Chapter 8 of 14 · The Transformation of the American Economy, 1865-1914 by Robert Higgs
II. Economic Growth and Transformation
ECONOMIC GROWTH AND TRANSFORMATION
The American at home, spinning along with his country, can obtain little idea of the amazing rate at which she is moving in comparison with other parts of the world. It is only when he sits down and studies statistics that he becomes almost dizzy at discovering the velocity with which she is rushing on. . . . It is probable that in many future decades the citizen is to look back upon this as the golden age of the Republic and long for a return of its conditions.
ANDREW CARNEGIE
OUTPUT AND PRICE TRENDS
In the 1840’s and 1850’s, and perhaps even earlier, output per capita increased quite rapidly, but the Civil War brought economic progress to a halt. In fact, standards of living fell during the war for most people on both sides. This decline is hardly surprising, for war always diverts resources from productive to destructive uses, and the Civil War was America’s most devastating experience. More than 600,000 men—over 5 percent of the labor force—most of them young adults, died in the conflict. In the South physical destruction was widespread. To make matters worse, the landless emancipation of the slaves, decreed by President Lincoln and later ratified by constitutional amendment, caused organizational chaos in the economic life of the South that had permanently harmful consequences. But not until the political issues had been settled on the battlefield were Americans ready to return to the business of economic progress.
TABLE 2.1
REAL GROSS NATIONAL PRODUCT PER CAPITA
AND IMPLICIT PRICE INDEX
| Period | Annual Average GNP per Capita (1860 dollars) (1) |
Implicit Price Index (2) |
| 1869–1878 | 147 | 123 |
| 1874–1883 | 172 | 115 |
| 1879–1888 | 193 | 106 |
| 1884–1893 | 208 | 97 |
| 1889–1898 | 213 | 92 |
| 1894–1903 | 234 | 94 |
| 1899–1908 | 268 | 103 |
SOURCE. Col. 1: calculated from GNP data in Robert E. Gallman, “Gross National Product in the United States, 1834–1909,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University, 1966), p. 30 and population data in U. S. Bureau of the Census, Long Term Economic Growth, 1860–1965 (Washington: Government Printing Office, 1966), p. 182. Col. 2: Gallman, loc. cit.
The economy grew spectacularly in the half century following the war. Real GNP per capita advanced at an average rate of 2 percent per year, and on the eve of World War I it stood at about three times the 1865 level (Table 2.1).1 Total output expanded even more astoundingly: real GNP grew at an average rate of more than 4 percent per year, increasing about eightfold over the period. Never before had such rapid growth continued for so long. Of course, growth did not occur in a perfectly smooth, regular fashion. Business fluctuations punctuated the whole era, particularly severe depressions occurring in the mid-1870’s and the mid-1890’s. As always in an unregulated market economy, growth proceeded in fits and starts.
After the war, despite brief inflations during the expansion phases of business fluctuations, the trend of the overall price level was downward until 1897. A reversal then occurred, and a generally rising price level characterized the two decades before America’s entry into World War I (Table 2.1). Changes in the stock of money and in total real output underlay these long phases of deflation and inflation.2
We can clarify these relations by considering the equation where P is the overall price level, M is the money stock in dollars, V is the average number of times that a dollar is spent for currently produced final goods each year, and Y is the quantity of real output. The equation merely states that the price level is, by definition, a ratio of money expenditure (MV) to real quantity purchased (Y). We can transform this definition into a theory of the price level by assuming that over the long run—say, over several decades—V is approximately constant, which is equivalent to assuming that the amount of money the public wishes to hold is a constant fraction of its money income. Changes in the price level, then, depend on changes in the money stock and in real output. If Y increases faster than M, prices will tend to fall because the quantity of goods grows faster than aggregate expenditures, and the total output can be sold only if its average price is reduced. Conversely, when M increases faster than Y, prices will tend to rise.
During the three decades of deflation before 1897, the money stock—including gold and silver coins, bank notes and deposits, and various obligations of the federal government—increased, but not as fast as real output increased. Immediately after the war, the federal government helped to slow monetary growth by reducing the quantity of its fiat money, the famous “greenbacks,” as a step toward reestablishing the currency/gold exchange rate at its prewar level. The government steadfastly resisted the demands of the Greenback Labor Party and others for a large issue of new fiat currency. After 1874, when its free market price fell below its mint price, silver could have pushed the money stock up, but the law provided for only a limited coinage of this metal, and its actual contribution to monetary growth was slight. Under the de facto gold standard after 1878, the stock of money could not vary independently of the gold stock, for besides serving directly as a medium of exchange, gold provided the convertibility reserves on which the quantity of bank notes and deposits depended. Therefore, the growth of the entire money stock was tied to production of the yellow metal, and for 30 years gold production simply did not keep pace with the outpouring of commodities and services. Falling prices were the consequence. After 1897, discoveries of gold in the Yukon, South Africa, and elsewhere, combined with newly devised, more efficient techniques of mining and refining, rapidly expanded the supply of gold and pushed the money stock up faster than real output. The price level rose. Notably, rapid economic growth occurred both before and after 1897; neither a falling nor a rising general price level was uniquely associated with economic growth.
POPULATION GROWTH
Growing at an average rate of over 2 percent per year, the population of the United States almost trebled between 1865 and 1915 (Table 2.2), But a tendency toward slower growth marked the period; the annual rate of growth fell from about 2.3 percent during the early years (1865–80) to about 1.9 percent at the end of the period (1900–15). The country’s population grew because births exceeded deaths and because the number of immigrants exceeded the number of emigrants. Despite unprecedented immigration, natural increase contributed far more to the growth of the population. In the 1870’s the birth rate was probably more than 40 per thousand of population, while the death rate was in the neighborhood of 23; therefore, the rate of natural increase was at least 17 per thousand. Both birth and death rates declined subsequently, and the gap between them became somewhat narrower. Just before World War I the birth rate had fallen below 30, the death rate to about 15, and hence the rate of natural increase to less than 15.
TABLE 2.2
POPULATION AND LABOR FORCE
| Year | Population (Millions) (1) | Labor Force (Millions) (2) |
| 1865 | 36 | 12 |
| 1870 | 40 | 13 |
| 1880 | 50 | 17 |
| 1890 | 60 | 23 |
| 1900 | 76 | 29 |
| 1910 | 92 | 37 |
| 1915 | 101 | 40 |
SOURCE. Col. 1: U. S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to (Washington: Government Printing Office, 1960), p. 7. Col. 2: figures for 1870–1910 from Stanley Lebergott, “Labor Force and Employment, 1800–1960,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University, 1966), p. 118; figures for 1865 and 1915 obtained by extrapolation from Lebergott’s data.
A decline in the birth rate has characterized every nation that has experienced economic growth, and it is closely related to the transformation that accompanies growth. In particular, the migration from the countryside to the cities led to a decline in the desired family size, and hence to a reduction in the number of births per family. On the farm large families furnished hands that, given the nature and organization of work there, could be set to useful tasks at an early age. But in the city the costs of rearing and educating children were greater, while their economic usefulness was smaller. There women found greater opportunities for working outside the home, and hence child rearing involved higher foregone incomes. An incentive therefore arose for limiting the number of children. Other influences also helped to reduce the birth rate. For example, with lower child mortality, a family required fewer births to achieve the desired number of surviving children. But declining fertility probably owed more to urbanization than to any other single cause. Since urbanization was a consequence of economic growth, an ultimate source of retardation in the rate of population growth was economic growth itself.3
A falling death rate resulted from better public health practices and from the improved standards of living that accompanied rising levels of output per capita. Improvements in sanitation, water supply, sewerage, nutrition, and housing all helped to reduce the incidence of infectious diseases like tuberculosis and typhoid. Advances in medical practice had little or no impact on the death rate. Again, as in the case of the declining birth rate, economic growth itself was a principal source of the change. (Later in this chapter and in Chapter III we discuss health improvements in more detail.)
