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Breaking Rockefeller: The Incredible Story of the Ambitious Rivals Who Toppled an Oil Empire

Author(s):Doran, Peter B.
Reviewer(s):Whaples, Robert

Published by EH.Net (July 2016)

Peter B. Doran, Breaking Rockefeller: The Incredible Story of the Ambitious Rivals Who Toppled an Oil Empire.  New York: Viking, 2016. xii + 337 pp. $28 (hardcover), ISBN: 978-0-525-42739-1.

Reviewed for EH.Net by Robert Whaples, Department of Economics, Wake Forest University.

To understand an economy it is important to examine the figures found in volumes like Historical Statistics of the United States.  As cliometricians know, it also important to use sound economic theory to help explain such numbers.  But it is also important to consider the lives of the people who were the economy — especially the entrepreneurs whose decisions developed and redirected the economy’s resources.  For example, one cannot ignore the lives of business leaders such as Cornelius Vanderbilt, Andrew Carnegie, John Rockefeller, Henry Ford, and Steve Jobs, if the goal is to have a clear view of what made the U.S. economy tick.  And these lives are often utterly fascinating, as one soon discovers by reading biographies such as T.J. Stiles’ The First Tycoon (on Vanderbilt), Ron Chernow’s Titan (on Rockefeller), David Nasaw’s Andrew Carnegie, Steven Watts’ The People’s Tycoon (on Ford), or Walter Isaacson’s Steve Jobs.

Alongside these masterpieces is a great body of entrepreneurial biographies that inform and engage the reader.  Peter Doran’s Breaking Rockefeller is such a book.  Its focus is on the men who built what became Standard Oil’s chief overseas rival in the late 1800s and early 1900s, the Royal Dutch Shell Company.

The volume begins with a chapter outlining the career of John Rockefeller — casting him and Standard Oil (SO) as the villain of the piece.  Gamely battling against SO and against the odds are Marcus Samuel who built Shell Oil (and later became a Viscount) and the men who built Royal Dutch — Aeilko Jans Zijlker, Jean Baptiste August Kessler, and especially Henri Deterding.  The chapter detailing how Samuel launched Shell on an entrepreneurial bet that he could construct a fleet of oil tankers safe enough to be granted passage through the Suez Canal is one of the best in the book — because it carefully shows the obstacles to his bold plan, how he worked with others to overcome them, and how he thwarted SO’s attempts to scuttle them.  But, like other chapters, it is prone to hyperbole, including the statement that these actions “flipped the oil world on its head” (p. 95).  Rather, these actions seem to have barely put a dent in Standard’s growing profits.

Also well done is the chapter on Royal Dutch’s early operations in Indonesia — the persistence and innovation with which obstacles, including the intense climate and geography, were overcome. This was an oil market where luck played a much bigger role than today.  Doran reports that drilling success rates were incredibly low — at one point Royal Dutch bored more than one hundred wells in its Indonesian fields without a single success — until geologists began to learn how to better find oil.  Today close to half of exploratory wells and about 90 percent of development wells are successful.

The downside of Doran’s book is that, in an effort to build up the drama of the battle between SO and its rivals, exaggerations are made.  Doran portrays Rockefeller as ruthless, unscrupulous and greedy, somehow bullying and conniving his way to a position of dominance — but leaving out keys to his success, such as relentless cost cutting and efficiency improvements, boldness in betting on the long-term prospects of the industry while others were willing to take quick profits, and impressive abilities to spot and reward talent, delegate tasks, and manage a growing empire.  Rockefeller’s scruples, along with the endearing facets of his personality — seen so clearly in Chernow’s biography — are ignored or mocked.  Standard is repeatedly referred to as a monopoly — even when it’s clear to the reader that it faced competition in many markets — and the roots of its domestic monopoly power, the barriers to entry that it struggled to build and maintain, are never considered.  Questionable economic logic seeps into the analysis, such as when Doran asserts that if Standard’s profits fell due to increased competition in the international market, it would respond by increasing its price in its domestic market.  Is this something a profit-maximizing monopolist would do?  If it had a domestic monopoly and already charged the profit-maximizing price there, why would it then increase the price above the profit-maximizing price?  Events overseas wouldn’t increase its marginal costs or demand domestically, so increasing the price at home wouldn’t make sense.

The volume is especially frustrating when it misrepresents important facts.  Doran repeatedly makes the claim that until the Spindletop gusher in early 1901, “the U.S. oil industry had been spiraling into a phase of terminal decline. … Each year they were pumping less crude” (p. 150, see also p. 108 and 143).  Such statements add drama to the story, but official statistics belie them. Historical Statistics (4:335) shows that crude petroleum production in the U.S. rose from 266 trillion BTUs in 1890 to 307 trillion in 1895 to 369 trillion in 1900, while exports of petroleum (4:298) rose most years during the decade — with an increase of 43 percent from 1890 to 1900.

Almost any successful market response against SO is made to sound heroic and improbable.  The brute fact is that petroleum was being discovered all over the world and Standard didn’t have the wherewithal to buy up and refine all of this oil.  So much oil was being discovered, especially in Russia, that it was bound to reach the market in competition with Standard.  And Standard’s competitors were backed by some pretty deep-pocketed groups — such as the Rothschilds — which Standard wasn’t going to be able to put out of business or buy up.

I’m also disappointed that — by focusing almost exclusively on Shell and Royal Dutch — Doran did not include more on SO’s American rivals.  As Alfred Chandler points out in The Visible Hand (1977, p. 350), before the 1911 court-ordered breakup of Standard, “a number of oil companies besides Standard Oil were among the largest business enterprises in the nation,” such as the Texas Company (Texaco), Gulf Oil, Associated Oil (Tidewater), Union Oil, and Sun Oil. Standard’s share of American refining fell from 86 percent to 70 percent in the five years before the breakup (Chernow, p. 555).  It simply couldn’t erect the barriers to keep competitors out.  Instead of exploring these rivals of Standard in greater detail, Doran takes the reader on numerous tangential asides.  Some of this makes for enjoyable, informative reading, but he certainly goes overboard in places.

The biggest irony, which Doran points out in the text but not in his title, is that despite this swarming competition and the Supreme Court ruling that broke up Standard into dozens of smaller companies, Rockefeller wasn’t ever really “broken.”  After the dissolution of Standard, Rockefeller’s wealth soared (buoyed by increasing demand for gasoline), he became the wealthiest man in the word, and then he gave almost all of it away — continuing the philanthropy he had practiced before his retirement from the oil business.

