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Credit in the Colonial American Economy

David T Flynn, University of North Dakota

Overview of Credit versus Barter and Cash

Credit was vital to the economy of colonial America and much of the individual prosperity and success in the colonies was due to credit. Networks of credit stretched across the Atlantic from Britain to the major port cities and into the interior of the country allowing exchange to occur (Bridenbaugh, 1990, 154). Colonists made purchases by credit, cash and barter. Barter and cash were spot exchanges, goods and services were given in exchange for immediate payment. Credit, however, delayed the payment until a later date. Understanding the role of credit in the eighteenth century requires a brief discussion of all payment options as well as the nature of the repayment of credit.

Barter

Barter is an exchange of goods and services for other goods and services and can be a very difficult method of exchange due to the double coincidence of wants. For exchange to occur in a barter situation each party must have the good desired by its trading partner. Suppose John Hancock has paper supplies and wants corn while Paul Revere has silver spoons and wants paper products. Even though Revere wants the goods available from Hancock no exchange occurs because Hancock does not want the good Revere has to offer. The double coincidence of wants can make barter very costly because of time spent searching for a trading partner. This time could otherwise be used for consumption, production, leisure, or any number of other activities. The principle advantage of any form of money over barter is obvious: money satisfies the double coincidence of wants, that is, money functions as a medium of exchange.

Money’s advantages

Money also has other functions that make it a superior method of exchange to barter including acting as the unit of account (the unit in which prices are quoted) in the economy (e.g. the dollar in the United States and the pound in England). A barter economy uses a large number of prices because every good must have a price in terms of each other good available in the economy. An economy with n different goods would have n(n-1)/2 prices in total, not an enormous burden for small values of n, but as n grows it quickly becomes unmanageable. A unit of account reduces the number of prices from the barter situation to n, or the number of goods. The colonists had a unit of account, the colonial pound (£), which removed this burden of barter.

Several forms of money circulated in the colonies over the course of the seventeenth and eighteenth centuries, such as specie, commodity money and paper currency. Specie is gold or silver minted into coins and is a special form of commodity money, a good that has an exchange value separate from the market value of the good. Tobacco, and later tobacco warehouse receipts, acted as a form of money in many of the colonies. Despite multiple money options some colonists complained of an inability to keep money in circulation, or at least in the hands of those wanting to use it for exchange (Baxter, 1945, 11-17; Bridenbaugh, 153).1

Credit’s advantages

When you acquire goods with credit you delay payment to a later time, be it one day or one year. A basic credit transaction today is essentially the same as in the eighteenth century, only the form is different.2 Extending credit presents risks, most notably default, or the failure of the borrower to repay the amount borrowed. Sellers also needed to worry about the total volume of credit they extended because it threatened their solvency in the case of default. Consumers benefited from credit by the ability to consume beyond current financial resources, as well as security from theft and other advantages. Sellers gained by faster sales of goods and interest charges, often hidden in a higher price for the goods.3

Uncertainty about the scope of credit

The frequency of credit versus barter and cash is not well quantified because surviving account books and transaction records generally only report cash or goods payments made after the merchant allowed credit, not spot cash or barter transactions (Baxter, 19n). Martin (1939, 150) concurs, “The entries represent transactions with those customers who did not pay at once on purchasing goods for [the seller] either made no record of immediate cash purchases, or else there were almost no such transactions.” The results of Flynn’s (2001) study using merchant account books from Connecticut and Massachusetts found also that most purchases recorded in the account books were credit purchases (see Table 1 below).4 Scholars are forced to make general statements about credit as a standard tool in transactions in port cities and rural villages without reference to specific numbers (Perkins, 1980, 123-124).

Table 1

Percentage of Purchases by Type

Purchases by Credit Purchases by Cash Purchases by Barter
Connecticut 98.6 1.1 0.3
Massachusetts 98.5 1.0 0.4
Combined 98.6 1.0 0.4

Source: Adapted from Table 3.2 in Flynn (2001), p. 54.

Indications of the importance of credit

In some regions, the institution of credit was so accepted that many employers, including merchants, paid their employees by providing them credit at a store on the business’s account (Martin, 94). Probate inventories evidence the frequency of credit through the large amount of accounts receivable recorded for traders and merchant in Connecticut, sometimes over £1,000 (Main, 1985, 302-303). Accounts receivable are an asset of the business representing amounts owed to the business by other parties. Almost 30 percent of the estates of Connecticut “traders” contained £100 or more of receivables as part of their estate (Main, 316). More than this, accounts receivable averaged one-eighth of personal wealth throughout most of the colonial period, and more than one-fifth at the end (Main, 36). While there is no evidence that enables us to determine the relative frequencies of payments, the available information supports the idea that the different forms of payment co-existed.

The Different Types of Credit

There are three different types of credit to discuss: international credit, book credit, and promissory notes and each facilitated exchange and payments. Colonial importers and wholesalers relied on credit from British suppliers while rural merchants received credit from importers and wholesalers in the port cities and, finally, consumers received credit from the retailers. A discussion starts logically with international credit from British suppliers to colonial merchants because it allowed colonial merchants to extend credit to their customers (McCusker and Menard, 1985, 80n; Martin, 1939, 19; Perkins, 1980, 24).

Overseas credit

Research on colonial growth attaches importance to several items including foreign funds, capital improvements and productivity gains. The majority of foreign funds transferred were in the form of mercantile credit (Egnal, 1998, 12-20). British merchants shipped goods to colonial merchants on credit for between six months and one year before demanding payment or charging interest (Egnal, 55; Perkins, 1994, 65; Shepherd and Walton, 1972, 131-132; Thomson, 1955, 15). Other examples show a minimum of one year’s credit given before suppliers assessed five percent interest charges (Martin, 122-123). Factors such as interest and duration determined for how long colonial merchants could extend credit to their own customers and at what level of markup. Some merchants sold goods on commission, where the goods remained the property of the British merchant until sold. After the sale the colonial merchant remitted the funds, less his fee, to the British merchant.

Relationships between colonial and British merchants exhibited regional differences. Virginia merchants’ system of exchange, known as the consignment system, depended on the credit arrangements between planters and “factors” – middlemen who accepted colonial goods and acquired British or other products desired by colonists (Thomson, 28). A relationship with a British merchant was important for success in business because it provided the tobacco growers and factors access to supplies of credit sufficient to maintain business (Thomson, 211). Independent Virginia merchants, those without a British connection, ordered their supplies of goods on credit and paid with locally produced goods (Thomson, 15). Virginia and other Southern colonies could rely on credit because of their production of a staple crop desired by British merchants. New England merchants such as Thomas Hancock, uncle of the famous patriot John Hancock, could not rely on this to the same extent. New England merchants sometimes engaged in additional exchanges with other colonies and countries because they lacked goods desired by British merchants (Baxter, 46-47). Without the willingness of British merchant houses to wait for payment it would have been difficult for many colonial merchants to extend credit to their customers.

Domestic credit: book credit and promissory notes

Domestic credit was primarily of two forms, book credit and promissory notes. Merchants recorded book credit in the account books of the business. These entries were debits for an individual’s account and were set against payments, credits in the merchant’s ledger. Promissory notes detailed a debt, including typically the date of issue, the date of redemption, the amount owed, possibly the form of repayment and an interest rate. Book credit and promissory notes were substitutes and complements. Both represented a delay of payment and could be used to acquire goods but book accounts were also a large source of personal notes. Merchants who felt payment was either too slow in coming or the risks of default too high could insist the buyer provide a note. The note was a more secure form of credit as it could be exchanged and, despite the likely loss on the note’s face value if the debtor was in financial trouble, would not represent a continuing worry of the merchant (Martin, 158-159).5

Figure 1

Accounts of Samuell Maxey, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
5/28/1748 To Maxey earthenware by Brock 62.00 5/30/1748 By cash & Leather 45.00
10/21/1748 To ditto by Cap’n Long 13.75 8/20/1748 By 2 quintals of fish @6-0-0 [per quintal] 12.00
5/25/1749 To ditto 61.75 11/15/1748 By cash received of Mr. Suttin 5.00
6/26/1749 To ditto 27.35 5/26/1749 By sundrys 74.75
10/1749 By cash of Mr. Kettel 9.75
12/1749 By ditto 18.35

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.7.

The settlement of debt obligations incorporated many forms of payment. Figure 1 details the activity between Samuell Maxey and Jonathan Parker, a Massachusetts merchant. Included are several purchases of earthenware by Maxey and others and several payments, including some in cash and goods as well as from third parties. Baxter (1945, 21) describes similar experiences when he says,

…the accounts over and over again tell of the creditor’s weary efforts to get his dues by accepting a tardy and halting series of odds and ends; and (as prices were often soaring, especially in 1740-64) the longer a debtor could put off payment, the fewer goods might he need to hand over to square a liability for so much money.

Repayment means and examples

The “odds and ends” included goods and commodity money as well as other cash, bills of exchange, and third party settlements (Baxter, 17-32). Merchants accepted goods such as pork beef, fish and grains for their store goods (Martin, 94). Flynn (2001) shows several items offered as payment, including goods, cash, notes and others, shown in Table 2.

Table 2

Percentage of Payments by Category

Repayment in Cash Repayment in Goods Repayment by note Repayment by Reckoning Repayment by third- party note Repayment by Bond Repayment by Labor

Conn.

27.5 45.9 3.3 7.5 6.9 0.0 8.9
Mass. 24.2 47.6 2.8 7.5 13.7 0.2 2.3
Combined 25.6 46.9 3.0 7.5 10.9 0.1 5.0

Source: Adapted from Table 3.4 in Flynn (2001), p. 54.

Cash, goods and notes require no further explanation, but Table 2 shows other items used in payment as well. Colonists used labor to repay their tabs, working in their creditor’s field or lending the labor services of a child or yoke of oxen. Some accounts also list “reckoning,” which occurred typically between two merchants or traders that made purchases on credit from each other. Before the two merchants settled their accounts it was convenient to determine the net position of their accounts with each other. After making the determination the merchant in debt possibly made a payment that brought the balance to zero, but at other times the merchants proceeded without a payment but a better sense of the account position. Third parties also made payments that employed goods, money and credit. When the merchant did not want the particular goods offered in payment he could hope to pass them on, ideally to his own creditors. Such exchange satisfied both the merchant’s debts and the consumer’s (Baxter, 24-25). Figure 1 above and Figure 2 below illustrate this.

Figure 2

Accounts of Mr. Clark, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
9/27/1749 To Clark earthenware 10.85 11/30/1749 By cash 3.00
4/14/1750 By ditto 1.00
?/1762 By rum in full of Mr. Blanchard 6.35

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.2.

The accounts of Parker and his customer, Mr. Clark, show another purchase of earthenware and three payments. The purchase is clearly on credit as Parker recorded the first payment occurring over two months after the purchase. Clark provided two cash payments and then a third person Mr. Blanchard settled Clark’s account in full with rum. What do these third party payments represent? For answers to this we need to step back from the specifics of the account and generalize.

Figures 1 and 2 show credits from third parties in cash and goods. If we think in terms of three-way trade the answer becomes obvious. In Figure 1 where a Mr. Suttin pays £5.00 cash to Parker on the account of Samuell Maxey, Suttin is settling a debt with Maxey (in part or in full we do not know). To settle the debt he owes Parker, Maxey directs those who owe him money to pay Parker, and thus reduce his debt. Figure 2 displays the same type of activity, except Blanchard pays with rum. Though not depicted here, private debts between customers could be settled on the merchant’s books. Rather than offering payment in cash or goods, private parties could swap debt on the merchant’s account book, ordering a transfer from one account to another. The merchant’s final approval for the exchange implied something about the added risk from a third party exchange. The new person did not pose a greater default risk in the creditor’s opinion, otherwise (we would suspect) they refused the exchange.6

Complexity of the credit system

The payment system in the colonies was complex and dynamic with creditors allowing debtors to settle accounts in several fashions. Goods and money satisfied outstanding debts and other credit obligations deferred or transferred debts. Debtors and creditors employed the numerous forms of payment in regular and third party transactions, making merchants’ account books a clearinghouse for debts. Although the lack of technology leaves casual observers thinking payments at this time were primitive, such was clearly not the case. With only pen and paper eighteenth century merchants developed a sophisticated payment system, of which book credit and personal notes were an important part.

The Duration of Credit

The length of time outstanding for credit, its duration, is an important characteristic. Duration represents the amount of time a creditor awaited payment and anecdotal and statistical evidence provide some insights into the duration of book credit and promissory notes.

The calculation of the duration of book credit, or any similar type of instrument, is relatively straightforward when the merchant recorded dates in his account book conscientiously. Consider the following example.

Figure 3

Accounts of David Forthingham, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
10/1/1748 To Forthingham earthenware 7.75 10/1/1748 By cash 3.00
4/1749 By Indian corn 4.75

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.2.

The exchanges between Frothingham and Jonathan Parker show one purchase and two payments. Frothingham provides a partial payment for the earthenware at the time of purchase, in cash. However, £4.75 of debt remains outstanding, and is not repaid until April of 1749. It is possible to calculate a range of values for the final settlement of this account, using the first day of April to give a lower bound estimate and the last day to give an upper bound estimate. Counting the number of days shows that it took at least 182 days and at most 211 days to settle the debt. Alternatively the debt lasted between 6 and 7 months.

Figure 4

Accounts of Joseph Adams, Customer, and Jonathan Parker, Massachusetts Merchant

Date Transaction Debt (£) Date Transaction Credit (£)
9/7/1747 to Adams earthenware -30.65 11/9/1747 by cash 30.65
7/22/1748 to ditto -22.40 7/22/1748 by ditto 12.40
No Date7 by ditto 10.00

Source: John Parker Account Book. Baker Library, Harvard Business School, Mss: 605 1747-1764 P241, p.4.

Not all merchants were meticulous record keepers and sometimes they failed to record a particular date with the rest of an account book entry.8 Figure 4 illustrates this problem well and also provides an example of multiple purchases along with multiple payments. The first purchase of earthenware is repaid with one “cash” payment sixty-three days (2.1 months) later.9 Computation of the term of the second loan is more complicated. The last two payments satisfy the purchase amount, so Adams repaid the loan completely. Unfortunately, Parker left out the date for the second payment. The second payment occurred on or after July 22, 1748, so this date is the lower end of the interval. The minimum time between purchase and second payment is zero days, but computation of a maximum time, or upper bound, is not possible due to the lack of information.10

With a sufficient number of debts some generalization is possible. If we interpret the data as the length of a debt’s life we can use demographic methods, in particular the life table.11 For a sample of Connecticut and Massachusetts account books the average duration looks like the following.12

Table 3

Expected Duration for Connecticut Debts, Lower and Upper Bound

(a) (b) (c) (d) (e)
Size of debt in £ eo lower bound (months) Median lower bound (interval) eo upper bound (months) Median upper bound (interval)
All Values 14.79 6-12 15.87 6-12
0.0-0.25 15.22 6-12 15.99 6-12
0.25-0.50 14.28 6-12 15.51 6-12
0.50-0.75 15.24 6-12 18.01 6-12
0.75-1.00 14.25 6-12 15.94 6-12
1.00-10.00 13.95 6-12 15.07 6-12
10.00+ 7.95 0-6 10.73 6-12

Table 4

Expectation Duration for Massachusetts Debts, Lower and Upper Bound

(a) (b) (c) (d) (e)
Size of debt in £ eo lower bound (months) Lower bound median (interval) eo upper bound (months) Upper bound median (interval)
All Values 13.22 6-12 14.87 6-12
0.0-0.25 14.74 6-12 17.55 12-18
0.25-0.50 12.08 6-12 12.80 6-12
0.50-0.75 11.73 6-12 13.08 6-12
0.75-1.00 11.01 6-12 12.43 6-12
1.00-10.00 13.08 6-12 13.88 6-12
10.00+ 14.28 12-18 17.02 12-18

Source: Adapted from Tables 4.1 and 4.2 in Flynn (2001), p. 80.

For all debts in the sample from Connecticut, the expected length of time the debt is outstanding from its inception is estimated between 14.78 and 15.86 months. For Massachusetts the range is somewhat shorter, from 13.22 to 14.87 months. Tables 3 and 4 break the data into categories based on the value of the credit transaction as well. An important question to ask is whether this represents a long- term or a short-term debt? There is no standard yardstick for comparison in this case. The best comparison is likely the international credit granted to colonial merchants. The colonial merchants needed to repay these amounts and had to sell the goods to make remittances. The estimates of that credit duration, listed earlier, center around one year, which means that colonial merchants in New England needed to repay their British suppliers before they could expect to receive full payment from their customers. From the colonial merchants’ perspective book credit was certainly long-term.

Other estimates of duration of book credit

Other estimates of book credit’s duration vary. Consumers paying their credit purchases in kind took as little time as a few months or as long as several years (Martin, 153). Some accounting records show book credit remaining unsettled for nearly thirty years (Baxter, 161). Thomas Hancock often noted expected payment dates, such as “to pay in 6 months” along with a purchase, though frequently this was not enough time for the buyer. Thomas blamed the law, which allowed twelve months for people to make repayments, complaining to his suppliers that he often provided credit to country residents of “one two & more years” (Baxter, 192). Surely such a situation is the exception and not the rule, though it does serve to remind us that many of these arrangements were open, lacking definite endpoints. Some merchants allowed accounts to last as long as two years before examining the position of the account, allowing one year’s book credit without charge, and thereafter assessing interest (Martin, 157).

Duration of promissory notes

The duration of promissory notes is also important. Priest (1999) examines a form of duration for these credit instruments, estimating the time between a debtor’s signing of the note and the creditor’s filing of suit to collect payment. Of course this only measures the duration for notes that go into default and require legal recourse. Typically, a suit originated some 6 to 9 months after default (Priest, 2417-18). Results for the period 1724 to 1750 show 14.5% of cases occurred within 6 months after the initial contraction date, the execution of the debt. Merchants brought suit in more than 60% of the cases between 6 months and 3 years from execution, 21.4% from six to twelve months, 27.4% from one to two years and 14.1% from two to three years. Finally, more than 20% of the cases occurred more than three years from the execution of the debt. The median interval between execution and suit was 17.5 months (Priest, 2436, Table 3).

The duration of promissory notes provides an important complement to estimates of book credit’s term. Median estimates of 17.5 months make promissory notes, more than likely, a long-term credit instrument when balanced against the one year credit term given colonial importers. The estimates for book credit range between three months and several years in the literature to between 13 and 16 months in Flynn (2001) study. Duration results show that merchants waited significant amounts of time for payment, raising the issue of the time value of money and interest rates.

The Interest Practices of Merchants

In some cases credit was outstanding for a long period of time, but the accounts make no mention of any interest charges, as in Figures 1 through 4. Such an omission is difficult to reconcile with the fairly sophisticated business practices for the merchants of the day. Accounting research and manuals from the time demonstrate clearly an understanding of the time value of money. The business community understood the concept of compound interest. Account books allowed merchants to charge higher and variable prices for goods sold on book credit (Martin, 94). While in some cases interest charges entered the account book as an explicit entry in many others interest was an added or implicit charge contained in the good’s price.

Advertisements from the time make it clear that merchants charged less for goods

purchased by cash, and accounts paid promptly received a discount on the price,

One general pricing policy seems to have been that goods for cash were sold at a lower price than when they were charged. Cabel[sic] Bull advertised beaver hats at 27/ cash and 30/ country produce in hand. Daniel Butler of Northampton offered dyes, and “a few Cwt. of Redwood and Logwood cheaper than ever for ready money.” Many other advertisements carried allusions to the practice but gave no definite data. A daybook of the Ely store contained this entry for October 21, 1757: “William Jones, Dr to 6 yds Towcloth at 1/6—if paid in a month at 1/4. (Martin, 1939, 144-145)

Other advertisements also evidence a price difference, offering cash prices for certain grains they desired. Connecticut merchants likely offered good prices for products they thought would sell well as they sought remittances for their British creditors. Hartford merchants charged interest rates ranging from four and one-half to six and one-half percent in the 1750s and 1760s, though Flynn (2001) arrives at different rates from a different sample of New England account books (Martin, 158). Many promissory notes in South Carolina specified interest, though not an exact rate, usually just the term “lawful interest” (Woods, 364).

Estimates of interest rates

Simple regression analysis can help determine if interest was implicit in the price of goods sold on credit though there are numerous technical issues, such as borrower characteristics, market conditions and the quality of the good that make a discussion here inappropriate.13 In general, there seems to be a positive correlation, with the annual interest rates falling between 3.75% and 7%, which seem consistent with the results from interest entries made in account books. There is some tendency for the price of a good to increase with the time waited for repayment, though many other technical matters need resolution.

Most annual interest rates in Flynn’s (2001) study, explicit and implicit, fall in the range of 4 to 6.5 percent making them similar to those Martin found in her examination of accounts and roughly consistent with the Massachusetts lawful rate of 6 percent at the time, though some entries assess interest as high as 10 percent (Martin, 158; Rothenberg, 1992, 124). Despite this, the explicit rates are insufficient on their own to form a conclusion about the interest rate charged on book credit; there are too few entries, and many involve promissory notes or third parties, factors expected to alter the interest rate. Other factors such as borrower characteristics likely changed the assessed rate of interest too, with more prominent and wealthy individuals charged lower rates, either due to their status and a perceived lower risk, or possibly due to longer merchant-buyer relationships. Most account books do not contain information sufficient to judge the effects of these characteristics.

Merchants gained from credit use by charging higher prices; credit required a premium over cash sales and so the merchant collected interest and at the same time minimized the necessary amount of payments media (Martin, 94). Interest was distinct from the normal markups for insurance, freight, wharfage, etc. that were often significant additions to the overall price and represented an attempt to account for risk and the time value of money (Baxter, 192; Thomson, 239).14

Conclusions

Credit was significant as a form of payment in colonial America. Direct comparisons of the number of credit purchases versus barter or cash are not possible, but an examination of accounting records demonstrates credit’s widespread use. Credit was present in all forms of trade including international trade between England and her colonies. The domestic forms of credit were relatively long-term instruments that allowed individuals to consume beyond current means. In addition, book credit allowed colonists to economize on cash and other means of payment through transfers of credit, “reckoning,” and other means such as paying workers with store credit. Merchants also understood the time value of money, entering interest charges explicitly in the account books and implicitly as part of the price. The use of credit, the duration of credit instruments, and the methods of incorporating interest show credit as an important method of exchange and the economy of colonial America to be very complex and sophisticated.

References

Baxter, W.T. The House of Hancock: Business in Boston, 1724-1775. Cambridge: Harvard University Press, 1945.

Bridenbaugh, Carl. The Colonial Craftsman. Dover Publications: New York, 1990.

Egnal, Marc. New World Economies: The Growth of the Thirteen Colonies and Early Canada. Oxford: Oxford University Press, 1998.

Flynn, David T. “Credit and the Economy of Colonial New England.” Ph.D. dissertation, Indiana University, 2001.

McCusker, John J., and Russel R. Menard. The Economy of British America, 1607-1789. Chapel Hill: University of North Carolina Press, 1985.

Main, Jackson Turner. Society and Economy in Colonial Connecticut. Princeton: Princeton University Press, 1985.

Martin, Margaret. “Merchants and Trade of the Connecticut River Valley, 1750-1820.” Smith College Studies in History. Department of History, Smith College: Northampton, Mass. 1939.

Parker, Jonathan. Account Book, 1747-1764. Mss:605 1747-1815. Baker Library Historical Collections, Harvard Business School; Cambridge, Massachusetts

Perkins, Edwin J. The Economy of Colonial America. New York: Columbia University Press, 1980.

Perkins, Edwin J. American Public Finance and Financial Services, 1700-1815. Columbus: Ohio State University Press, 1994.

Price, Jacob M. Capital and Credit in British Overseas Trade: The View from the Chesapeake, 1700-1776. Cambridge: Harvard University Press, 1980.