The greatest volume of immigration in recorded history augmented the natural increase of the population. After the Civil War the rate of alien arrivals reached an unprecedented high, and the trend continued upward until the First World War reduced the inflow to a trickle. In the 1920’s the imposition of legal quotas finally closed the doors on the age of massive, unrestricted immigration. Before the 1890’s the so-called “old” immigration predominated, having its sources primarily in the United Kingdom, Germany, and the Scandinavian countries. Beginning in the 1890’s and extending until the war, the so-called “new” immigration accounted for the greater part of the influx. These people came mainly from southern and eastern Europe, with Italy supplying the most, followed closely by Austria-Hungary and Russia. Throughout the post-Civil War era immigration followed a rough correspondence with fluctuations of prosperity and depression in the United States, all the great surges of immigration occurring during periods of American prosperity (Figure 2.1). The reduced employment opportunities that accompanied the business depressions of 1873–1878, 1882–1885, 1893–1897, and 1908 are mirrored in the troughs of the net immigration cycle that correspond to those dates. The push of hard times in the countries of origin undoubtedly played a part also, especially in determining what parts of Europe would contribute most heavily, but the timing of the migrations seems to have been influenced more decisively by the pull of prosperous conditions in the United States. In total, more than 28 million immigrants entered between 1865 and 1915. Perhaps as many as a third eventually returned to Europe, putting net immigration in the neighborhood of 20 million persons. Immigrants provided a large part of the additions to the population in some decades. At the peaks, in the 1880’s and 1900’s. they accounted for about a fifth of the increase in population. Being heavily concentrated in the young adult ages, they constituted an even larger proportion of the total additions to the labor force, at times as much as 30 percent.
Figure 2.1 Arrivals minus departures, all alien passengers. Source: Simon Kuznets and Ernest Rubin, Immigration and the Foreign Born (New York: National Bureau of Economic Research, 1954), p. 95.
A rapidly growing population had major economic consequences. Most importantly, it provided a growing labor force (Table 2.2). In fact, the labor force grew even more rapidly than the population, because the immigrants augmented the working-aged population proportionately more than the dependent-aged population and because as the birth rate fell the ratio of adults (workers) to children increased. Population growth also expanded the number of consumers, broadening markets and permitting a greater degree of specialization. A rapidly growing population buoyed up investors’ confidence in future market conditions, encouraging them to bear risks in expanding the capital stock. In comparison with Europe, the United States was an economy of labor scarcity and low population density. In such a setting, population growth never operated as a drag on economic growth but rather encouraged the capital accumulation that gave rise to economic progress.
THE SOURCES OF GREATER PRODUCTIVITY
Our understanding of economic growth would be greatly advanced if we could say just how much each source of growth—material capital formation, education, technological progress, and so forth—contributed toward increasing output. In recent years economists have developed several techniques for attributing economic growth to its various sources. Unfortunately, however, it is impossible to provide a very detailed breakdown, and the calculations are subject to errors of unknown magnitude because the available data do not correspond very well with the theoretical concepts and because the data are not very accurate anyhow. Still, such calculations may reveal relative orders of magnitude in a broad way. The figures presented below are based on calculations shown in the Appendix, which some readers may wish to examine before reading any further.4
We can partition the rise in total GNP during the 1869–1914 period roughly as follows: the increase in the number of man-hours worked accounts for about four tenths; the expansion of the material capital stock, including land, explains about three tenths; and all other sources account for the remaining three tenths. Partitioning the growth of output per man-hour, we find that the increase in the ratio of material capital to labor explains over one fourth, and all other sources account for almost three fourths. Crude as these conclusions may be, they are nevertheless of great significance, for they indicate that economic growth—a sustained increase in output per capita—cannot, as economists believed for a long time, be attributed mainly to material capital accumulation. We must not, of course, dismiss material capital accumulation as unimportant; after all, it did account for over one fourth of the increase in output per man-hour. Furthermore, we know that technological advances were often realizable only in conjunction with investment in material capital. Still, to explain economic growth, we must devote the lion’s share of our attention to the accumulation of human and intellectual capital.
Material Capital Accumulation
The nineteenth century saw great expansions in the territory of the United States, which not only added to the country’s arable acreage but also brought land of superior quality into use. Besides farming land, the acquisitions contained vast amounts of other resources, including minerals, timber, and grass. The 1840’s saw a flurry of territorial expansion: Texas was annexed in 1845; claims to the Oregon country were settled with Great Britain in 1846; and the Mexican Cession was acquired as the spoils of war in 1848. These lands added almost 70 percent to the national domain, and as late as 1865 all of them were sparsely populated, some of them virtually uninhabited.
The thrust of the population movement was inexorably westward. By 1865 the frontier—defined as an area of at least two but less than six persons per square mile, cities of 8000 or more not being considered—extended into Minnesota, Kansas, Nebraska, and Texas, and the states in the first tier west of the Mississippi were fast filling up. After the Civil War the population flooded over the trans-Mississippi prairies and the Great Plains, and the Pacific Coast states attracted hordes of migrants. The Superintendent of the Census of 1890 declared: “Up to and including 1880 the country had a frontier of settlement, but at present the unsettled area has been so broken into by isolated bodies of settlement that there can hardly be said to be a frontier line,” In 1893 the historian Frederick Jackson Turner further dramatized the “closing of the frontier,” and many subsequent accounts of westward expansion have placed great emphasis on this event and the date of its occurrence. Actually, the announcement was premature. The hard times of the 1890’s drove both farmers and townspeople eastward, and in 1900 the frontier line miraculously reappeared (without comment) in the census maps. But its days were numbered. In 1910 the maps of settlement showed that no clear cutting edge remained of the frontier, and pockets of population dotted the area between the 100th meridian and the Pacific Coast. Thousands of words cannot compete effectively with a few maps on this subject, so the reader is referred to Figures 2.2–2.6.
It is difficult nowadays to comprehend the importance of land in the nineteenth century. Perhaps a fruitful approach is to consider how nineteenth-century economists viewed its place in the economy. The great English economist David Ricardo and his followers, among whom the influential American writer Henry George may be counted, explained that land operates as a drag on economic growth, for there is only a fixed amount of it. As poorer quality land is put into production to provide for a growing population, the higher quality land commands larger rents. And as the limit of available land is reached, the only means of expanding food production is by cultivating the land more intensively. But here we encounter the specter of diminishing returns: the addition to output obtained by successive applications of labor and material capital to a fixed amount of land tends to become progressively smaller. The real returns to labor and capital decline; both workers and capitalists are eventually impoverished, while useless landlords grow rich, and the economy ultimately arrives at a “stationary state,” with a stable but mostly destitute population. Small wonder that some contemporaries called economics the “dismal science”!
In the United States the seemingly limitless availability of cheap land banished the specter of diminishing returns. In the overly optimistic words of Thomas Jefferson, there was “room enough for our descendants to the thousandth and thousandth generation.” Typically the lack of transportation making it economically accessible, not a scarcity of land itself, constrained the growth of farm production. After the Civil War, with the expansion of the railroad network, farming moved westward on a broad front, and fertile new lands in the Dakotas, Nebraska, Kansas, Oklahoma, Texas, and the Far West all contributed to an unprecedented outpouring of agricultural products. In the twentieth century technological progress alone would conquer diminishing returns in agriculture; but in the nineteenth century, when the pace of technological progress was slower and population growth more rapid, the availability of a vast expanse of unoccupied land played a crucial role in permitting economic growth to continue unhampered by the drag of diminishing returns.
Figure 2.2 Spatial distribution of population, 1870. Source: C. O. Paullin, Atlas of the Historical Geography of the United States (Washington: Carnegie Institution, 1932), plate 77c.
Figure 2.3 Spatial distribution of population, 1880. Source: C. O. Paullin, Atlas of the Historical Geography of the United States (Washington: Carnegie Institution, 1932), plate 78a.
Figure 2.4 Spatial distribution of population, 1890. Source: C. O. Paullin, Atlas of the Historical Geography of the United States (Washington: Carnegie Institution, 1932), plate 78b.
Figure 2.5 Spatial distribution of population, 1900. Source: C. O. Paullin, Atlas of the Historical Geography of the United States (Washington: Carnegie Institution, 1932), plate 79a.
Figure 2.6 Spatial distribution of population, 1910. Source: C. O. Paullin, Atlas of the Historical Geography of the United States (Washington: Carnegie Institution, 1932), plate 79b.