Robert Whaples is the co-editor of four recent books: The Future: Economic Peril or Prosperity? (with Chris Coyne and Michael Munger, 2016), The Routledge Handbook of Modern Economic History (with Randall Parker, 2013), The Routledge Handbook of Major Events in Economic History (with Randall Parker, 2013), and The Economic Crisis in Retrospect: Explanations by Great Economists (with G. Page West, 2013).

Copyright (c) 2016 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2016). All EH.Net reviews are archived at http://eh.net/book-reviews/

Subject(s):Agriculture, Natural Resources, and Extractive Industries
Business History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century
20th Century: Pre WWII

Manufactured and Natural Gas Industry

Christopher Castaneda, California State University – Sacramento

The historical gas industry includes two chemically distinct flammable gasses. These are natural gas and several variations of manufactured coal gas. Natural gas is composed primarily of methane, a hydrocarbon composed of one carbon atom and four hydrogen atoms, or CH4. As a “fossil fuel,” natural gas flowing from the earth is rarely pure. It is commonly associated with petroleum and may contain other hydrocarbons including butane, ethane, and propane. In the United States, substantial commercial natural gas utilization did not begin until after the discovery of large quantities of both crude oil and natural gas in western Pennsylvania during 1859.

Manufactured Gas

Manufactured coal gas (sometimes referred to as “town gas”), and its several variants, was used for lighting throughout most of the nineteenth century. Consumers also used this gas as a fuel for heating and cooking from the late nineteenth through the mid-twentieth century in many locations where natural gas was unavailable. Generally, a rather simple process of heating coal, or other organic substance, produces a flammable gas. The resulting gas (a combination of carbon monoxide, hydrogen and other gasses depending upon the exact process) was stored in a “holder” or “gasometer” for later distribution. Coal based “gas works” produced manufactured gas from the early nineteenth century through the mid-twentieth century. Commercial utilization of manufactured coal gas occurred prior to that of natural gas due to the comparative ease of producing coal gas. The first manufactured coal gas light demonstration in the United States apparently took place in 1802. Benjamin Henfrey of Northumberland, Pennsylvania, used a “thermo-lamp,” reportedly based on European design, with which he produced a “beautiful and brilliant light,” Despite Henfrey’s successful demonstration in this case and others, he was unable to attract financial support to develop further his gas light endeavors.

Other experimenters followed, but the most successful were several members of the Peale family. Charles Willson Peale, the family patriarch, Revolutionary War colonel, and George Washington’s portraitist, opened a museum in Independence Hall in Philadelphia and subsequently transferred control of it to his son Rubens. Seeking ways to attract paying visitors, Rubens decided to use gaslights in the museum. With technical assistance from chemist Benjamin Kugler in 1814, Rubens installed gaslights. He operated and maintained the museum’s gas works for the next several years until his fear that a fire, or explosion, might destroy the building caused him to disassemble the equipment.

Rembrandt Peale in Baltimore

In the meantime, Rembrandt Peale, another of Charles’ sons, opened a new Peale Museum in Baltimore. The Baltimore museum was similar to his father’s Philadelphia museum in that it contained both works of art and specimens of nature. Rembrandt understood that his museum’s success depended upon its ability to attract paying visitors, and he installed gaslights in the Baltimore museum.

The first advertisement for the museum’s new gas light attraction appeared in the “American and Commercial Daily Advertiser” on June 13, 1816. The ad stated:

Gas Lights – Without Oil, Tallow, Wicks or Smoke. It is not necessary to invite attention to the gas lights by which my salon of paintings is now illuminated; those who have seen the ring beset with gems of light are sufficiently disposed to spread their reputation; the purpose of this notice is merely to say that the Museum will be illuminated every evening until the public curiosity be gratified.

Controlled by a valve attached to the wall in a side room on the second floor next to the lecture hall, Rembrandt Peale dazzled onlookers with his “magic ring” of one hundred burners. The valve allowed Rembrandt to vary the luminosity from dim to very bright. The successful demonstration of gas lighting at the museum underscored to Rembrandt the immense potential for the widespread application of gas lighting.

In his successful gas light demonstration, Rembrandt recognized an opportunity to develop a commercial gasworks for Baltimore. Rembrandt had purchased the patent for Dr. Kugler’s gas light method, and he organized a group of men to join him in a commercial gas lighting venture. These men established the Gas Light Company of Baltimore (GLCB) on June 17, 1816. On February 7, 1817, the GLCB lit its first street lamp at Market and Lemon Streets. The Belvidere Theater located directly across the street from the gas works became the first building illuminated by GLCB, and J. T. Cohen who lived on North Charles Street owned the first private home lit by gas. Rembrandt’s role at GLCB soon diminished, in large part because he lacked understanding of both business and relevant technological issues. Rembrandt was ultimately forced out of the company, and he continued his career as an artist.

The Gas Light Company of Baltimore was the first commercial gas light company in the United States. Other entrepreneurs soon thereafter formed gas light firms for their cities and towns. By 1850, about 50 urban areas in the United States had a manufactured gas works. Generally, gas lighting was available only in medium sized or larger cities, and it was used for lighting streets, commercial establishments, and some residences. Despite the rapid spread of gas lighting, it was expensive and beyond the means of most Americans. Other than gas, whale oil and tallow candles continued to be the most popular fuels for lighting.

1840s-50s: Use of Manufactured Gas Spreads Rapidly

Manufactured gas utilization for lighting and heating spread rapidly throughout the nation during the 1840s and 1850s. By the mid-nineteenth century, New York City ranked first in manufactured gas utilization by consuming approximately 600 million cubic feet (MMcf) per year, compared to Philadelphia’s consumption of approximately 300 MMcf per year.

Developments in portable gas lighting allowed for gas lamp installations in some passenger railroad cars. In the 1850s, the New Jersey Railroad’s service between New York City and Philadelphia offered gas lighting. Coal gas was stored in a wrought-iron cylinder attached to the undercarriage of the passenger cars. Each cylinder contained enough gas to light the two burners per car for fifteen hours. The New Haven Railroad also used gas lighting in the smoking cars of its night express. Each car had two burners that together consumed 7 cubic feet (cf) of gas per hour.

Challenge from Electric Lighting and Consolidation

Although kerosene and tallow candles competed with coal gas for the nineteenth century lighting market, it was electricity that forced permanent restructuring on the manufactured gas industry. In the early 1880s, Thomas Edison promoted electricity as both a safer and cleaner energy source than coal gas which had a strong odor and left soot around the burners. However, the superior quality of electric light and its rapid accessibility after 1882 forced gas light companies to begin promoting manufactured gas for cooking instead of lighting.