Priest, Claire. “Colonial Courts and Secured Credit: Early American Commercial Litigation and Shays’ Rebellion.” Yale Law Journal 108, no. 8 (June, 1999): 2412-2450.

Rothenberg, Winifred. From Market-Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850. Chicago: University of Chicago Press, 1992.

Shepherd, James F. and Gary Walton. Shipping, Maritime Trade, and the Economic Development of Colonial North America. Cambridge: University Press 1972.

Thomson, Robert Polk. The Merchant in Virginia, 1700-1775. Ph.D. dissertation, University of Wisconsin, 1955.

Further Reading:

For a good introduction to credit’s importance across different professions, merchant practices and the development of business practices over time I suggest:

Bailyn, Bernard. The New England Merchants in the Seventeenth-Century. Cambridge: Harvard University Press, 1979.

Schlesinger, Arthur. The Colonial Merchants and the American Revolution: 1763-1776. New York: Facsimile Library Inc., 1939.

For an introduction to issues relating to money supply, the unit of account in the economy, and price and exchange rate data I recommend:

Brock, Leslie V. The Currency of the American Colonies, 1700-1764: A Study in Colonial Finance and Imperial Relations. New York: Arno Press, 1975.

McCusker, John J. Money and Exchange in Europe and America, 1600-1775: A Handbook. Chapel Hill: University of North Carolina Press, 1978.

McCusker, John J. How Much Is That in Real Money? A Historical Commodity Price Index for Use as a Deflator of Money Values in the Economy of the United States, Second Edition. Worcester, MA: American Antiquarian Society, 2001.

1 Some authors note a small amount of cash purchases as well as small numbers of cash payments for debts as evidence of a lack of money (Bridenbaugh, 153; Baxter, 19n).

2 Presently, credit cards are a common form of payment. While such technology did not exist in the past, the merchant’s account book provided a means of recording credit purchases.

3 Price (1980, pp.16-17) provides an excellent summary of the advantages and risks of credit to different types of consumers and to merchants in both Britain and the colonies.

4 Please note that this table consists of transactions mostly between colonial retail merchants and colonial consumers in New England. Flynn (2001) uses account books that collectively span from approximately 1704 to 1770.

5 In some cases with the extension of book credit came a requirement to provide a note too. When the solvency of the debtor came into question the creditor, could sell the note and pass the risk of default on to another.

6 I offer a detailed example of such an exchange going sour for the merchant below.

7 “No date” is Flynn’s entry to show that a date is not recorded in the account book.

8 It seems that this frequently occurs at the end of a list of entries, particularly when the credit fully satisfies an outstanding purchase as in Figure 4.

9 To calculate months, divide days by 30. The term “cash” is placed in quotation marks as it is woefully nondescript. Some merchants and researchers using account books group several different items under the heading cash.

10 Students interested in historical research of this type should be prepared to encounter many situations of missing information. There are ways to deal with this censoring problem, but a technical discussion is not appropriate here.

11 Colin Newell’s Methods and Models in Demography (Guilford Press, 1988) is an excellent introduction for these techniques.

12 Note that either merchants recorded amounts in the lawful money standard or Flynn (2001) converted amounts into this standard for these purposes.

13 The premise behind the regression is quite simple: we look for a correlation between the amount of time an amount was outstanding and the per unit price of the good. If credit purchases contained implicit interest charges there would be a positive relationship. Note that this test implies forward looking merchants, that is, merchants factored the perceived or agreed upon time to repayment into the price of the good.

14 The advance varied by colony, good and time period,

In 1783, a Boston correspondent wrote Wadsworth that dry goods in Boston were selling at a twenty to twenty-five percent ‘advance’ from the ‘real Sterling Cost by Wholesale.’ The ‘advances’ occasionally mentioned in John Ely’s Day Book were far higher, seventy to seventy-five per cent on dry goods. Dry goods sold well at one hundred and fifty per cent ‘advance’ in New York in 1750… (Martin, 136).

In the 1720s a typical advance on piece goods in Boston was eighty per cent, seventy-five with cash (Martin, 136n). It should be noted that others find open account balances were commonly kept interest free (Rothenberg, 1992, 123).

13

Citation: Flynn, David. “Credit in the Colonial American Economy”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/credit-in-the-colonial-american-economy/

Council of Economic Advisers

Robert Stanley Herren, North Dakota State University

“The Council of Economic Advisers was established by the Employment Act of 1946 to provide the President with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues” (Economic Report of the President 2001: 257). Although it has been the most enduring and important result of the Employment Act of 1946, the Council of Economic Advisers (CEA) was not the legislation’s major focus. As the Second World War ended, many feared that the United States would return to being a depressed economy. Many felt that the United States had the ability, through discretionary fiscal policy, to prevent such an economic collapse but needed legislation to force the federal government to promote continued economic prosperity. Thus, Keynesian economists in government convinced their congressional allies to introduce the Full Employment Act of 1945. Because critics thought the proposed legislation would result in higher inflation, the final legislation (Employment Act of 1946) included vague goals of “maximum production and employment consistent with price stability.”

Neither Congress nor President Truman possessed a clear vision concerning the purpose of the three-member Council of Economic Advisers (CEA). President Truman complicated the CEA’s early years by appointing three people (Edwin Nourse, chair; Leon Keyserling, vice-chair; and John D. Clark) who held disparate views concerning the CEA’s purpose and economic policies. Nourse preferred the CEA to provide impartial economic advice to the President and to avoid the political process; for example, he did not believe that it was appropriate for CEA members to participate in Congressional hearings. Keyserling, who came to Washington during the 1930s to work in President Franklin Roosevelt’s administration, wanted to participate in the political process by being a forceful advocate of the President’s economic program. The squabbling continued until Nourse resigned, and Keyserling became the CEA’s second chair in 1949.

During the first months of the Eisenhower administration, there was substantial debate about whether the three-member form of the CEA should be continued. Critics of Truman’s CEA noted that it did not always speak with a unified voice; more damaging was the belief that Keyserling had become a Democratic partisan in his vigorous defense of presidential initiatives. President Eisenhower wanted to maintain the CEA in some form because he appreciated receiving expert advice from his staff. He chose Arthur Burns to chair his first CEA and to reorganize the CEA. Burns kept three members but eliminated the vice-chair position to make it clear that the chair controlled the CEA; this structure still exists.

The three-member Council of Economic Advisers has continually provided professional economic advice to presidents, who have appointed to the CEA many prominent mainstream economists including several recipients of the Nobel Prize in economics. Its staff has remained small with between 25 and 30 people including senior staff economists (usually on leave from universities), junior staff economists (most often graduate students), and several permanent statisticians. Writing its annual Economic Report provides a CEA with the opportunity to explain the economic rationale for an administration’s economic programs.

Advocacy of Economic Growth

Each Council of Economic Advisers has stressed the importance of adopting policies to ensure a high rate of economic growth. CEAs have been advocates within administrations for emphasizing economic growth as a national priority. CEAs have been most successful in promoting economic growth by consistently supporting microeconomic policies to promote competition and to make markets work better. Because they contend that free international trade improves a nation’s economic growth, CEAs have supported presidential efforts to enact policies that would result in more open trade among nations. Former CEA members have often noted that much of their and the staff’s time dealt with microeconomic policies, often to provide arguments against ill-conceived proposals coming from other parts of the administration or from Congress. Clinton’s CEA described well this function: “The Council’s mission within the Executive Office of the President is unique: it serves as a tenacious advocate for policies that facilitate the workings of the market and that emphasize the importance of incentives, efficiency, productivity, and long-term growth. …The Council has also been important in helping to weed out proposals that are ill-advised or unworkable, proposals that cannot be supported by the existing economic data, and proposals that could have damaging consequences for the economy” (Economic Report of the President 1996:11).

Although CEAs in both Democratic and Republican administrations have given similar advice regarding microeconomic and international trade policies, they have not agreed on how to use fiscal policy to increase the growth of potential real output. Republican CEAs, particularly in the Reagan and Bush administrations, have recommended lower marginal tax rates to increase work effort, saving, and investment. Democratic CEAs have generally thought that such effects are small. For example, Clinton’s CEA vigorously defended the increase in marginal tax rates imposed by the Omnibus Budget Reconciliation Act of 1993. It argued, similar to other Democratic CEAs, that an increase in marginal tax rates would not adversely affect economic growth because it would not significantly reduce work effort, saving, and investment.

Fiscal Policies and Business Cycles

The Employment Act of 1946 focused on using discretionary fiscal policy to prevent another Great Depression. CEAs have contributed to convincing presidents during recessions not to raise tax rates or to reduce government expenditures in an attempt to balance the budget. This effort started early in the CEA’s history with the recessions of 1948-1949 and 1953-1954 because both Truman’s CEA and Eisenhower’s CEA accepted the idea that budgets should be balanced over the business cycle, rather than annually.

Although it was easy to avoid using contractionary fiscal policy during an economic downturn, it was more difficult to know when to advocate expansionary fiscal policy. For example, many have criticized the Eisenhower administration for not moving more aggressively in using fiscal policy to stimulate aggregate demand between 1958 and 1960. Eisenhower’s CEA, however, never found an appropriate time to recommend a tax cut. It perceived the economy to be too strong in 1958 to warrant additional demand. It saw the economic slowdown in 1959 to be caused by a supply disturbance (a lengthy steel strike) rather than a lack of aggregate demand. The fear in 1960 was any potential tax legislation, enacted during a presidential election year, would contain too many provisions that would adversely affect long-term economic growth.

The CEA’s most famous success in using discretionary fiscal policy occurred during the 1960s. President Kennedy appointed Walter Heller as his first chair. Heller, joined by Kermit Gordon and James Tobin, formed the most Keynesian CEA ever. They thought that unemployment could be reduced from the current level of seven percent to four percent without increasing inflation. In its 1962 report, the CEA explicitly set four percent unemployment as the interim target for the full-employment rate of unemployment. Heller’s excellent rapport with President Kennedy allowed the CEA to successfully promote the investment tax credit (1962) and reduction of marginal tax rates for personal income (1964); the latter legislation was primarily designed to increase consumer demand.

However even this success demonstrated the extensive time period required to enact fiscal policy. Later in the 1960s during President Johnson’s administration, aggregate demand increased faster than expected due to increasing government spending arising from both military expenditures in Vietnam and the creation of many new government programs. To prevent inflation the CEA recommended a tax increase. President Johnson did not immediately accept this advice; he ultimately proposed and obtained a tax surcharge (1968) that was too little and too late to prevent rising inflation.

Over time, there has been a growing realization that the political process reduces the opportunities for timely enactment of discretionary fiscal policies. Moreover a long and variable effectiveness (impact) lag combined with uncertainty in the magnitude of fiscal policy multipliers further weaken the case for discretionary fiscal policy in reducing cyclical fluctuations. Instead, CEAs have stressed the importance of strengthening the automatic stabilizing aspects of the fiscal system.

Monetary Policy

While fiscal policy has declined in importance as a countercyclical tool, monetary policy has become relatively more important. The CEA does not directly influence monetary policy, but it does regularly communicate with the Federal Reserve in an attempt to provide it with the CEA’s view of the economy. It is uniquely qualified to explain the economic consequences of monetary policy to the President and White House staff.

Most CEAs have publicly supported the concept of an independent Federal Reserve; the most notable exception was Truman’s CEA, which under chair Leon Keyserling opposed the 1951 Treasury-Federal Reserve Accord. Although later they were often frustrated by the Federal Reserve’s monetary policy, particularly when CEAs preferred a more expansionary policy, CEAs vigorously attempted to prevent administrations from excessive criticism of the Federal Reserve’s monetary policy. CEAs viewed such “Fed-bashing” as counterproductive for several reasons. The Federal Reserve vigorously protects the appearance of its independence; it does not want to appear to be caving into congressional or presidential pressure. Moreover since the early 1980s, the CEA has not wanted to undermine the Federal Reserve’s credibility of successfully restraining inflation because CEAs believe that the Federal Reserve can best promote economic growth by keeping inflation low and stable.

Inflation

Although since 1980 CEAs have agreed that monetary policy is the primary long-run determinant of inflation, earlier CEAs held a variety of views concerning methods to prevent inflation. Truman’s CEA contended that a lack of supply in specific sectors, rather than excess aggregate demand, was the underlying cause of inflation; it recommended selective price and wage controls rather than contractionary monetary policy to reduce inflation.

A perceived problem during the 1950s and 1960s was that administered prices and cost-push inflation caused inflation to rise before the economy could reach full employment. Eisenhower’s CEA used a policy of exhortation, appealing for voluntary restraint with business and labor sharing responsibility for obtaining price stability. Kennedy-Johnson CEAs formulated wage-price guideposts that provided a quantitative aspect for its exhortation; these guideposts crumbled when aggregate demand grew too fast.

President Nixon’s CEA faced the challenge of devising a policy to reduce inflation without causing a major recession. The CEA recommended using monetary and fiscal policy to gradually reduce the growth of aggregate demand. However, inflation did not slow even though the nation went through a recession. The slow fall in inflation resulted in the Nixon administration formulating the “New Economic Policy” in August 1971, which suspended convertibility of the dollar into gold and instituted a temporary comprehensive freeze on wages and prices. Nixon’s CEA, which initially opposed imposition of mandatory wage and price controls, would spend much of the next three years helping to provide an orderly transition from the freeze. Subsequent CEAs, with exception of Carter’s CEA, did not consider wage-price policies to be a viable tool in preventing inflation.

During the 1960s, the Kennedy-Johnson CEAs believed that the relationship between inflation and unemployment (the Phillips curve) was relatively flat at unemployment rates greater than four percent; lower unemployment rates were associated with higher rates of inflation. Since 1969, CEAs with the exception of Carter’s CEA have used a natural rate theory of inflation. The natural rate theory indicates that there is not a permanent tradeoff between inflation and unemployment; instead the economy tends to move toward a given level of unemployment often termed the natural rate of unemployment or full-employment rate of unemployment. Nixon and Ford CEAs both thought that the natural rate of unemployment had risen since the early 1960s, but for political reasons the CEA was reluctant to abandon the 4 percent target established in 1962. Finally in 1977, it wrote that the full-employment unemployment rate had risen to at least 4.9 percent due to demographic shifts; other factors may have raised it to 5.5 percent. Between 1981 and 1996, the CEA generally thought the natural rate of unemployment was about 6 percent. During the latter half of the 1990s, it reduced its estimate because unemployment fell without inflation increasing. Both the last report written by Clinton’s CEA (2001) and the most recent report written by Bush’s CEA (2004) consider the natural rate of unemployment to be currently about 5 percent.

Evolving Role and Influence

The CEA have been most influential in affecting economic policy when its chair has been able to develop an excellent rapport with the President; examples include Walter Heller with President Kennedy and Alan Greenspan with President Ford. CEAs have rarely disagreed with the President or his staff in public even though they have lost many battles. Often they do not even mention policies, with which they disagree, in their annual reports. If the disagreements are serious enough, members have preferred to quietly resign. A notable exception occurred when Martin Feldstein’s public feuding with White House staff concerning budgetary policy in 1983 and 1984 reduced the CEA’s influence; in 1984 Reagan’s White House staff considered terminating the CEA.

Over time more departments and agencies have hired professional economists, thereby eroding the “monopoly” of economic expertise once held by the CEA in the White House and executive branch. Moreover, each administration adopts a different organization for its decision making and flow of information; these organizational differences may affect the CEA’s impact on the formulation of economic policies. For example, President Clinton established a National Economic Council (NEC) to coordinate economic policies within his administration. Laura Tyson, Clinton’s first CEA chair, resigned to become director of the NEC; some interpreted this move as indicating the latter position was more influential in affecting economic policy. President Bush continued the NEC.

The CEA retains influence with its chief constituent – the President – because it does not represent a specific sector or department. It can focus on providing economic advice to promote the use of incentives to obtain economic efficiency and economic growth.

Further Reading

The CEA’s annual reports documents changes in thinking in “mainstream economics.”

Presidential libraries contain many files from the CEA and its individual members. Many former members have written articles and books reflecting about their experiences. There has been much written about the ideas and politics involved in making specific economic policies. The works listed below constitute just a small part of a vast literature; I have chosen the literature that I have found to be most useful in understanding the role of the Council of Economic Advisers in advising the President about economic policies.

Bailey, Stephen. Congress Makes a Law: The Story Behind the Employment Act of 1946. New York: Columbia University Press, 1950. Bailey’s work remains the definitive study regarding the legislative debates that resulted in the Employment Act of 1946.

DeLong, J. Bradford. “Keynesianism, Pennsylvania Avenue Style: Some Economic Consequences of the Employment Act of 1946.” Journal of Economic Perspectives 10, no. 3 (1996): 41-53. DeLong places the CEA’s ideas and influence within a broader context of the profession’s changing views concerning economic stabilization.

Feldstein, Martin. “American Economic Policy in the 1980s: A Personal View.” In American Economic Policy in the 1980s, edited by Martin Feldstein, 1-79. Chicago: University of Chicago Press, 1994. Feldstein was CEA chair (1982-1984); he often clashed with other White House staff members.

Goodwin, Craufurd, editor. Exhortation and Controls: The Search for a Wage-Price Policy, 1945-1971. Washington: Brookings Institution, 1975. The authors of the essays extensively used documents in presidential libraries and interviews with many economists who participated in developing wage-price policies.

Hargrove, Edwin C. and Samuel A. Morley, editors. The President and the Council of Economic Advisers: Interviews with CEA Chairmen. Boulder: Westview Press, 1984. The editors interviewed nine of the first ten CEA chairs (Edwin Nourse had already died). In addition to the interviews, the editors included an introductory essay that summarized the major themes of the interviews.

Herren, Robert Stanley. “The Council of Economic Advisers’ View of the Full-Employment Unemployment Rate: 1962-1998.” Journal of Economics 24, no. 2 (1998): 49-62. This article discusses how various CEAs have viewed the “maximum employment” provision of the 1946 Employment Act.

Orszag, Jonathan M., Peter R. Orszag, and Laura D. Tyson. “The Process of Economic Policy-Making during the Clinton Administration.” In American Economic Policy in the 1990s, edited by Jeffrey Frankel and Peter Orszag, 983-1027. Cambridge, MA: MIT Press, 2002. Tyson was CEA chair (1993-1995). The authors briefly discuss attempts to coordinate economic policy prior to the Clinton administration. The authors emphasize activities of the National Economic Council and its interactions with the CEA.

Porter, Roger. “The Council of Economic Advisers.” In Executive Leadership in Anglo-American Systems, edited by Colin Campbell and Margaret Jane Wyszomirzki, 171-193. Pittsburgh, PA: University of Pittsburgh Press, 1991. Porter provides a brief history of the evolving role and functions of the CEA.

Saulnier, Raymond. Constructive Years: The U.S. Economy under Eisenhower. Lanham, MD: University Press of America, 1991. Saulnier was CEA member (1955-1956) and chair (1956-1961). He provides his views about the economic ideas of Eisenhower’s CEA.

Schultze, Charles L. “The CEA: An Inside Voice for Mainstream Economics.” Journal of Economic Perspectives 10, no. 3 (1996): 23-39. Schultze was CEA chair (1977-1981).

Sobel, Robert and Bernard S. Katz, editors. Biographical Directory of the Council of Economic Advisers. New York: Greenwood Press, 1988. The essays emphasize the economic ideas and careers of the forty-five economists who served in the CEA from 1947 to 1985.

Stein, Herbert. Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton. Third revised edition. Washington: American Enterprise Institute for Public Policy Research, 1994. Stein was CEA member (1969-1971) and chair (1972-1974). He focuses on the general context, including the advice of CEAs, in which Presidents formulated economic policies.

Stiglitz, Joseph E. The Roaring Nineties: A New History of the World’s Most Prosperous Decade. New York: W.W. Norton, 2003. Stiglitz was CEA member (1993-1995) and chair (1995-1997). He provides substantial information concerning the ideas that affected economic policy during President Clinton’s administration.

United States, President. The Economic Report of the President. Washington: United States Government Printing Office, 1947-2004. The reports since 1995 have been available on-line at http://www.gpoaccess.gov/eop. The most recent report, and other general information about the CEA, can be found at http://www.whitehouse.gov/cea/

Citation: Herren, Robert. “Council of Economic Advisers”. EH.Net Encyclopedia, edited by Robert Whaples. August 18, 2004. URL http://eh.net/encyclopedia/council-of-economic-advisers/

Mechanical Cotton Picker

Donald Holley, University of Arkansas at Monticello

Until World War II, the Cotton South remained poor, backward, and un-mechanized. With minor exceptions, most tasks — plowing, cultivating, and finally harvesting cotton — were done by hand. Though sharecropping stifled the region’s attempts to mechanize, too many farmers, both tenants and owners, were trying to survive on small, uneconomical farms, trapping themselves in poverty. From 1910 to 1970 the Great Migration, which included whites as well as blacks, reduced the region’s oversupply of small farmers and embodied a tremendous success story for both migrants and the region itself. The mechanical cotton picker played an indispensable role in the transition from the prewar South of over-population, sharecropping, and hand labor to the capital-intensive agriculture of the postwar South.

Inventions and Inventors

In 1850 Samuel S. Rembert and Jedediah Prescott of Memphis, Tennessee, received the first patent for a cotton harvester from the U.S. Patent Office, but it was almost a century later that a mechanical picker was commercially produced. The late nineteenth century was an age of inventions, and many inventors sought to perfect a mechanical cotton harvester. Their lack of success reinforced the belief that cotton would always be picked by hand. For almost a hundred years, it seemed, a successful cotton picker had been just around the corner.

Inventors experimented with a variety of devices that were designed to pick cotton.

  • Pneumatic harvesters removed cotton fiber from the bolls with suction or a blast of air.
  • Electrical cotton harvesters used a statically charged belt or finger to attract the lint and remove it from the boll.
  • The thresher type cut down the plant near the surface of the ground and took the entire plant into the machine, where the cotton fiber was separated from the vegetable material.
  • The stripper type harvester combed the plant with teeth or drew it between stationary slots or teeth.
  • The picker or spindle type machine was designed to pick the open cotton from the bolls using spindles, fingers, or prongs, without injuring the plant’s foliage and unopened bolls.

The picker or spindle idea drew the most attention. In the 1880s Angus Campbell of Chicago, Illinois, was an agricultural engineer who saw the tedious process of picking cotton. For twenty years he made annual trips to Texas to test the latest model his spindle picker, but his efforts met with ridicule. The consensus of opinion was that cotton would always be picked by hand. Campbell joined with Theodore H. Price and formed the Price-Campbell Cotton Picker Corporation in 1912. The Price-Campbell machine performed poorly, but they believed they were on the right track.

Hiram M. Berry of Greenville, Mississippi, designed a picker with barbed spindles, though it was never perfected. Peter Paul Haring of Goliad, Texas, worked for thirty years to build a mechanical cotton picker using curved prongs or corkscrews.

John Rust

John Rust, the man who was ultimately credited with the invention of the mechanical cotton picker, personified the popular image of the lone inventor working in his garage. As a boy, he had picked cotton himself, and he dreamed that he could invent a machine that would relieve people of one of the most onerous forms of stoop labor.

John Daniel Rust was born in Texas in 1892. He was usually associated with his younger brother Mack Donald Rust, who had a degree in mechanical engineering. Mack did the mechanical work, while John was the dreamer who worried about the social consequences of their invention.

John was intrigued with the challenge of constructing a mechanical cotton picker. Other inventers had used spindles with barbs, which twisted the fibers around the spindle and pulled the lint from the boll. But the problem was how to remove the lint from the barbs. The spindle soon became clogged with lint, leaves, and other debris. He finally hit on the answer: use a smooth, moist spindle. As he later recalled:

The thought came to me one night after I had gone to bed. I remembered how cotton used to stick to my fingers when I was a boy picking in the early morning dew. I jumped out of bed, found some absorbent cotton and a nail for testing. I licked the nail and twirled it in the cotton and found that it would work.

