Northern Agriculture After the Civil War

Northern Agriculture After the Civil War

• 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 1800 Wheat 100 Bu 373 Corn 100 Bu 344 Cotton 1 bale 601 1840 233 276 439 1880 152 180 304 1900 108 147 283 1910 106 135 276 1930 -40 70 123 252 1960 12 11 49

Where do increases in productivity come from? • Refer back to lecture on Northern Agriculture before Civil War – New Land • Reduction in transportation costs increases size of market • Railroads – Mechanization – New varieties of plants

Total Factor Productivity • Q=La. Kb. Tc • TFP=Q/La. Kb. Tc • Between 1889 and 1899, TFP increase by. 7% per year compared to 1. 7% for manufacturing

Increased costs of farming • Increase in farm size • Increase in capital necessary to start up – Cost of machinery was falling • Increase in cost of land • Sources of Agrarian Discontent (Populist Movement) • Were these concerns justified?

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 1880 -1920 • Concern that “land monopoly” was threatening agricultural ladder

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

What is farmer’s goal? • farm ownership – Minimize transaction costs • income maximization – Tenancy is also a way of increasing farm size and to accumulate capital and land Allows farmer to resources on farm equipment and other capital – Is it better to rent a bigger farm or buy a smaller one?

Increase in Tenancy • Tenancy is step on Agricultural ladder but it is also a way of altering farm size. – In the South, owners of large amounts of land rent out parts to sharecroppers and other tenants but still manage the land as one unit – In North some farmers rent land in addition to land owned to make larger farms

Mortgage Market • As land becomes more expensive, increased use of mortgages • Did banks have monopoly power? – Entry is easy – Low forclosure 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 • Railroad rates were falling faster than farm prices • Railroads were a natural monopoly – High fixed costs – In some cases competition between lines and with water transport. In some cases not.

Natural Monopoly p 1 ac q 1 D mr mc

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.

Marginal Cost price p 1 ac p 2 q 1 D q 2 mr mc

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 taken from your text 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 • Populism can be explained as a special interest group – Agricultural price supports are part of its legacy • William Jennings Bryant famous candidate

Populism, a success? • Never got more than 10% of popular vote • William Jennings Bryant was their most famous presidential candidate (Cross of Gold) – He actually ran on a democratic party ticket and was endorsed by the populist party • Were successful in increasing amount of regulation of RR and other utilities and setting the ground work for agricultural price supports. •

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

Role of Railroad • Most of the expansion takes place after 1850. • Railroads created external benefits just as canals and turnpikes did • Was construction ahead of demand? – Were returns to investors< returns in the next best investment

• Fishlow’s analysis show railroads in midwest profitable from beginning • Fogel shows much larger social rate of return than private rate of return for Union Pacific – Justifies government subsidies such as land grants – Controversy about whether land grants were necessary

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 1899. – 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 Fishlows

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 – Important is not the same as indispensible