By the late nineteenth century, independent gas distribution firms began to merge. Competitive pressures from electric power, in particular, forced gas firms located in the same urban area to consider consolidating operations. By the early twentieth century many coal gas companies also began merging with electric power firms. These business combinations resulted in the formation of large public utility holding companies, many of which were referred to collectively as the “Power Trust.” These large utility firms controlled urban manufactured and natural gas production, transmission, and distribution as well as the same for electric power.

Manufactured gas continued to be used well into the twentieth century in many urban areas that did not have access to natural gas. Between 1930 and the mid-1950s, however, utility companies began converting their manufactured gas plants to natural gas, as the natural fuel became available through newly built long-distance gas pipelines.

Natural Gas

While the manufactured gas business expanded rapidly in the United States during the nineteenth century, natural gas was then neither widely available nor easy to utilize. During the Colonial era, it was the subject more of curiosity than utility. Both George Washington and Thomas Jefferson observed natural gas “springs” in present-day West Virginia. However, the first sustained commercial use of natural gas, albeit relatively minimal, occurred in Fredonia, New York in 1825.

After discovery of large quantities of both oil and natural gas at Titusville, Pennsylvania in 1859, natural gas found a growing market. The large iron and steel works in Pittsburgh contracted for natural gas supply as this fuel offered a stable temperature for industrial heat. Residents and commercial establishments in Pittsburgh also used natural gas for heating purposes. In 1884, the New York Times proclaimed that natural gas would help reduce Pittsburgh’s unpleasant coal smoke pollution.

1920s: Development of Southwestern Fields

The discovery of massive southwestern natural gas fields and technological advancements in long distance pipeline construction dramatically altered the twentieth century gas industry market structure. In 1918, drillers discovered huge natural gas fields in the Panhandle area of North Texas. In 1922, a crew located a large gas well in Kansas that became the first one in the Hugoton field, located in the common Kansas, Oklahoma, and Texas border area (generally referred to as the mid-continent area). The combined Panhandle/Hugoton Field became the nation’s largest gas producing area comprising more than 1.6 million acres. It contained as much as 117 trillion cubic feet (Tcf) of natural gas and accounted for approximately 16 percent of total U.S. reserves in the twentieth century.

As oil drillers had done earlier in Appalachia, they initially exploited the Panhandle Field for petroleum only while allowing an estimated 1 billion cubic feet per day (Bcf/d) of natural gas to escape into the atmosphere. As new markets emerged for the burgeoning natural gas supply, the commercial value of southwestern natural gas attracted entrepreneurial interest and bolstered the fortunes of existing firms. These discoveries led to the establishment of many new companies including the Lone Star Gas Company, Arkansas Louisiana Gas Company, Kansas Natural Gas Company, United Gas Company, and others, some of which evolved into large firms.

Pipeline Advances

The sheer volume of the southwestern fields emphasized the need for advancements in pipeline technology to transport the natural gas to distant urban markets. In particular, new welding technologies allowed pipeline builders in the 1920s to construct longer lines. In the early years of the decade, oxy-acetylene torches were used for welding, and in 1923 electric arc welding was successfully used on thin-walled, high tensile strength, large-diameter pipelines necessary for long-distance compressed gas transmission. Improved welding techniques made pipe joints stronger than the pipe itself; seamless pipe became available for gas pipelines beginning in 1925. Along with enhancements in pipeline construction materials and techniques, gas compressor and ditching machine technology improved as well. Long-distance pipelines became a significant segment of the gas industry beginning in the 1920s.

These new technologies made possible the transportation of southwestern natural gas to distant markets. Until the late 1920s, most interstate natural gas transportation took place in the Northeast, and it was based upon Appalachian production. In 1921, natural gas produced in West Virginia accounted for approximately 65% of interstate gas transportation while only 2% of interstate gas originated in Texas. The discovery of southwestern gas fields occurred as Appalachian gas reserves and production began to diminish. The southwestern gas fields quickly overshadowed those of the historically important Appalachian area.

Between the mid-1920s and the mid-1930s, the combination of abundant and relatively inexpensive southwestern natural gas production, improved pipeline technology, and increasing nation-wide natural gas demand stimulated the creation of a new interstate gas pipeline industry. Metropolitan manufactured gas distribution companies, typically part of large holding companies, financed most of the pipelines built during this first era of rapid pipeline construction. Long distance lines built during this era included the Northern Natural Gas Company, Panhandle Eastern Pipe Line Company, and the Natural Gas Pipeline Company.

Midwestern urban utilities that began receiving natural gas typically mixed it with existing manufactured gas production. This mixed gas had a higher Btu content than straight manufactured gas. Eventually, with access to reliable supplies of natural gas, all U.S. gas utilities converted their distribution systems to straight natural gas.

Samuel Insull

In the late 1920s and early 1930s, the most well-known public utility figure was Samuel Insull, a former personal secretary of Thomas Edison. Insull’s public utility empire headquartered in Chicago did not fare well in the economic climate that followed the 1929 Wall Street stock market crash. His gas and electric power empire crumbled, and he fled the country. The collapse of the Insull empire symbolized the end of a long period of unrestrained and rapid growth in the U.S. public utility industry.

Federal Regulation

In the meantime, the Federal Trade Commission (FTC) launched a massive investigation of the nation’s public utilities, and its work culminated in New Deal legislation that imposed federal regulation on the gas and electric industries. The Public Utility Holding Company Act (1935) broke apart the multi-tiered gas and electric power companies while the Federal Power Act (1935) and the Natural Gas Act (1938), respectively authorized the Federal Power Commission (FPC) to regulate the interstate transmission and sale of electric power and natural gas.

During the Depression the gas industry also suffered its worst tragedy in the twentieth century. In 1937 at New London, Texas, an undetected natural gas leak at the Consolidated High School resulted in a tremendous explosion that virtually destroyed the Consolidated High School, 15 minutes before the end of the school day. Initial estimates of 500 dead were later revised to 294. Texas Governor Allred appointed a military court of inquiry that determined an accumulation of odorless gas in the school’s basement, possibly ignited by the spark of an electric light switch, created the explosion. This terrible tragedy was marked in irony. On top of the wreckage, a broken blackboard contained these words apparently written before the explosion:

Oil and natural gas are East Texas’ greatest mineral blessings. Without them this school would not be here, and none of us would be here learning our lessons.

Although many gas firms used odorants, the New London explosion resulted in the implementation of new natural gas odorization regulations in Texas.

The New Deal era regulatory regime did not appear to constrain gas industry growth during the post-World War II era, as entrepreneurs organized several long-distance gas pipeline firms to connect southwestern gas supply with northeastern markets. Both during and immediately after World War II, a second era of rapid gas industry growth occurred. Pipeline firms targeted northeastern markets such as Philadelphia, New York and Boston, very large urban areas previously without natural gas supply. These cities subsequently converted their distribution systems from manufactured coal gas to the more efficient natural gas.