By the mid-1930s the widespread use of mechanical cotton harvesters seemed imminent and inevitable. When in 1935 the Rust brothers moved to Memphis, the self-styled headquarters of the Cotton South, John Rust announced flatly, “The sharecropper system of the Old South will have to be abandoned.” The Rust picker could do the work of between 50 and 100 hand pickers, reducing labor needs by 75 percent. Rust expected to put the machine on the market within a year. A widely read article in the American Mercury entitled “The Revolution in Cotton” predicted the end of the entire plantation system. Most people compared the Rust picker with Eli Whitney’s cotton gin.

Rust’s 1936 Public Demonstration

In 1936, the Rust machine received a public trial at the Delta Experiment Station near Leland, Mississippi. Though the Rust picker was not perfected, it did pick cotton and it picked it well. The machine produced a sensation, sending a shutter throughout the region. The Rust brothers’ machine provoked the fear that a mechanical picker would destroy the South’s sharecropping system and, during the Great Depression, throw millions of people out of work. An enormous human tragedy would then release a flood of rural migrants, mostly black, on northern cities. The Jackson (Miss.) Daily News editorialized that the Rust machine “should be driven right out of the cotton fields and sunk into the Mississippi River.”

Soon a less strident and more balanced view emerged. William E. Ayres, head of the Delta Experiment Station, encouraged Rust:

We sincerely hope you can arrange to build and market your machine shortly. Lincoln emancipated the Southern Negro. It remains for cotton harvesting machinery to emancipate the Southern cotton planter. The sooner this [is] done, the better for the entire South.

Professional agricultural men saw the mechanization of cotton as a gradual process. The cheap price of farm labor in the depression had slowed the progress of mechanization. Still, the prospects for the future were grim. One agricultural economist predicted that mechanical cotton picking would become reality over the next ten or fifteen years.

Cotton Harvester Sweepstakes

International Harvester

Major farm implement companies, which had far more resources than did the Rust brothers, entered what may be called the cotton harvester sweepstakes. Usually avoiding publicity, implement companies were happy to let the Rust brothers bear the brunt of popular criticism. International Harvester (IH) of Chicago, Illinois, had invented the popular Farmall tractor in 1924 and then experimented with pneumatic pickers. After three years of work, Harvester realized that a skilled hand picker could easily pick faster than their pneumatic machine.

IH then bought up the Price-Campbell patents and turned to spindle pickers. By the late 1930s Harvester was sending a caravan southward every fall to test their latest prototype, picking early cotton in Texas and late-maturing cotton in Arkansas and Mississippi. In 1940 chief engineer C. R. Hagen abandoned the idea of a tractor that pulled the picking unit. Instead of driving the tractor forward, the tractor moved backward enabling the picking unit to encounter the cotton plants first. The transmission was reversed so that it still used forward gears.

After the 1942 caravan, Fowler McCormick, chairman of the board of International Harvester, formally announced that his company had a commercial cotton picker ready for production. The IH picker was a one-row, spindle-type picker, but unlike the Rust machine it used a barbed spindle, which improved its ability to snag cotton fibers. This machine employed a doffer to clean the spindles before the next rotation. Unfortunately, the War Production Board allocated IH only enough steel to continue production of experimental models; IH was unable to start full-scale production until after World War II was over.

In late 1944, as World War II entered its final months, attention turned to a dramatic announcement. The Hopson Planting Company near Clarksdale, Mississippi, produced the first cotton crop totally without the use of hand labor. Machines planted the cotton, chopped it, and harvested the crop. It was a stunning achievement that foretold the future.

IH’s Memphis Factory, 1949

After the war, International Harvester constructed Memphis Works, a huge cotton picker factory located on the north side of the city, and manufactured the first pickers in 1949. Though the company had assembled experimental models for testing purposes, this event marked the first commercial production of mechanical cotton pickers. The plant’s location clearly showed that the company aimed its pickers for use in the cotton areas of the Mississippi River Valley.

Deere

Deere and Company of Moline, Illinois, had experimented with stripper-type harvesters and variations of the spindle idea, but discontinued these experiments in 1931. In 1944 the company resumed work after buying the Berry patents, though Deere’s machine incorporated its own innovative designs. Deere quickly regained the ground it had lost during the depression. In 1950, Deere’s Des Moines Works at Ankeny, Iowa, began production of a two-row picker that could do almost twice the harvesting job of one-row machines.

Allis Chalmers

Despite his success, John Rust realized that his picker was substandard, and during World War II he went back to his drafting board and redesigned his entire machine. His lack of financial resources was overcome when he received an offer from Allis Chalmers of Indianapolis, Indiana, to produce machines using his patents. He signed a non-exclusive agreement.

Pearson

In late 1948 cotton farmers near Pine Bluff, Arkansas, suffered from a labor shortage. Since cotton still stood unpicked in the fields at the end of the year, they invited Rust to demonstrate his picker. The demonstration was a success. Rust entered into an agreement with Ben Pearson, a Pine Bluff company known for archery equipment, to produce 100 machines for $1,000 each, paid in advance. All the machines were sold, and Ben Pearson hired Rust as a consultant and manufactured Rust cotton pickers.

Ancillary Developments

The mechanization of cotton did indeed proceeded slowly. The production of cotton involved three distinct “labor peaks”: land breaking, planting, and cultivating; thinning and weeding; and harvesting. Until the 1960s cotton growers did not have a full set of technological tools to mechanize all labor peaks.

Weed Control

The control of weeds with herbicides was the last labor peak to be conquered. Desperate to solve the problem, farmers cross-cultivated their cotton, plowing across rows as well as up and down rows. Taking advantage of the toughness of cotton stalks, flame weeders used a flammable gas to kill weeds. The most peculiar sight in northeast Arkansas was flocks of weed-hungry geese that sauntered through cotton fields. The weed problem was solved not by machines, but by chemicals. In 1964, the preemergence herbicide Treflan became a household word because of a television commercial. Ultimately, the need to chop and thin cotton was a problem of plant genetics.

Western cotton growers embraced mechanization earlier than did southern farmers. As early as 1951, more than half of California’s cotton crop was mechanically harvested, with hand picking virtually eliminated by the 1960s. Environmental conditions produced smaller cotton plants, not the “rank” cotton in the Delta, and small plants favored machine picking. Western farmers also did not have to overcome the burden of an antiquated labor system. (See Figure 1.)

Figure 1. Machine Harvested Cotton as a Percentage of the Total Cotton Crop, Arkansas, California, South Carolina, and U.S. Average, 1949-1972

Source: United States Department of Agriculture, Economic Research Service. Statistics on Cotton and Related Data, 1920-1973, Statistical Bulletin No. 535 (Wash­ing­ton: Government Printing Office, 1974), 218.

Mechanization and Migration

The most controversial issue raised by the introduction of the mechanical cotton harvester has been its role in the Great Migration. Popular opinion has accepted the view that machines eliminated jobs and forced poor families to leave their homes and farms in a forlorn search for urban jobs. On the other hand agricultural experts argued that mechanization was not the cause, but the result of economic change in the Cotton South. Wartime and postwar labor shortages were the major factors in stimulating the use of machines in cotton fields. Most of the out-migration from the South stemmed from a desire to obtain high paying jobs in northern industries, not from an “enclosure” movement motivated by landowners who mechanized as rapidly as possible. Indeed, the South’s cotton farmers were often reluctant to make the transition from hand labor, which was familiar and workable, to machines, which were expensive and untried.

Holley (2000) used an empirical analysis to compare the impact of mechanization and manufacturing wages on the labor available for picking cotton. The result showed that mechanization accounted for less than 40 percent of the decrease in handpicking, while the other 60 percent was attributed to the decrease in the supply of labor caused by higher wages in manufacturing industries. Hand labor was pulled out of the Cotton South by higher industrial wages rather than displaced by job-destroying machines.

Timing of Migration

The evidence is overwhelming that migration greatly accelerated mechanization. The first commercial production of mechanical cotton pickers were manufactured in 1949, and these machines did not exist in large numbers until the early 1950s. Since the Great Migration began during World War I, mechanical pickers cannot have played any causal role in the first four decades of the migration. By 1950, soon after the first mechanical cotton pickers were commercially available, over six million migrants had already left the South. (See Table 1.) A decade later, most of the nation’s cotton was still hand picked. Only by the late 1960s, when the migration was losing momentum, did machines harvest virtually the total cotton crop.

Table 1
Net Migration from the South, by Race, 1870-1970 (thousands)

Decade Native White Black Total
1870-1880 91 -68 23
1880-1890 -271 88 -183
1890-1900 -30 -185 -215
1900-1910 -69 -194 -218
1910-1920 -663 -555 -1,218
1920-1930 -704 -903 -1,607
1930-1940 -558 -480 -1,038
1940-1950 -866 -1,581 -2,447
1950-1960* -1,003* -1,575* -2,578
1960-1970* -508* -1,430* -1,938
Totals for 1940-1970 -2,377 -4,586 -6,963

Source: Hope T. Eldridge and Dorothy S. Thomas, Population Redistribution and Economic Growth, vol. 3 (Philadelphia: American Philosophical Society, 1964), 90. *United States Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington: Government Printing Office, 1975), Series C 55-62, pp. 93-95.

Migration figures also provide a comparison of statewide migration estimates in Arkansas, Louisiana, and Mississippi with estimates for counties that actually used mechanical pickers (79 of 221 counties or parishes). During the 1950s these counties accounted for less than half of the total white migration from the three-state region and just over half of the black migration. The same was true in the 1960s except that the white population showed a net gain, not a loss. (See Table 2.) Though push factors played some role in the migration, pull factors were more important. People deserted the cotton areas because they hoped to obtain better jobs and more money elsewhere.

Table 2
Estimated Statewide Migration, Arkansas, Louisiana, and Mississippi
Compared to Migration Estimates for Cotton Counties, 1950-1970

 

1950-1960 1960-1970
State as a Whole Counties Using Mechanical Pickers Percent­age State as a Whole Counties Using Mechanical Pickers Percent­age
White
Arkansas -283,000 -106,388 37.6 38,000 -26,026 68.5
Louisiana 43,000 -15,769 36.7 26,000 -28,949* 111.3
Mississippi -110,000 -50,997 46.4 10,000 -771 7.7
Totals -350,000 -173,154 49.6 74,000 -55,746 75.3
Black
Arkansas -150,000 -74,297 49.5 -112,000 -64,445 57.5
Louisiana -93,000 -42,151 45.3 -163,000 -62,290 38.2
Mississippi -323,000 -175,577 54.4 -279,000 -152,357 54.6
Totals -566,000 -292,025 51.6 -554,000 -279,092 50.4

Source: Donald Holley. The Second Great Emancipation: The Mechanical Cotton Picker, Black Migration, and How They Shaped the Modern South (Fayetteville: University of Arkansas Press, 2000), 178.

*The selected counties lost population, but Louisiana statewide recorded a population gain for the decade.

Most of the Arkansas migrants, for example, were young people from farm families who saw little future in agriculture. They were people with skills and thus possessed high employment potential. They also had better than average educations. In other words, they were not a collection of pathetic sharecroppers who had been driven off the land.

Conclusion

During and after World War II, the Cotton South was caught up in a complex interplay of economic forces. The region suffered shortages of agricultural labor during the war, which led to the collapse of the old plantation system. The number of tenant farmers and sharecroppers declined precipitously, and the U.S. Department of Agriculture stopped counting them after its 1959 census. The structure of southern agriculture changed as the number of farms declined steadily, while the size of farms increased. The age of Agri-Business had arrived.

The migration solved the long-standing problem of rural overpopulation, and did so without producing social upheaval. The migrants found jobs and improved their living standards, and simultaneously rural areas were relieved of their overpopulation. The migration also enabled black people to gain political clout in northern and western cities, and since Jim Crow was in part a system of labor control, the declining need for black labor in the South loosened the ties of segregation.

After World War II southern farmers faced a world that had changed. While the Civil War had freed the slaves, the mechanical cotton picker emancipated workers from backbreaking labor and emancipated the region itself from its dependence on cotton and sharecropping. Indeed, mechanization made possible the continuation of cotton farming in the post-plantation era. Yet cotton acreages declined as farmers moved into rice and soybeans, crops that were already mechanized, creating a more diversified agricultural economy. The end of sharecropping also signaled the end of the need for cheap, docile labor — always a prerequisite of plantation agriculture. The labor control that the South had always exercised over poor whites and blacks proved unattainable after the war. Thus the mechanization of cotton was an essential condition for the civil rights movement in the 1950s, which freed the region from Jim Crow. The relocation of political power from farms to cities was a related by-product of agricultural mechanization. In the second half of the twentieth century, the South underwent a second great emancipation as revolutionary changes swept the region that earlier were unattainable and even unimaginable.

Selected Bibliography

Carlson, Oliver. “Revolution in Cotton.” American Mercury 34 (February 1935): 129-36. Reprinted in Readers’ Digest 26 (March 1935): 13-16.

Cobb, James C. The Most Southern Place on Earth: The Mississippi Delta and the Roots of Regional Identity. New York: Oxford University Press, 1992.

Day, Richard H. “The Economics of Technological Change and the Demise of the Sharecropper.” American Economic Review 57 (June 1967): 427-49.

Drucker, Peter. “Exit King Cotton.” Harper’s 192 (May 1946): 473-80.

Fite, Gilbert C. Cotton Fields No More: Southern Agriculture, 1865-1980. Lexington: University of Kentucky Press, 1984.

Hagen, C. R. “Twenty-Five Years of Cotton Picker Development.” Agricultural Engineering 32 (November 1951): 593-96, 599.

Hamilton, C. Horace. “The Social Effects of Recent Trends in the Mechaniza­tion of Agriculture.” Rural Sociology 4 (March 1939): 3-19.

Heinicke, Craig. “African-American Migration and Mechanized Cotton Harvesting, 1950-1960.” Explorations in Economic History 31 (October 1994): 501-20.

Holley, Donald. The Second Great Emancipation: The Mechanical Cotton Picker, Black Migration, and How They Shaped the Modern South. Fayetteville: University of Arkansas Press, 2000.

Johnston, Oscar. “Will the Machine Ruin the South?” Saturday Evening Post 219 (May 31, 1947): 36-37, 94-95, 388.

Maier, Frank H. An Economic Analysis of Adoption of the Mechanical Cotton Picker.”Ph.D. dissertation, University of Chicago, 1969.

Peterson, Willis, and Yoav Kislev. “The Cotton Harvester in Retrospect: Labor Displacement or Replacement.” Journal of Economic History 46 (March 1986): 199-216.

Rasmussen, Wayne D. “The Mechanization of Agriculture.” Scientific American 247 (September 1982): 77-89.

Rust, John. “The Origin and Development of the Cotton Picker.” West Tennessee Historical Society Papers 7 (1953): 38-56.

Street, James H. The New Revolution in the Cotton Economy: Mechanization and Its Consequences. Chapel Hill: University of North Carolina Press, 1957.

Whatley, Warren C. “New Estimates of the Cost of Harvesting Cotton: 1949-1964.” Research in Economic History 13 (1991): 199-225.

Whatley, Warren C. “A History of Mechanization in the Cotton South: The Institutional Hypothesis.” Quarterly Journal of Economics 100 (November 1985): 1191-1215.

Wright, Gavin. Old South, New South: Revolutions in the Southern Economy since the Civil War. New York: Basic Books, 1986.

Citation: Holley, Donald. “Mechanical Cotton Picker”. EH.Net Encyclopedia, edited by Robert Whaples. June 16, 2003. URL http://eh.net/encyclopedia/mechanical-cotton-picker/

Cotton Gin

William H. Phillips, University of South Carolina

The cotton gin developed by Eli Whitney in 1793 marked a major turning point in the economic history of the Southern United States. Prior to this time, the major commodities produced and exported by the South were tobacco and rice. Only with the ability to quickly separate short-staple cotton fiber from its seed was the future of the Southern economy, and its use of slave labor, tied to cotton production.

Whether slavery in the American South would have withered away without the cotton gin and expanded cotton production has not been given a definitive answer. Almost certainly it would have altered the development of sectional conflict prior to 1861. Nonetheless, as shown in Table 1, the South was already a major slave economy prior to the cotton gin, and would have remained so for some time. The table shows that the percentage of slaves in the Southern population remained at about one-third from 1790 down to the eve of the Civil War. There was a notable decline in the border-states, offset by the increasing weight of the Lower South’s population expansion.

Table 1
Percent of Slave Population to Total Population, Southern States, 1790-1860

Year Southern States Border States Lower South
1790 33.5 32.0 41.1
1800 32.7 30.8 40.3
1810 33.4 30.1 44.7
1820 34.0 29.6 45.6
1830 34.0 29.0 46.0
1840 34.0 26.7 46.0
1850 33.3 24.7 45.4
1860 32.3 22.3 44.8

Sources: Adapted from Table 21 in Lewis Cecil Gray, History of Agriculture in the Southern United States to 1860, vol. 2 (Gloucester, MA: Peter Smith, 1958), 656. Original Data from United States Census, 1860, Population, 599-604. Border States are Delaware, Kentucky, Maryland, Missouri, North Carolina, Tennessee and Virginia, while Lower South states are Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, South Carolina and Texas.

Cotton Ginning before Eli Whitney

Devices for separating cotton fiber from seed have existed since antiquity. This process is considerably easier to perform for smooth seed long-staple cotton varieties, which dominated total cotton production prior to the popularization of Whitney’s machine. In 1788, Joseph Eve patented an improved machine for this purpose, using a method that is now referred to as “roller” ginning.

The problem faced by planters in the Southern United States was that long-staple cotton could only be grown at that time in a narrow band along the Carolina and Georgia coast (hence the term “sea island” cotton). Demand for cotton by English textile factories was increasing, but interior areas of the Southern states could only grow “upland” short-staple cotton. This cotton variety was marked by two characteristics: it had cotton fibers which were shorter in length (the short staple), reducing yarn and cloth quality, and it had a “fuzzy” seed since the fibers were tightly attached to the entire seed surface. This attachment of fiber to seed meant that removing the fiber without damaging it was time consuming and labor intensive.

Eli Whitney’s Design

While visiting a plantation (Mulberry Grove) near Savannah, Georgia, Connecticut native Whitney used his familiarity with New England textile machinery to construct his engine (shortened to “gin”). It used wire teeth hammered into a rotating wooden cylinder to snare the cotton fibers and pull them through a grate. The slots in this grate were too narrow for the cotton seed to pass, so that the fibers were pulled away from the seed.

The quick adoption of Whitney’s original design and its subsequent modifications contradicts the common perception that slavery prevents labor-saving technical change. The opportunity cost of slaves, as represented by their purchase or potential sale price to the slaveowner, was significant. Southern planters jumped at the chance to reduce the labor time needed to prepare picked cotton for market.

In fact, the primary barrier that the new cotton gin faced was that it sacrificed fiber quality for quantity, and so met with some resistance from English buyers of cotton fiber. Due to its short staple and damage caused by Whitney-style gins, the upland cotton varieties consistently sold for half the price received by long-staple cotton prior to the Civil War. Because undamaged fiber was so crucial to the high price received by sea-island cotton, it continued to be roller ginned.

Despite these drawbacks, short staple cotton was the only option if cotton production was to expand. With low-cost ginning assured by Whitney’s design, the Southern economy moved westward and planted cotton. Table 2 shows that American cotton production expanded 1000-fold from 1790 to 1860. In 1790, before the Whitney gin, almost all of the 3,000-plus bales of cotton made were sea-island cotton. By 1860, almost all of the 3.8 million bales grown were short-staple varieties.

Table 2
American Production of Raw Cotton, 1790-1860 (bales)

Year Production Year Production Year Production
1790 3,135 1815 208,986 1840 1,346,232
1795 16,719 1820 334,378 1845 1,804,223
1800 73,145 1825 532,915 1850 2,133,851
1805 146,290 1830 731,452 1855 3,217,417
1810 177,638 1835 1,060,711 1860 3,837,402

Sources: Adapted from Table 40 in Lewis Cecil Gray, History of Agriculture in the Southern United States to 1860, vol. 2 (Gloucester, MA: Peter Smith, 1958), 1026. Original Data from United States Department of Agriculture, Atlas of American Agriculture, V, Sec. A, Cotton, Table IV, p. 18. Crop Year begins October 1 for 1790-1840 and July 1 for 1845-1860. Production is measured in equivalent 500-pound bales, gross weight.

Whitney and the Patent System

The story of the cotton gin is also significant in that it led to the first major test of the newly created United States patent system. The test was not only of the ability of the system to protect the rights of inventors, but also of how the courts would interpret what a patent protected and what it did not protect. In the case of the cotton gin, the patent system was immediately confronted with the reality that new innovations are not born in a state of eternal, or even temporary, perfection.

Almost immediately, Whitney and other gin users encountered problems with the use of his wire teeth, which were difficult to install properly and easily damaged in use. In a development of murky origins, cotton gin technology had quickly switched by 1800 to the use of a series of circular saws attached to the rotating cylinder. These “saw” gins (still the basis of short-staple ginning today) used the teeth of the rotating saws to pull the cotton fiber through the grate, instead of Whitney’s original wire teeth. As these events unfolded, Whitney claimed that he had originally thought of this alternative as well and that it was an obvious variation of his design and thus covered under his patent. The courts eventually ruled in Whitney’s favor, but it was the initial warning that patent law was going to be complicated.

Whitney’s ultimate problem, however, was that his attempt at factory production of his cotton gins in a New Haven, Connecticut facility was not feasible. Given the crude state of cotton gin design at this time, he could not make a machine that was any better than what a local craftsman could make. The alternative was licensing, that is, selling the right to copy Whitney’s patent to would-be cotton gin makers.

This task fell to Whitney’s business partner, Phineas Miller of Georgia, who sold the licenses, printed newspaper notices warning those who would infringe on the patent, and took some of the alleged violators to court. Miller did sell a number of licenses, and his activities undoubtedly at least forced non-licensed ginmakers in South Carolina and eastern Georgia to avoid publicity. Miller’s efforts, however, had little impact in the western cotton market developing around Natchez, Mississippi. Whitney moved on to fire arms production, and his patent expired in 1807 without making either he or Miller rich.

Whitney and Miller, however, would probably have become quite wealthy if factory-made cotton gins had been clearly superior by 1800. Monitoring the patent under these circumstances would have been much less costly, whether they were making the gins in New Haven, or factory licensees were making them in Savannah and Natchez. Even today, patent holders whose innovations are too easily copied will be overwhelmed by the legal costs of taking all the violators to court.

The Arrival of Factory-made Cotton Gins

Table 3 demonstrates that what Whitney was attempting was not impossible in theory, just too early in practice. The earliest successful cotton gin factories appeared in the 1820s, and by 1850 the six largest cotton gin manufacturers were making close to a half-million dollars worth of cotton gins per year. With this amount, these leading factories controlled around half of the total cotton gin market, a market share that was maintained after the Civil War as well.

Table 3
Output Value of the Six Largest Cotton Gin Manufacturing Firms

Year Value($)
1850 $428,250
1860 $703,250
1870 $823,800
1880 $839,777

Sources: Manuscript schedules and published volumes of the U.S. Manufacturing Census, 1850-1880, and information provided on 1850 Georgia production in George White, Historical Collections of Georgia (New York: Pudney and Russell, 1854). Microfilm copies of the surviving schedules for the Southern states found at the microfilm library, University of North Carolina-Chapel Hill. Microfilm copies of schedules for Connecticut and Massachusetts found at the respective state archives.

