensuring stability for investment. Through this and other decisions, the independent federal judiciary promoted contractual rights at the state level, reinforcing private ordering in economic life and limiting local government overrides.

One of the most famous cases of the period solidified federal supremacy over the states for interstate commerce and the development of a national market. In Gibbons v. Ogden (1824), the Supreme Court ruled against a New York state‐granted monopoly to run a ferry line between New York and New Jersey, concluding that only the federal government could confer privileges over interstate commerce. The decision limited the ability of states to put up roadblocks to economic activity, the corollary of the federal government's exclusive right to regulate in this area; this principle would later become known as the “dormant” commerce clause. But the case also tacitly acknowledged that property rights could be removed under certain circumstances in order to enable competition.

New York had given the monopoly to the well‐connected Robert Livingston, who had had the foresight to invest in Robert Fulton's innovative steam technology a decade earlier. But now the monopoly threatened to limit further innovation and was restricting competition in the growing transportation market. With the court's ruling, Livingston's patrician family was forced to compete with a young man of little education or social standing named Cornelius Vanderbilt. Property rights were important, but cronyism would not be permitted, especially if it would stand in the way of innovation, competition, and economic intercourse among the states.²⁸

The common law also evolved during this period to help address the changing needs of the rapidly developing economy. In the past, judges resolved tensions within business cases by deciding on the basis of fairness, an approach that was consistent with the traditional judicial role. They might have focused on communal standards of propriety and the interests of the larger society. But instead judges and the common law evolved and adopted an “instrumentalist” approach, allowing the laws to serve economic development. Law was to be a tool to give private parties flexibility in ordering their economic arrangements as they saw fit. Instead of abstract ideas of fairness, judges focused on the intent of contracts. This “will theory” of contracts, seeing the agreements as the meeting of the minds between private parties, added certainty to commercial transactions and opened up sophisticated tools of commerce in areas such as insurance and bills of exchange. Reflecting the popular mood against governmental control over business, judges largely refrained from dictating to individuals how they should run their affairs. It helped that they were working within the flexibilities of common law, which gave discretion to judges, rather than a directive system such as the Napoleonic code.²⁹

While adding predictability and certainty, the courts found ways to support economic development and entrepreneurs. For instance, to generate waterpower for mills, entrepreneurs often needed to dam streams – which flooded the land of nearby farmers. Rather than respect property rights absolutely and allow stubborn landowners a veto on the dams, courts supported entrepreneurs and required farmers to accept reasonable compensation for the land. As one historian said, “the law became more about protecting ventures than protecting holdings.”³⁰

Just as the political climate and legal framework evolved from prizing stability and investment to encouraging innovation, so too did the new field of corporate law. In the first decades following independence, corporations were chartered for specific infrastructure projects such as canals and turnpikes. Most of these charters had strictly defined terms and scope. Corporate charters initially depended on special state legislation and often included unique privileges, as with Hamilton's Paterson works. But starting in 1809 in Massachusetts, the states adopted incorporation statutes that allowed entrepreneurs without political connections to get access to this form of capital formation, thereby expanding opportunity and competition.³¹ Instead of conferring privileges, the charters came to be understood simply as quasi‐automatic registration for a new business, open to anyone who could make a modest investment.³² Moreover, rather than limited to specific purposes or time frames, the corporations were allowed broad latitude in their activities and received expansive terms, ultimately becoming “general” in nature and “perpetual” in status. The creation and access to the “general perpetual corporation” supported entrepreneurship at all levels, but was particularly useful in enabling ventures of large scale.

Vanderbilt as the Relentless Mogul

Vanderbilt, the upstart in Gibbons, went on to become perhaps the most successful entrepreneur in American history, ultimately obtaining a near‐unrivaled position of economic incumbency. As an upstart, Vanderbilt started by working as a ferry hand and then captain on his uncle's boat, plying the waters between Staten Island and Manhattan. He then went to work for wealthy fleet owner Thomas Gibbons, leading the charge in the famous case.

The favorable court decision was just the beginning of his remarkable entrepreneurial run. Going on his own, he assembled a transportation network that improved service, cut costs, and mercilessly undercut rivals. He continued to innovate by implementing new technologies and building bigger and faster boats. He named one of his flagships Lexington to signal his anti‐authoritarian streak, and his network would come to be known as the “People's Line.”

Most significantly, he wouldn't stop. Vanderbilt moved from steamboats to ocean liners, especially after the Gold Rush in 1849, and challenged the powerful Cunard line for transatlantic passengers. Then, while seemingly at his apex, Vanderbilt moved into railroads, mastering the technical engineering issues associated with integrating disparate lines and routes. He also learned the nuances and technicalities related to stock trading and securities, famously battling with Jay Gould and others over control of the Erie Railroad.

