Northern Agriculture After the Civil War and Railroads

Some what misleading title because there is much that the North and South have in common Substantial Increases in Productivity

Labor Productivity Man hours needed Wheat 100 Bu Corn 100 Bu Cotton 1 bale

Where do increases in productivity come from? New Land Reduction in transportation costs increases size of market Railroads Technological Change/mechanization –More capital Biological innovations –New varieties of plants

Technological Change Plows –Wood –Cast Iron 1820s –Steel plows 1840s

Technology Mechanical Threshing 1830s-1840s Mechanical reaper invented in –Harvesting is time critical –Reaper is not common until after 1850s Horse/Mule is still main source of power Amount of capital necessary to farm increases

New Land Wheat production from 1839 to 1909 increased from 85 million to 640 million bushels Geographic area changed

Development of New Plant Varieties New varieties which allowed wheat to be grown in regions with different climates and rainfall New varieties to maintaining yield with new plant disease and insect pests –Red Queen

Source of New Varieties Seed companies US and State Departments of Agriculture –USDA created in 1862 –Became part of the Cabinet until 1889

Agrarian Discontent? In spite of increases in productivity, this is an era of farm protest. What were the farmers complaints and were they justified?

Increased costs of farming Increase in farm size in North Increase in capital necessary to start up –Cost of machinery was falling Increase in cost of land Fall in transportation costs due to expansion of railroads increased size of market

Increase in Tenancy Increase in the percentage of farms operated by tenants –From 1880 to 1920 the percentage of tenant farms increased from 19% to 28% in North 36% to 50% in South Increase in average farm size in North –From 115 acres to 156 for all farms from Concern that “land monopoly” was threatening agricultural ladder, ability to move from tenant to farm owner

Was the Agricultural Ladder in trouble? No easy answer even looking a aggregate data Increase in farm size in North was larger for tenant farms than owner operated farms From 1900 to 1920 average farm size increased from –125 acres to 169 acres for tenants –136 acres to 152 acres for owners

Mortgage Market As farm size increased land becomes more expensive, increased use of mortgages Did banks have monopoly power? –Entry is easy –Low foreclosure rate Prices were falling but this should only be a problem if it was unanticipated Interest rates were falling during this period

Railroads Farmers saw themselves victims of railroad monopoly Railroads were a natural monopoly –High fixed costs –In some cases competition between lines and with water transport. In some cases not.

Natural Monopoly ac D mc mr q1 p1

Problems with unregulated Natural Monopoly Higher price than competitive industry on lines where no competition If there are two railroads will compete and price could be driven down to MC which would eliminate deadweight loss but cause negative profits. Prices tended to be high on short hauls with no competition but lower on land hauls. Overall RR price were falling and falling faster than crop prices.

Demand for regulation Farmers want equal rates but with the low rates Railroads want equal rates but with high rates (Enforcement of cartel) Increase in demand for regulation leads to Interstate Commerce Commission (ICC) Some evidence that for part of the period it benefited railroads

Railroads Farmers saw themselves victims of railroad monopoly Railroad rates were falling faster than farm prices Why did Populism flourish? Consider this graph which shows crop price/railroad rates

Price Variability Preceding graph shows that crop price is variable (lots of ups and down) Farmers are selling in European market which demand is variable Connection between price variability and farm protest –Between 1880 and 1900 lots of years where crop prices are falling faster than RR prices even though overall trend is up.

Farm protest organizations The Grangers –Supports gov regulation (Munn vs Illinois) –Cooperatives Greenback Movment Alliances Populists –Political party formed in 1892

Railroads How important were Railroads to increasing US economic growth? –Rostow claimed RR were the cause of takeoff of US economic growth –Lots of company

Problems Problem- No evidence of acceleration in rate of economic growth when we look at GNP or GNP per capita Reduction in transportation costs before railroads with canals and turnpikes Most of expansion takes place after 1850.

Main Line Railroad Track in Operation (in Thousands of Miles)

Role of Railroad Railroads created external benefits just as canals and turnpikes did Reduced cost of transportation –Increased regional specialization –Increased market size to include Europe for some crops –Increased value of land

Question: Was construction of Railroads ahead of demand? –Were returns to investors< returns in the next best investment Should government have subsidized RR building? Were social rate of return greater than private rates?

Fishlow’s analysis show railroads in midwest profitable from beginning –Farmers and business settled areas in anticipation of the RR being built. –Not much government aid given.

Transcontinental RR Fogel and Mercer find initial profits low, but increase over time. Fogel shows much larger social rate of return than private rate of return for Union Pacific –May government subsidies such as land grants –Controversy about whether land grants were necessary, depends on time horizon of investors. Most of gov aid was from the federal government.

Social Savings of Railroads This is not social rate of return vs private rate of return Social savings is related to the opportunity cost –Difference between transporting goods on railroads and transporting goods on canals adjusting for speed, quality, time water ways are frozen etc –If we just take (Pw-Prr)q of freight shipped it is about $150 to 175 million in 1859 or about 4% of GNP. Would have grown to about 15% of GNP by end of century (Fishlow)

Fogel’s revision Compare cost of transportation with railroads in 1899 to cost of transportation without railroads in –Land under cultivation would change Land more 40 miles from water source would not be cultivate (24% of farmland would not be cultivate) Should use the rental value of the land as the social savings, not the difference in cost of hauling the goods –More canals would be built

Not all goods are agricultural commodities where speed is essential, need to adjust for this Estimate of Social Savings for 1890 is about 7.3 percent of GNP, much less than Fishlow’s

Points of controversy Fogel does not consider passenger’s time savings Costs vs prices. Both use price and not resource costs. If markets are competitive, rates should adjust so that they are equal. Could additional waterways be built and could existing waterways handle more traffic?

Linkages Backward linkages –Railroads are not large part of demand for iron Forward linkages –Benefits of linking country Railroads were important. Important is not the same as indispensible