Small local gin makers continued to survive into the late 1800s, but increasingly they were unable to match the mechanical sophistication of factories that incorporated the latest improvements in gin technology as they appeared. Among the most notable of these early cotton gin manufacturers were: Eleazer Carver of Bridgewater, MA, Samuel Griswold of Jones County, GA, Daniel Pratt of Prattville, AL, Israel Brown of Columbus, GA (later New London, CT), Franklin Lummus of Juniper and Columbus, GA, and Benjamin Gullett of Aberdeen, MS (later Amite, LA). Started largely by New England mechanics who migrated to the South, the Southern cotton gin manufacturing sector was one of the few machinery industries that successfully competed against Northern firms during the nineteenth century.

Plantation Gins

Whether made by a local mechanic or in one of the later factories, cotton gins before the Civil War were primarily sold to farmers who installed them on their own property and used them to gin their own cotton. The newspapers of the time were full of the testimonials of planters discussing the merits of particular gins and how the processed fiber graded for price in the market. Gin makers for their part assured potential buyers in ads that they had thoroughly studied every aspect of proper gin design. They used only the best materials in their premium product, while at the same time offering economy models at a discounted price per saw (the standard measure of a cotton gin’s capacity).

During this period, the Patent Office approved many new patents on various improvements in the technology of cotton ginning, but progress was incremental, with no one innovation making other gins obsolete. The cumulative impact of the search for a better gin, however, was substantial. According to Lakwete (2003, pp. 146-47), early Whitney ginning operations could only turn out a quarter of a bale per day. But by the late 1850s, large-capacity steam powered gins could claim 5 to 6 bales per day.

The Rise of System Ginning

The turbulent Reconstruction era led to an increase in “custom” ginning across the Cotton South. Now tenant and small-acreage farmers did not purchase gins, but took their unginned “seed cotton” to a ginner who removed the seed for a fee. As the ginning operation might be connected to a supply store at which the farmer had run up a debt, crop liens (legal claims on the cotton filed by a lender) could leave the farmer with little or no saleable cotton. However, the concentration by location of the ginning process gave a boost to the new cottonseed industry. Farmers could now get extra cash by selling their surplus seed to nearby oil mills for pressing into cottonseed oil and meal.

But the biggest impact of custom ginning was that it focused the attention of innovators on how to maximize the efficiency of the entire process of ginning, rather than just the cotton gin itself. In the mid-1880s, Robert Munger of Texas developed “system” ginning, as seed cotton was fed continuously to multiple gin stands, from which the fiber went directly into pressing equipment for baling. This eventually ended once and for all the era of plantation gins and small cotton gin makers.

As seen in Table 4, the major cotton gin machinery firms in the late 1800s now patented systems for new ginning plants, sharply increasing patent activity by Southern inventors. Similar increases in ginning patents occurred among the major Northern firms. The possession of key patents was now essential for survival in cotton gin manufacturing, as ginning productivity increased rapidly and made older ginning machinery obsolete. At the ginning plant level, this meant that the most modern plants were now capable of processing all the cotton grown in an ever-widening radius around their location. Ginning operations had to upgrade their equipment or be quickly pushed out of business by more up-to-date competitors.

Table 4
Cotton Gin Patents in the Southern States, 1831-1890

Years Number of Patents
1831-40 5
1841-50 7
1851-60 53
1861-70 21
1871-80 109
1881-90 156
Total 351

Sources: William H. Phillips. “Making a Business of It: The Evolution of Southern Cotton Gin Patenting, 1831-90,” Agricultural History 68 (1994): 82. Original data from U.S. Patent Office, Annual Reports of the Commissioner of Patents (Washington, D.C.). Patents issued by the Confederate Patent Office during the Civil War are not included. The Southern States consist of the eleven states of the Confederacy plus West Virginia and Kentucky.

Conclusion

The modern process of cotton ginning continues across the Southern states where cotton is grown, but is now also located in the major cotton producing areas of the American Southwest and overseas. The machinery that even for small ginning plants costs several million dollars is made by a small number of technologically sophisticated firms, based on the designs of specialized engineers. In 1999 one of those firms, Lummus Corporation, relocated to Savannah, Georgia, bringing the history of short-staple cotton ginning back to its roots at Mulberry Grove Plantation.

Selected Bibliography

Aiken, Charles S. “The Evolution of Cotton Ginning in the Southeastern United States.” Geographical Review 63 (1973): 196-224.

Bennett, Charles A. Cotton Ginning Systems in the United States and Auxiliary Developments. Dallas: Cotton Gin and Oil Mill Press, 1962.

Britton, Karen Gerhardt. Bale o’ Cotton: The Mechanical Art of Cotton Ginning. College Station, TX: Texas A&M University Press, 1992.

DeWitte, Dave. “Lummus Cottons to Savannah.” Savannah Morning News. August 29, 1999.

Evans, Curtis J. The Conquest of Labor: Daniel Pratt and Southern Industrialization. Baton Rouge, LA.: Louisiana State University Press, 2001.

Gray, Lewis Cecil. History of Agriculture in the Southern United States to 1860, 2 vols. Gloucester, MA: Peter Smith, 1958.

Green, Constance McLaughlin. Eli Whitney and the Birth of American Technology. Boston: Little, Brown, and Co., 1956.

Lakwete, Angela. Inventing the Cotton Gin: Machine and Myth in Antebellum America. Baltimore: John Hopkins University Press, 2003.

Mirsky, Jeannette, and Allan Nevins. The World of Eli Whitney. New York: Macmillan, 1952.

Phillips, William H. “Making a Business of It: The Evolution of Southern Cotton Gin Patenting, 1831-90.” Agricultural History 68 (1994): 80-91.

Ransom, Roger L. and Richard Sutch. One Kind of Freedom: The Economic Consequences of Emancipation. Cambridge: Cambridge University Press, 1977.

Wrenn, Lynette Boney. Cinderella of the New South: A History of the Cottonseed Industry, 1855-1955. Knoxville, TN: University of Tennessee Press, 1995.

Citation: Phillips, William. “The Cotton Gin”. EH.Net Encyclopedia, edited by Robert Whaples. February 10, 2004. URL http://eh.net/encyclopedia/cotton-gin/

An Economic History of Copyright in Europe and the United States

B. Zorina Khan, Bowdoin College

Introduction

Copyright is a form of intellectual property that provides legal protection against unauthorized copying of the producer’s original expression in products such as art, music, books, articles, and software. Economists have paid relatively little scholarly attention to copyrights, although recent debates about piracy and “the digital dilemma” (free use of digital property) have prompted closer attention to theoretical and historical issues. Like other forms of intellectual property, copyright is directed to the protection of cultural creations that are nonrivalrous and nonexclusive in nature. It is generally proposed that, in the absence of private or public forms of exclusion, prices will tend to be driven down to the low or zero marginal costs and the original producer would be unable to recover the initial investment.

Part of the debate about copyright exists because it is still not clear whether state enforcement is necessary to enable owners to gain returns, or whether the producers of copyrightable products respond significantly to financial incentives. Producers of these public goods might still be able to appropriate returns without copyright laws or in the face of widespread infringement, through such strategies as encryption, cartelization, the provision of complementary products, private monitoring and enforcement, market segmentation, network externalities, first mover effects and product differentiation. Patronage, taxation, subsidies, or public provision, might also comprise alternatives to copyright protection. In some instances “authors” (broadly defined) might be more concerned about nonfinancial rewards such as enhanced reputations or more extensive diffusion.

During the past three centuries great controversy has always been associated with the grant of property rights to authors, ranging from the notion that cultural creativity should be rewarded with perpetual rights, through the complete rejection of any intellectual property rights at all for copyrightable commodities. However, historically, the primary emphasis has been on the provision of copyright protection through the formal legal system. Europeans have generally tended to adopt the philosophical position that authorship embodies rights of personhood or moral rights that should be accorded strong protections. The American approach to copyright has been more utilitarian: policies were based on a comparison of costs and benefits, and the primary emphasis of early copyright policies was on the advancement of public welfare. However, the harmonization of international laws has created a melding of these two approaches. The tendency at present is toward stronger enforcement of copyrights, prompted by the lobbying of publishers and the globalization of culture and commerce. Technological change has always exerted an exogenous force for change in copyright laws, and modern innovations in particular provoke questions about the extent to which copyright systems can respond effectively to such challenges.

Copyright in Europe

Copyright in France

In the early years of printing, books and other written matter became part of the public domain when they were published. Like patents, the grant of book privileges originated in the Republic of Venice in the fifteenth century, a practice which was soon prevalent in a number of other European countries. Donatus Bossius, a Milan author, petitioned the duke in 1492 for an exclusive privilege for his book, and successfully argued that he would be unjustly deprived of the benefits from his efforts if others were able to freely copy his work. He was given the privilege for a term of ten years. However, authorship was not required for the grant of a privilege, and printers and publishers obtained monopolies over existing books as well as new works. Since privileges were granted on a case by case basis, they varied in geographical scope, duration, and breadth of coverage, as well as in terms of the attendant penalties for their violation. Grantors included religious orders and authorities, universities, political figures, and the representatives of the Crown.

The French privilege system was introduced in 1498 and was well-developed by the end of the sixteenth century. Privileges were granted under the auspices of the monarch, generally for a brief period of two to three years, although the term could be as much as ten years. Protection was granted to new books or translations, maps, type designs, engravings and artwork. Petitioners paid formal fees and informal gratuities to the officials concerned. Since applications could only be sealed if the King were present, petitions had to be carefully timed to take advantage of his route or his return from trips and campaigns. It became somewhat more convenient when the courts of appeal such as the Parlement de Paris began to issue grants that were privileges in all but name, although this could lead to conflicting rights if another authority had already allocated the monopoly elsewhere. The courts sometimes imposed limits on the rights conferred, in the form of stipulations about the prices that could be charged. Privileges were property that could be assigned or licensed to another party, and their infringement was punished by a fine and at times confiscation of all the output of “pirates.”

After 1566, the Edict of Moulins required that all new books had to be approved and licensed by the Crown. Favored parties were able to get renewals of their monopolies that also allowed them to lay claim to works that were already in the public domain. By the late eighteenth century an extensive administrative procedure was in place that was designed to restrict the number of presses and engage in surveillance and censorship of the publishing industry. Manuscripts first had to be read by a censor, and only after a permit was requested and granted could the book be printed, although the permit could later be revoked if complaints were lodged by sufficiently influential individuals. Decrees in 1777 established that authors who did not alienate their property were entitled to exclusive rights in perpetuity. Since few authors had the will or resources to publish and distribute books, their privileges were likely to be sold outright to professional publishers. However, the law made a distinction in the rights accorded to publishers, because if the right was sold the privilege was only accorded a limited duration of at least ten years, the exact term to be determined in accordance with the value of the work, and once the publisher’s term expired, the work passed into the public domain. The fee for a privilege was thirty six livres. Approvals to print a work, or a “permission simple” which did not entail exclusive rights could also be obtained after payment of a substantial fee. Between 1700 and 1789, a total of 2,586 petitions for exclusive privileges were filed, and about two thirds were granted. The result was a system that resulted in “odious monopolies,” higher prices and greater scarcity, large transfers to officials of the Crown and their allies, and pervasive censorship. It likewise disadvantaged smaller book producers, provincial publishers, and the academic and broader community.

The French Revolutionary decrees of 1791 and 1793 replaced the idea of privilege with that of uniform statutory claims to literary property, based on the principle that “the most sacred, the most unassailable and the most personal of possessions is the fruit of a writer’s thought.” The subject matter of copyrights covered books, dramatic productions and the output of the “beaux arts” including designs and sculpture. Authors were required to deposit two copies of their books with the Bibliothèque Nationale or risk losing their copyright. Some observers felt that copyrights in France were the least protected of all property rights, since they were enforced with a care to protecting the public domain and social welfare. Although France is associated with the author’s rights approach to copyright and proclamations of the “droit d’auteur,” these ideas evolved slowly and hesitatingly, mainly in order to meet the self-interest of the various members of the book trade. During the ancien régime, the rhetoric of authors’ rights had been promoted by French owners of book privileges as a way of deflecting criticism of monopoly grants and of protecting their profits, and by their critics as a means of attacking the same monopolies and profits. This language was retained in the statutes after the Revolution, so the changes in interpretation and enforcement may not have been universally evident.

By the middle of the nineteenth century, French jurisprudence and philosophy tended to explicate copyrights in terms of rights of personality but the idea of the moral claim of authors to property rights was not incorporated in the law until early in the twentieth century. The droit d’auteur first appeared in a law of April 1910. In 1920 visual artists were granted a “droit de suite” or a claim to a portion of the revenues from resale of their works. Subsequent evolution of French copyright laws led to the recognition of the right of disclosure, the right of retraction, the right of attribution, and the right of integrity. These moral rights are (at least in theory) perpetual, inalienable, and thus can be bequeathed to the heirs of the author or artist, regardless of whether or not the work was sold to someone else. The self-interested rhetoric of the owners of monopoly privileges now fully emerged as the keystone of the “French system of literary property” that would shape international copyright laws in the twenty first century.

Copyright in England

England similarly experienced a period during which privileges were granted, such as a seven year grant from the Chancellor of Oxford University for an 1518 work. In 1557, the Worshipful Company of Stationers, a publishers’ guild, was founded on the authority of a royal charter and controlled the book trade for next one hundred and fifty years. This company created and controlled the right of their constituent members to make copies, so in effect their “copy right” was a private property right that existed in perpetuity, independently of state or statutory rights. Enforcement and regulation were carried out by the corporation itself through its Court of Assistants. The Stationers’ Company maintained a register of books, issued licenses, and sanctioned individuals who violated their regulations. Thus, in both England and France, copyright law began as a monopoly grant to benefit and regulate the printers’ guilds, and as a form of surveillance and censorship over public opinion on behalf of the Crown.

The English system of privileges was replaced in 1710 by a copyright statute (the “Statute of Anne” or “An Act for the Encouragement of Learning, by Vesting the Copies of Printed Books in the Authors or Purchasers of Such Copies, During the Times Therein Mentioned,” 1709-10, 8 Anne, ch. 19.) The statute was not directed toward the authors of books and their rights. Rather, its intent was to restrain the publishing industry and destroy its monopoly power. According to the law, the grant of copyright was available to anyone, not just to the Stationers. Instead of a perpetual right, the term was limited to fourteen years, with a right of renewal, after which the work would enter the public domain. The statute also permitted the importation of books in foreign languages.

Subsequent litigation and judicial interpretation added a new and fundamentally different dimension to copyright. In order to protect their perpetual copyright, publishers tried to promote the idea that copyright was based on the natural rights of authors or creative individuals and, as the agent of the author, those rights devolved to the publisher. If indeed copyrights derived from these inherent principles, they represented property that existed independently of statutory provisions and could be protected under common law. The booksellers engaged in a series of strategic litigation that culminated in their defeat in the landmark case, Donaldson v. Beckett [98 Eng. Rep. 257 (1774)]. The court ruled that authors had a common law right in their unpublished works, but on publication that right was extinguished by the statute, whose provisions determined the nature and scope of any copyright claims. This transition from publisher’s rights to statutory author’s rights implied that copyright had transmuted from a straightforward license to protect monopoly profits into an expanding property right whose boundaries would henceforth increase at the expense of the public domain.

Between 1735 and 1875 fourteen Acts of Parliament amended the copyright legislation. Copyrights extended to sheet music, maps, charts, books, sculptures, paintings, photographs, dramatic works and songs sung in a dramatic fashion, and lectures outside of educational institutions. Copyright owners had no remedies at law unless they complied with a number of stipulations which included registration, the payment of fees, the delivery of free copies of every edition to the British Museum (delinquents were fined), as well as complimentary copies for four libraries, including the Bodleian and Trinity College. The ubiquitous Stationers’ Company administered registration, and the registrar personally benefited from the monetary fees of 5 shillings when the book was registered and an equal amount for each assignment and each copy of an entry, along with one shilling for each entry searched. Foreigners could only obtain copyrights if they presented themselves in a part of the British Empire at the time of publication. The book had to be published in the United Kingdom, and prior publication in a foreign country – even in a British colony – was an obstacle to copyright protection.

The term of the copyright in books was for the longer of 42 years from publication or the lifetime of the author plus seven years, and after the death of the author a compulsory license could be issued to ensure that works of sufficient public benefit would be published. The “work for hire” doctrine was in force for books, reviews, newspapers, magazines and essays unless a distinct contractual clause specified that the copyright was to accrue to the author. Similarly, unauthorized use of a publication was permitted for the purposes of “fair use.” Only the copyright holder and his agents were allowed to import the protected works into Britain.

The British Commission that reported on the state of the copyright system in 1878 felt that the laws were “obscure, arbitrary and piecemeal” and were compounded by the confused state of the common law. The numerous uncoordinated laws that were simultaneously in force led to conflicts and unintended defects in the system. The report discussed but did not recommend an alternative to the grant of copyrights, in the form of a royalty system where “any person would be entitled to copy or republish the work on paying or securing to the owner a remuneration, taking the form of royalty or definite sum prescribed by law.” The main benefit would be to be public in the form of early access to cheap editions, whereas the main cost would be to the publishers whose risk and return would be negatively affected.

The Commission noted that the implications for the colonies were “anomalous and unsatisfactory.” The publishers in England practiced price discrimination, modifying the initial high prices for copyrighted material through discounts given to reading clubs, circulating libraries and the like, benefits which were not available in the colonies. In 1846 the Colonial Office acknowledged “the injurious effects produced upon our more distant colonists” and passed the Foreign Reprints Act in the following year. This allowed the colonies who adopted the terms of British copyright legislation to import cheap reprints of British copyrighted material with a tariff of 12.5 percent, the proceeds of which were to be remitted to the copyright owners. However, enforcement of the tariff seems to have been less than vigorous since, between 1866 and 1876 only £1155 was received from the 19 colonies who took advantage of the legislation (£1084 from Canada which benefited significantly from the American reprint trade). The Canadians argued that it was difficult to monitor imports, so it would be more effective to allow them to publish the reprints themselves and collect taxes for the benefit of the copyright owners. This proposal was rejected, but under the Canadian Copyright Act of 1875 British copyright owners could obtain Canadian copyrights for Canadian editions that were sold at much lower prices than in Britain or even in the United States.

The Commission made two recommendations. First, the bigger colonies with domestic publishing facilities should be allowed to reprint copyrighted material on payment of a license to be set by law. Second, the benefits to the smaller colonies of access to British literature should take precedence over lobbies to repeal the Foreign Reprints Act, which should be better enforced rather than removed entirely. Some had argued that the public interest required that Britain should allow the importation of cheap colonial reprints since the high prices of books were “altogether prohibitory to the great mass of the reading public” but the Commission felt that this should only be adopted with the consent of the copyright owner. They also devoted a great deal of attention to what was termed “The American Question” but took the “highest public ground” and recommended against retaliatory policies.

Copyright in the United States

Colonial Copyright

In the period before the Declaration of Independence individual American states recognized and promoted patenting activity, but copyright protection was not considered to be of equal importance, for a number of reasons. First, in a democracy the claims of the public and the wish to foster freedom of expression were paramount. Second, to a new colony, pragmatic concerns were likely of greater importance than the arts, and the more substantial literary works were imported. Markets were sufficiently narrow that an individual could saturate the market with a first run printing, and most local publishers produced ephemera such as newspapers, almanacs, and bills. Third, it was unclear that copyright protection was needed as an incentive for creativity, especially since a significant fraction of output was devoted to works such as medical treatises and religious tracts whose authors wished simply to maximize the number of readers, rather than the amount of income they received.

In 1783, Connecticut became the first state to approve an “Act for the encouragement of literature and genius” because “it is perfectly agreeable to the principles of natural equity and justice, that every author should be secured in receiving the profits that may arise from the sale of his works, and such security may encourage men of learning and genius to publish their writings; which may do honor to their country, and service to mankind.” Although this preamble might seem to strongly favor author’s rights, the statute also specified that books were to be offered at reasonable prices and in sufficient quantities, or else a compulsory license would issue.

Federal Copyright Grants

Despite their common source in the intellectual property clause of the U.S. Constitution, copyright policies provided a marked contrast to the patent system. According to Wheaton v. Peters, 33 U.S. 591, 684 (1834): “It has been argued at the bar, that as the promotion of the progress of science and the useful arts is here united in the same clause in the constitution, the rights of the authors and inventors were considered as standing on the same footing; but this, I think, is a non sequitur, for when congress came to execute this power by legislation, the subjects are kept distinct, and very different provisions are made respecting them.”

The earliest federal statute to protect the product of authors was approved on May 31 1790, “for the encouragement of learning, by securing the copies of maps, charts, and books to the authors and proprietors of such copies, during the times therein mentioned.” John Barry obtained the first federal copyright when he registered his spelling book in the District Court of Pennsylvania, and early grants reflected the same utilitarian character. Policy makers felt that copyright protection would serve to increase the flow of learning and information, and by encouraging publication would contribute to democratic principles of free speech. The diffusion of knowledge would also ensure broad-based access to the benefits of social and economic development. The copyright act required authors and proprietors to deposit a copy of the title of their work in the office of the district court in the area where they lived, for a nominal fee of sixty cents. Registration secured the right to print, publish and sell maps, charts and books for a term of fourteen years, with the possibility of an extension for another like term. Amendments to the original act extended protection to other works including musical compositions, plays and performances, engravings and photographs. Legislators refused to grant perpetual terms, but the length of protection was extended in the general revision of the laws in 1831, and 1909.

In the case of patents, the rights of inventors, whether domestic or foreign, were widely viewed as coincident with public welfare. In stark contrast, policymakers showed from the very beginning an acute sensitivity to trade-offs between the rights of authors (or publishers) and social welfare. The protections provided to authors under copyrights were as a result much more limited than those provided by the laws based on moral rights that were applied in many European countries. Of relevance here are stipulations regarding first sale, work for hire, and fair use. Under a moral rights-based system, an artist or his heirs can claim remedies if subsequent owners alter or distort the work in a way that allegedly injures the artist’s honor or reputation. According to the first sale doctrine, the copyright holder lost all rights after the work was sold. In the American system, if the copyright holder’s welfare were enhanced by nonmonetary concerns, these individualized concerns could be addressed and enforced through contract law, rather than through a generic federal statutory clause that would affect all property holders. Similarly, “work for hire” doctrines also repudiated the right of personality, in favor of facilitating market transactions. For example, in 1895 Thomas Donaldson filed a complaint that Carroll D. Wright’s editing of Donaldson’s report for the Census Bureau was “damaging and injurious to the plaintiff, and to his reputation” as a scholar. The court rejected his claim and ruled that as a paid employee he had no rights in the bulletin; to rule otherwise would create problems in situations where employees were hired to prepare data and statistics.

This difficult quest for balance between private and public good was most evident in the copyright doctrine of “fair use” that (unlike with patents) allowed unauthorized access to copyrighted works under certain conditions. Joseph Story ruled in [Folsom v. Marsh, 9 F. Cas. 342 (1841)]: “we must often, in deciding questions of this sort, look to the nature and objects of the selections made, the quantity and value of the materials used, and the degree in which the use may prejudice the sale, or diminish the profits, or supersede the objects, of the original work.” One of the striking features of the fair use doctrine is the extent to which property rights were defined in terms of market valuations, or the impact on sales and profits, as opposed to a clear holding of the exclusivity of property. Fair use doctrine thus illustrates the extent to which the early policy makers weighed the costs and benefits of private property rights against the rights of the public and the provisions for a democratic society. If copyrights were as strictly construed as patents, it would serve to reduce scholarship, prohibit public access for noncommercial purposes, increase transactions costs for potential users, and inhibit learning which the statutes were meant to promote.