It might be asked: why do we discuss land under the heading “Material Capital Accumulation”? After all, isn’t land a “natural” resource? The answer is that land lies virtually useless to men in its natural state, and it yields its fruits only after human effort has turned it into a productive resource. Virgin soil is lush with weeds, brush, and wild flowers, but the market for these is exceedingly limited. Before it can yield wheat, corn, or cotton it must be cleared, plowed, cultivated, and often drained, fenced, or irrigated. To make the land useful we must invest in it, and the product of our efforts, improved land, is no less capital than is a drill press or a lathe. Like other forms of material capital, the stock of improved land can be augmented. Even trees and minerals are typically useless as they exist in nature; before they can assume a value trees must be cut, minerals dug, both transported to markets.5 It is easy to exaggerate the significance of “natural” resources. America’s immense territory yielded its riches only in response to human effort, and very little was obtained as a gift of nature.
Of course, if a territory lacks coal, no amount of effort or ingenuity will suffice to dig it up. But given the effort and ingenuity, lack of a particular “natural” resource would not matter much, for a good substitute would probably be soon provided. In any case, resources are useful only because the technology describes how to use them, and when a particular resource is relatively scarce—and hence relatively expensive—inventors are presented with a strong incentive to conceive of a good substitute material or a way of economizing on the material even in the absence of a good substitute. Ultimately the influence of the natural resource endowment on economic growth must yield to the much greater influence of technological ingenuity. And as we have already seen, the technological virtuosity of a population in a market economy depends crucially on the way property rights are defined and enforced.
As the labor force and the quantity of improved land increased, the stock of structures and equipment more than kept pace. During the period from 1869 to World War I, this capital stock increased at an annual rate of about 4 percent. Since the labor force grew more slowly, the stock of material capital per worker increased steadily (Table 2.3).
TABLE 2.3
MATERIAL CAPITAL STOCK
| Year | Total Material Capital Stock Net of Capital Consumption (Billions of 1929 Dollars) | Total Material Capital Stock Net of Capital Consumption per Member of Labor Force (Thousands of 1929 Dollars) |
| 1869 | 27 | 2.11 |
| 1879 | 42 | 2.49 |
| 1889 | 68 | 3.06 |
| 1899 | 108 | 3.79 |
| 1909 | 165 | 4.41 |
SOURCE. Simon Kuznets, Capital in the American Economy, Its Formation and Financing (Princeton, N. J.: Princeton University, 1961), p. 64.
In the late 1870’s the proportion of the national output being channeled into material investment was already quite high, in excess of 20 percent on a gross basis—including investment for maintaining the material capital stock as it wears out or becomes obsolete—and about 13 percent on a net basis. These ratios remained high throughout the period; during the decade 1890–1908 the gross material investment ratio was about 28 percent. Before 1860 the bulk of material investment had been in structures, but the relative importance of these declined steadily, while equipment became a larger element—evidence of the increasing extent to which production was being mechanized in the post-Civil War era. A substantial share of the material investment of this period went toward building the railroad network, especially during the 1870’s and 1980’s. Figures showing miles of main track (Table 2.4) give a rough indication of the expansion of the railroad system. The enormous growth of cities also provided major opportunities for profitable additions to the stock of structures and equipment.
TABLE 2.4
MILES OF MAIN RAILROAD TRACK
| Year | Mileage |
| 1869 | 46,800 |
| 1879 | 86,600 |
| 1889 | 161,300 |
| 1899 | 190,000 |
| 1909 | 238,100 |
SOURCE. Albert Fishlow, “Productivity and Technological Change in the Railroad Sector, 1840–1910,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University, 1966). p. 596.
Human Capital Accumulation
The useful skills of the labor force constitute an important part of the nation’s capital stock. Literacy, the most basic of these skills, was always widespread in the United States. In 1870 about 90 percent of adult white Americans could read and write; by 1910, 95 percent possessed these basic skills. For obvious reasons, literacy was much less prevalent among the nonwhite population—predominantly blacks—but improvement was rapid. In 1870 only about 20 percent of the adult nonwhite population was literate; by 1910 the proportion had increased to 70 percent. The erstwhile slaves apparently believed from the very start of their free existence that investment in education would yield a relatively high rate of return. That their property rights in human capital were less easily expropriated than their property rights in material capital may help to explain the blacks’ rapid rate of advance in literacy.
For the nation as a whole, formal education progressed erratically. The school enrollment rate tended slightly upward, from 48 percent of school-aged (5–19 years old) children in 1870 to 59 percent in 1910, but reversals beset the advance. From 1880 to 1900 the enrollment rate fell substantially, from 58 to 51 percent, and then recovered in the first decade of the new century. We must interpret these figures cautiously, for actual attendance at schools fell substantially below enrollment, typically by as much as a third. The average student actually attended school no more than three or four months each year. The quality of the instruction was poor, teachers frequently being trained only marginally better than their students. Teenage girls formed a major part of the teaching staff, but marriage usually removed them from the job after a few years. Teachers’ salaries were relatively low; in rural districts they often earned less than common laborers.
Impressed by such evidence, one scholar has ventured the judgment that, considering the quantity and the quality of formal education in the nineteenth century, “Taken together they do not suggest that formal education was anything like a significant factor in raising the quality of the American labor force, or in stimulating economic growth.”6 In a fundamental sense, however, this judgment may miss the point. Economic growth is the return on mutually interdependent investments; we cannot neglect the complementarity among skilled workers, mechanization, and advancing technology. Growth simply cannot be sustained for long where the bulk of the population is illiterate and unskilled. In the United States illiteracy never obstructed economic progress. And not only was the labor force mostly literate, but an increasing number of workers invested in acquiring additional skills as the tasks to be performed grew more complex and intellectually demanding. In 1870 only about 2 percent of those at least 17 years old had graduated from high school, but in 1914 the proportion exceeded 10 percent. The number of bachelor’s degrees conferred increased from about 10,000 in 1870 to over 44,000 in 1914, and in the latter year the nation’s universities also granted more than 3000 master’s and over 550 doctor’s degrees. Of course these data measure only very imperfectly the formation of human capital, for much education is consumption rather than investment. Yet the evidence suggests quite strongly that the economically useful skills of the average worker did improve and did contribute toward raising the productivity of labor. The question remains: how much growth can be explained in this way? Unfortunately, a firm answer must await the results of future study.
Albert Fishlow’s research indicates that the nation channeled an increasing proportion of its resources into the production of formal education during the nineteenth century (Table 2.5). Merely adding the amounts spent to provide school buildings and to pay teachers’ salaries does not give a complete account of the cost of education. Whether education is viewed from the point of view of the individual student or from that of society, there is an additional cost: the earnings the student foregoes when he occupies himself with studies instead of some alternative productive occupation. This opportunity cost, which was substantial under nineteenth-century conditions of widespread child labor, has been taken into account in arriving at the “total resource cost” figures of Table 2.5. The table also shows that while public education expanded progressively, private education provided a substantial share during the early years and still supplied more than 20 percent in 1900. Catholics and Lutherans led in supplying private education.
SOURCE. Albert Fishlow, “Levels of Nineteenth-Century American Investment in Education,” Journal of Economic History. XXVI (Dec. 1966), 430.
Workers acquired a large part of their skills not at schools but on the job. Skilled craftsmen—carpenters, masons, blacksmiths, coopers, wheelwrights, printers, mechanics, and many others—typically gained their skills through apprenticeships. The same was true of engineers, lawyers, and physicians. Without doubt, practically all farming skills were transmitted on the farm, often within the family. These kinds of training clearly constitute investment in human capital, but the available evidence is insufficient to indicate the rates at which they were increasing. On-the-job training, however, might well have been more important than formal education during the post-Civil War era. Despite its importance, this subject has yet to be systematically studied.
Health, like education, is a form of capital, but not until near the end of the nineteenth century did Americans make substantial investments in improving their health. Though probably superior to contemporary European standards, American health conditions in the mid-nineteenth century were by present-day standards almost unbelievably poor. Disastrous epidemics occurred frequently—yellow fever, smallpox, cholera, typhoid, diphtheria, and typhus were common scourges. As if these periodic afflictions were not enough, a very substantial part of the population suffered from chronic diseases. Hookworm disease plagued the people of the South. Malaria and dysentery, also prevalent there, spread throughout the great interior basin drained by the Mississippi River system, where the people complained resignedly of the “ague,” and every autumn saw a new onslaught of “fevers.” Tuberculosis, the greatest killer of all, flourished in the rapidly expanding cities. Disease not only took a heavy toll in human lives, but in addition it frequently left the survivors in a debilitated and less productive condition.