In the 1950s, the beginnings of a national market for natural gas had emerged. During the last half of the twentieth century, natural gas consumption in the U.S. ranged from about 20-30% of total national energy utilization. However, the era of natural gas abundance ended in the late 1960s.

1960s to 1980s: Price Controls, Shortages, and Decontrol

The first overt sign of serious industry trouble emerged in the late 1960s when natural gas shortages first appeared. Economists almost uniformly blamed the shortages on gas pricing regulations instituted by the so-called Phillips Decision of 1954. This law extended the FPC’s price setting authority over the natural gas producers that sold gas to interstate pipelines for resale. The FPC’s consumerist orientation meant that it had held gas prices low and producers lost their incentive to develop new gas supply for the interstate market.

The 1973 OPEC oil embargo exacerbated the growing shortage problem as factories switched boiler fuels from petroleum to natural gas. Cold winters further strained the nation’s gas industry. The resulting energy crisis compelled consumer groups and politicians to call for changes in the regulatory system that had constricted gas production. In 1978, a new comprehensive federal gas policy dictated by the Natural Gas Policy Act (NGPA) created a new federal agency, the Federal Energy Regulatory Commission (FERC) to assume regulatory authority for the interstate gas industry.

The NGPA also included a complex system of natural gas price decontrols that sought to stimulate domestic natural gas production. These measures soon resulted in the creation of a nationwide gas supply “bubble” and lower prices. The lower prices wreaked additional havoc on the gas pipeline industry since most interstate lines were purchasing gas at high prices under long-term contracts. Large gas purchasers, particularly utilities, subsequently sought to circumvent their high-priced gas contracts with pipelines and purchase natural gas on the emerging spot market.

Once again, dysfunction of the regulated market forced government to act in order to try and bring market balance to the gas industry. Beginning in the mid-1980s, a number of FERC Orders culminating in Order 636 (and amendments) transformed interstate pipelines into virtual common carriers. This industry structural change allowed gas utilities and end-users to contract directly with producers for gas purchases. FERC continued to regulate the gas pipelines’ transportation function.

The Future

Natural gas is a limited resource. While it is the most clean burning of all fossil fuels, it exists in limited supply. Estimates of natural gas availability vary widely from hundreds to thousands of years. Such estimates are dependent upon the technology that must be developed in order to drill for gas in more difficult geographical conditions, find gas where it is expected to be located, and transport it to the consumer. Methane can also be extracted from coal, peat, and oil shale, and if these sources can be successfully utilized for methane production the world’s methane supply will be extended another 500 or more years.

For the foreseeable future, natural gas will continue to be used primarily for residential and commercial heating, electric power generation, and industrial heat processes. The market for methane as a transportation fuel will undoubtedly grow, but improvements in electric vehicles may well dampen any dramatic increase in natural gas powered engines. The environmental characteristics of natural gas will certainly retain this fuel’s position at the forefront of all fossil fuels. In a broadly historical and environmental perspective, we should recognize that in a period of a few hundred years, human society will have burned as fuel for lighting, cooking and heating a very large percentage of the earth’s natural gas supply.

References:

Castaneda, Christopher J. Invisible Fuel: Manufactured and Natural Gas in America, 1800-2000. New York: Twayne Publishers, 1999.

Herbert, John H. Clean Cheap Heat: The Development of Residential Markets for Natural Gas in the United States. New York: Praeger, 1992.

MacAvoy, Paul W. The Natural Gas Market: Sixty Years of Regulation and Deregulation. New Haven: Yale University Press, 2000.

Rose, Mark H. Cities of Light and Heat: Domesticating Gas and Electricity in Urban America. University Park: Pennsylvania State University Press, 1995.

Tussing, Arlon R. and Bob Tippee. The Natural Gas Industry: Evolution, Structure, and Economics, second edition. Cambridge, MA: Ballinger Publishing, 1984.

Citation: Castaneda, Christopher. “Manufactured and Natural Gas Industry”. EH.Net Encyclopedia, edited by Robert Whaples. September 3, 2001. URL http://eh.net/encyclopedia/manufactured-and-natural-gas-industry/

Alcohol Prohibition

Jeffrey A. Miron, Boston University

The prohibition of alcohol, 1920-1933, is one of the most interesting policy experiments in U.S. history. Temperance movements waxed and waned in the U.S. from early in the nineteenth century, and these movements produced numerous state prohibitions. Many of these prohibitions were subsequently repealed, however, and those that persisted were widely regarded as ineffective. Amid the atmosphere created by World War I, support for national prohibition reached critical mass, and the country ratified the 18th Amendment to the Constitution in January, 1919.1 Under this amendment and the Volstead Act, which provided for the enforcement of Prohibition, the manufacture, transportation, and sale of alcohol were prohibited by federal law.2 The Amendment was popular for many years, but beginning in the late 1920s support began to erode.3 In 1933 the 21st Amendment repealed the 18th, ending Prohibition.

This article provides a brief economic history of Alcohol Prohibition. The first section discusses the major effects one should expect from policies like Prohibition and mentions evidence consistent with these effects. The second and third sections then consider more detailed evidence on two keys issues: Prohibition’s effect on the quantity and price of alcohol, and Prohibition’s effect on violent crime.

The Effects of Prohibitions

The most direct effects of prohibitions are on the supply and demand for the prohibited commodity.4 Prohibitions raise supply costs because black market suppliers face legal punishments for manufacturing, distributing, and selling. Conditional on operating in secret, however, black market suppliers face low marginal costs of evading government regulations and taxes (Miron 2001), which provides a partial offset to the increased costs due to prohibition.5 Prohibitions reduce demand by creating legal penalties for possession and by increasing uncertainty about product quality.6 Prohibitions also reduce demand if consumers exhibit “respect for the law.” At the same time, prohibitions can increase demand through a “forbidden fruit” effect, meaning a tendency for consumers to desire that which has been forbidden to them. Thus, the effect of prohibitions on price and even quantity are ambiguous a priori and must be determined empirically.

In addition to affecting price and quantity, prohibitions potentially increase violent and non-violent crime. Participants in an illegal trade cannot use the legal and judicial system to resolve disputes, so they seek other methods such as violence. Enforcement of prohibitions means reduced resources for enforcement of non-prohibition laws, which implies reduced deterrence of crime generally. Prohibitions can increase income-generating crime, such as theft or prostitution, by raising prices if consumers finance consumption of the prohibited commodity from such crime. And prohibitions give black market suppliers an incentive to corrupt law enforcement officials and politicians. Despite these tendencies to increase crime, the net effect of prohibitions on crime can be negative if prohibitions discourage consumption of the prohibited good and if such consumption encourages criminal activity. Thus, the net effect of prohibitions on crime can only be determined empirically.