Nevertheless, like other forms of intellectual property, the copyright system evolved to encompass improvements in technology and changes in the marketplace. Technological changes in nineteenth-century printing included the use of stereotyping which lowered the costs of reprints, improvements in paper making machinery, and the advent of steam powered printing presses. Graphic design also benefited from innovations, most notably the development of lithography and photography. The number of new products also expanded significantly, encompassing recorded music and moving pictures by the end of the nineteenth century; and commercial television, video recordings, audiotapes, and digital music in the twentieth century.

The subject matter, scope and duration of copyrights expanded over the course of the nineteenth century to include musical compositions, plays, engravings, sculpture, and photographs. By 1910 the original copyright holder was granted derivative rights such as to translations of literary works into other languages; to performances; and the rights to adapt musical works, among others. Congress also lengthened the term of copyright several times, although by 1890 the term of copyright protection in Greece and the United States were the most abbreviated in the world. New technologies stimulated change by creating new subjects for copyright protection, and by lowering the costs of infringement of copyrighted works. In Edison v. Lubin, 122 F. Cas. 240 (1903), the lower court rejected Edison’s copyright of moving pictures under the statutory category of photographs. This decision was overturned by the appellate court: “[Congress] must have recognized there would be change and advance in making photographs, just as there has been in making books, printing chromos, and other subjects of copyright protection.” Copyright enforcement was largely the concern of commercial interests, and not of the creative individual. The fraction of copyright plaintiffs who were authors (broadly defined) was initially quite low, and fell continuously during the nineteenth century. By 1900-1909, only 8.6 percent of all plaintiffs in copyright cases were the creators of the item that was the subject of the litigation. Instead, by the same period, the majority of parties bringing cases were publishers and other assignees of copyrights.

In 1909 Congress revised the copyright law and composers were given the right to make the first mechanical reproductions of their music. However, after the first recording, the statute permitted a compulsory license to issue for copyrighted musical compositions: that is to say, anyone could subsequently make their own recording of the composition on payment of a fee that was set by the statute at two cents per recording. In effect, the property right was transformed into a liability rule. The next major legislative change in 1976 similarly allowed compulsory licenses to issue for works that are broadcast on cable television. The prevalence of compulsory licenses for copyrighted material is worth noting for a number of reasons: they underline some of the statutory differences between patents and copyrights in the United States; they reflect economic reasons for such distinctions; and they are also the result of political compromises among the various interest groups that are affected.

Allied Rights

The debate about the scope of patents and copyrights often underestimates or ignores the importance of allied rights that are available through other forms of the law such as contract and unfair competition. A noticeable feature of the case law is the willingness of the judiciary in the nineteenth century to extend protection to noncopyrighted works under alternative doctrines in the common law. More than 10 percent of copyright cases dealt with issues of unfair competition, and 7.7 percent with contracts; a further 12 percent encompassed issues of right to privacy, trade secrets, and misappropriation. For instance, in Keene v. Wheatley et al., 14 F. Cas. 180 (1860), the plaintiff did not have a statutory copyright in the play that was infringed. However, she was awarded damages on the basis of her proprietary common law right in an unpublished work, and because the defendants had taken advantage of a breach of confidence by one of her former employees. Similarly, the courts offered protection against misappropriation of information, such as occurred when the defendants in Chamber of Commerce of Minneapolis v. Wells et al., 111 N.W. 157 (1907) surreptitiously obtained stock market information by peering in windows, eavesdropping, and spying.

Several other examples relate to the more traditional copyright subject of the book trade. E. P. Dutton & Company published a series of Christmas books which another publisher photographed, and offered as a series with similar appearance and style but at lower prices. Dutton claimed to have been injured by a loss of profits and a loss of reputation as a maker of fine books. The firm did not have copyrights in the series, but they essentially claimed a right in the “look and feel” of the books. The court agreed: “the decisive fact is that the defendants are unfairly and fraudulently attempting to trade upon the reputation which plaintiff has built up for its books. The right to injunctive relief in such a case is too firmly established to require the citation of authorities.” In a case that will resonate with academics, a surgery professor at the University of Pennsylvania was held to have a common law property right in the lectures he presented, and a student could not publish them without his permission. Titles could not be copyrighted, but were protected as trade marks and under unfair competition doctrines. In this way, in numerous lawsuits G. C. Merriam & Co, the original publishers of Webster’s Dictionary, restrained the actions of competitors who published the dictionary once the copyrights had expired.

International Copyrights in the United States

The U.S. was long a net importer of literary and artistic works, especially from England, which implied that recognition of foreign copyrights would have led to a net deficit in international royalty payments. The Copyright Act recognized this when it specified that “nothing in this act shall be construed to extend to prohibit the importation or vending, reprinting or publishing within the United States, of any map, chart, book or books … by any person not a citizen of the United States.” Thus, the statutes explicitly authorized Americans to take free advantage of the cultural output of other countries. As a result, it was alleged that American publishers “indiscriminately reprinted books by foreign authors without even the pretence of acknowledgement.” The tendency to reprint foreign works was encouraged by the existence of tariffs on imported books that ranged as high as 25 percent.

The United States stood out in contrast to countries such as France, where Louis Napoleon’s Decree of 1852 prohibited counterfeiting of both foreign and domestic works. Other countries which were affected by American piracy retaliated by refusing to recognize American copyrights. Despite the lobbying of numerous authors and celebrities on both sides of the Atlantic, the American copyright statutes did not allow for copyright protection of foreign works for fully one century. As a result, American publishers and producers freely pirated foreign literature, art, and drama.

Effects of Copyright Piracy

What were the effects of piracy? First, did the American industry suffer from cheaper foreign books being dumped on the domestic market? This does not seem to have been the case. After controlling for the type of work, the cost of the work, and other variables, the prices of American books were lower than prices of foreign books. American book prices may have been lower to reflect lower perceived quality or other factors that caused imperfect substitutability between foreign and local products. As might be expected, prices were not exogenously and arbitrarily fixed, but varied in accordance with a publisher’s estimation of market factors such as the degree of competition and the responsiveness of demand to determinants. The reading public appears to have gained from the lack of copyright, which increased access to the superior products of more developed markets in Europe, and in the long run this likely improved both the demand and supply of domestic science and literature.

Second, according to observers, professional authorship in the United States was discouraged because it was difficult to compete with established authors such as Scott, Dickens and Tennyson. Whether native authors were deterred by foreign competition would depend on the extent to which foreign works prevailed in the American market. Early in American history the majority of books were reprints of foreign titles. However, nonfiction titles written by foreigners were less likely to be substitutable for nonfiction written by Americans; consequently, the supply of nonfiction soon tended to be provided by native authors. From an early period grammars, readers, and juvenile texts were also written by Americans. Geology, geography, history and similar works would have to be adapted or completely rewritten to be appropriate for an American market which reduced their attractiveness as reprints. Thus, publishers of schoolbooks, medical volumes and other nonfiction did not feel that the reforms of 1891 were relevant to their undertakings. Academic and religious books are less likely to be written for monetary returns, and their authors probably benefited from the wider circulation that lack of international copyright encouraged. However, the writers of these works declined in importance relative to writers of fiction, a category which grew from 6.4 percent before 1830 to 26.4 percent by the 1870s.

On the other hand, foreign authors dominated the field of fiction for much of the century. One study estimates about fifty percent of all fiction best sellers in antebellum period were pirated from foreign works. In 1895 American authors accounted for two of the top ten best sellers but by 1910 nine of the top ten were written by Americans. This fall over time in the fraction of foreign authorship may have been due to a natural evolutionary process, as the development of the market for domestic literature over time encouraged specialization. The growth in fiction authors was associated with the increase in the number of books per author over the same period. Improvements in transportation and the increase in the academic population probably played a large role in enabling individuals who lived outside the major publishing centers to become writers despite the distance. As the market expanded, a larger fraction of writers could become professionals.

Although the lack of copyright protection may not have discouraged authors, this does not imply that intellectual property policy in this dimension had no costs. It is likely that the lack of foreign copyrights led to some misallocation of efforts or resources, such as in attempting to circumvent the rules. Authors changed their residence temporarily when books were about to be published in order to qualify for copyright. Others obtained copyrights by arranging to co-author with a foreign citizen. T. H. Huxley adopted this strategy, arranging to co-author with “a young Yankee friend … Otherwise the thing would be pillaged at once.” An American publisher suggested that Kipling should find “a hack writer, whose name would be of use simply on account of its carrying the copyright.” Harriet Beecher Stowe proposed a partnership with Elizabeth Gaskell, so they could “secure copyright mutually in our respective countries and divide the profits.”

It is widely acknowledged that copyrights in books tended to be the concern of publishers rather than of authors (although the two are naturally not independent of each other). As a result of lack of legal copyrights in foreign works, publishers raced to be first on the market with the “new” pirated books, and the industry experienced several decades of intense, if not quite “ruinous” competition. These were problems that publishers in England had faced before, in the market for books that were uncopyrighted, such as Shakespeare and Fielding. Their solution was to collude in the form of strictly regulated cartels or “printing congers.” The congers created divisible property in books that they traded, such as a one hundred and sixtieth share in Johnson’s Dictionary that was sold for £23 in 1805. Cooperation resulted in risk sharing and a greater ability to cover expenses. The unstable races in the United States similarly settled down during the 1840s to collusive standards that were termed “trade custom” or “courtesy of the trade.”

The industry achieved relative stability because the dominant firms cooperated in establishing synthetic property rights in foreign-authored books. American publishers made payments (termed “copyrights”) to foreign authors to secure early sheets, and other firms recognized their exclusive property in the “authorized reprint”. Advance payments to foreign authors not only served to ensure the coincidence of publishers’ and authors’ interests – they were also recognized by “reputable” publishers as “copyrights.” These exclusive rights were tradable, and enforced by threats of predatory pricing and retaliation. Such practices suggest that publishers were able to simulate the legal grant through private means.

However, private rights naturally did not confer property rights that could be enforced at law. The case of Sheldon v. Houghton 21 F. Cas 1239 (1865) illustrates that these rights were considered to be “very valuable, and is often made the subject of contracts, sales, and transfers, among booksellers and publishers.” The very fact that a firm would file a plea for the court to protect their claim indicates how vested a right it had become. The plaintiff argued that “such custom is a reasonable one, and tends to prevent injurious competition in business, and to the investment of capital in publishing enterprises that are of advantage to the reading public.” The courts rejected this claim, since synthetic rights differed from copyrights in the degree of security that was offered by the enforcement power of the courts. Nevertheless, these title-specific of rights exclusion decreased uncertainty, enabled publishers to recoup their fixed costs, and avoided the wasteful duplication of resources that would otherwise have occurred.

It was not until 1891 that the Chace Act granted copyright protection to selected foreign residents. Thus, after a century of lobbying by interested parties on both sides of the Atlantic, based on reasons that ranged from the economic to the moral, copyright laws only changed when the United States became more competitive in the international market for literary and artistic works. However, the act also included significant concessions to printers’ unions and printing establishments in the form of “manufacturing clauses.” First, a book had to be published in the U.S. before or at the same time as the publication date in its country of origin. Second, the work had to be printed here, or printed from type set in the United States or from plates made from type set in the United States. Copyright protection still depended on conformity with stipulations such as formal registration of the work. These clauses resulted in U.S. failure to qualify for admission to the international Berne Convention until 1988, more than one hundred years after the first Convention.

After the copyright reforms in 1891, both English and American authors were disappointed to find that the change in the law did not lead to significant gains. Foreign authors realized they may even have benefited from the lack of copyright protection in the United States. Despite the cartelization of publishing, competition for these synthetic copyrights ensured that foreign authors were able to obtain payments that American firms made to secure the right to be first on the market. It can also be argued that foreign authors were able to reap higher total returns from the expansion of the market through piracy. The lack of copyright protection may have functioned as a form of price discrimination, where the product was sold at a higher price in the developed country, and at a lower or zero price in the poorer country. Returns under such circumstances may have been higher for goods with demand externalities or network effects, such as “bestsellers” where consumer valuation of the book increased with the size of the market. For example, Charles Dickens, Anthony Trollope, and other foreign writers were able to gain considerable income from complementary lecture tours in the extensive United States market.

Harmonization of Copyright Laws

In view of the strong protection accorded to inventors under the U.S. patent system, to foreign observers its copyright policies appeared to be all the more reprehensible. The United States, the most liberal in its policies towards patentees, had led the movement for harmonization of patent laws. In marked contrast, throughout the history of the U.S. system, its copyright grants in general were more abridged than almost all other countries in the world. The term of copyright grants to American citizens was among the shortest in the world, the country applied the broadest interpretation of fair use doctrines, and the validity of the copyright depended on strict compliance with the requirements. U.S. failure to recognize the rights of foreign authors was also unique among the major industrial nations. Throughout the nineteenth century proposals to reform the law and to acknowledge foreign copyrights were repeatedly brought before Congress and rejected. Even the bill that finally recognized international copyrights almost failed, only passed at the last possible moment, and required longstanding exemptions in favor of workers and printing enterprises.

In a parallel fashion to the status of the United States in patent matters, France’s influence was evident in the subsequent evolution of international copyright laws. Other countries had long recognized the rights of foreign authors in national laws and bilateral treaties, but France stood out in its favorable treatment of domestic and foreign copyrights as “the foremost of all nations in the protection it accords to literary property.” This was especially true of its concessions to foreign authors and artists. For instance, France allowed copyrights to foreigners conditioned on manufacturing clauses in 1810, and granted foreign and domestic authors equal rights in 1852. In the following decade France entered into almost two dozen bilateral treaties, prompting a movement towards multilateral negotiations, such as the Congress on Literary and Artistic Property in 1858. The International Literary and Artistic Association, which the French novelist Victor Hugo helped to establish, conceived of and organized the Convention which first met in Berne in 1883.

The Berne Convention included a number of countries that wished to establish an “International Union for the Protection of Literary and Artistic Works.” The preamble declared their intent to “protect effectively, and in as uniform a manner as possible, the rights of authors over their literary and artistic works.” The actual Articles were more modest in scope, requiring national treatment of authors belonging to the Union and minimum protection for translation and public performance rights. The Convention authorized the establishment of a physical office in Switzerland, whose official language would be French. The rules were revised in 1908 to extend the duration of copyright and to include modern technologies. Perhaps the most significant aspect of the convention was not its specific provisions, but the underlying property rights philosophy which was decidedly from the natural rights school. Berne abolished compliance with formalities as a prerequisite for copyright protection since the creative act itself was regarded as the source of the property right. This measure had far-reaching consequences, because it implied that copyright was now the default, whereas additions to the public domain would have to be achieved through affirmative actions and by means of specific limited exemptions. In 1928 the Berne Convention followed the French precedent and acknowledged the moral rights of authors and artists.

Unlike its leadership in patent conventions, the United States declined an invitation to the pivotal copyright conference in Berne in 1883; it attended but refused to sign the 1886 agreement of the Berne Convention. Instead, the United States pursued international copyright policies in the context of the weaker Universal Copyright Convention (UCC), which was adopted in 1952 and formalized in 1955 as a complementary agreement to the Berne Convention. The UCC membership included many developing countries that did not wish to comply with the Berne Convention because they viewed its provisions as overly favorable to the developed world. The United States was among the last wave of entrants into the Berne Convention when it finally joined in 1988. In order to do so it complied by removing prerequisites for copyright protection such as registration, and also lengthened the term of copyrights. However, it still has not introduced federal legislation in accordance with Article 6bis, which declares the moral rights of authors “independently of the author’s economic rights, and even after the transfer of the said rights.” Similarly, individual countries continue to differ in the extent to which multilateral provisions governed domestic legislation and practices.

The quest for harmonization of intellectual property laws resulted in a “race to the top,” directed by the efforts and self interest of the countries which had the strongest property rights. The movement to harmonize patents was driven by American efforts to ensure that its extraordinary patenting activity was remunerated beyond as well as within its borders. At the same time, the United States ignored international conventions to unify copyright legislation. Nevertheless, the harmonization of copyright laws proceeded, promoted by France and other civil law regimes which urged stronger protection for authors based on their “natural rights” although at the same time they infringed on the rights of foreign inventors. The net result was that international pressure was applied to developing countries in the twentieth century to establish strong patents and strong copyrights, although no individual developed country had adhered to both concepts simultaneously during their own early growth phase. This occurred even though theoretical models did not offer persuasive support for intellectual property harmonization, and indeed suggested that uniform policies might be detrimental even to some developed countries and to overall global welfare.

Conclusion

The past three centuries stand out in terms of the diversity across nations in intellectual property institutions, but the nineteenth century saw the origins of the movement towards the “harmonization” of laws that at present dominates global debates. Among the now-developed countries, the United States stood out for its conviction that broad access to intellectual property rules and standards was key to achieving economic development. Europeans were less concerned about enhancing mass literacy and public education, and viewed copyright owners as inherently meritorious and deserving of strong protection. European copyright regimes thus evolved in the direction of author’s rights, while the United States lagged behind the rest of the world in terms of both domestic and foreign copyright protection.

By design, American statutes differentiated between patents and copyrights in ways that seemed warranted if the objective was to increase social welfare. The patent system early on discriminated between nonresident and domestic inventors, but within a few decades changed to protect the right of any inventor who filed for an American patent regardless of nationality. The copyright statutes, in contrast, openly encouraged piracy of foreign goods on an astonishing scale for one hundred years, in defiance of the recriminations and pressures exerted by other countries. The American patent system required an initial search and examination that ensured the patentee was the “first and true” creator of the invention in the world, whereas copyrights were granted through mere registration. Patents were based on the assumption of novelty and held invalid if this assumption was violated, whereas essentially similar but independent creation was copyrightable. Copyright holders were granted the right to derivative works, whereas the patent holder was not. Unauthorized use of patented inventions was prohibited, whereas “fair use” of copyrighted material was permissible if certain conditions were met. Patented inventions involved greater initial investments, effort, and novelty than copyrighted products and tended to be more responsive to material incentives; whereas in many cases cultural goods would still be produced or only slightly reduced in the absence of such incentives. Fair use was not allowed in the case of patents because the disincentive effect was likely to be higher, while the costs of negotiation between the patentee and the more narrow market of potential users would generally be lower. If copyrights were as strongly enforced as patents it would benefit publishers and a small literary elite at the cost of social investments in learning and education.

The United States created a utilitarian market-based model of intellectual property grants which created incentives for invention, but always with the primary objective of increasing social welfare and protecting the public domain. The checks and balances of interest group lobbies, the legislature and the judiciary worked effectively as long as each institution was relatively well-matched in terms of size and influence. However, a number of legal and economic scholars are increasingly concerned that the political influence of corporate interests, the vast number of uncoordinated users over whom the social costs are spread, and international harmonization of laws have upset these counterchecks, leading to over-enforcement at both the private and public levels.

International harmonization with European doctrines introduced significant distortions in the fundamental principles of American copyright and its democratic provisions. One of the most significant of these changes was also one of the least debated: compliance with the precepts of the Berne Convention accorded automatic copyright protection to all creations on their fixation in tangible form. This rule reversed the relationship between copyright and the public domain that the U.S. Constitution stipulated. According to original U.S. copyright doctrines, the public domain was the default, and copyright merely comprised a limited exemption to the public domain; after the alignment with Berne, copyright became the default, and the rights of the public and of the public domain now merely comprise a limited exception to the primacy of copyright. The pervasive uncertainty that characterizes the intellectual property arena today leads risk-averse individuals and educational institutions to err on the side of abandoning their right to free access rather than invite potential challenges and costly litigation. A number of commentators are equally concerned about other dimensions of the globalization of intellectual property rights, such as the movement to emulate European grants of property rights in databases, which has the potential to inhibit diffusion and learning.

Copyright law and policy has always altered and been altered by social, economic and technological changes, in the United States and elsewhere. However, the one constant feature across the centuries is that copyright protection involves crucial political questions to a far greater extent than its economic implications.

Additional Readings

Economic History

B. Zorina Khan. The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920. New York: Cambridge University Press, 2005.

Law and Economics

Besen, Stanley, and L. Raskind. “An Introduction to the Law and Economics of Intellectual Property.” Journal of Economic Perspectives 5 (1991): 3-27.

Breyer, Stephen. “The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies and Computer Programs.” Harvard Law Review 84 (1970): 281-351.

Gallini, Nancy and S. Scotchmer. “Intellectual Property: When Is It the Best Incentive System?” Innovation Policy and the Economy 2 (2002): 51-78.

Gordon, Wendy, and R. Watt, editors. The Economics of Copyright: Developments in Research and Analysis. Cheltenham, UK: Edward Elgar, 2002.

Hurt, Robert M., and Robert M. Shuchman. “The Economic Rationale of Copyright.” American Economic Review Papers and Proceedings 56 (1966): 421-32.

Johnson, William R. “The Economics of Copying.” Journal of Political Economy 93 (1985): 1581-74.

Landes, William M., and Richard A. Posner. “An Economic Analysis of Copyright Law.” Journal of Legal Studies 18 (1989): 325-63.

Landes, William M., and Richard A. Posner. The Economic Structure of Intellectual Property Law. Cambridge, MA: Harvard University Press, 2003.

Liebowitz, S. J. “Copying and Indirect Appropriability: Photocopying of Journals.” Journal of Political Economy 93 (1985): 945-57.

Merges, Robert P. “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations.” California Law Review 84, no. 5 (1996): 1293-1393.

Meurer, Michael J. “Copyright Law and Price Discrimination.” Cardozo Law Review 23 (2001): 55-148.

Novos, Ian E., and Michael Waldman. “The Effects of Increased Copyright Protection: An Analytic Approach.” Journal of Political Economy 92 (1984): 236-46.

Plant, Arnold. “The Economic Aspects of Copyright in Books.” Economica 1 (1934): 167-95.

Takeyama, L. “The Welfare Implications of Unauthorized Reproduction of Intellectual Property in the Presence of Demand Network Externalities.” Journal of Industrial Economics 42 (1994): 155–66.

Takeyama, L. “The Intertemporal Consequences of Unauthorized Reproduction of Intellectual Property.” Journal of Law and Economics 40 (1997): 511–22.

Varian, Hal. “Buying, Sharing and Renting Information Goods.” Journal of Industrial Economics 48, no. 4 (2000): 473–88.

Varian, Hal. “Copying and Copyright.” Journal of Economic Perspectives 19, no. 2 (2005): 121-38.

Watt, Richard. Copyright and Economic Theory: Friends or Foes? Cheltenham, UK: Edward Elgar, 2000.

History of Economic Thought

Hadfield, Gilliam K. “The Economics of Copyright: A Historical Perspective.” Copyright Law Symposium (ASCAP) 38 (1992): 1-46.

History

Armstrong, Elizabeth. Before Copyright: The French Book-Privilege System, 1498-1526. Cambridge: Cambridge University Press, 1990.

Birn, Raymond. “The Profits of Ideas: Privileges en librairie in Eighteenth-century France.” Eighteenth-Century Studies 4, no. 2 (1970-71): 131-68.

Bugbee, Bruce. The Genesis of American Patent and Copyright Law. Washington, DC: Public Affairs Press, 1967.

Dawson, Robert L. The French Booktrade and the “Permission Simple” of 1777: Copyright and the Public Domain. Oxford: Voltaire Foundation, 1992.

Hackett, Alice P., and James Henry Burke. Eighty Years of Best Sellers, 1895-1975. New York: Bowker, 1977.

Nowell-Smith, Simon. International Copyright Law and the Publisher in the Reign of Queen Victoria. Oxford: Clarendon Press, 1968.

Patterson, Lyman. Copyright in Historical Perspective. Nashville: Vanderbilt University Press, 1968.

Rose, Mark. Authors and Owners: The Invention of Copyright. Cambridge: Harvard University Press, 1993.

Saunders, David. Authorship and Copyright. London: Routledge, 1992.