The conditions that fostered frequent illness are easily identified. Perhaps the first thing noticed by a modern man, could he be projected back in time-machine fashion to the mid-nineteenth century, would be the ubiquitous filth. Cities were probably more objectionable than the countryside, as evidenced by a physician’s vivid description of New York’s slums in 1865:
Domestic garbage and filth of every kind is thrown into the streets, covering their surface, filling the gutters, obstructing the sewer culverts, and sending forth perennial emanations which must generate pestiferous disease. In winter the filth and garbage, etc., accumulate in the streets to the depth sometimes of two or three feet.
The refuse of the bedrooms of those sick with typhoid and scarlet fevers and smallpox is frequently thrown into the streets, there to contaminate the air, and, no doubt, aid in the spread of those pestilential diseases.
At high tide the water often wells up through the floors [of the cellar apartments occupied by some 18,000 New Yorkers], submerging them to a considerable depth. In very many cases the vaults of privies are situated on the same or a higher level, and their contents frequently ooze through the walls into the occupied apartments beside them.7
Conscious design could hardly have produced conditions more agreeable to the spread of infectious diseases, and the cost of living amid such filth was a sickly and uncertain existence. But although the stench and ugliness sometimes gave rise to complaints, the connection between filth and disease escaped widespread recognition.
Until near the end of the century the causes of almost all diseases remained shrouded in mystery, and hence no really effective steps could be taken to combat them. Medical science, lacking a tested theory of infection, could do very little to relieve the suffering; more often its false cures exacerbated the afflictions of the sick. The most popular theory, that of miasmatic contagion, maintained that disease results from the breathing of air contaminated by the vapors rising from decomposing animal and vegetable matter. (The New York physician quoted above obviously subscribed to this theory.) Interestingly, this false theory did lead to some improvements in public health, for it prescribed the construction of sewers and the removal of garbage from the streets, which reduced the spread of certain diseases. The backwardness of formal medical science probably made little difference, for most physicians were untrained anyhow. A Swedish immigrant recorded with surprise: “A person I have seen going about working as a mason served for a couple of months as an assistant in a drug store in Milwaukee, whereupon he laid aside the trowel, got himself some medical books, and assumed the title of doctor.”8 The nineteenth century abounded in such curious examples of recruitment into the medical profession. Throughout most of the century only two serious diseases responded to the usual treatments: smallpox to vaccination, and malaria to quinine. As late as 1860, “bleed and purge” remained the most common prescription for the treatment of serious disease. Naturally, such remedies destroyed many who would otherwise have survived.
Toward the end of the century the discoveries of Louis Pasteur, Robert Koch, and their followers made possible the first effective campaign against infectious diseases. These scientists showed that many diseases result from the action of microorganisms, bacteria, and that these can be destroyed by substances toxic to them but not to the human organism itself. Within a few years bacteriologists had identified the specific microorganisms responsible for many ailments. In a few cases vaccines were developed to combat the diseases, but of much greater significance was the impetus given to measures designed to impede the transmission of infectious agents. Armed for the first time with firm knowledge about infectious disease causation and transmission, cities devoted increasing amounts of resources to sewage disposal and treatment, the pasteurization of milk, and the provision of pure water. The number of urban people drinking filtered water increased from 30,000 in 1880 to over 20,000,000 in 1920.9
These investments in better health yielded returns in several ways. One measure of the improvements in health is the falling death rate. In New York, Boston, Philadelphia, and New Orleans, taken together, the death rate stood at 30 in 1840–1864, at 26 in 1865–1889, and at 19 in 1890–1914.10 For the nation as a whole the death rate declined from about 23 in the 1870’s to about 15 in 1915. After 1900 great epidemics became increasingly rare and finally nonexistent. Life expectancy at birth increased substantially: in Massachusetts, for which reliable data exist, it rose from about 40 years in 1855 to more than 50 on the eve of the Great War; and fragmentary evidence suggests that the improvement was at least as great elsewhere. That people lived longer and endured less physical pain cannot be doubted. And since many of these improvements worked mainly to reduce child mortality, the sorrow of losing children was diminished and the cost of fruitless pregnancies more often avoided. These improvements in health are surely one of the most significant welfare gains to accompany economic growth.
Organizational Changes and Economies of Scale
In a market economy the fundamental unit of economic organization is the business firm, of which there are three basic kinds according to ownership: the single proprietorship, the partnership, and the corporation. Each has characteristic advantages and might be preferred to the others under certain circumstances. The single proprietorship generally prevails where the scale of operations is small. It allows the owner to have complete control over his business, to operate it as he thinks best. Financial difficulties often arise, however, when a single owner wishes to expand his business; the partnership then becomes attractive. The necessity for mutual trust limits the number of partners. If the business becomes so large by the addition of new partners that no one can keep track of its condition, all may come to grief, because each partner’s legal liability extends to his personal property as well as to that invested in the firm. In addition, the limited life-span of the partners increases the risks of creditors who lend to the partnership, and consequently the business can borrow only at relatively high rates of interest. The corporate form of organization solves the interrelated problems of size, liability, and longevity inherent in the partnership. The corporation can usually obtain funds by selling its stocks—ownership shares in the firm—to the public. Investors often subscribe to such securities even without a detailed knowledge of the firm’s operations because each risks only the amount of his subscription. Unlike the simpler forms of organization, the corporation lives on when all of its original shareholders have died, because the stocks can be passed on to heirs or sold without disrupting the organization of the firm.
Before the Civil War the organization of economic life had been relatively uncomplicated. Most businessmen conducted their affairs within small and highly localized markets, and therefore proprietorships and partnerships predominated. The few existing corporations appeared in industries where the “public interest” intruded, such as turnpikes, railroads, banks, insurance, and utilities. Although several surges of incorporation occurred before the Civil War, the corporation did little more than hold its own with the other forms of business organization.
After the war, incorporation increased greatly, and although the number of incorporations typically fell during business depressions the trend was sharply upward for the next half century. Incorporations of financial firms and utilities declined relatively, while manufacturing incorporations became more prevalent. During the two decades from the mid-1870’s to the mid-1890’s entrepreneurs adopted the corporation in many fields where it had not previously appeared. After the 1890’s the incorporation of trade and service businesses became progressively more common.11
The rise of the corporation reflected several influences. One was the increasing size of markets. As firms expanded to meet a growing demand, they typically found it desirable to assume the corporate form, for reasons already discussed. Another influence was the development of formal markets for corporate stocks and bonds, which reduced the costs of attracting new investors in corporate securities. Changes in the law also encouraged incorporation. As early as 1816 the legislatures of Connecticut and New Hampshire had passed statutes providing for limited liability, thus resolving a long-unsettled legal question, and by 1860 this provision was widespread among the states. In the early part of the century, incorporation had typically required a special charter granted by a state legislature, which explains why so many corporations then bore a close relation to the “public interest.” Although some states had passed general incorporation acts early in the century—for example, New York in 1811—not until the 1870’s did constitutionally required incorporation under general laws become the rule in most states. Under these laws, entrepreneurs could incorporate their firms simply by filing a few papers and paying a small fee. The costs of incorporation being greatly reduced, increasing numbers of businessmen selected this form of organization. By 1916 more than 340,000 corporations had been formed, over 80,000 of them in manufacturing.
An economy in which the corporation is the most important form of business organization is certain to differ in fundamental respects from one in which proprietorships and partnerships prevail: fewer people are self-employed, and more are wage earners; firms are larger, more impersonal, and more bureaucratic; even political power may come to rest with those who control the large corporations. These are important consequences, but our present concern is with the corporation’s relation to economic growth. The question is whether the rise of the corporation led to increased productivity, and the answer is that it did.