Vanderbilt epitomized the model of the relentless innovator. He daringly challenged incumbents, mastered new technologies and platforms, and abandoned old ones as needed. He inspired generations of aspiring entrepreneurs.³³

Jackson and the Decentralization of Finance

The neo‐mercantilist system in the first decades after independence had led to a federal government dominated by elites, but only temporarily. They were gradually challenged, not just by a new generation of entrepreneurs but also by artisans, mechanics, small farmers, and those not included in the developing economy.³⁴ Demographic changes brought about by opportunity, immigration, and transportation were significant; by 1850 half of the population lived west of the Appalachian mountains.³⁵ Innovations in transportation, energy, manufacturing, and other areas were creating pressure for openness in many areas and industries. At the same time, the Panic of 1819, the result of a precipitous decline in cotton prices and the first large‐scale financial crisis in the country, fueled resentment against the financial elite. The challenge to incumbency reached its breaking point with the election of Andrew Jackson in 1828.

Jackson saw his attack on the privileged few and the promotion of laissez‐faire populism as consistent with the assertion of rights in 17th‐century England and the 18th‐century colonies. He voiced special wrath toward the Second Bank of the United States, calling it a “hydra of corruption” and denouncing it as a monopoly that favored a small commercial and financial elite, particularly its establishment head, Nicholas Biddle. When the charter, due to expire in 1836, came up for extension, Jackson overruled his cabinet and vetoed the legislation. Then for good measure he withdrew federal funds from the bank when it tried to carry on as a purely private institution.³⁶

Jackson sought to lessen the federal government's involvement in other areas of the economy as well. In particular, he discontinued the federal government's investment in corporate securities, a position that has largely continued to the present and deeply affected corporate governance (discussed in a later chapter).³⁷

The financial retreat proved costly, as it triggered a severe financial crisis and prolonged depression. Jackson shifted federal deposits to “pet” banks across the states, themselves vulnerable to local cronyism and loose lending standards, and many failed in the Panic of 1837. In the ensuing decades, the American economy suffered periodic episodes of volatile financial collapse, as the era of “free banking” helped create many state institutions that lent funds recklessly. Ruinous panics became the price, as it were, of Americans’ instinctive aversion to central banking and concerns about undue economic and political power among a certain elite.³⁸ Yet Jackson's costly transformation served as a vital counterweight against an emerging class of incumbents.

With strong justification, some argue that unstable banking brought about by Jackson created uncertainty that raised the cost of entrepreneurship. But the generally decentralized nature of banking that evolved in the United States has helped spawn small business and local entrepreneurship in the long run. This aversion to large central banks continued, both with the development of the stock market as a funding mechanism for large‐scale projects (particularly the railroads, as discussed in the next chapter) and ultimately the development of venture capital.

The relatively reduced power of large banks in the United States, compared with other sources of entrepreneurial financing, can be seen today, as most start‐ups and many other enterprises look for growth capital from venture funds or capital markets, rather than large banks. This decentralization is in sharp contrast to the concentration and power of banks in countries such as Germany, France, and England, where large banking institutions often have close ties to major incumbent enterprises and are less apt to fund small, risky, or disruptive entities.³⁹

When the Right to Compete Trumped Property Rights

Back in 1785, Massachusetts had granted a monopoly to a company that built and managed a bridge between Boston and Charlestown. The investors included relatives of John Hancock and other wealthy and politically connected families. Forty years later, in response to population growth, long waits, and still‐hefty tolls, the state allowed another company to build a second bridge between the two municipalities. The owners of the original bridge sued, claiming infringement on their monopoly, and the case eventually went to the federal Supreme Court in 1837.

Even more than Gibbons v. Ogden, the Charles River Bridge Case marked an inflection point. In the first few decades of American development, charters and grants reassured investors with property rights to foster growth. But in the decades up to the Civil War, a new era of entrepreneurs operating under laissez‐faire brought a wave of innovation, challenging incumbents with an intense period of (perhaps ultimately excessive) competition.⁴⁰

The Charles River Bridge case explicitly balanced property rights against the right to compete, with implications far beyond bridges. The judges worried that the older bridge, turnpike, and canal monopolies might restrict the growth of railroads, which were starting to spread across the country. The case starred important legal minds, including Daniel Webster, who represented the original bridge owners (and had argued in both the Dartmouth and Gibbons cases), and Justice Joseph Story, a staunch advocate of preserving established rights. In the middle of the case, long‐serving but ailing Chief Justice Marshall stepped down, replaced by President Jackson with Roger Taney, who shared Jackson's bias for open development.