Citation: Khan, B. “An Economic History of Copyright in Europe and the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/an-economic-history-of-copyright-in-europe-and-the-united-states/

Economic Interests and the Adoption of the United States Constitution

Robert A. McGuire, University of Akron

The adoption of the Constitution greatly strengthened the national government at the expense of the states. This article examines how our Founding Fathers designed the Constitution, examining findings on the political and economic factors behind the provisions included in the Constitution and its ratification. The article discusses the views of Charles Beard and his critics and focuses on recent quantitative findings that explain the making of the Constitution. These findings suggest that personal interests of the Founding Fathers, as well as constituents’ interests, played an important role in drafting the Constitution. They also suggest that economic and other interests played important roles at the ratifying conventions.

The Adoption of the Constitution

During the summer of 1787, fifty-five men attended the constitutional convention in Philadelphia that drafted the Constitution of the United States. In less than a year after the convention finished, New Hampshire, on June 21, 1788, became the ninth state to have ratified the Constitution that was drafted. As a result, Congress declared the Constitution to be in force beginning March 4, 1789, because ratification by only nine of the thirteen states was required for the Constitution to be considered adopted by the ratifying states. The Constitution thus replaced the Articles of Confederation and Perpetual Union as the law of the land. Under the Articles, which had been in effect only since 1781, the American political system consisted of a loose confederation of largely independent states with a very weak central government. Under the Constitution, the Articles were replaced with a political system that consisted of a powerful central government with, ultimately, little state sovereignty.

Fiscal and Economic Problems under the Articles of Confederation

Under the Articles of Confederation, the central (federal) government had little or no power to raise revenues and had difficulty repaying its domestic and foreign debt. The fiscal problems under the Articles were twofold. First, the primary source of revenues to fund the federal government was requisitions to the state governments asking them to send to the federal government state-collected tax revenues. Yet the Articles did not include any enforcement mechanism to ensure that the state governments would send in the full amount of the funds requested of them, which they never did. Second, each state had a single vote in the federal Congress and the unanimous consent of the thirteen states was required for the Congress to enact any federal taxes. A single state could thus block federal tax legislation. This de facto veto power on the part of each state created substantial decision-making costs for Congress and prevented proposed federal imposts (import duties) from being enacted under the Articles. The central government also lacked the legal power to enforce uniform commercial or trade regulations – either at home or abroad – that might have been conducive to the development of a common economic trading area. Likewise, the Confederation government possessed uncertain authority to deal with foreign powers. Its problems raising revenues and repaying existing debts created uncertainty about the financial viability of the federal government. Although state and local interference in trade was not a major problem at the time, many commercial interests apparently feared that local and state barriers to trade could develop in the future under the Articles of Confederation. Western landowners also were often impatient with the federal government because of its inability to establish order on the frontiers.

How the Constitution Strengthened the Power of the Central Government

Under the Constitution, the power to tax, along with the authority to settle past federal debts, was firmly delegated to the central (national) government, improving the central government’s financial future as well as improving capital markets (the markets for funds). The Constitution, unlike the Articles, required only a simple majority vote of the representatives in both chambers of the national Congress to enact tax legislation. There were, and are, checks on simple majority voting though. The president can veto congressional legislation and a two-thirds vote in Congress can override the presidential veto. But neither of these constraints on majority voting creates the magnitude of decision-making costs that unanimous voting under the Articles created. The assignment of the sole right “To coin money, [and] regulate the value thereof,” to the national government and the prohibition on states from emitting “bills of credit” (paper money) also were expected to improve capital markets. A national judiciary was created under the Constitution and the power to make treaties with foreign nations was firmly delegated to the central government.

How a Strong Central Government Affected the Economy

With respect to interstate trade, Gary M. Walton and James F. Shepherd (1979) suggest “the possibility of such barriers [to interstate commerce] loomed as a threat until the Constitution specifically granted the regulation of interstate commerce to the federal government” (pp. 187-88). Walton and Shepherd conclude that the most important changes associated with the Constitution “were those changes that strengthened the framework for protection of private property and enforcement of contracts” (pp. 187-88). These changes were most important because they increased the benefits of exchange (the cornerstone of a market economy) and created incentives for individuals to specialize in economic activities in which they had a particular advantage and then engage in mutually advantageous exchange (trade) with individuals specializing in other economic activities. Specific provisions in the Constitution that helped to increase the benefits of exchange were those that prohibited the national and state governments from enacting ex-post-facto laws (retroactive laws) and a provision that prohibited the state governments from passing any “law impairing the obligation of contracts.” These prohibitions were important to the development of a market economy because they constrained governments from interfering in economic exchange, making the returns to economic activity more secure.

Because the economies of the thirteen states were not highly interconnected in the 1780s, the immediate consequences for the nation of adopting the Constitution were not at all large. But the change in our fundamental political institution was ultimately to have a profound influence on our nation’s history, because the Constitution over time became the foundation of the supremacy of the national government in the United States.

The “Important Question”: How Did Constitutional Change Come About?

How did this fundamental change come about? Why did our nation’s Founding Fathers replace the Articles of Confederation, our first “constitution,” with the United States Constitution? In defending the Constitution in late 1787, Alexander Hamilton observed “It has been frequently remarked that it seems to have been reserved to the people of this country . . . to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend for their political constitutions on accident and force” (Hamilton, Jay and Madison, 1937, No. 1, p. 3). To paraphrase Hamilton: How did “this country” decide “the important question”?

Since the middle of the nineteenth century, hundreds of scholars have studied and debated the possible explanations for such an important change in the fundamental political institution of our nation. Many historians have concluded that the Constitution was drafted and adopted as a result of a consensus that the Articles of Confederation were fatally flawed. Other scholars have argued that the limitations of the Articles could have been eliminated without fundamentally altering the balance of power between the states and the central government. Others have suggested that the adoption of the Constitution was the product of conflict between various economic and financial interests within the nation, a conflict between those who, because of their interests, wanted a strengthened, more powerful national government and those who, because of their interests, did not.

Charles Beard’s “Economic” Interpretation

In 1913, Charles A. Beard (1913 [1935]) consolidated various scholarly views of the Constitution and, in the process, offered what became identified as “the” economic interpretation of the Constitution. Beard (pp. 16-18) argued that the formation of the Constitution was a conflict based upon competing economic interests – interests of both the proponents and opponents. In his view, the Federalists, the founders who supported a strong, centralized government and favored the Constitution during its drafting and ratification, were individuals whose primary economic interests were tied to personal property. They were mainly merchants, shippers, bankers, speculators, and private and public securities holders, according to Beard (pp. 31-51). The Anti-federalists, the opponents of the Constitution and supporters of a more decentralized government, were individuals whose primary economic interests were tied to real property. Beard (pp. 26-30) contended these opponents consisted primarily of more isolated, less-commercial farmers, who often were also debtors, and northern manorial planters along the Hudson River. However, Beard (pp. 29-30) maintained that many southern slaveowning planters, who held much of their wealth in personal property, had much in common with northern merchants and financiers, and should be included as supporters of the Constitution.

Beard (pp. 31-51) claimed that support for his argument could be found in the economic conditions prevailing during the 1780s. As a result, he suggested that the primary beneficiaries under the Constitution would have been individuals with commercial and financial interests – particularly, those with public securities holdings who, according to Beard, had a clause included in the Constitution requiring the assumption of existing federal debt by the new national government. Commercial and financial interests also would benefit because of more certainty in the rules of commerce, trade, and credit markets under the Constitution. More isolated less-commercial farmers, debtors, paper money advocates, and the northern planters along the Hudson would be the primary beneficiaries under the status quo. They would have had greater ability at the state level with decentralized government to avoid heavy land taxation – levied to pay off the public debt – and to promote paper money and debt moratorium issues that advanced their interests. Consequently, they opposed the Constitution.

Criticisms of Beard’s View: Brown and McDonald

Beard’s thesis soon emerged as the standard historical interpretation and remained so until the 1950s, when it began to face serious scholarly challenges. The most influential and lasting of the challenges were those by Robert E. Brown (1956) and Forrest McDonald (1958). Robert E. Brown’s (1956) critique dismisses an economic interpretation as utterly without merit, attacking Beard’s conclusions in their entirety. Brown counters Beard’s views that eighteenth-century America was not very democratic, that the wealthy were strong supporters of the Constitution, and that those without personal property generally opposed the Constitution. Brown examines the support for the Constitution among various economic and social classes, the democratic nature of the nation, and the franchise within the states in eighteenth-century America. He maintains that Beard was plain wrong, eighteenth-century America was democratic, the franchise was common, and there was widespread support for the Constitution.

In contrast, Forrest McDonald’s (1958) study empirically examines the wealth, economic interests, and the votes of the delegates to the constitutional convention in Philadelphia that drafted the Constitution in 1787 and of the delegates to the thirteen ratifying conventions that considered its adoption afterward. McDonald’s primary interest is in testing Charles A. Beard’s thesis. Based on his evidence collected from the Philadelphia convention, McDonald (1958, p. 110) concludes, “anyone wishing to rewrite the history of those proceedings largely or exclusively in terms of the economic interests represented there would find the facts to be insurmountable obstacles.” With respect to the ratification of the Constitution, McDonald (1958. p. 357) likewise concludes, “On all counts, then, Beard’s thesis is entirely incompatible with the facts.”

Neither Brown nor McDonald, however, offered any modern rigor (no formal or statistical analysis of any type) in testing the behavior of the Founding Fathers during the drafting or ratification of the Constitution. Yet Brown and McDonald are still credited by many with delivering the fatal blows to Beard’s economic interpretation of the Constitution. (Examples of economists, historians, political scientists, and legal scholars who credit Brown and McDonald, or both, with proving Beard incorrect include Buchanan and Tullock (1962), Wood (1969), Riker (1987), and Ackerman (1991).

The New Quantitative Approach

Recently economic historians have begun to reexamine the behavior of our Founding Fathers concerning the Constitution. This reexamination, which employs formal economics and modern statistical techniques, involves the application of an economic model of voting behavior during the drafting and ratification processes and the collection and processing of large amounts of data on the economic and financial interests and other characteristics of the men who drafted and ratified the Constitution. The findings of this reexamination, which have become the accepted view among quantitative economic historians today (Robert Whaples, 1995), provide answers to many heretofore-unresolved issues involving the adoption of the Constitution.

What factors explain the behavior of George Washington, James Madison, Alexander Hamilton, and the other Founding Fathers regarding the Constitution? Why did they include a prohibition on state paper-money issues in the Constitution? Why did they decide to allow for duties (taxes) on imports but not on exports? Why did they fail to adopt a clause giving the national government an absolute veto over state laws? Were the economic, financial, and other interests of the founders significant factors in their support for the Constitution, or their support for specific clauses in it, or their support for ratification? Were, for example, the slaveholdings of the founders a significant factor in their behavior? Were the founders’ commercial activities significant factors? Were the private or public securities holdings significant factors?

The Rational Choice Model

The critical reexamination of the adoption of the Constitution, which began in the mid-1980s (Robert A. McGuire and Robert L. Ohsfeldt, 1984), offers an economic model of the founders that is based on rational choice and methodological individualism, and employs formal statistical techniques. Methodologically, such an approach analyzes the choices of the individuals involved in the drafting and ratification of the Constitution. The object of analysis is the behavior of the individual Founding Fathers not the behavior of some social class or group. The economic model presumes that a founder was motivated by self-interest to maximize the satisfaction he received from the choices he made at the constitutional convention attended. But neither self-interest nor economic rationality implies that a founder was concerned only with his financial or material well-being. The economic model indicates that a founder weighed the benefits (the satisfaction) and the costs (the sacrifice) to himself of his actions, making those choices that were in his self-interest, broadly defined to include any pecuniary and non-pecuniary benefits and costs of his choices. This is the presumption of rational choice.

Personal and Constituent Interests

More precisely, the economic model is that a founder acted individually to maximize the net benefit he received from his votes. A founder would have voted in favor of a particular issue at Philadelphia, or in favor of ratification, if he expected the net benefit he would receive would have been greater if the issue, or the Constitution, was adopted. Because a founder was from a particular state or locality, the founder represented the citizens (the constituents) of the state or locality in which he resided as well as represented his own personal interests at Philadelphia or a ratifying convention. The benefit of a founder’s vote was affected directly by the anticipated impact of his vote on his personal interests and indirectly by the anticipated impact of his vote on his constituents’ interests. A founder’s personal interests depended on his own economic interests and ideology and his constituent interests depended on the economic interests and ideologies of his constituents. The interests may have been purely economic (pecuniary interests, such as the ownership or value of specific economic assets) or ideological (non-pecuniary interests, such as beliefs about the moral correctness of a particular form of government). The potential effect of personal interests on a founder’s vote is straightforward; the founder would have benefited or been harmed directly. The potential effect of constituents’ interests on a founder’s vote is through the impact of his vote on the potential for maintaining his decision-making authority, continuing to represent his constituents.

Statistical Tests

To quantitatively test the economic model, the founders’ observed votes on a particular issue at Philadelphia or on ratification are statistically related to measures of the economic interests and ideologies of the founders and their constituents. The statistical technique employed is called multivariate logistic regression. Estimation of a logistic regression model is designed to determine the marginal or incremental impact of each explanatory variable – the measures of the economic interests and ideologies – on the dependent variable – the “yes” or “no” votes on a particular issue at Philadelphia or ratification. The estimated logistic regression produces for each explanatory variable an estimated coefficient that captures the influence (its direction and magnitude) of the explanatory variable on the probability of a founder voting in favor of the issue being estimated, holding the influence of all other explanatory variables constant. The benefit of this approach is that each potential factor, each explanatory variable, affecting a vote is examined separately from the influence of the other factors, while at the same time, controlling for the influence of the other factors. This reduces to a minimum the incidence of spurious relationships between any particular factor and a vote. For example, if the relationship between the vote on an issue and the founders’ slaveholdings is examined in isolation, a positive correlation may be indicated. But if other interests are taken into account (for example, the founders’ public securities holdings), the correlation with slaveholdings could change and, in fact, be negative.

The modern economic history of the Constitution indicates that Charles Beard’s economic interpretation has not yet been refuted. The issues, in fact, have not been heretofore tested. Earlier historical studies did not have the benefit of modern economic methodology and systematic statistical analysis. As such, their conclusions cannot pass scientific scrutiny. Major advances in both economic thinking about political behavior and statistical techniques have taken place in the last thirty or so years. These modern methods allow for a systematic quantitative analysis of the voting behavior of the founders employing, among other data and evidence, the types of non-quantitative data about the founders that historians collected decades ago but never systematically analyzed. They failed to systematically analyze such data and evidence because the necessary techniques did not exist and because they generally were not trained in quantitative analysis.

Findings of the Quantitative Approach: A New Economic Interpretation of the Constitution

One unambiguous conclusion can be drawn from the recent quantitative studies: There is a valid economic interpretation of the Constitution. The idea of self-interest can explain the design and adoption of the Constitution. This does not mean that either the framers or the ratifiers of the Constitution were motivated by a greedy desire to “line their own pockets” or by some dialectic concept of “class interests.” Nor does it mean that some “conspiracy among the founders” or some fatalistic concept of “economic determinism” explains the Constitution. Nor does it mean that the founders were completely selfish in a purely financial or material sense. It does mean that the pursuit of one’s “interests” both in a narrow, pecuniary (financial) sense and a broader, non-pecuniary sense can explain the drafting and ratification of the Constitution. (See McGuire (2001).)

The recent quantitative studies contend that the Constitution was neither drafted nor ratified by a group of disinterested and nonpartisan demigods motivated only, or even primarily, by high-minded political principles to promote the nation’s interest. The fifty-five delegates to the Philadelphia convention that drafted the Constitution during the summer of 1787 were motivated by self-interest, in a broad sense, in choosing its design. Quantitative research suggests that these framers of the Constitution can be seen as rational individuals who were making choices in designing the fundamental rules of governance for the nation. In doing so, they rationally weighed the expected costs and benefits of each clause they considered. They included a particular clause in the Constitution only if they expected the benefits from its inclusion to exceed the costs they expected to result from inclusion. Likewise, the more than 1,600 delegates who participated in the thirteen state ratifying conventions, which took place between 1787 and 1790 to consider adopting the Constitution, can be viewed as rational individuals who were making the choice to adopt the set of rules embodied in the Constitution as drafted at the Philadelphia Constitutional Convention. In doing so, they rationally weighed the expected costs and benefits of their decision to ratify. They voted to ratify only if the benefits they expected from adoption of the set of rules embodied in the Constitution exceeded the costs they expected to result from that set of rules. If not, they voted against ratification.

Contrary to earlier views that the founders’ specific economic or financial interests cannot be principally identified with one side or the other of an issue, the modern evidence indicates that their economic and financial interests can be so identified. When specific issues arose at the Philadelphia convention that had a direct impact on important economic interests of the founders, their economic interests, even narrowly defined, significantly influenced the specific design of the Constitution, and the magnitudes of the influences were often quite large. The types of economic interests that mattered for the choice of specific issues were those that were likely to have accounted for a substantial portion of the overall wealth or represent the primary livelihood of the founders.

Even when the founders were deciding on the general issue of the basic design of the Constitution to strengthen the national government, economic and other interests significantly influenced them. In terms used in constitutional political economics, even when the founders were making fundamental “constitutional” choices rather than more specific-interest “operational” choices, the modern evidence indicates their choices were still consistent with self-interested and partisan behavior. In terms used among legal scholars, even when the founders were involved in the “higher lawmaking” of the “constitutional founding,” they were still self-interested and partisan. Partisan behavior explains even this “constitutional moment.” However, the modern evidence does indicate that fewer economic and financial interests mattered for the basic design of the Constitution than for specific-interest aspects of it.

Specific Empirical Findings from the Constitutional Convention and the Ratifying Conventions

Financial Securities

The financial securities holdings of the founders often had a significantly large influence on their behavior and founders with such financial assets were often aligned with each other on the same issue. These findings are in contrast to a strongly held view among many historical scholars that the founders’ financial securities holdings had little or no influence on their behavior or that these founders were not aligned on common issues. For a small number of the issues considered at the Philadelphia convention, the founders’ financial securities holdings mattered. Moreover, during the ratification process, the financial securities holdings had a major influence. Specifically, delegates with private securities holdings (private creditors) or public securities holdings (public creditors), and especially delegates with large amounts of public securities holdings (generally, Revolutionary War debt), were significantly more likely to vote in favor of ratification.

This does not mean that all securities-holding delegates voted together at the constitutional conventions. What it does mean is that the holdings of financial securities, controlling for other influences, significantly increased the probability of supporting some of the issues at the Philadelphia convention, particularly those issues that strengthened the central government (or weakened the state governments). For example, one issue that the securities holders were more likely to have supported was a proposal to absolutely prohibit state governments from issuing paper money. This means that the securities holders (creditors) at the convention desired to constrain the states’ ability to inflate away the value of their financial holdings through expansion of the supply of state paper money. Not surprisingly, the twelve founders at Philadelphia with private securities holdings voted unanimously in favor of the prohibition. Likewise, those with public securities holdings were significantly more likely to have favored it. The evidence indicates that a founder at Philadelphia with any public securities holdings, who at the same time possessed the average values of all other interests represented at the convention, was 26.5 percent more likely to vote yes than was an otherwise average delegate with no public securities holdings. With respect to the ratification process, a delegate’s financial securities holdings, controlling for other influences, significantly increased his probability of voting in favor of ratification at his state convention. An implication that can be drawn from this evidence is that to the extent some delegates with financial securities holdings did not support strengthening the central government, or did not vote for ratification, it was the effects of their other interests that influenced them to vote “no.”

Slaveowners

The view of many historical scholars is that delegates who were slaveowners and those who represented slave areas generally supported strengthening the central government and supported ratifying the Constitution. While this may be correct as far as it goes, the issue of the influence of slaveholdings on the behavior of the Founding Fathers, as is the influence of any factor, is actually more complex. The quantitative evidence indicates that, although a majority of the slaveowners and a majority of the delegates from slave areas, may have, in fact, voted for issues strengthening the central government or voted for ratification, the actual influence of slaveholdings or representing slave areas per se was to significantly decrease a delegate’s likelihood of voting for strengthening the central government or voting for ratification.

As with the findings for financial securities holdings, this does not mean that all slaveholding delegates or all delegates from slave areas voted together at the various constitutional conventions. What it does mean for the Philadelphia constitutional convention is that slaveholdings, controlling for other influences, decreased the probability of voting at the convention for issues that would have strengthened the central government. For example, one issue that slaveholders at Philadelphia were less likely to have supported was a proposal that would have given the national legislature an absolute veto over state laws, which would have greatly strengthened the central government. This means that if the national veto had been put into the Constitution at Philadelphia, which it was not, the national Congress, especially if it had a majority of non-slaveholding representatives, could have vetoed state laws concerning slavery, for example. This would have given the national Congress the power to limit the economic viability of slavery, if it so chose. Not surprisingly, the evidence suggests that a delegate at Philadelphia who owned the most slaves at the convention, for example, and had average values of all other interests, was one-twelfth as likely to have voted yes on the national veto than an otherwise average delegate with no slaveholdings. Likewise, during the ratification process, slaveholdings, controlling for other influences, significantly decreased the probability of voting in favor of ratification at the state ratifying conventions. An implication from this evidence is that in the case of the slaveholding delegates and the delegates from slave areas, who did vote to strengthen the central government or did vote for ratification, it was the effects of their other interests that influenced them to vote “yes.”

Commercial Interests

The modern evidence confirms that the framers and the ratifiers of the Constitution, who were from the more commercial areas of their states, were likely to have voted differently from individuals from the less commercial areas. Delegates who were from the more commercial areas were significantly more likely to have voted for clauses in the Constitution that strengthened the central government and were significantly more likely to have voted for ratification in the ratifying conventions. The Founding Fathers who were from the more isolated, less commercial areas of their states were significantly less likely to support strengthening the central government and significantly less likely to vote for ratification.

Local and State Office Holders

But surprisingly, the findings for the ratification of the Constitution strongly conflict with the nearly unanimous prevailing scholarly view that the localism and parochialism of local and state officeholders were major factors in the opposition to the Constitution’s ratification. The modern quantitative evidence, in fact, indicates that there were no significant relationships whatsoever between any measure of local or state office holding and the ratification vote in any ratifying convention for which the data on officeholders were collected.

The Founders Mattered: How the Constitution Would Have Been Different If Men with Different Interests Had Written It

One of the more important findings of the modern approach to the adoption of the Constitution is that it makes evident the importance to historical outcomes of the specific individuals involved in any historical process. The modern evidence attests to the paramount importance of the specific political actors involved in the American constitutional founding. The estimated magnitudes of the influences of many of the economic, financial, and other interests on the founders’ behavior are large enough that the findings suggest the product of the constitutional founding most likely would have been dramatically different had men with dramatically different interests been involved.

For example, had all the founders at Philadelphia represented a state with a population the size of the most populous state, and possessed the average values of all other interests represented at Philadelphia, the Constitution most certainly would have contained a clause giving the national government an absolute veto over all state laws. If the national veto had been put into the Constitution, which it was not, and representation in the national Congress was based on the population of a state, which it was and is in the House of Representatives, rather than each state possessing an equal vote as under the Articles, representatives from the most populous states could have controlled legislative outcomes. This would have given “large” states potential control over the “small” states. As might be expected, the modern findings indicate that the predicted probability of voting yes on the national veto for a founder at Philadelphia who represented the most populous state and possessed the average values of all other interests is 0.837. But the predicted probability for an “average” delegate, one with the average values of all measured interests including state population, is only 0.379.

