What caused the American Industrial Revolution?

The initial vestiges of industrialization appeared in the United States in 1790, when Samuel Slater opened a British-style textile factory in Rhode Island. While most historical accounts place the start of the full-scale American Industrial Revolution at either 1820 or 1870, factory labor and entrepreneurial innovation, such as the Slater Mill, were the driving forces of industrialization.

Industrialization was made possible by increases in productivity, capital investment and re-investment, business expansion and the rise of corporations. Economic historian Robert Higgs, in The Transformation of the American Economy, wrote that economic growth was preceded by investment in material capital and by Chief Justice John Marshall's influence in securing private property and contract rights between 1801 and 1835.

Industrialization is defined by the movement from primarily agrarian labor toward urbanized, mass-producing industrial labor. This transformation corresponds with rising marginal productivity and rising real wages, albeit not consistently or equally.

According to the 1790 U.S. Census, more than 90% of all American laborers worked in farming. The productivity—and corresponding real wages—of farm labor was very low. Factory jobs tended to offer wage rates that were several times higher than farm rates. Workers eagerly moved from low-paying, hard labor in the sun to relatively high-paying, hard labor in industrial factories.

By 1890, the number of non-farm workers had overtaken the number of farmers in the U.S. This trend continued into the 20th century; farmers made up just 2.6% of the U.S. labor force in 1990.

In 1813, the Boston Manufacturing Company became the first integrated U.S. corporate textile factory. For the first time, investors could contribute to the development of new buildings, new machines and new profits in manufacturing.

Corporations became the dominant manufacturing business model by the mid-1840s. Wages rose as labor became more productive; for example, young unmarried women in New England were earning factory wages three times the rate of domestic maids. Higher productivity translated to higher standards of living, a greater demand for other goods and increased capital investment.

Improved technology increased farm output as well, dropping farm product prices and allowing workers to move into other industries. Railroads, steam ships and the telegraph increased communication and transportation speeds as well. 

In market economies, private producers want to be able to keep the fruits of their labor. Moreover, retained profits can be reinvested into a company for expansion, research and development.

Several landmark Supreme Court cases in the early 19th century protected private property from government seizure. Chief Justice John Marshall issued opinions in Fletcher v. Peck (1810) and Trustees of Dartmouth College v. Woodward (1819) that established limits on government seizures and contractual arrangements.

Workers and businesses alike exhibited very high savings rates after 1870. Real interest rates declined, propelling a huge rise in loans. Farmers also saw rising land values and could mortgage their land to invest in capital goods. Prices dropped and real wages rose very quickly between 1880 and 1894, further improving the standard of living.

(For related reading, see: What is the history of corporations in America?)