In ruling against any compensation for the owners of the original bridge, the court supported the imperative of economic progress and signaled that a new era of expansion was underway. The older bridge, which had been among the most lucrative endeavors in North America, lost most of its customers and went out of business soon after.⁴¹

America's Dynamic Economic Elites

Jackson’s attack on established power thus confirmed an environment where economic incumbency was difficult to maintain, and innovation and productivity were hard to hold back. Even as the economy established a solid foundation for investment and growth, it showed a notable churn rate among elites. Fortunes were won, lost, and won again, and successful entrepreneurs who wanted to maintain their position among the economic elite would have to stay sharp. Despite attempted cronyism at both the national and state level, political elites would not be sheltered. The fates of Robert Morris, the Livingstons, John Hancock's descendants, and others showed that no position was guaranteed, and though some descendants could remain successful, the economy would not stand still to protect a privileged few. Those that would be successful, such as the Browns or Vanderbilt, would need to continue to innovate or move into new ventures to keep ahead.

Schumpeter noted how “creative destruction” could undermine elites, with even some of the most successful families going from “shirtsleeves to shirtsleeves in three generations.” While this may be an overstatement, America has witnessed new elites superseding the old almost continually, usually raising the bar overall. Established elites may still preserve their wealth, often by deploying it in new opportunities or investing it in secure but less dynamic areas, but new entrepreneurs propel themselves – and the economy – to new heights. While Elias Hasket Derby had become a millionaire by his death in 1799, John Jacob Astor was worth $25 million when he died in 1848. Vanderbilt's wealth exceeded $100 million when he died 30 years later.

This phenomenon can be seen today in the Forbes 400 list of wealthiest Americans. The list was started in 1982, and in the nearly 40 years of its existence the fluidity of the list is notable. Few families on the list have remained on it continuously, and many have dropped off as their businesses faced challenges or were superseded by new players.⁴²

Not only are the list members churning, but an increasing percentage are now first‐generation entrepreneurs as opposed to scions of inherited wealth. When the first list came out in 1982, people with inherited wealth represented a large percentage. By 2007, only 74 people on the list (19%) came from inherited fortunes, while more than half were self‐made, a metric that holds true in 2021. Not surprisingly, entrepreneurs with technology backgrounds and immigrants with engineering backgrounds continue to take more spots on the lists.

Moreover, the bar for reaching the Forbes 400 list continues to rise impressively, suggesting that successful entrepreneurs have pushed the economy as a whole forward and themselves into the upper echelon by generating exceptional performance, or growth beyond that of the market generally.⁴³ The aggregate net worth of Forbes 400 members increased by 423% from 1982 to 2002, while the S&P 500 increased by 353%. In 1982 three families (the Hunts, Rockefellers, and DuPonts) accounted for 53 members of the list (13% of the total); by 2002, only three members of those same families (all Rockefellers) still appeared at all.⁴⁴

While it is unlikely that those who fell off the initial list were reduced to “shirtsleeves,” the entrepreneurial dynamism of upstarts continues to raise the bar for inclusion. In 1982, the threshold for membership on the list was $75 million. By 2021, that hurdle was just shy of $3 billion.⁴⁵ Of course, an important and worrying aspect of this phenomenon is that the combined net worth represented by these individuals as a percentage of GDP has increased markedly, signaling dramatic levels of inequality between the very rich and everyone else.

By contrast, inherited wealth has traditionally dominated the lists abroad. This is beginning to change with the increase in entrepreneurship globally, but other countries continue to show less dynamism. In some places, such as the former Soviet Union, most dynamism is linked to cronyism. Some researchers have analyzed the persistent and concentrated power of a small number of families in many non‐U.S. countries, and the results suggest hierarchies are far more static there. According to one study, ownership of company assets by the 15 richest families in the United States amounted to 3% of total assets in 1996, whereas in some Asian countries the range was an astounding 20% or higher.

We also see a link between economic power and political control in many nations with concentrated wealth: “where a few families control the state, they can use it to suppress economic competitors and secure monopoly profits.”⁴⁶ Evidence also suggests a link between cronyism and concentrated banking and finance. This is consistent with the claim that a broad dispersion of economic and political power, and increased social mobility in countries, supports higher rates of growth, productivity, competitiveness, and innovation, while the opposite holds in less dynamic regimes.

The North‐South Divide

For all of its entrepreneurial success, America was still an immature economy in the decades leading up to the Civil War. A frenzy of competition ensued from the 1830s, triggered by Jackson as well as the general movement to open corporation laws, the proliferation of banks, and continued westward expansion. Two major panics, in 1837 and 1857, added to the instability. To some it was the conquest of the self‐made man and new entrepreneurs (generally small businesses) over the merchants and capitalists of the first decades after independence.⁴⁷ Yet the myriad railroad networks brought duplication and confusion, with over 20,000 miles of track built by 1850 yet little standardization in width of track.⁴⁸ Policymakers in some states lamented the competition that made transportation networks unprofitable. The fledgling New York Stock Exchange struggled to build up a regular market in railroad and government securities.