Two other effects of prohibitions are the effects on overdoses and accidental poisonings. Because suppliers in a prohibited market must hide their activities from the authorities, they have a strong incentive to produce and ship the good in the most concentrated and hence most easily concealed form (Thornton 1998). This implies that prohibitions help make the potent forms of a good more readily available or even help create more potent forms of a prohibited substance. By itself this effect does not necessarily change the manner in which consumption takes place; consumers can potentially redilute the commodity in question to achieve their desired degree of potency. But in practice such redilution is imperfect, suggesting increased overdoses under prohibitions.7

Consumers in a prohibited market cannot sue the manufacturers of faulty goods or complain to government agencies without incriminating themselves. In addition, the costs of advertising are high in a prohibited market, so producers cannot easily develop a reputation for quality in order to generate repeat business. Thus, uncertainty about quality is likely to be greater in a prohibited market. Combined with the greater existence of high potency products, this further suggests the possibility of increased overdoses, as well as accidental poisonings, under prohibition.8

Alcohol Consumption and Prices under Prohibition

The evidence on alcohol consumption during Prohibition is incomplete, since standard data sources are not available for the Prohibition period. Thus, most analyses of Prohibition’s effect use the cirrhosis death rate as a proxy. Figures 1 and 2 present data on alcohol consumption and cirrhosis, respectively.9 The figures suggests a strong correlation between alcohol consumption and cirrhosis. Both series decline noticeably just before the onset of Prohibition and increase gradually for the first three decades after repeal of Prohibition. Both series then increase more rapidly from the mid-1960’s to the mid-1970’s and decline from 1980 to the present. The correlation is not perfect; alcohol consumption exhibits a noticeable spike relative to cirrhosis in the 1940’s, and cirrhosis starts declining several years earlier than alcohol consumption during the 1970’s. But the figure suggests that cirrhosis is a reasonable proxy for alcohol consumption, and the evidence summarized in Dills and Miron (2001) confirms this impression.

The fact that cirrhosis was substantially lower on average during Prohibition than before or after might suggest that Prohibition played a substantial role in reducing cirrhosis, but further examination suggests this conclusion is premature. First, there have been substantial fluctuations in cirrhosis outside the Prohibition period, indicating that other factors are important determinants and must be accounted for in analyzing whether Prohibition caused the low level of cirrhosis during Prohibition. Second, there is no obvious jump in cirrhosis upon repeal. This fact does not prove that Prohibition had no effect, since the lags between consumption and cirrhosis mean the effect of increased consumption might not have shown up immediately. Nevertheless, the behavior of cirrhosis after repeal fails to suggest a large effect of Prohibition. Third, cirrhosis began declining from its pre-1920 peak by as early as 1908, and it had already attained its lowest level over the sample in 1920, the year in which constitutional prohibition took effect.

This last fact is the most problematic for the claim that Prohibition reduced alcohol consumption. One possible explanation for the large pre-1920 decline in cirrhosis is that state prohibition laws were becoming increasingly widespread during the 1910-1920 period. Dills and Miron (2001) use state-level data, however, to show the declines in cirrhosis during this period were typically as large or larger in wet states as in states that adopted prohibition laws. More formally, they estimate a fixed-effects regression using state-level cirrhosis data to show that, once aggregate effects are accounted for, there is little effect of state prohibitions on cirrhosis.

A different possible explanation for the large decline in cirrhosis is pre-1920 federal anti-alcohol policies. In February 1913, Congress adopted the Webb-Kenyon Law, which prohibited shipments of liquor from wet states into dry states if such shipments were in violation of the dry state law. This did not prohibit all shipments into dry states, since some dry states allowed importation (Merz 1930, p. 14). In February 1917, Congress passed the Reed bone-dry amendment, which forbade interstate shipment of liquor into states that prohibited manufacture and sale, even if the state allowed importation. (Merz 1930, p. 20). In August 1917, Congress adopted the Food Control Law, which forbade the manufacture of distilled spirits from any form of foodstuff and closed the distilleries (Merz 1930, pp. 26-27, 40-41). In September 1918, it closed the breweries as well (Merz 1930, p. 41). Also in September 1918, Congress approved wartime prohibition, although this did not take effect until July 1, 1919 (Merz 1930, p. 41). Wartime prohibition contained the first general restriction on sale, providing that after June 30, 1919, no liquor could be sold for beverage purposes except for export (Schmeckebier 1929, pp. 4-5).

There are a number of reasons to doubt that these policies were major factors in causing the pre-1920 declines in cirrhosis. First, cirrhosis had been declining since 1908, well before any of these policies took effect. Second, all these policies except war-time prohibition (which did not take effect until July, 1919) were weak; they did not restrict production until August 1917, and none outlawed importation or consumption of existing stocks. Moreover, Congress made no appropriation for the enforcement of any of these laws. In addition, there are other factors that potentially explain a decline in alcohol consumption or cirrhosis. Patriotism might have encouraged temperance, since food was considered vital to the War effort and beer production was associated with Germany. And the high morality rate in Word War I combined with the flu epidemic of 1918 might have removed many persons from the population at risk who would otherwise have died from cirrhosis.

Beyond the results presented here, additional results in Dills and Miron (2001)—which account for the effects of state prohibitions, pre-1920 federal anti-alcohol policies, alcoholic beverage taxes, income and other factors—demonstrate consistently that Prohibition had a small, statistically insignificant, and possibly even a positive effect on cirrhosis. Given the evidence that cirrhosis is a reasonable proxy for alcohol consumption, this implies Prohibition had little impact on the path of alcohol consumption.

The question raised by this result is why consumption did not fall more significantly, since conventional accounts suggest that alcohol prices rose by several hundred percent on average (Warburton (1932), Fisher (1928)). One possibility is that the conventional view is overstated.

The first problem with the calculations presented by Warburton or Fisher is that they neglect the behavior of the overall price level. Warburton’s data compare prices between 1911-1915 and 1926-1930, while Fisher’s compare prices between 1916 and 1928. Both authors examine the behavior of nominal prices, yet the price level increased by approximately 75 percent between these two periods (Bureau of the Census (1975), p.211). Thus, at a minimum, the raw data presented by Warburton and Fisher overstate the increase in the relative price of alcohol.

