Northern Agriculture After the Civil War

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Northern Agriculture After the Civil War
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• Some what misleading title because there is much
  that the North and South have in common
• Substantial Increases in Productivity

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Labor ProductivityMan hours needed
Wheat 100 Bu Corn 100 Bu Cotton 1 bale
1800 373 344 601
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
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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

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Total Factor Productivity

• Total Factor Productivity
• QLaKbTc
• TFPQ/LaKbTc
• Between 1889 and 1899, TFP increase by .7 per
  year compared to 1.7 for manufacturing

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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?

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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

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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

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What is farmers 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?

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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

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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

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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.

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Natural Monopoly
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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.

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Marginal Cost price
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p2
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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

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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

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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

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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.

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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

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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

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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 investorslt returns in the next
  best investment

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• Fishlows 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

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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)

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Fogels 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

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• 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

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Points of controversy

• Fogel does not consider passengers 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?

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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