The crucial link between greater efficiency and incorporation is size. As we have seen, firms normally assumed the corporate form in order to facilitate their expansion. But expansion did not mean simply producing more in the same way, for larger firms could frequently make use of improved forms of organization that enabled them to reduce the average cost of production. Larger size permitted greater specialization of functions within the firm, which promoted efficiency. A famous novel, written in 1905, gives a graphic description of the efficiency that resulted from the division of labor in the meat-packing industry:
The carcass hog was scooped out of the vat by machinery, and then it fell to the second floor, passing on the way through a wonderful machine with numerous scrapers, which adjusted themselves to the size and shape of the animal, and sent it out at the other end with nearly all of its bristles removed. It was then again strung up by machinery, and sent upon another trolley ride; this time passing between two lines of men, who sat upon a raised platform, each doing a certain single thing to the carcass as it came to him. One scraped the outside of a leg; another scraped the inside of the same leg. One with a swift stroke cut the throat; another with two swift strokes severed the head, which fell to the floor and vanished through a hole. Another made a slit down the body; a second opened the body wider; a third with a saw cut the breastbone, a fourth loosened the entrails; a fifth pulled them out—and they also slid through a hole in the floor. There were men to scrape each side and men to scrape the back; there were men to clean the carcass inside, to trim it and wash it. Looking down this room one saw, creeping slowly, a line of dangling hogs a hundred yards in length; and for every yard there was a man, working as if a demon were after him.12
The use of more efficient techniques requiring highly indivisible, or “lumpy,” capital goods like bristle-scraping machines or conveyers was advantageous only when large outputs were produced. An assembly line like the one described above was economical only for packers handling hundreds, perhaps thousands, of animals each day. In sum, incorporation allowed firms to grow, and growth often permitted the realization of various economies of scale, thus raising productivity.
Besides the rise of the corporation, numerous other organizational changes occurred during the post-Civil War era. The merger movement, for example, reached a crest around the turn of the century. Mergers often led to greater productivity; in Alfred Chandler’s words,
The transformation of a loose alliance of manufacturing or marketing firms into a single consolidated organization with a central headquarters made possible economies of scale through standardization of processes and standardization in the procurement of materials. Of more significance, consolidation permitted a concentration of production in a few large favorably located factories. By handling a high volume of output, consolidated factories reduced the cost of making each individual unit. They could specialize further and subdivide the process of manufacturing and also were often able to develop and apply new technological improvements more easily than could smaller units. To a lesser extent consolidations of marketing firms offered comparable advantages.13
Expansion of the market led to greater specialization and hence to higher productivity within individual firms, as described above, but economies of scale also appeared in a broader context. In a growing market many firms themselves became more and more specialized. For example, in the early nineteenth century, textile manufacturers produced their own equipment, for the total demand for such machinery was too small in any particular place to support a firm specializing in such products, and transportation charges were too high to permit an economical centralization of machinery production. As the demand for textiles became larger, the demand for textile machinery also increased, and about the middle of the century specialized machinery producers began to appear. This specialization among firms raised productivity throughout the textile industry, for it enabled the machinery firms to benefit from the learning process inherent in specialization and then, through competition with one another, to pass benefits on to textile makers in the form of reduced machinery costs. In a similar fashion countless other new industries emerged. Of special significance was the appearance of a distinct industry producing machine tools, instruments for cutting, grinding, and polishing metals. This became a focus for the discovery and dissemination of new techniques applicable to a wide range of manufacturing processes.14
The costs of transacting exchanges fell in most markets during this period. For example, the financial markets, where savings are channeled into investment, became more efficient on a national scale as funds began to flow more freely between regions. In a growing market a host of specialists—brokers, investment bankers, financial journalists, and others—arose to perform services, typically involving the collection and dissemination of information, enabling the market system to operate more efficiently as a by-product of their own pursuit of wealth.
Technological Progress
Technological progress means an increase in useful knowledge. It is useful to think of it as occurring in three steps: (1) invention, the original conception of a new idea; (2) innovation, its original application in a firm’s production process; and (3) diffusion, its spread from the innovator to applications in other firms. Some inventions never become innovations, and some innovations never spread beyond their original application. The diffusion of a new idea may require many years, or even decades. Very often new knowledge is applicable only in conjunction with a new capital good; economists then speak of technological progress as “embodied” in the material capital. Because of this embodiment, material capital accumulation takes on an additional productivity-raising dimension. Not only does it augment the productivity of labor by increasing the material capital/labor ratio, but it provides as well a vehicle for the implementation of new ideas, for raising the intellectual capital/labor ratio. The examples of technological progress considered below comprise only a minute sample from a vast universe. We must remember, too, that major productivity gains often resulted from a series of minor improvements. The spectacular technological advance captures everyone’s attention, but ultimately the small, unspectacular advances may have had an even greater importance.
The steamboat revolutionized inland transportation in the early nineteenth century, and in combination with the canals it gave the United States a transportation system that compared favorably with those of the advanced European nations. The two decades before the Civil War were the golden age of the steamboat, but beginning in the 1840’s the railroad, which had first appeared in the United States in 1830, began to furnish serious competition for the water carriers. By 1860 the railroads operated over 30,000 miles of main lines. The railroad was much less an improvement over the steamboats than the steamboats had been over flatboats, keelboats, and wagons. Still, the iron horse progressively displaced water transportation in most lines. Mark Twain portrayed the trend in a characteristic description:
Boat used to land—captain on hurricane roof—mighty stiff and straight—iron ramrod for a spine—kid gloves, plug tile, hair paned behind—man on shore takes off hat and says—
“Got twenty-eight tons of wheat, cap’n—be great favor if you can take them.”
“‘ll take two of them”—and don’t even condescend to look at him.
But now-a-days the captain takes off his old slouch, and smiles all the way around to the back of his ears, and gets off a bow which he hasn’t got any ramrod to interfere with, and says—
“Glad to see you, Smith, glad to see you—you’re looking well—haven’t seen you looking so well for years—what you got for us?”
“Nuth’n,” says Smith; and keeps his hat on, and just turns his back and goes to talking with somebody else.15
The water carriers, being relatively more efficient in the carriage of bulky, low-value-per-pound goods, survived and even flourished transporting grains, ores, and coal. After the Civil War the development of towboatbarge systems helped the river carriers to retain much of their business on the Ohio and the Mississippi, and enormous ore boats on the Great Lakes continued to expand their trade. But the future belonged to the railroad, and its impact was so great that some historians have dubbed the post-Civil War era the Railway Age. Probably no other single invention in the nineteenth century had such far-reaching influence.
Railroads did not simply provide more cheaply the same service that canals and steamboats had previously supplied. In fact, transport rates on the canals, lakes, and rivers, in cents per ton-mile, remained lower than railroad rates. But the railroad provided a service so superior in quality that it more than compensated for its higher price. Its major advantages were more direct routes, reduced transshipment, greater speed and safety, and year-round service. With the introduction of the railroad, insurance rates and warehousing charges fell, as did the degree of uncertainty surrounding shipping and delivery dates. Commerce became more predictable. Moreover, the railroad permitted the settlement of large parts of the western United States where water transportation was not feasible, and there its influence was most striking. The availability of railroad transportation in the trans-Mississippi West encouraged a far-reaching relocation of agricultural activities; grain and meat production soon concentrated in this area. This relocation contributed substantially toward raising overall agricultural productivity.16
In Communications great technological advances occurred. The telegraph had appeared in the 1840’s; the telephone followed in the 1870’s; and both continued to diffuse, supplying progressively more services. Information could now be transmitted in seconds instead of days. The availability of instant communications improved the working of markets by increasing their competitiveness, for traders could now carry out arbitrage operations quickly—buying in one market to sell in another with lugher prices—thus insuring that prices in different markets for the same good would normally differ only by the cost of transportation between the places. Businessmen could discover opportunities for remunerative sales in markets throughout the nation. David A. Wells noted in 1889 that “the command through the telegraph of instantaneous information throughout the world of the conditions and prospects of all markets for all commodities has also undoubtedly operated to impart steadiness to prices, increase the safety of mercantile and manufacturing operations, and reduce the elements of speculation and of panics to the lowest minimum.”17 In short, the telephone and the telegraph lowered the cost of information and thereby contributed toward increasing productivity throughout the entire economic system by reducing the uncertainties surrounding transactions and by reducing the quantity of resources committed to search activities or tied up in inventory stocks. On the eve of World War I, Western Union handled more than 100 million telegraphic messages annually, and over 10 million telephones facilitated additional communications.
Technological advances in agriculture, where a large proportion of the nation’s total output originated, had a major influence in determining the economy’s overall rate of productivity growth. Improved iron and steel plows, cultivators, seed drills, reapers, and threshing machines had all appeared before the Civil War, but their diffusion continued for decades after 1865. A variety of horse-drawn implements like the springtooth and disc harrows, the gang plow, the self-binding reaper, and the “combine” reaper-thresher appeared after the war. These examples illustrate “embodied” technological progress. Other advances, like new methods of plowing and crop rotation, were “disembodied,” not requiring new capital goods for their implementation. Livestock keepers improved the quality of their animals through selective breeding, and farmers raised the quality of their crops by carefully selecting hardier, more disease-resistant seeds. After 1905 the gasoline tractor came into use, giving indications of even greater productivity gains in agriculture that would come with the replacement of horsepower by the internal combustion engine.