In addition, Warburton presents a broad range of prices for the Prohibition period, and the lowest prices reported suggest that, even ignoring inflation, some alcoholic beverage prices fell relative to the pre-Prohibition period. This does not prove that consumers paid less, on average, for alcohol, but they certainly faced an incentive to buy at the lowest prices and then stockpile the quantities purchased at these prices. The available data do not allow computation of the average price actually paid, and the extremely high prices reported in many cases by both Warburton and Fisher allow for the possibility that the average price paid in fact rose. But the magnitude of this rise is undoubtedly less than they asserted, and it is at least possible prices failed to rise substantially overall. If prices did not increase very much, there is no puzzle in the failure of consumption to fall substantially.

Alcohol Prohibition and Crime

The evidence on Prohibition and crime focuses on the homicide rate, since this is the only type of crime for which data are reported consistently both before, during, and after Prohibition.10 Figure 3 presents the homicide rate in the United States (measured as homicides per 100,000 population) for the period 1900-1995. Starting from around 1906, the homicide rate rises steadily through 1933-1934, when it begins a general decline until approximately 1960, interrupted by a spike during World War II. Beginning in the early 1960’s the homicide rate rises steadily until the early 1970’s—to a level slightly above the previous peak in 1933-1934—and then fluctuates around a relatively high value for the remainder of the sample.

Roughly speaking, therefore, there have been two periods with high homicide rates in U.S. history, the 1920-1934 period and the 1970-1990 period (Friedman 1991). Both before the first episode and between these two episodes, homicide rates were relatively low or clearly declining. Prima facie, this pattern is consistent with the hypothesis that alcohol prohibition increased violent crime: homicide rates are high in the 1920-1933 period, when constitutional prohibition of alcohol was in effect; the homicide rate drops quickly after 1933, when Prohibition was repealed; and the homicide rate remains low for a substantial period thereafter. Further, the homicide rate is low during the 1950s and early 1960s, when drug prohibition was in existence but not vigorously enforced, but high in the 1970-1990 period, when drug prohibition was enforced to a relatively stringent degree (Miron 1999).

To see this more carefully, consider Figure 4, which plots real per capita expenditure by the federal government for enforcement of alcohol and drug prohibition over this same period. As discussed in Miron (1999, 2001), the effect of prohibition on violence depends not just on the existence of a prohibition but on the degree to which it is enforced. Increased enforcement narrows the scope of legal exceptions to the prohibition (e.g., medical uses), thereby increasing the size of the black market, and increased enforcement destroys reputations and implicit property rights within the black market. Both effects increase the use of violence.

Real per Capita Expenditures for Enforcement of Alcohol and Drug Prohibition

Note: Vertical axis is measured in 1992 dollars.

The data in Figure 4 combined with the data in Figure 3 show that expenditure climbs along with the homicide rate during Alcohol Prohibition and then falls at the end of this prohibition, as does the homicide rate. The relation is not perfect; other factors undoubtedly play a role. For example, the homicide rate begins rising about a decade before constitutional Prohibition takes effect, a fact that potentially reflects demographics (the enormous levels of immigration during the early part of this century), the violence-inducing effects of World War I, or perhaps merely changes in the sample of states used to compute homicide rates (Miron 1999). Regression analysis in Miron (1999) considers this more formally and confirms that enforcement of alcohol prohibition played a central role in causing the increasing and decreasing homicide rates during this period.

Conclusions

Prohibition represents one of the most dramatic policy experiments in U.S. history, with implications for a broad range of economic, historical, and political issues. This summary has focused narrowly on the most basic economic effects of Prohibition. The analysis shows that the evidence is consistent with the predictions of standard economic theory about the effects of prohibitions.

References

Clark, Norman H. Deliver Us From Evil: An Interpretation of American Prohibition. New York: W.W. Norton and Company, 1976.

Dills, Angela and Jeffrey A. Miron. “Alcohol Prohibition, Alcohol Consumption, and Cirrhosis.” Manuscript, Boston University, 2001.

Fisher, Irving. Prohibition Still at Its Worst. New York: Alcohol Information Committee, 1928.

Friedman, Milton. “The War We Are Losing.” In Searching for Alternatives: Drug-Control Policy in the United States, edited by M. B. Krauss and E. P. Lazear, 53-67. Stanford, CA: Hoover Institution, 1991.

Levine, Harry G. and Craig Reinarman. “From Prohibition to Regulation: Lessons from Alcohol Policy for Drug Policy.” The Milbank Quarterly 69 (1991): 1-43.

Merz, Charles. The Dry Decade. Garden City, NY: Doubleday, Doran and Co., 1930.

Miron, Jeffrey A. “Some Estimates of Annual Alcohol Consumption Per Capita, 1870-1991,” ISP Discussion Paper #69, Department of Economics, Boston University, 1996.

Miron, Jeffrey A. “The Effect of Alcohol Prohibition on Alcohol Consumption.” NBER Working Paper No. 7130, 1997.

Miron, Jeffrey A. “Violence and the U.S. Prohibitions of Drugs and Alcohol,” American Law and Economics Review 1-2 (1999): 78-114.

Miron, Jeffrey A. “Violence, Guns, and Drugs: A Cross-Country Analysis.” Manuscript, Boston University, 2001.

Miron, Jeffrey A. and Jeffrey Zwiebel. “Alcohol Consumption During Prohibition.” American Economic Review 81, no. 2 (1991): 242-247.

Miron, Jeffrey A. and Jeffrey Zwiebel. “The Economic Case against Drug Prohibition.” Journal of Economic Perspectives, 9, no. 4 (1995): 175-192.

Sinclair, Andrew. Prohibition: The Era of Excess. London: Faber and Faber, 1962.

Schmeckebier, Laurence F. The Bureau of Prohibition: Its History, Activities, and Organization. Brookings Institution: Washington, 1929.

Thornton, Mark. The Economics of Prohibition. Salt Lake City: University of Utah Press, 1991.

Thornton, Mark. “The Potency of Illegal Drugs.” Journal of Drug Issues 28, no. 3 (1998): 725-740.

Warburton, Clark. The Economic Results of Prohibition. New York: Columbia University Press, 1932.

1 Historical accounts cite a range of factors as finally tipping sentiment in favor of national prohibition. One was the huge number of immigrants during the first decade and a half of the 20th century, since popular wisdom held that immigrants were heavy drinkers. A second factor was increasing urbanization, which made the presence of the hard drinking, saloon frequenting, urban poor more visible (Clark, 1976). U.S. involvement in World War I may also have played a significant role, by legitimizing the view that turning grain into alcohol was wasteful (Merz 1930), by creating an air of moral certainty that facilitated passage of prohibition (Sinclair 1962), and by producing a distaste for anything German (i.e., beer).

2 Most states adopted similar laws, but the severity and enforcement of these varied widely (Merz 1930).

3 The two key factors usually credited with precipitating Prohibition’s demise (Levine and Reinarman 1991) are the Great Depression, which invalidated dry claims that Prohibition promoted prosperity and produced a need for tax revenue, and the increasing violence associated with Prohibition.