Or, had all the founders at Philadelphia represented a state with the heaviest concentration of slaves of all states, and possessed the average values of all other interests, the Constitution likely would have contained a clause requiring a two-thirds majority of the national legislature to enact any commercial laws. If the two-thirds majority requirement had been put into the Constitution, which it was not, it would have been more difficult to enact commercial laws, laws that could have regulated the slave-based export economies of the southern states. The two-thirds requirement would have made it much more difficult for a future northern majority to impact negatively on the southern economy through commercial regulation. Again, as might be expected, the modern findings indicate that the predicted probability of a yes vote on the two-thirds issue for an otherwise “average” founder who represented a state with the heaviest concentration of slaves is 0.914; but it is only 0.206 for an “average” founder. The Constitution also might not have contained a clause prohibiting the national legislature from enacting export duties (taxes) had there been no delegates with merchant interests at the Philadelphia convention; there might have been only a fifty-fifty chance of passing the prohibition. The predicted probability of a yes vote to prohibit national-level export duties for an otherwise “average” delegate without merchant interests is 0.505. But it is 0.790 for an otherwise “average” delegate with merchant interests, and nine of the Founding Fathers at the Philadelphia convention had merchant interests.

Interests of the Ratifiers Mattered

With respect to ratification, the quantitative evidence indicates that the magnitudes of the influences of the economic and other interests on the ratification votes were even more considerable than for the Philadelphia convention. The outcome of ratification appears to have depended even more on the specific individuals involved. The estimated influences were considerable enough that they suggest the outcome of ratification almost certainly would have been different had men with different interests attended the ratifying conventions. Had there been, among the ratifiers, fewer merchants, more debtors, more slaveowners, more delegates from the less-commercial areas, or more delegates belonging to dissenting religions, there would have been no ratification of the Constitution, at least no ratification as the Constitution was written. For example, at the Massachusetts ratifying convention, the predicted probability of a yes vote on ratification for an otherwise “average” delegate who was a debtor is only 0.175 but if the same delegate was not a debtor it is 0.624. For an otherwise “average” Baptist, the predicted probability of a yes vote is only 0.162 but if the Massachusetts delegate was not a Baptist it is 0.657. At the North Carolina ratifying convention, the predicted probability of a yes vote for an otherwise “average” delegate who was not a merchant is 0.175 but if the same delegate was a merchant it is 0.924. For an otherwise “average” North Carolina delegate from the least commercial areas in the state, the predicted probability of a yes vote is a trivial 0.002 but if the delegate was from the most commercial areas in the state it is 0.753. At the Virginia ratifying convention, the predicted probability of a yes vote for an otherwise “average” slaveowner is 0.451 but if the otherwise “average” delegate was not a slaveowner it is 0.837. Differences of these magnitudes suggest that ratification of the Constitution strongly depended on the specific economic, financial, and other interests of the specific individuals who attended the state conventions.

Broader Implications for Constitution Making

Overall, the modern approach to explaining the design and adoption of the Constitution suggests that it is unlikely that any real world constitution would ever be drafted or ratified through a disinterested and nonpartisan process. Because actual constitutional settings will always involve political actors who possess partisan interests and who likely will be able to predict the consequences of their decisions; partisan interests will influence constitutional choice. The economic history of the drafting and ratification of our nation’s Constitution makes it hard to envision any actual constitutional setting, including any setting to reform existing constitutions, in which self-interested and partisan behavior would not dominate. The modern evidence suggests that constitutions are the products of the interests of those who design and adopt them.

The Statistical Approach versus the Traditional Approach

Much of the differences between the modern evidence and the evidence found in the traditional historical literature is a matter of the approach taken, as well as the questions asked, rather than a matter of arriving at fundamentally different answers to identical questions. Many studies in the traditional literature question an economic interpretation of the Constitution because they question whether the Constitution is strictly an economic document designed solely to promote specific economic interests. Of course, it was not designed merely to promote economic interests. Many others question an economic interpretation because they question whether the founders were really attempting to solely, or even to principally, enhance their personal wealth, or the wealth of those they represented, as a result of adopting the Constitution. Of course, the founders were not. Others question an economic interpretation because they question whether the founders were really involved in a conspiracy to promote specific economic interests. Of course, they were not. Others question an economic interpretation because they question whether political principles, philosophies, and beliefs can be ignored in an attempt to understand the design of the Constitution. Of course, they cannot. In contrast, the modern economic history of the Constitution does not take any of these positions.

Yet the conclusions drawn from the modern evidence on the role of the economic, financial, and other interests of the founders are fundamentally different from the conclusions found in the traditional literature. The primary reason is that the statistical technique employed in the modern reexamination yields estimates of the separate influence of a particular economic interest or other factor on the founders’ behavior (how they voted) taking into account, and controlling for, the influence of other interests and factors on the founders’ behavior. The traditional literature nearly always draws conclusions about how the majority of the delegates with a particular interest – for example, how the majority of public securities holding delegates – voted on a particular issue, without regard to the influence of other interests and factors on behavior and without any formal statistical analysis. Prior studies, consequently, do not control for the confounding influences of other factors when drawing conclusions about any particular factor. As a result, the modern reexamination and the prior studies will often reach different conclusions about the influence of the same economic interest or other factor on the founders’ behavior. The conclusions differ because in a sense the studies are asking different questions. The modern economic history of the Constitution asks: How did a particular economic interest (for example, slaveholdings) per se influence the founders’ voting behavior taking into account all the influences of other factors on those founders’ voting behavior (for example, the slaveholding founders)? Prior historical studies more simply ask: How many of the founders with a particular economic interest (for example, founders with slaveholdings) voted the same on a particular issue?

The modern approach to the adoption of the Constitution may be disquieting to individuals of all political persuasions. It may be personally difficult for many to embrace. The evidence suggests motivating factors and intent on the part of our Founding Fathers that may be distasteful to conservatives, moderates, and liberals alike, to those on the left, in the middle, and on the right. The methodology employed, rational choice and methodological individualism, will be acceptable to some. But methodological individualism and a presumption of rational choice are likely to be troublesome to others. Some may have difficulty because an economic approach to the adoption of the Constitution appears “too calculating.” To some, it may appear “too deterministic” or “too economic.” Yet it actually is a dispassionate, almost antiseptic, view of the founders. It does not offer a special approach to the behavior of the founders because of the unique position reserved for them in our nation’s history. It treats them as it would any political actor. The modern approach represents an impartial, disinterested explanation of the behavior of our Founding Fathers, employing what are today commonly accepted techniques of economic and statistical analysis. Yet many individuals tend to look at our Founding Fathers through rose-colored glasses. They often place the founders on a pedestal and treat them as demigods. Many contend that the founders were motivated primarily, if not solely, by high-minded political principles “To Form a More Perfect Union.” The modern approach takes a broader view.

Annotated References

Ackerman, Bruce. We the People, two volumes. Cambridge, MA: The Belknap Press of Harvard University Press, 1991.

A view of the American constitutional founding by an eminent legal scholar. Ackerman offers a “dualist” theory of the founders’ politics in an attempt to recover the “true” revolutionary character of the founders, contending they were “dualist democrats.” Given this dualism, it is claimed that the founders behaved differently during “constitutional politics” than during “normal politics.” The founders thus were able to suspend their self-interests during the framing of the Constitution and promote instead the “rights of citizens and the permanent interests of the community.” Dismisses an economic interpretation as not serious. Indicates how a modern legal scholar thinks about the issues. Not a quantitative study.

Beard, Charles A. An Economic Interpretation of the Constitution of the United States. New York, NY: Macmillan Publishing Company, 1913 (1935).

A must read. The classic study of economics and the Constitution. Beard consolidated existing scholarly views and, in the process, his study became identified as “the” economic interpretation of the Constitution. Argues that the adoption of the Constitution was based on a conflict among competing economic interests. Contends that the founders who supported the strong, centralized government in the Constitution were merchants, shippers, bankers, land speculators, or private and/or public securities holders. Contends that the opponents, who supported a more decentralized government, represented agrarian interests and were less-commercial farmers, who often were also debtors, and/or northern planters along the Hudson. Contains little empirical evidence. Offers no formal or quantitative analysis.

Brown, Robert E. Charles Beard and the Constitution: A Critical Analysis of An Economic Interpretation of the Constitution. Princeton, NJ: Princeton University Press, 1956.

The first significant blow to Beard after nearly a half-century of acceptance. Dismisses an economic interpretation as utterly without merit, attacking its conclusions in their entirety. Brown maintains that eighteenth-century America was democratic, the franchise was common, and there was widespread support for the Constitution, claiming that his evidence counters Beard’s contention about the lack of democracy and the narrow support for the Constitution. Brown accuses Beard of taking the Philadelphia debates out of context, falsely editing The Federalist, and misstating facts. Not an empirical study per se. Offers no formal or quantitative analysis of the economic or financial interests of the founders.

Buchanan, James M., and Gordon Tullock. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor, MI: University of Michigan Press, 1962.

An important read. The first modern attempt by economists to develop an economic theory of constitutions. The premise is that citizens rationally devise constitutions, which contain the fundamental rules of governance to be used for future collective decisions in a society. As constitutions specify the constraints placed on governments and individuals, they establish the incentive structure for the future. Buchanan and Tullock maintain that it is in the self-interest of rational citizens to adopt a constitution that contains economically “efficient” rules that promote the interests of the society as a whole rather than the interests of any particular group. Suggests that the theory is applicable to the American founding. No empirical evidence is presented, however.

Elliot, Jonathan, editor. The Debates in the Several State Conventions on the Adoption of the Federal Constitution as Recommended by the General Convention at Philadelphia, in 1787, 5 volumes. Philadelphia, PA: J. B. Lippincott, 1836 (1888).

Worth perusing. Contains a record of the speeches and debates during the ratification process at most of the state ratifying conventions, as well as numerous other documents and correspondence pertaining to the Constitution’s ratification and drafting. The original source of information on what was said at the constitutional conventions. Elliot’s “Debates” are a most illuminating source of information concerning the views of both the supporters and opponents of the Constitution. Contains a record of the debates over ratification in the ratifying conventions in Massachusetts, New York, Pennsylvania, Virginia, South Carolina, and North Carolina. Contains only small fragments of the debates in the ratifying conventions in Connecticut, New Hampshire, and Maryland. No debates from the other four state ratifying conventions are included.

Farrand, Max, editor. The Records of the Federal Convention of 1787, 3 volumes. New Haven, CT: Yale University Press, 1911.

Worth perusing. Reputably the best source of information concerning what took place at the Philadelphia Constitutional Convention in 1787. Contains copies of the official journal of the convention; James Madison’s highly respected notes of the entire proceedings; the diaries, notes, and memoranda of seven others (Alexander Hamilton, Rufus King, George Mason, James McHenry, William Pierce, William Paterson, and Robert Yates); the Virginia and the New Jersey plans of government presented at the convention; several documents recording the work of the Committee of Detail that wrote the first draft of the Constitution; a list of the framers, their attendance records, whether they signed the Constitution, and for thirteen of the sixteen non-signing framers whether the debates indicated they favored or opposed the Constitution; and hundreds of letters and correspondence of many of the framers and their contemporaries.

Hamilton, Alexander, John Jay, and James Madison. The Federalist: A Commentary on the Constitution of the United States, Being a Collection of Essays written in Support of the Constitution agreed upon September 17, 1787, by the Federal Convention. New York, NY: The Modern Library, 1937.

A must read to understand the arguments put forth by the contemporary supporters of the Constitution. Commonly referred to today as The Federalist Papers, a collection of eighty-five essays written, between October 1787 and May 1788, under the pseudonym “Publius,” in support of the Constitution during the ratification debate in New York, seventy-seven of which originally appeared in the New York press. They appeared in book form in the spring of 1788 and it was soon after revealed that Alexander Hamilton, James Madison, and John Jay collectively wrote them. Given the “Papers” were part of a political campaign to win ratification, they should not be considered unbiased interpretations of the Constitution. Yet because Hamilton and, especially, Madison, the “Father” of the Constitution, were both at the Philadelphia convention that drafted the Constitution and Jay was a renowned lawyer, The Federalist soon became the authoritative interpretation of the intention of the framers as well as the meaning of the Constitution. Still viewed as such today by many but some scholars readily acknowledge the biased political nature of their conception.

Jensen, Merrill. The Making of the Constitution. New York, NY: Van Nostrand, 1964.

A culmination of more than two decades of scholarship on constitutional history and the Confederation period. Presents an interesting view of the issues. Concludes that many of the framers “who agreed on ultimate goals differed as to the means of achieving them, and they tended to reflect the interests of their states and their sections when those seemed in conflict with such goals.” Suggests that throughout the Philadelphia convention the framers expressed their common belief that men conducting public business must be restrained from using their influence to further their private interests. Jensen’s conclusion about the controversy over Charles Beard is especially revealing, as he maintains that the founders would have been bewildered because they “took for granted the existence of a direct relationship between the economic life of a state or nation and its government.” Not a study of economic interests, however.

Jillson, Calvin C. Constitution Making: Conflict and Consensus in the Federal Convention of 1787. New York, NY: Agathon Press, 1988.

An argument for the importance of economic and other interests by a respected political scientist. Employs modern statistical techniques to describe the voting alignments among the states at the Philadelphia convention. The findings indicate that many of the long recognized voting alignments existed over many of the issues considered at Philadelphia. Concludes that issues of basic constitutional design were decided on the basis of principle, whereas specific economic and political interests decided votes involving more specific issues. Is limited though because it does not use explicit data to measure economic or other interests. Employs the historical literature to categorize the interests of the states represented at the convention and then tests whether the states voted together on particular issues, concluding that when they did, economic or political interests mattered. Employs fairly sophisticated statistical techniques. Concerns issues of interest mainly to political scientists, voting alignments and coalition formation.

McDonald, Forrest. We the People: The Economic Origins of the Constitution. Chicago, IL: University of Chicago Press, 1958.

An important read to understand the scholarly opinion of an “economic interpretation of the Constitution” among many. The most important and lasting blow to Beard after nearly a half-century of acceptance. Empirically examines the wealth and economic interests of the framers of the Constitution and ratifiers at the thirteen state conventions. Several economic interests are reported for nearly 1,300 (about three-quarters) of the founders. The votes on several issues at the Philadelphia convention and the votes at the ratifying conventions also are reported. Concludes that for the Philadelphia convention and the ratifying conventions the facts do not support an interpretation of the Constitution based on the economic interests represented. Further concludes there is no measurable relationship between specific economic interests and specific voting at the Philadelphia convention nor generally between specific economic interests and the votes at most of the ratifying conventions. Argues that an economic interpretation is more complex than that offered by Beard. Contains much empirical evidence but offers no formal or quantitative analysis. Many of its conclusions are overturned in McGuire’s To Form A More Perfect Union.

McGuire, Robert A. To Form A More Perfect Union: A New Economic Interpretation of the United States Constitution. New York, NY: Oxford University Press, (2002, in press).

Should be read by anyone interested in the modern “economic interpretation of the Constitution” and what the evidence indicates formally. The culmination of more than a decade and a half of modern research critically reexamining the adoption of the Constitution that seriously challenges the prevailing interpretation of our constitutional founding. Based on large amounts of new data on the economic, financial, and other interests of the Founding Fathers, an economic model of their voting behavior, and formal statistical analysis. The votes of the founders on selected issues at the Philadelphia convention and the votes during ratification are statistically related to measures of the founders and their constituents’ interests. The findings indicate that the economic and other interests significantly influenced the drafting and ratification of the Constitution. The magnitudes of the influences are shown to be substantial in many cases. Indicates how the Constitution would have been different had different interests been present at Philadelphia and how ratification would have been different had different interests been represented at the ratifying conventions. Attests to the importance of the specific individuals involved in historical events to historical outcomes.

McGuire, Robert A., and Robert L. Ohsfeldt. “Economic Interests and the American Constitution: A Quantitative Rehabilitation of Charles A. Beard.” Journal of Economic History 44 (1984): 509-519.

Quite readable. A useful preliminary study, reexamining the adoption of the Constitution employing the methods of modern economic history. Discusses the issues in a straightforward fashion with a minimum of technical jargon. Develops an economic model of the behavior of the Founding Fathers, discusses the data and evidence collected on the economic and other interests, and reports preliminary statistical findings on the role of economic interests in the drafting and ratification of the Constitution. The findings are dated though because of their preliminary nature. The findings have been superceded by those reported in McGuire’s To Form A More Perfect Union.

Riker, William H. “The Lessons of 1787.” Public Choice 55 (1987): 5-34.

Quite readable. Written with a minimum of technical jargon by an eminent political scientist and constitutional expert. While emphasizing a rational choice view of the founders, it places little weight on the importance of economic interests per se. Riker maintains that military threats to the status quo during the 1780s explain the adoption of a strengthened central government. Presumes the framers of the Constitution were different from modern day politicians. Their achievements could not be duplicated today because, according to Riker, they were not constrained, as so many contemporaries are, by the foolish views of their constituencies. Maintains that the framers were less partisan and more disinterested than politicians are today. The approach presumes there was near unanimity among the framers. Indicates how an important political scientist thinks about the issues. Not a quantitative study.

Rossiter, Clinton. 1787: The Grand Convention. New York, NY: Macmillan Publishing Company, 1966.

An influential study of the Philadelphia convention that maintains economic interests motivated the founders throughout their deliberations. Contends, however, that the founders were essentially “like-minded gentlemen” whose interests and political ideologies were similar. Openly rejects an economic interpretation during ratification, claiming that “Virginia ratified the Constitution . . . because of a whole series of accidents and incidents that mock the crudely economic interpretation of the Great Happening of 1787-1788.” Further concludes “the evidence we now have leads most historians to conclude that no sharp economic or social line can be drawn on a nationwide basis.” Offers no formal or quantitative analysis of the role of any economic, financial, or other interests, however.

Storing, Herbert J. The Complete Anti-Federalist, volumes 1 through 7. Chicago, IL: University of Chicago Press, 1981.

A must read for anyone seriously interested in our nation’s founding. Places the essays in The Federalist in perspective. It is not at all necessary to read the volumes in their entirety. The seven volumes are the magnum opus for the arguments of the contemporary opponents of the Constitution. Given the success of the supporters of the Constitution and the esteem given their arguments presented in The Federalist, the opponents have often been denigrated and ignored. Yet many prominent Americans in the 1780s did oppose the Constitution. Among some of the better know Anti-Federalists, and opponents of the Constitution, are Patrick Henry and George Mason of Virginia, and Melancton Smith of New York. The Complete Anti-Federalist is a superb attempt, in Storing’s words, “to make available for the first time all of the substantial Anti-Federal writings in their complete original form and in an accurate text, together with appropriate annotation.” See, especially, the introduction, contained in volume one, which gives valuable coherence to Anti-Federalist thought.

Whaples, Robert. “Where Is There Consensus among American Economic Historians? The Results of a Survey on Forty Propositions.” Journal of Economic History, 55 (1995): 139-154.

The title of this article says it all. Whaples surveyed economists and historians whose specialty is American economic history to determine whether, and where, there is consensus among economic historians on forty important historical issues concerning the American economy. Reports the findings of the survey so that they indicate whether there are differences in the consensus on various issues among scholars trained in economics versus scholars trained in history.

Wood, Gordon S. The Creation of the American Republic 1776-1787. Chapel Hill, NC: University of North Carolina Press, 1969.

An important read. A widely acclaimed, and monumentally influential, study of the American founding by an eminent historian. Contends it is nearly impossible to identify the supporters or opponents of the Constitution with specific economic interests. Argues that the founding can be better understood in terms of the fundamental social forces underlying the ideological positions of the founders. Wood maintains the Constitution was founded on these larger sociological and ideological forces, which are the primary interests of the book. Concludes, “The quarrel was fundamentally one between aristocracy and democracy.” Offers no formal or quantitative analysis of the role of any economic, financial, or other interests.

Walton, Gary M., and James F. Shepherd. The Economic Rise of Early America. New York, NY: Cambridge University Press, 1979.

Quite readable. A concise presentation of the economic history of early America from the colonial period through the early national period by two eminent economic historians of early America. In addition to the material on the colonial period, contains a discussion of general economic conditions in the United States in the 1780s, a discussion of the Articles of Confederation, and the immediate and longer-term influences on the American economy brought about by the adoption of the Constitution. A nice starting point for a general understanding of the economic history of early America. It is somewhat dated though, as there has been new scholarship on the early American economy in the last twenty years.

Citation: McGuire, Robert. “Economic Interests and the Adoption of the United States Consitution”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001.
URL http://eh.net/encyclopedia/economic-interests-and-the-adoption-of-the-united-states-constitution/

Money and Finance in the Confederate States of America

Marc Weidenmier, Claremont McKenna College

The Nobel Laureate Milton Friedman once noted that wars have provided laboratories to examine the behavior of money, prices, and income (Friedman, 1952). The Confederate experience during the American Civil War is no exception. Between January 1861 and April 1865, the Lerner Commodity Price Index of leading cities in the Eastern Confederacy increased from 100 to over 9000. Price inflation in the South during the Civil War ranks second only to the American Revolution in U.S. history.


Confederate Revenue Sources during the War

There are three sources of government revenue: taxation, borrowing, and printing money. Given that the Confederate States of America was established on the principle of states’ rights, many Southerners were suspicious of granting the central government powers to impose and collect taxes. Governor Moore of Alabama summarized this position, “The collection of this tax, by the state would be an onerous and unpleasant duty as it imposes upon the state the necessity of enforcing the laws of the Confederate government against her own citizens” (quoted in Lerner, 1956, p. 165 and Weidenmier, 1999a). With opposition from the general public as well as leading political figures, it is not surprising that the Confederate government collected approximately only 8.2% of its total revenues from taxes (Ball, 1991). Tariffs, another potential source of tax revenue, were hampered by the Union blockade of Southern ports.

The Confederacy then turned to debt issue as a means of war finance. The South successfully sold some long-term government securities during the early stages of the war. Bond issues proved a limited source of war financing as Southern prospects diminished, however. Investors increasingly shied away from purchasing securities offered by a government with little or no tax base and a deteriorating military situation. The government resorted to money financing as their primary source of revenue. Overall, debt issue and the printing press accounted for nearly 32 and 60 percent of the South’s total real revenues during the war (Ball, 1991). In the following section, I will briefly analyze the economic effects of the Confederacy’s reliance on note issue as a source of war finance.

The Confederate Inflation

Lerner (1954, 1955, 1956) used the quantity theory of money to analyze the Confederate inflation. The quantity theory of money can be described by the following equation:

M = K*(P*Y), (1)

where P is the price level, Y is real (i.e., inflation-adjusted) output, and M is money. Equation (1) assumes that people hold some fraction, K, of their nominal income, P*Y, in the form of money. For example, if your income was $10,000 per year and K=1/5, then you would hold $2,000 in the form of money. To study inflation, it is useful to express equation (1) in growth rates, using equation (2):

p = m – y – k (2)

Lerner decomposed the influence of changes in money, velocity — the number of times a dollar bill turns over in a year (mathematically velocity is the inverse of k) — and real output on the inflation rate — the rate at which prices rise. Lerner showed that the Confederate money supply increased 11.5 times between January 1861 and October 1864 while commodity prices increased 28 times in the same period (also see Godfrey, 1978). Rising velocity contributed to the runaway price level as people reduced their holdings of money balances and purchased commodities and non-monetary assets. Lerner also inferred from periodic Treasury reports that the South experienced a forty percent fall in real output during the war.

More recent contributions, notably by Burdekin and Langdana (1993) and McCandless (1996), have emphasized the importance of war news and fiscal confidence in price level determination (also see Schwab, 1901). The basic idea is that Confederate citizens were forward-looking and incorporated all available information in forming their expectations of the price level. In the event of a Confederate defeat, for example, people forecasted higher government spending and money growth in the future and bid up prices immediately. Moreover, mounting Confederate defeats also drove up prices as people were unsure about the fate of the fledging nation. War news, a measure of fiscal confidence, was an important determinant of the Confederate price level and helps to explain the low correlation between the money stock and price level.