Sweeping technological advances occurred in manufacturing. The sewing machine, invented in the 1840’s, was put to varied use in the garment and shoe industries as well as in homes. In the 1870’s the milling industry adopted roller grinding, which allowed the transformation of hard Western wheats into fine, high-quality flour. Refrigerated railway cars and storage rooms made meatpacking and fresh meat distribution into a unified national industry after 1880, putting fresh meat from the Midwest on the tables of consumers throughout the nation. The Bessemer converter and the open-hearth process revolutionized the steel industry, permitting for the first time the large-scale manufacture of steel at prices so low that it soon became commonly used as a building material throughout industry (Figure 2.7). Steel makers made major productivity gains by rearranging their plants to eliminate much of the reheating of materials and to capture valuable by-products. The productivity of machine tools increased rapidly. High-speed tool steel—an alloy that retains its strength at high temperatures—appeared around the turn of the century, permitting cutting operations to be performed much quicker. During the 1870’s steam surpassed water as a source of power, and after 1890 electrical power was increasingly applied in industrial uses. Between 1865 and 1915 aggregate energy consumption increased more than fivefold, and mineral fuels (predominantly coal), which had provided less than 20 percent of this energy in 1865, furnished over 85 percent in 1915.
Figure 2.7 Steel production. Source: Peter Temin, Iron and Steel in Nineteenth-Century America (Cambridge, Mass.: M. I. T. Press, 1964), pp. 270–71.
MAIN PATTERNS OF TRANSFORMATION
The composition of the economy’s total output changed dramatically in the post-Civil War era (Table 2.6). As their incomes rose, consumers increased their spending for the products of agriculture only slowly, and for manufactured products much more rapidly. Moreover, the rise in the fraction of total income used to finance material investment placed a greater demand on the manufacturing industries. As a result, the rate of return in manufacturing enterprises became relatively greater, and entrepreneurs moved to expand such production; at the same time many farmers, discouraged by their relative lack of success, sought to improve their condition by seeking nonfarm occupations. The upshot of these movements was the transformation of a predominantly agrarian economy into a great industrial economy—a transformation so sweeping and pregnant with implications that economic historians have called it an “industrial revolution” and made it the focus of a major part of their research for the past century. In 1870, after several decades of industrial growth, the United States had a manufacturing output equal to that of France and Germany combined, but only about three fourths as large as that of the United Kingdom; by 1913 the American manufacturing output equalled that of France, Germany, and the United Kingdom combined! Still the greatest producer of raw materials and foodstuffs, the United States had become the world’s industrial giant as well.
TABLE 2.6
PERCENTAGE DISTRIBUTION OF COMMODITY OUTPUT
| Year | Agriculture | Mining | Manufacturing | Construction |
| 1869 | 53 | 2 | 33 | 12 |
| 1874 | 46 | 2 | 39 | 12 |
| 1879 | 49 | 3 | 37 | 11 |
| 1884 | 41 | 3 | 44 | 12 |
| 1889 | 37 | 4 | 48 | 11 |
| 1894 | 32 | 4 | 53 | 11 |
| 1899 | 33 | 5 | 53 | 9 |
SOURCE. Robert E. Gallman, “Commodity Output, 1831–1899,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Trends in the American Economy in the Nineteenth Century (Princeton, N. J.: Princeton University, 1960), p. 26.
The rapid growth of manufacturing, trade, and transportation outputs and the relative decline of agricultural output led to parallel changes in the distribution of employment among the various sectors (Table 2.7). Most striking was the great reduction in the agricultural share: in 1870 well over half of all workers were farmers or farm laborers; by 1910 only one in three was. The relative employment gains, being spread over several sectors, were less obvious than agriculture’s relative losses. Transportation employment grew fastest of all, trade employment somewhat slower; and the still slower expansion of manufacturing jobs seems really quite moderate in relation to the immense outpouring of manufactured goods. The relatively slow expansion of manufacturing employment is partly a statistical illusion arising from changes in the definition of manufacturing workers starting with the census of 1900, but to a larger extent it reflects the enormous increases in output per worker achieved in the manufacturing sector.
TABLE 2.7
PERCENTAGE DISTRIBUTION OF LABOR FORCE
SOURCE. Stanley Lebergott, “Labor Force and Employment, 1800–1960,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University, 1966), p. 119.
While the sectoral composition of output and employment underwent rapid changes, locational patterns shifted in an equally radical way. The thrust of the interregional movement was westward, but the pattern was more complicated than this simple statement suggests (Table 2.8). In general, opportunities for earning an income determined the locations of productive activities, and individual workers and businessmen adjusted accordingly, though population movements did of course produce a feedback effect on decisions about the location of production. The overall impression of scholars who have studied migration patterns is that Americans moved readily in an attempt to improve their economic condition. This high mobility played an important role in the successful functioning of a geographically vast market economy.
TABLE 2.8
PERCENTAGE REGIONAL DISTRIBUTION OF POPULATION
SOURCE. Richard A. Easterlin, “Interregional Differences in Per Capita Income, Population, and Total Income, 1840–1950,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Trends in the American Economy in the Nineteenth Century (Princeton, N. J.; Princeton University, 1960), p. 136. Percentages may not sum to 100 because of rounding. Regions are defined as follows. New England: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, and Rhode Island. Middle Atlantic: New York, New Jersey, Pennsylvania, Delaware, and Maryland. East North Central: Ohio, Indiana, Illinois, Michigan, and Wisconsin. West North Central: Minnesota, Iowa, Missouri, North Dakota. South Dakota, Nebraska, and Kansas. South Atlantic: Virginia, West Virginia, North Carolina, South Carolina. Georgia, and Florida. East South Central: Kentucky, Tennessee, Alabama, and Mississippi. West South Central: Arkansas, Louisiana, Oklahoma, and Texas. Mountain: Montana, Idaho, Wyoming, Colorado, New Mexico, Arizona, Utah, and Nevada. Pacific: Washington, Oregon, and California.
1 Gross national product, usually abbreviated GNP, is defined as the value at market prices of all final goods produced in a year. It is the most common measure of an economy’s total output. Notice that we count only final commodities and services. For example, suppose a farmer sells wheat to a miller, who makes it into flour for sale to a baker, who makes it into bread for sale to final consumers. Only the bread is a final good; the wheat and the flour are intermediate goods. By accounting convention, we consider durable capital goods and additions to inventories final, even though their sole purpose is to enlarge the capacity to produce, and therefore they are intermediate in an important sense. By speaking of a change in real GNP we refer to a comparison of two collections of goods valued at the same prices. Since prices typically change over time, we can make reliable statements about growth or decline of output only by weighting goods with constant prices. See Armen A. Alchian and William R. Allen. University Economics, 2d ed. (Belmont, Calif.: Wadsworth. 1967). pp. 513–16.
2The following analysis of price trends is highly simplified. For a detailed account, see Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N. J.: Princeton University, 1963), pp, 15–188.
3 This brief discussion necessarily omits many aspects of the secular decline in fertility. For detailed analysis and description, see Gary S. Becker, “An Economic Analysis of Fertility.” in National Bureau of Economic Research, Demographic and Economic Change in Developed Countries (Princeton, N. J.: Princeton University, 1960). pp. 209–31, and comments by James S. Duesenberry and Bernard Okun, pp. 231–40; and E. A. Wrigley, Population and History (New York: McGraw-Hill, 1969), especially pp. 217–24.
4 The problems surrounding these calculations are both conceptual and empirical. For an introduction to the literature on productivity measurement, see Solomon Fabricant, “Productivity,” in International Encyclopedia of the Social Sciences (New York: Macmillan, 1968). The most sophisticated contribution to this literature is Dale: Jorgenson and Zvi Griliches, “The Explanation of Productivity Change,” Review of Economic Studies, XXXIV (July 1967). But see also the important criticisms of the Jorgenson-Griliches paper by Edward F. Denison, “Some Major Issues in Productivity Analysis,” Survey of Current Business, IL (May 1969), Pt. II. The whole field is lucidly surveyed by M. Ishaq Nadiri, “Some Approaches to the Theory and Measurement of Total Factor Productivity: A Survey,” Journal of Economic Literature, VIII (Dec. 1970).