4 The analysis in this section is based on Miron and Zwiebel (1995).

5 For example, black market suppliers during Prohibition evaded the high alcohol taxes enacted during World War I.

6 The federal prohibition of alcohol did not include any penalties for possession per se, although “possession” of large amounts could be prosecuted as “intent to distribute.”

7 Evidence from Warburton (1932) suggests a substantial substitution of hard liquor for beer consumption during Prohibition, presumably because of this effect.

8 Miron and Zwiebel (1991) show that deaths due to alcoholism, which probably included deaths from overdoses or accidental poisonings, soared during Prohibition relative to other proxies.

9The data on alcohol consumption are estimates of the per capita consumption of pure alcohol, measured in gallons, computed as a weighted sum of separate estimates for beer, spirits, and wine, assuming a particular pure alcohol content for each component. The cirrhosis death rate is measured as the number of deaths per 100,000. Miron (1996, 1997) and Dills and Miron (2001) provides details of the construction of these series.

10 The discussion here is based on Miron (1999).

Citation: Miron, Jeffrey. “Alcohol Prohibition”. EH.Net Encyclopedia, edited by Robert Whaples. September 24, 2001. URL http://eh.net/encyclopedia/alcohol-prohibition/

Envy of the World: A History of the U.S. Economy and Big Business

Author(s):Botti, Timothy J.
Reviewer(s):Bodenhorn, Howard

Published by EH.NET (February 2007)

Timothy J. Botti, _Envy of the World: A History of the U.S. Economy and Big Business_. New York: Algora Press, 2006. xxx + 701 pp. $36 (paper), ISBN: 0-87586-431-7.

Reviewed for EH.NET by Howard Bodenhorn, Department of Economics, Yale University.

Timothy J. Botti, an independent scholar, holds a Ph.D. in the history of American foreign policy, but considers himself an expert on the history of empires, military and strategic history, and economic and business history. In the foreword to his book, Botti informs us that his aim is to provide the reader with an approachable narrative about how four centuries of individual and collective action generated a $12 trillion modern economic powerhouse that is the “envy of the world.” In doing so, he traces the increase in business activity and economic output from the Jamestown arrival up to the present. Modern Americans, he correctly notes, are virtually awash in the cornucopia of goods and services provided by a post-industrial economy. It is the breadth and depth of U.S. material wealth that sets the country apart from most of the world.

Botti’s fundamental question: “How did this come to pass?” is, of course, of fundamental importance and enduring interest to economic and business historians. It is a shame that the author fails to provide meaningful insights. What he provides, instead, is a mountain of information without much analysis. There is no theoretical structure underlying the narrative so that, at the end of the book, I was left wondering what I had learned. Botti’s thick book is lacking in depth.

Botti arranges his material chronologically and, for expositional purposes, divides U.S. history into four epochs: Foundations (1607-1860); Business and Government Compete for Supremacy (1861-1945); Economic Possibilities (1946-1989); and Old versus New Economy (1990-2004). Every author is, of course, free to divide history into as many and as large or small segments as suits his or her purpose, but the fact that fourteen years of the “new economy” are covered in 215 pages versus the 95 pages devoted to the first 253 years of the “ancient economy” is a nod to contemporary fascination with the ubiquity of the microprocessor and the so-called “dot-com” boom, while failing to appreciate legitimate doubts about the microprocessor’s true transformative effect.[1]

My substantive complaint has little to do with the author’s choice of chronological divisions or fascination with the new economy, but with his expositional style. The historian’s task is to organize material in such a way as to make sense of the rush of past events. Without imposing some narrative structure, history becomes little more than a recitation of what one of my college history professors labeled “one damned thing after another.” Rather than accept the historian’s task, Botti reinforces the apparent randomness of events through his narrative structure. In the ten paragraphs devoted to consumer expenditures as a driver of the U.S. economy in the postwar (1946-1960) period, he tells us that political leaders did not want to swing back toward interwar protectionist policies; that pent-up consumer demand “brought greater prominence and profits to a raft of companies;” that, despite mounting evidence of the health risks associated with cigarettes, R. J. Reynolds’ sales soared; that increased competition between the oligopolies squeezed out small producers; that Gillette introduced Foamy saving cream and Right Guard deodorant in aerosol form; that Kodak hit it big with the Brownie Starmatic camera; that wartime gasoline rationing nearly devastated the Howard Johnson restaurant chain; and that Aramark emerged as major vending machine-based retailer (pp. 292-95).

Each of these topics might serve as a springboard into a meaningful discussion of larger implications, such as the waxing and waning of corporate calls for protectionism, or oligopolistic practices, or massive investments in corporate R&D or the growing pressure on corporations to behave in socially responsible ways. But here, as throughout the volume, such opportunities go unexploited.

As a full-time economic historian I found the volume disappointing because it fails to demonstrate a grasp of, or even acknowledge, some of the most important contributions of thirty years of new economic history to our understanding of the American experience. It is troubling how few of these new interpretations have found their way into the historical discourse. It is particularly troubling in this instance that they haven’t even found their way into a volume ostensibly describing the economic history of the United States.

As a part-time business historian I found the volume disappointing because, at its best, business history is by turns insightful and engaging, informative and entertaining, interesting and eclectic. Botti’s volume exhibits few of these qualities.

As I read Botti’s book, I kept wondering about his intended audience. The book is inappropriate as a primary, or even supplementary, reader in an economic or business history course, mostly because it lacks any substantive analysis, organizing theme or theoretical superstructure. Readers in search of source material in business history may find some of Botti’s thumbnail sketches of firms and their founders of some value, but several business history encyclopedias better serve that purpose. Finally, it is unlikely to attract a popular audience because the narrative is not particularly engaging. I am therefore at a loss in identifying an appropriate audience.

Note: 1. Robert Gordon, “U.S. Economic Growth since 1870: One Big Wave,” _American Economic Review_ 89:2 (May 1999), 123-28; Joel Mokyr, “Are We in the Middle of an Industrial Revolution,” Federal Reserve Bank of Kansas City _Economic Review_ (1997); and Jeremy Greenwood and Mehmet Yorukoglu, “1974,” _Carnegie-Rochester Conference Series on Public Policy_ 46 (June 1997), 49-95 all cast doubt on whether the computer represents a fundamental technological change of the same magnitude of the technological breakthroughs of the late nineteenth century, such as electricity, the internal combustion engine, or plastics and pharmaceuticals.