In effect, too much entrepreneurship had unsettled many industries. By the end of the 1850s, open competition had arguably gone too far, bringing inefficiencies across sectors of the economy and failed banks in many states. The legal system, so flexible and adaptive after 1790, began to ossify, as local elites secured their positions using protective legislation. Judges relied more on technical rules to limit action, a move now known as “formalism.”⁴⁹

The bigger problem was that this openness had not integrated North and South as it had tied together North and West. Together, the northeastern and midwestern states developed diverse mixes of agriculture, industry, and commerce. These regions accounted for almost all manufacturing, as well as over 90% of all patentees between 1790 and 1860.⁵⁰

Meanwhile the South specialized in high‐margin crops, especially cotton. The development of the cotton gin and cotton loom resulted in massive increase in demand, which Southerners not surprisingly rushed to supply. By 1860, more than half of the richest 7,500 people in the country lived in the South, and slave‐trading Natchez, Mississippi, was among the wealthiest towns in the nation, despite the North's relative strength overall.⁵¹

This lucrative specialization led white Southerners to expand their horrific reliance on enslaved Black laborers. Slavery was the stain on the American economy as a whole, and both Northerners and Southerners benefitted – “lords of the lash” supplying the “lords of the loom.” The South’s emphasis on large‐scale production of agricultural commodities meant that business in the South lost much of its capacity for dynamic development. Planter dominance within strong social hierarchies prevented the openness to upstarts that drove innovation in the North. The South certainly had elements of entrepreneurship, including advanced capital accounting and inventors such as Cyrus McCormick, who developed his mechanical reaper in Virginia before perfecting it in Illinois. But these innovations happened within the narrow band of slave‐produced export crops.⁵²

A hint of the dynamism and creativity the South lost from slavery comes in the life of Robert Gordon. He was born enslaved to a wealthy Virginian who spent much of his time with yachts. Gordon was put in charge of the master's coal yard and allowed to do what he liked with the waste coal dust. Gordon collected the dust, found ways to sell it, and eventually bought his freedom in 1846. He traveled north and settled in Cincinnati, where he set up a coal yard. Cincinnati was hardly free of racism, with a race riot as recently as 1841, and its white coal dealers banded together to lower their prices and squeeze Gordon out. But Gordon hired some light‐skinned men to pass for white and buy a large volume of coal at the low price, which Gordon held for a while before reselling. His maneuver worked, and Gordon went on to expand and amass a large fortune.⁵³

Falling behind in development, Southern planters clamored for new territories – the only way they could imagine sustaining their position. Northerners distrusted what they saw as an entrenched “Slave Power,” and “Free Soil, Free Labor, Free Men” became the rallying cry of the emergent Republican Party in the 1850s. Northerners were determined to prevent the Southern upper class from claiming the new lands out west.⁵⁴

Amidst these changes, signs of new opportunity were becoming apparent. Railroads were expanding the commercial frontier and bringing economic and demographic transformation along with it, and the discovery of gold sparked a new wave of migration. A new form of communication – the telegraph – also appeared and was aided by congressional appropriations that drove growth from 40 miles in 1846 to over 23,000 miles a mere six years later.⁵⁵ The need to rationalize the economy and the opportunity for nationwide expansion opened a path for a new generation of entrepreneurial upstarts.

Conclusion

The early American republic failed to eliminate slavery, and it culminated in a devastating civil war. Yet it accomplished something remarkable: a solid foundation for entrepreneurship that protected most property rights while encouraging sustained innovation and scale. Thanks to its favorable geography and democratic ambitions, as well as some farsighted leaders, the country continued to empower entrepreneurs who sought out and embraced opportunity. Because of its balanced legal and political framework, it largely contained the dangers of crony capitalism and populist disorder. Too many other developing countries, especially in the 20th century, have failed to maintain the entrepreneurial balance between property rights and the right to compete. They never break the hold of early elites, so they struggle to evolve over time.

By 1860, the first big development cycle – from investment to competition to consolidation to disruption – had reached completion. Derby, Livingston, and other early innovators had played their part, then new players such as Girard and Vanderbilt overshadowed them. They, too, soon faced competition as new market opportunities, technologies, and entrepreneurs upset the balance. Maintaining that momentum required new fields to be conquered, both geographical and industrial. A new breed of entrepreneurs, especially ones who could consolidate and rationalize, would soon find their chance. They would build not just new enterprises, but ones of unprecedented scale. The first unicorns were coming.