5 Recreational uses of resources constitute exceptions to these statements, but such uses were of little consequence during the post-Civil War era.
6 Stanley Lebergott, “Labor Force and Employment, 1800–1960,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University, 1966), p. 126.
7 Cited in C.-E. A. Winslow, The Evolution and Significance of the Modern Public Health Campaign (New Haven: Yale University, 1923), p. 10.
8 Cited in Stanley Lebergott, Manpower in Economic Growth (New York: McGraw-Hill, 1964), p. 120.
9 George C. Whipple, “Fifty Years of Water Purification,” in Mazyck P. Ravenel, Ed., A Half Century of Public Health (New York: American Public Health Association, 1921), p. 166.
10 Frederick L. Hoffman, “American Mortality Progress During the Last Half Century,” in Ravenel, op. cit., p. 102.
11 For detailed statistics concerning incorporation, see George Heberton Evans, Jr., Business Incorporations in the United States, 1800–1943 (New York: National Bureau of Economic Research, 1948).
12 Upton Sinclair, The Jungle (New York: Signet Classics, 1960), pp. 40–41.
13 Alfred D. Chandler. Jr., Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, Mass.: M. I. T. Press, 1962), p. 37.
14 On the strategic role of the machine tool industry in economic growth, see Nathan Rosenberg, “Capital Goods, Technology, and Economic Growth,” Oxford Economic Papers, XV (Nov. 1963), and idem. “Technological Change in the Machine Tool Industry, 1840–1910,” Journal of Economic History, XXIII (Dec. 1963).
15 Mark Twain, Life on the Mississippi (New York: Charles L. Webster, 1891), pp. 570–71
16 For calculations of the effect of the westward movement on productivity in grain cultivation, see William N. Parker and Judith L. V. Klein, “Productivity Growth in Grain Production in the United States, 1840–60 and 1900–10,” in National Bureau of Economic Research, Conference on Research in Income and Wealth, Output, Employment, and Productivity in the United States after 1800 (New York: Columbia University, 1966).
17 David A. Wells, Recent Economic Changes (New York: Appleton, 1889). p. 82.
A DIGRESSION: HOW GROWTH BEGAN
Capital formation is one of the conditions of economic growth, and the existence of a law of property is one of the conditions of capital formation. . . . For if a resource and its fruit could not be protected against the public at large, it would certainly be misused, and hardly any person would find it worth while to invest in its improvement. . . . [U]nless we match differential effort with differential reward, men are unlikely to take the trouble to develop their talents and resources to the utmost of their capabilities.
W. ARTHUR LEWIS
Economic growth did not begin with a great leap after the Civil War. Although our evidence on when it actually began is scanty, it appears certain that rapid growth occurred in the two decades before the Civil War, and output per capita probably increased also in the two decades before 1840, although at a slower rate. In short, sustained economic growth began sometime in the first half of the nineteenth century. Perhaps the attempt to date the starting point with any greater precision is really not a fruitful exercise. After all, economic growth did not just suddenly appear; rather, it emerged slowly and haltingly, against many obstacles and with many temporary setbacks.
In a book concerned only with the post-Civil War era, we could easily dismiss the subject of how growth began as a question belonging to another study. But that would be a serious mistake, for unless we understand how growth began, we cannot really understand how it continued in a self-sustaining fashion throughout the post-Civil War era. In this digression, we offer a theory of how growth began. Though we shall present some evidence that it is consistent with the facts of American economic history, no rigorous tests of the hypotheses implied by this theory are presently available. Property rights, which play a central role in the theory, are particularly difficult to incorporate into clear-cut hypothesis tests. Our hope is that by sketching the theory we will encourage others to join in the attempt to extend and test it. Having issued our caveats at the outset, we proceed below without qualification.
Before the nineteenth century, relatively little investment in material capital took place, the technology advanced haltingly, and workers acquired new skills at a snail’s pace. This virtual absence of productivity-raising activities, extending back through millenia of civilized history, sprang from two sources.
The first was the prevalence of limited markets. The limitations on the effective size of markets arose in some places from small populations, in other places from low levels of income per capita, and in most places from both. Primitive technologies of transportation and communication obstructed the widening of effective markets through interregional or international trade, and high costs of information about potential foreign markets restricted trade to items with high value/weight ratios, as in the famous medieval spice trade. With the revival of commerce in the late medieval period, European markets began to widen; population growth promoted the same result. But these changes occurred slowly, ever so slowly, and with frequent reversals as wars and raiding disrupted trade and as plagues, famines, and other natural disasters decimated the population of Europe. Over the centuries, however, markets did grow, the settlement of North America by English colonists being a simple overseas extension of this growth. The colonies expanded in response to the home country’s growing demand for American staples—tobacco, rice, indigo, fish, lumber, naval stores. Later, in the early nineteenth century, cotton became the leading export. The expansion of a rapidly growing population westward into an apparently inexhaustible area of fertile land made possible an increasing supply of these goods. Within the United States the growth of population from less than 4 million in 1790 to more than 31 million in 1860 provided visible evidence of widening markets. At the same time canals, steamboats, and railroads made the population more internally accessible. Certainly before the middle of the nineteenth century, narrow markets no longer constrained the undertaking of productivity-raising activities in America.1
Large markets alone, however, could not stimulate many individuals to invent or to acquire skills. The second requirement was the development of secure private property rights, for even with wide markets the substantial risk remained that, having made investments in raising their productivity, investors would be unable to capture gains sufficient to justify the effort. The same insecurity influenced the accumulation of material capital where the returns accrued over a lengthy and uncertain future. As markets became geographically larger, with many transactions being necessarily conducted at a distance, the problems of insuring that one’s property would be respected grew more severe. And always the threat was twofold, for property rights might be disregarded by governments as well as by other individuals. With private property rights ill-defined and ill-enforced, individuals could not form reliable expectations. Uncertainty dominated the future, and only the fool or the humanitarian risked valuable resources in ventures promising greater but later rewards.
Englishmen, of course, had proceeded further than others toward securing the rights of private property. But much remained to be done even in the late eighteenth century, and in many cases the American colonists enjoyed less protection than their cousins did at home. After all, the American Revolution was in large measure provoked by the British government’s arbitrary treatment of American property. Mere independence, however, did not cure these ills completely. Shays’ Rebellion, a 1786 uprising of Massachusetts farmers defying court orders to repay debts as agreed in their contracts, alarmed many throughout the new nation and intensified concern for the security of property. In November 1787, James Madison complained of a “prevailing and increasing distrust of public engagements, and alarm for private rights, which are echoed from one end of the continent to the other.” And two months later he wrote:
The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less-informed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. They very rightly infer, therefore, that some thorough reform is wanting, which will banish speculations on public measures, inspire a general prudence and industry, and give a regular course to the business of society.2
Independence did create an opportunity for Americans to establish a new framework of property rights consistent with their desire for material advancement. The Constitution was the first step, and in many ways the most important one. Its provisions for security against foreign and domestic threats, for post offices and roads, for duty-free interstate trade, and for uniform bankruptcy laws directly helped to promote trade and specialization. It also gave Congress the right to provide for a patent system: “To promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” With greater assurance of capturing the gains from their ideas, inventors emerged more rapidly than ever before. Of immense importance was the provision prohibiting any state from passing a law that would impair the obligation of contracts. In 1819 John Marshall, Chief Justice of the U. S. Supreme Court, recalled the insecurity that had afflicted the rights of private property before the Constitution: “[A] course of legislation had prevailed in many, if not in all, of the states, which weakened the confidence of man in man, and embarrassed all transactions between individuals, by dispensing with a faithful performance of engagements.” Marshall apparently had in mind the acts passed by seven states in the 1780’s authorizing the issue of paper currency to serve as a legal tender for the settlement of debts contracted in terms of specie. The Contract Clause of the Constitution, he said, was designed “to correct this mischief, by restraining the power which produced it.”3 The Constitution also explicitly forbade the states to coin money or to emit bills of credit. The Bill of Rights, ten amendments to the Constitution adopted in 1791, guaranteed “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures”; it provided that no person “be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation”; furthermore, “in Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.” In brief, the Constitution laid the foundation of private property rights so as to curb the arbitrary powers of government and to promote the security required for the pursuit of productivity-raising activities of all kinds.