Howard Bodenhorn, Visiting Professor of Economics at Yale University, is author of _A History of Banking in Antebellum America: Financial Markets and Economic Development in an Age of Nation Building_ (Cambridge: Cambridge University Press, 2000) and _State Banking in Early America: A New Economic History_ (New York: Oxford University Press, 2003). He is currently writing a history of free African Americans in the antebellum South.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

From Silver to Cocaine: Latin American Commodity Chains and the Building of the World Economy, 1500-2000

Author(s):Topik, Steven
Carlos Marichal
Frank, Zephyr
Reviewer(s):Baskes, Jeremy

Published by EH.NET (January 2007)

Steven Topik, Carlos Marichal and Zephyr Frank, editors, From Silver to Cocaine: Latin American Commodity Chains and the Building of the World Economy, 1500-2000. Durham, NC: Duke University Press, 2006. v + 378 pp. $24 (paperback), ISBN: 0-8223-3766-5.

Reviewed for EH.NET by Jeremy Baskes, Department of History, Ohio Wesleyan University.

The field of Latin American history has been slow and reluctant to abandon the dependency paradigm (and its world systems sister). Conceived largely by Latin American scholars who used the region as the prime example to illustrate the alleged underdevelopment of the periphery caused by international trade, dependency theory came to be the nearly universal model influencing textbooks as well as monographs on regional trade.

For some time, scholars of Latin America have grown dubious of the claims of dependency theory. The model seemed too rigid, too dogmatic and too flimsily based on statistical data, which when actually compiled did not necessarily corroborate the paradigm’s dismal predictions. Despite the discrediting of dependency theory, Latin American scholars did not find a suitable alternative, rejecting the triumphant claims of neoliberalism as equally unrealistic.

The essays in this excellent collection seek to illustrate the value of examining Latin America’s international trade through the lens of “commodity chains,” the trajectory through which commodities passed from producers to consumers. While this method cannot possibly “answer” as many questions as dependency theory purported to address, the authors leave little doubt that a commodity chain approach can prove rewarding.

As the authors demonstrate, the examination of commodity chains serves to rupture historians’ tendency to focus exclusively on the national level. Too often, Latin American historians have focused on the supply side of the region’s exports, and have consequently been ignorant of the broader forces affecting the industries. The essays in this book demonstrate clearly the value of examining the entire commodity chain.

From Silver to Cocaine contains twelve essays penned by fifteen authors, each of them highly respected scholars. Each essay focuses on a single (or complementary) commodity and attempts to follow its path from producer to consumer. Four of the pieces examine colonial products. Carlos Marichal writes on both silver and Mexican cochineal; David McCreery compares Salvadoran and Bengali indigo and Laura Nater explores Caribbean tobacco. The remaining essays discuss Latin American commodities that, for the most part, took off in the second half of the nineteenth century. Steven Topik and Mario Samper contrast the Brazilian and Costa Rican coffee industries; Horacio Crespo examines the world market for sugar; Mary Ann Mahony investigates Bahian cacao; Marcelo Bucheli and Ian Read focus on Central American bananas and especially the United Fruit Company; Rory Miller and Robert Greenhill compare and contrast Peruvian guano and Chilean nitrates, both used as fertilizers; Zephyr Frank and Aldo Musacchio consider the Brazilian rubber boom; Allen Wells looks at the demise of the Yucatecan henequen industry; and, finally, Paul Gootenberg explores coca and cocaine.

It would be impossible to summarize adequately these rich and detailed chapters. One issue emphasized by a number of the authors is the social transformations undergone by commodities as they move from producer to consumer. Coffee became the preferred beverage of French revolutionaries who thought little about the enslaved workers who produced it. Cochineal was employed to dye the clothing of kings and popes, yet was produced by poor indigenous peasants in southern Mexico. Tobacco and coca were considered spiritual products by their Caribbean and Andean producers but consumed by Americans and Europeans for their medicinal or intoxicant value.

A central issue examined by most of the essays was the “agency” of producing countries. Dependency theory suggests that decisions of significance are made in the “metropolis” and that the “peripheral” producing countries have little control over their destiny. These essays clearly extinguish this notion demonstrating that “Latin American producers were much more than simple marionettes set to dance by overseas commands and demands. They were not simply passive victims” (p. 3). While wealthy capitalists and multinational companies undoubtedly wielded significant influence, producers and governments in Latin America exercised considerable market and other power. The massive expansion of Bahian cacao naturally responded to growing international demand, but was also influenced by government policies and the gradual conclusion among planters that it was their most advantageous commodity. The coffee industry of Costa Rica and Brazil followed very different paths due to distinct domestic conditions. Costa Rica opted to produce high quality coffee while Brazil took advantage of ample territory and an interventionist state to become by far the world’s largest producer.

More generally, the essays convincingly show the greater understanding that arises through an examination of the entire commodity chain. The boom and bust of the rubber trade in Brazil is much more comprehensible and much less tragic when one takes into consideration the evolution of the automobile industry. Considerable light is shed on the Salvadoran indigo industry by examining its major competitor, Bengal, India. While substitute products might have contributed to henequen’s decline, corruption and mismanagement in Mexico sealed its demise.

An additional matter addressed in the essays is the distribution of profits between core and periphery. Dependency theory predicted that profits from international trade invariably accrued in the more developed countries. While none of the essays goes so far as to suggest that the opposite was the case, for the most part they reject dependency’s predatory claim, arguing that reasonable profits accumulated and development occurred in Latin America. The arrangements of production and the networks of distribution were rational solutions given the different endowments of the various actors. According to Miller and Greenhill, for example, the nitrate and guano industries came to be organized in the most efficient manner conceivable, benefiting from the technological, financial, and informational advantages enjoyed by the multinational companies engaged in the trade. Despite multinational control over marketing, the authors conclude that each government extracted reasonable rents and that no alternative organization of the trade “would have provided significantly better rewards for Peru and Chile” (p. 261).

The death of dependency theory in Latin America is long overdue. It answered lots of questions, but the answers were most often facile. The essays in this excellent collection illustrate the potential rewards of reexamining old topics and offer a compelling way to help shape this new research. Unlike so many edited collections that lack cohesion or seem poorly conceived, the essays in From Silver to Cocaine are remarkably well integrated and address similar questions and themes. As such, the reader is well rewarded from comparison of the differing commodity chains.

Jeremy Baskes is Professor of Latin American History at Ohio Wesleyan University. He is the author of Indians Merchants and Markets: A Reinterpretation of the Repartimiento and Spanish-Indian Economic Relations in Colonial Oaxaca, 1750-1821 (Stanford University Press). His current research examines the ways that merchants in the Spanish empire organized their transatlantic commerce to mitigate risk.

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Subject(s):Markets and Institutions
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
Time Period(s):20th Century: WWII and post-WWII