Upon this foundation an imposing legal structure arose in the first half of the nineteenth century. Of central importance were the elaboration and extension of the common law of contract. With English precedents as a starting point, judges set down new rules for the legal treatment of negotiable instruments like notes, bills of exchange and lading, and warehouse receipts. In an expanding and far-flung market, uniform standards for dealing with these commercial documents were essential. Judges also clarified the legal responsibilities of factors and agents and extended the law with respect to banking and insurance. In 1836 Congress reformed the patent system, and the new law, in combination with its subsequent interpretations by the courts, did much more to protect inventors’ rights to their ideas. In all these areas the general effect was to facilitate the operation of private economic activities and to stabilize the expectations of individuals concerning the legal status of private property in its various forms. The doctrine of stare decisis—that lower courts are bound by the prior decision of the highest court in the same jurisdiction in substantially similar cases—became firmly entrenched during this period, contributing further to the establishment of a predictable legal order.
The judges of Massachusetts pioneered in establishing a body of American precedents. Theophilus Parsons, Chief Justice of the Massachusetts Supreme Court from 1806 to 1813, became known as “The Giant of the Law.” “He was,” says Daniel Boorstin, “a true New Englander both in his feeling for local customs and in his desire, especially in the laws of commerce, shipping, and insurance, to follow the practice of merchants.”4 Lemuel Shaw, Massachusetts Chief Justice from 1830 to 1860, contributed monumentally to the body of common law. He did much to make the law consistent with economic progress by adapting liability provisions to the special circumstances of railroad transportation. He also introduced the notion of “eminent domain,” which allowed the fully compensated confiscation of private property for public use—as, for example, in establishing a railroad right-of-way. The distinguishing feature of this new legal device was that governments might delegate their confiscatory power to private parties, such as railroad companies, for well-defined and limited purposes. Without the power of eminent domain, it is doubtful that the nation’s transportation system, with all its associated social benefits, could have developed as fast as it did.
Law writers also performed a crucial function in the early nineteenth century, for until the existing rules had been systematized, it was difficult and costly to know the legal consequences of many actions. Though lawyers and judges commonly cited English precedents, some states attempted to restrict their citation, and they were not uniformly observed. As Boorstin properly notes, “Without a general American legal system, technically defined and available in books, the free commerce among our states and the industrial unity of our nation might have been impossible.”5 After the first quarter of the nineteenth century this gap was steadily filled. Landmark writings included Nathan Dane’s General Abridgement and Digest of American Law (8 vols., 1823), James Kent’s Commentaries on American Law (4 vols., 1826–30), and the voluminous works of Joseph Story, an Associate Justice of the U. S. Supreme Court, including Commentaries on the Conflict of Laws (1834) and On Equity Jurisprudence (2 vols., 1836). Among his many accomplishments Story contributed a great deal to the law of patents. All these writers relied on the transcripts of court proceedings prepared by official reporters, appointed first to report United States Supreme Court cases early in the nineteenth century. By the Civil War all the states had official reporters, greatly facilitating the systematic compilation of cases on which the development of common law crucially depends.
From his position as Chief Justice of the U. S. Supreme Court, John Marshall exerted a powerful influence on the establishment of a legal order of security for private property. His long tenure on the court extended from 1801 to 1835, a crucial period in the shaping of American law. Marshall’s opinions in the cases of Fletcher v. Peck (1810) and Trustees of Dartmouth College v. Woodward (1819) were giant steps forward in guaranteeing the sanctity of contracts. In the former case he asked rhetorically: “It may well be doubted whether the nature of society and of the government does not prescribe some limits to the legislative power; and if any be prescribed, where are they to be found, if the property of an individual fairly and honestly acquired, may be seized without compensation?” The Constitution’s Contract Clause, he added in the latter case, “must be understood as intended to guard against a power of at least doubtful utility, the abuse of which had been extensively felt, and to restrain the legislature in future from violating the right to property.” In Gibbons v. Ogden (1824) Marshall declared the validity of the Interstate Commerce Clause in giving the power to regulate interstate trade solely to the federal government, and by proscribing the obstructive actions of individual states he helped to create the legal conditions that would permit the emergence of a broad national market. In all his decisions he was at pains to combat those who would interpret the Constitution narrowly, who would “explain away the constitution of our country and leave it a magnificent structure indeed, to look at, but totally unfit for use.”6 In his hands the Constitution became the basic institutional foundation for the promotion of material progress in America’s market economy.
As the economy’s total output grew in response to the foreign demand for American staples, many inventions became attractive investments for the first time; the acquisition of many skills became worthwhile for the first time; many investments in material capital were justified for the first time. In a setting where property rights were defined and enforced in a way that encouraged invention and protected private property, economic growth could begin. And once under way, the whole process became self-sustaining, because material, human, and intellectual capital accumulation led to the growth of output per capita, thus expanding markets and making it worthwhile to invent further, to acquire additional skills, and to accumulate more material capital. In brief, the great transformation that permitted men for the first time to escape from poverty rested on two fundamental bases: (1) the growth of markets, which in the United States had its origins in increasing foreign demand and in population growth under conditions of unlimited land; and (2) the evolution of secure private property rights, including the private right to intellectual property. These developments, stretching back for centuries, have no precise dates of origin. But the Constitution was a major landmark, and in the first half of the nineteenth century, when private property rights became firmly established, several convergent influences finally culminated. By the post-Civil War era, self-sustaining growth had become the normal condition of the American economy.
Of course, nothing guaranteed the continuation of these conditions. But in fact the rights of private property were consolidated and extended during the half century after the Civil War at the same time that markets were growing at unprecedented rates. In the words of the legal historian, Willard Hurst,
[T]he development of the market steadily increased the interlocking character of operations in this society and thus tended to raise men’s need to be able to rely on one another’s performance. Various features of our growing law of agreements reflected this. In more and more instances, from mid-century on, the law itself provided a framework for the parties’ dealing, unless they explicitly contracted out of the transaction which the rules of law shaped for them. This was notably true in respect to the instruments of commerce—bills of lading, warehouse receipts, stock transfer documents—and the forms of association, especially the partnership or corporation.7
The culmination of all these developments came when the Supreme Court in the 1880’s declared that corporations were legal “persons,” extending to them the protection of the Fourteenth Amendment and making it impossible for states to levy discriminatory taxes upon them.
In 1890 the Supreme Court extended the definition of property from physical things to the expected earning power of things—a definition always observed in the market—thereby striking down the power of state legislatures to destroy the value of private property by fixing unreasonably low prices on the services provided by railways and other utilities. A few years later it recognized that earning power depends on free access to markets. In Allgeyer v. Louisiana (1897), the court said:
The liberty mentioned in that Amendment [Fourteenth] means not only the right of the citizen to be free from physical restraint of his person, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary, and essential to his carrying out to a successful conclusion the purposes above mentioned. . . . His enjoyment upon terms of equality with all others in similar circumstances of the privilege of pursuing an ordinary calling or trade, and of acquiring, holding, and selling property is an essential part of liberty and property as guaranteed by the Fourteenth Amendment.8
“Institutions,” Arthur Lewis has written, “promote or restrict growth according to the protection they accord to effort, according to the opportunities they provide for specialization, and according to the freedom of manoeuvre they permit.”9 In all these respects American institutions were basic to the initiation of economic growth and to its sustainment.
1 For a detailed account of the widening of markets in the early national period. see Douglass C. North, The Economic Growth of the United States, 1700–1860 (Engle-wood Cliffs, N.J.: Prentice-Hall, 1961).
2 James Madison, in The Federalist (New York: Modern Library, n. d.), pp. 54. 289.
3 Trustees of Dartmouth College v. Woodward (1819), reprinted in Henry Steele Commager, Ed., Documents of American History, 4th ed. (New York: Appleton, Century, Crofts, 1948). pp. 220–23.
4 Daniel J. Boorstin, The Americans: The National Experience (New York: Random House. 1965). p. 39.
5ibid., p. 38.
6Gibbons v. Ogden (1824), reprinted in Commager, op. cit., pp. 338–43.
7 James Willard Hurst, Law and the Conditions of Freedom in the Nineteenth-Century United States (Madison, Wis.: University of Wisconsin, 1(156), p. 14.
8 Cited in John R. Commons. Legal Foundations of Capitalism (New York: Macmillan, 1914). p. 17. See also pp. 11–16.
9 W. Arthur Lewis, The Theory of Economic Growth (New York; Harper Torch books, 1970), p. 57.
The Transformation of the American Economy, 1865-1914
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