Monetary Reforms

Pecquet (1987) and Burdekin and Weidenmier (2001) have attempted to disentangle the effects of war news and money supply changes in Confederate prices. They compare fluctuations in the Confederate money price of gold, the Grayback, in the leading gold market in the eastern (Richmond) and western (Galveston/Houston) Confederacy. The two studies focus on the Confederate Currency Reform Act of 1864, which repudiated one-third of the Confederate money supply. The monetary reform act took effect April 1, 1864 east of the Mississippi River, but did not take effect until July 1, 1864 in the Trans-Mississippi Confederacy. For practical purposes, the reform did not take effect until January 1865 in the west because of difficulties in transporting the new currency across the enemy-controlled Mississippi River. As shown in Figure 2, there was a large divergence in the prices for new money trading in Richmond and old money in Houston. Even after the currency reform took effect in the west, there was a fifty percent difference in the value of the same currency in Richmond and Houston. The results strongly suggest that war news alone cannot explain the behavior of Confederate prices during the war.

Davis and Pecquet (1990) and Burdekin and Weidenmier (2002) have focused on different aspects of the Confederacy’s fiscal and monetary policies. Davis and Pecquet (1990) argue that the Confederacy fixed nominal interest rates though a special monetary instrument, call certificates, to reduce the cost of debt service. Burdekin and Weidenmier (2002b) examine the effects of three monetary reforms on Confederate asset and commodity prices. Each reform authorized that currency be exchanged for bonds by a certain date. After the funding date, noteholders could only exchange their money into lower yielding bonds — or in some cases their notes would no longer be convertible at all. As shown in Figure 3, monetary reforms in early 1863 and 1864 led to a sharp rise in the ratio of commodity to currency prices as Confederate citizens unloaded their money balances and purchased goods before the funding date. Currency prices temporarily stabilized as the money stock was reduced through the forced funding of notes into bonds. Only the August 1863 reform did not have a noticeable effect on the ratio of commodity to currency prices. This exception can be explained in part by the much smaller quantity of notes that were exchanged for bonds and by the fact that this reform occurred in the aftermath of Confederate defeats at Gettysburg and Vicksburg.

Event Studies and War News

How did contemporaries view the American Civil War? This question has traditionally been answered by reading diaries, newspapers, and first-hand accounts of the conflict. An alternative method is to examine how financial market participants reacted to war, fiscal, and political events (see Willard, Guinnane, and Rosen, 1996). To investigate this issue, we need a financial instrument that accurately reflected Confederate victory prospects. Fortunately for our purposes, the South issued Grayback money to purchase goods and services during the war. The value of Confederate money depended on victory or at least on a negotiated peace settlement with the United States. Contemporaries of the Civil War noted that “financial matters fluctuated under the successes and reverses of the war like ebb and tide” (Richmond Examiner, July 9, 1863, p. 1, quoted in Weidenmier, 2002a).

Figure 4 plots the Grayback price of a gold dollar during the Civil War. Large movements in Grayback money prices are labeled and associated with important military, fiscal, and political events to determine events important to contemporaries of the Civil War. Grayback prices depreciated following battle defeats at Antietam and Gettysburg/Vicksburg. The gold premium also rose following the passage of the US Conscription/Finance Bill that increased the North’s ability to finance the war and draft soldiers. A final breakpoint occurred in late spring 1864 when the Confederate government repudiated one-third of the money supply with a currency reform act. The monetary legislation’s positive effect on currency prices was short-lived, however, as the Confederacy cranked up the printing press again in the fall of 1864. Graybacks renewed their depreciation and continued to actively trade until early February 1864. At this point, many Richmond bankers and gold traders packed their wagons and left the besieged capital (Weidenmier, 2002a).

Confederate Debt Operations Abroad

The Confederacy floated two small loans in Europe during the American Civil War: cotton bonds in London and unbacked, high-risk “junk bonds” in Amsterdam. These two loans accounted for less than one percent of Confederate military expenditures during the war. Funds from the two loans were used to build ships in Europe, purchase supplies, and finance overseas operations (Gentry, 1970). Weidenmier (2002b) also argues that the South floated the cotton bonds for political gain. The Confederacy believed the war debt could open the way for sovereign recognition or aid from England or France.

The cotton bonds were unique in that they were denominated in British currency (the pound sterling), and could be converted into cotton on demand. The only catch was that investors had to take delivery of the cotton in the Confederacy. The South honored the provisions of the debt issue for the entire war. The bonds were initially oversubscribed three times when they came to market in March 1863. Holders of the bonds allegedly included several members of British Parliament and the Right Honourable William Gladstone, Chancellor of the Exchequer and future Prime Minister of England.

The junk bonds, on the other hand, were floated in Amsterdam in the summer of 1863, weeks before news of Confederate defeats at Gettysburg and Vicksburg reached European markets. The Dutch bonds contained a default clause that allowed the Confederacy to postpone interest payments on the debt issue until after the war. Indeed, the South never serviced the junk bonds and pursued a debt management policy of selective default (Weidenmier, 2002b).

Figure 5 plots cotton and junk bond prices. The cotton bonds retained a large premium to the junk bonds for the entire war. The discrepancy is largest during 1864 when the cotton bonds rose from a price of 36 pounds sterling in December 1864 to nearly 90 in late August 1864. The junk bonds, in contrast, lost nearly 50 percent of their value during this period. Weidenmier (2001) and Burdekin and Brown (2001) examine the large runup in Confederate bond prices during this period. Brown and Burdekin (2001) attribute the rise to the belief that George McClellan would be elected President of the United States on a peace party platform in November 1864. Weidenmier (2001) traces the large increase in bond prices to an increase in the underlying collateral of the war bonds, New Orleans cotton prices. Since a win for the peace party should have strengthened the price of junk bonds as well as the price of cotton bonds, the decline in junk bond prices during this


period suggests that the decline was largely due to the runup in cotton prices.

Confederate debt prices in Europe plummeted following news of the South’s defeat at Atlanta in late September 1864. By June 1865, cotton bond prices were trading for about 6 pounds sterling and the junk bonds at 1-2 pounds. The small positive price for the cotton bonds can perhaps be explained by the (unlikely) possibility that England might put pressure on the United States or individual Southern states to pay off the bonds. As for the junk bonds, the Dutch firm underwriting the issue offered investors a small credit for exchanging their defaulted Confederate debt for “good bonds” (Weidenmier, 2002b). The investment house’s reputation was apparently tarnished by their dealings in Southern war debt.

Counterfeit Money and the Yankee Scoundrel

Economic and monetary historians have largely ignored the role of counterfeit money in the Confederate inflation because data are not available on the amount of bogus notes. Nevertheless, contemporaries and scholars of the Civil War have noted that counterfeit money posed a serious problem for the Confederacy (Hughes, 1992). More money chasing the same number of goods created inflation, reducing the central government’s take from the inflation tax. The Confederacy was unable to curtail counterfeiting because they lacked the resources and equipment to produce high quality money. Counterfeiting was such a widespread problem that people sometimes joked that fake money was of higher quality than government issued currency.

Weidenmier (1999b) studied the effects of counterfeit money on the Confederate price level by examining the history of the war’s most famous counterfeiter, Sam Upham. The Philadelphia lithographer, printed nearly 15 million dollars of bogus Confederate notes during the war. Upham claims that he originally printed bogus “rebel” notes as souvenirs. Although this may have been initially true, Upham certainly became aware of the fact that smugglers were using his notes to buy cotton in the South. The businessman expanded his business to include mail orders and placed advertisements for his bogus notes in leading Northern cities, including Louisville and St, Louis. Upham’s venture was so successful that the Confederate Treasury Secretary Memminger made the following comments about the “Yankee scoundrel” in June 1862:

“Organized plans seem to be in operation for introducing counterfeiting among us by means of prisoners and traitors, and printed advertisements have been found stating that the counterfeit notes, in any quantity, will be forwarded by mail from Chestnut Street

[Sam Upham’s address], in Philadelphia to the order of any purchaser.” (Secretary of the Treasury Memminger to Confederate Speaker of the House of Representatives, Thomas Bocock, quoted in Todd, 1954, p. 101).

President Jefferson Davis and the Confederate government placed a $10,000 bounty on Upham. The bogus money maker was never caught and some have suggested that the U.S. government protected the businessman with secret service agents.

Weidenmier (1999b) attempted to quantify Upham’s effect on the Confederate price level by making different assumptions about the proportion of Upham’s notes that ended up in the South. Weidenmier estimates that Upham printed between 1.0-2.5 percent of the Confederate money supply between June 1862 and August 1863. Upham stopped printing bogus notes once Confederate money had depreciated so much that it was no longer accepted as a medium of exchange in cotton smuggling. Given that the Philadelphia businessman was one of many counterfeiters, it is probably safe to assume that bogus money makers had a large impact on the Confederate price level. The actions of bogus money makers fueled the Confederate inflation via a large increase in the money stock.

Interest-Bearing Money

There are very few instances in monetary history where governments have issued currency that pays interest. Governments tend to issue interest-bearing money during crises to increase the demand for money — it is more attractive to hold money if it pays interest. Twenty-percent of the South’s money supply paid interest, providing an opportunity to test theories of interest/non-interest-bearing money. Legal restrictions theory, for example, predicts that interest-bearing money will drive non-interest bearing money out of circulation unless there are laws — legal restrictions — that prevent this from happening. Burdekin and Weidenmier (2002a) examine why non-interest-bearing money remained the predominant medium of exchange in the Southern Confederacy despite the existence of large quantities of interest-bearing money. They find that state and Confederate governments forced banks to accept both types of money through de facto legal restrictions. The Confederate and state governments threatened to resume specie convertibility if banks did not accept Grayback interest and non-interest bearing liabilities at par. Banks obviously went along with this policy as they feared losing their gold stocks with specie resumption. In turn, banks held a disproportionate amount of their reserves in interest-bearing money. Non-interest bearing money enjoyed greater circulation in the Confederate economy as banks rationally chose to hold money that paid interest (Makinen and Woodward, 1999).

Weekly data on Confederate cotton bond prices in London and junk bond prices in Amsterdam can be found here. (You may have to right-click and choose Save As to open this file with Excel)

Biweekly data on the Confederate Grayback note price of a gold dollar in Richmond and Houston can be found here. (You may have to right-click and choose Save As to open this file with Excel)

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Weidenmier, Marc D. “Bogus Money Matters: Sam Upham and His Confederate Counterfeiting Business.” Business and Economic History 28 no. 2 (1999b): 313-324.

Weidenmier, Marc D. “The Market for Confederate Cotton Bonds.” Explorations in Economic History 37 no. 1 (2001): 76-97.

Weidenmier, Marc D. “Turning Points in the US Civil War: Views from the Grayback Market.” Southern Economic Journal 68 no. 4 (2002): 875-890.

Weidenmier, Marc D. “Understanding the Costs of Sovereign Default: The Foreign Debts of the Southern Confederacy.” Claremont McKenna College Working Paper, 2002b.

Willard, Kristen, Timothy W. Guinnane, and Harvey Rosen. “Turning Points in the Civil War: Views from the Greenback Market.” American Economic Review 86 no. 4 (1996): 1001-1018.

Citation: Weidenmier, Marc. “Money and Finance in the Confederate States of America”. EH.Net Encyclopedia, edited by Robert Whaples. September 22, 2002. URL
http://eh.net/encyclopedia/money-and-finance-in-the-confederate-states-of-america/

The Company Town

Lawrence W. Boyd, University of Hawaii

The company town was an economic institution that was part of the market for labor. In a company town a single firm provided its employees with goods and services, hired police, collected garbage, dispensed justice, and answered (or failed to answer) complaints from residents. The economy of the company town was totally “privatized” — community services that today are provided by municipal governments were provided by the profit-maximizing firm, which ran the company town. Property rights were defined in such a way that companies could exclude competition by other firms that wished to provide goods and services to their employees.

Although company towns were most closely associated with the coal mining industry it should be noted that they existed in a number of other industries. For example, Homestead, Pennsylvania was a company town situated next to the Homestead Steel Mill. Similarly, Pullman, Illinois was a company town for workers employed at the factory that produced Pullman railroad cars. Because of large and persistent labor struggles associated with the coal industry the focus of interest, both historical and scholarly, has been on coal company towns.

Prevalence of Company Towns in the Coal Industry

The prevalence of company towns, at least in the coal industry, was related to the settlement of regions where mines were developed. When mines opened in isolated regions they needed to provide housing and other necessities to their employees. Thus in more settled regions, the proportion of miners living in company towns was less than in areas that were less settled. In the early 1920’s the United States Coal Commission found that in Southern Appalachia (West Virginia, Eastern Kentucky, Tennessee, Maryland, Virginia, and Alabama) and in the Rocky Mountains 65 to 80 percent of miners lived in company towns. In most of the Midwest only 10 to 20 percent of miners lived in company towns. In Ohio 25 percent lived in company towns, while in Pennsylvania 50 percent lived in company towns.

Property Rights in Company Towns

The leases for company houses that miners rented to a certain extent governed property rights in these company towns. These leases were also something like “tied” contracts in that miners rented their homes so long as they were employed by the company, or at least, had a good relationship with it. Leases generally allowed for a quick termination, usually five days, rather than longer notices. Many leases prevented non-employees from living in or trespassing on company housing. In some leases companies reserved the right of entry into the property and the right to make and enforce regulations on the roads leading into the property.

These rights were commonly enforced during strikes when strikers were evicted from their homes. Sometimes mine owners prevented peddlers or deliveries from independent stores from entering the towns. A practice that seemed to be more common early on was requiring workers to purchase supplies at the company store. This practice appears to have mostly disappeared by the 1920’s.

Complaints about Company Towns

The relationship between employees and owners in company towns could be contentious and this in turn generated a series of complaints that were surprisingly similar across time. The first mention of coal company towns can be found in Friedrich Engels’The Condition of the Working Class in England in 1844, which described dangerous working conditions, cheating on the weighing of coal for piece rate workers, high prices and unsanitary conditions.

Prices in Coal Company Towns

At various times prices charged by mining companies, or profits derived from the sale of goods and services, were deemed excessive. The United States Census in its Census of Mines in 1910 found many mines reported revenues from their mining operations were lower than their expenses and that they stayed in business through sales of goods and services to their employees. Lawrence Lynch in an article published during 1913 in the Political Science Quarterly found prices in company stores excessive. He used the example of black powder, which companies sold to their employees at an average markup of 62 percent.

The United States Coal Commission surveyed stores in mining districts during 1922. They found that stores in southern West Virginia mining districts of New River and Kanawha had prices that were approximately 9 and 5 percent higher, respectively, than in the nearby city of Charleston. In other mining districts the prices were equal to or lower than they were in the nearby city. The Commission also compared the price differentials between independent and company stores and found that in the southern West Virginia districts they were 4.2 percent higher in company stores while in Alabama they were 7 percent higher.

Price Fishback’s Findings

Price Fishback pointed out that a competitive labor market would limit monopolistic pricing policies on the part of firms that operated company towns and produce a single real wage for all miners participating in this market. Thus if miners were free to move among mines, and companies competed for employees then this would in turn have prevented mine owners from exploiting their employees.

Fishback suggested that the 4.2 percent price differential on food that existed between company and independent stores represented the maximum company stores could charge due to their favorable location. Furthermore, this difference was partly offset by higher wages and transportation costs.

Fishback also found that the use of scrip, or advances by the company, used to finance living expenses was limited. Companies seldom carried debt longer than two weeks. Furthermore most miners had no more than 60 percent of their pay deducted as a result of the use of scrip. This meant that miners were not tied to the company through exorbitant debt. In addition he found that rents on company housing were normal in comparison to rents in independent communities. He also found that companies that offered exceptional sanitation, such as flush toilets, paid lower wages (roughly 3.4 percent less). This suggests that wages adjusted to differences in amenities offered by different company towns.

Lawrence Boyd’s Findings

Lawrence Boyd made use of the data in the 1923 Coal Commission’s Report to develop a price index for food that was comparable across districts. This was something the Commission had not done in their original report. The Commission decided not to compare living conditions in various districts because:

It would blur the picture of living conditions beyond recognition if the information were assembled in one composite photograph. Notwithstanding their common occupational interest, the American mountaineer miner of West Virginia, the Slovakian on Pennsylvania’s plateaus and hills, the Alabama negro, the Italian miner in Illinois towns, differ greatly in habits and ideals. (United States Coal Comission, Report. 1453)

Boyd found that close to 90 percent of the items listed in the Commission’s Report could also be found in other districts. Thus a price index for these items could be constructed that allowed a comparison between those districts where most miners lived in company towns and those where company towns were less prevalent.

Boyd found that that the price index was as much as 15 percent lower in districts where the fewest miners lived in company towns such as Illinois and Ohio. Furthermore, districts where there were fewer miners in company towns tended to have higher incomes. If the price index was used to deflate nominal incomes then real incomes were approximately 70 percent higher in a district like Illinois. Boyd suggests that this indicates that miners were mobile within mining districts but not between mining districts.

Boyd’s comparisons were only for food, which comprised approximately 45 percent of miner’s budgets in southern West Virginia and about 30 percent in districts around Illinois. The Coal Commissions reported that miners in Southern Appalachia spent nearly twice as much on flour as they did on rent. Unfortunately, records for other prices, as well as wages, were not available, due in part to a fire that burned some of the archives of the U. S. Coal Commission.

The Decline of Company Towns

Company towns declined as an institution as automobiles and highways became more common. As the Coal Commission found in 1923, company towns were limited to areas newly settled and thus isolated from previous patterns of settlement. As areas became more settled and connected to transportation networks company towns declined. Many former company towns simply were abandoned when mines shut down. Others became incorporated or unincorporated communities. Former company towns such as Homestead are now suburbs of cities like Pittsburgh. Anniston, Alabama, on the other hand, started out as a company town and was transformed into a public town. Grace Gates documents this transition and describes the role of diversification of industry and commerce in this transformation. The necessity that workers live close to their place of employment ended with the development of modern transportation networks.

Conclusions

What can be said about the company town is that it does not appear to have risen to the level of exploitation many commentators have assumed. As Fishback concludes coal miners were able to protect themselves from exploitation through the use of both “voice and exit.” They could engage in collective action through strikes, and joining a union, or through individual actions such as quitting and moving to a better location. Thus the functioning of a competitive labor market could blunt the worst aspects of the company town.

References

Boyd, Lawrence W. “The Coal Company Town.” Ph.D. Dissertation, West Virginia University, 1993.

Fishback, Price V. Soft Coal, Hard Choices: The Economic Welfare of Bituminous Coal Miners 1890-1930. New York: Oxford University Press, 1992.

Gates, Grace Hooten. The Model City of the New South: Anniston, Alabama, 1872-1900. Tuscaloosa, AL: University of Alabama Press, 1996.

United States Coal Commission, Report, 5 parts, Senate Document 195, 68th Congress, Second Session. Washington, DC: U. S. Government Printing Office, 1925.

Citation: Boyd, Lawrence. “The Company Town”. EH.Net Encyclopedia, edited by Robert Whaples. January 30, 2003. URL http://eh.net/encyclopedia/the-company-town/

Common Agricultural Policy

David R. Stead, University College Dublin

Europe’s Common Agricultural Policy (CAP) has been one of the most controversial, and complex, farm policies of all time. The CAP was a cornerstone of the European Economic Community (EEC) established by the 1957 Treaty of Rome, which aimed to progressively create a common market and harmonize the economic policies of the then six member states. France, West Germany, Italy, the Netherlands, Belgium and Luxembourg were the original signatories. The objectives of the CAP for “the six” as stated in Article 39 of the Treaty were to (i) increase agricultural productivity; (ii) ensure a fair standard of living for the agricultural community; (iii) stabilize markets; (iv) provide certainty of food supplies; and (v) ensure that those supplies reached consumers at reasonable prices.

To attempt to achieve these objectives (some of which were potentially conflicting), two main mechanisms were used. First, a generous EEC-wide common “target price” was set for each of the major farm products. Foodstuffs entering the EEC from non-member countries were subject to “variable levies” (tariffs), which prevented target prices from being undercut by cheaper imports. Second, if a commodity’s market price within the Community fell to an appointed “intervention price” – usually set ten to twenty percent below its target price – then national intervention agencies would purchase all produce that could not otherwise be sold at that price, artificially removing supply and thereby preventing a further fall in price. Thus the CAP effectively set a “price floor” for agricultural commodities produced in the EEC. Other countries subsequently adopted the CAP when they joined what became the European Community (EC) and is now the European Union (EU), beginning with Denmark, Ireland and the United Kingdom in 1973 and Greece in 1981.

Throughout its lifetime, the CAP has come under heavy criticism. The policy’s financial cost has been very substantial. In the 1970s and 1980s, the CAP absorbed about two-thirds of the EC’s entire annual budget on average. European taxpayers have paid higher taxes than would have been the case in the absence of farm support, while the setting of target and intervention prices substantially above the prices prevailing on world markets raised the cost of food for European consumers. Estimates of the CAP’s total expense vary widely due to differences in the methods employed and movements in world commodity prices; one ballpark figure for the late 1990s was a cost to each EU citizen of about British pounds 250 per year.

The key problem was that stabilizing agricultural prices at high levels encouraged Europe’s farmers to increase output. Importantly, this met a number of the CAP’s original objectives, but by the early 1980s as domestic production consistently ran ahead of domestic consumption the EC was compelled to purchase and store large amounts of surplus commodities, producing so-called “butter mountains” and “wine lakes” which often had to be resold at a loss on world markets; or else the EC had to entice traders to sell overseas by paying them export “refunds” (export subsidies) equal to the difference between the Community intervention prices and the lower world prices. Moreover, the linking or “coupling” of support to the farmer’s current volume of production ensured that, inequitably, the largest producers received most of the benefits (in 1991 a European Commission document said that eighty percent of CAP assistance went to just twenty percent of farmers), and also contributed to environmental damage by encouraging farmers to increase output through intensive practices such as the application of chemical pesticides and the removal of hedgerows. Outside the EC, agricultural producers in developed and developing nations have been denied commercial opportunities on account of the EC’s import levies and the subsidized “dumping” of excess European produce on world markets.

Radical proposals for policy reform were made as early as 1968 with the Mansholt Plan to provide financial incentives to encourage about half of the farming population to leave the sector during the 1970s and to take at least five million hectares of land out of production. But this and subsequent reform attempts were substantially watered down by the politicians who make the policy choices. Thus today the CAP still absorbs more than two-fifths of the EU budget. The failure of these more radical reform recommendations can be principally attributed to the influence of the agricultural lobby, particularly in France. While the costs of the CAP are widely dispersed among millions of EU taxpayers and consumers, its sizeable benefits are concentrated on a relatively small number of farmers. Europe’s agriculturists therefore have had a strong economic incentive to apply political pressure for the continuation of current policy, while the individual taxpayer/consumer has a far weaker pecuniary incentive to lobby for change. Hence there is a bias towards the status quo, and for many years the challenges of solving the problem of overproduction and curbing the CAP’s cost were only addressed through a number of somewhat minor policy adjustments. For example, production quotas in the milk sector were introduced in 1984, and since 1988 arable farmers have been given money if they “set-aside” from production part of their land.

International complaints about the CAP in the Uruguay Round of world trade talks helped to trigger the MacSharry reforms of 1992, named after the European Commissioner for Agriculture at the time. Again representing a compromise from originally more far-reaching proposals, the policy changes made included the extension of milk quotas and set-aside, and much more importantly, for the first time significant reductions in the level of institutional prices for cereals and beef. In compensation for these cutbacks in price support, farmers were given direct payments (“cheques in the post”) per head of livestock and hectare under crops, more-or-less up to a maximum of their pre-reform quantities. Economists regard these direct payments as a less unsatisfactory type of subsidy than price support because they were partially “decoupled” (partially independent) from the current volume of the farmer’s production, thereby reducing his or her incentive to overproduce using intensive methods. Funds were also made available for programs to assist the development of rural areas (such as subsidies for afforestation) and for schemes where farmers pursue environmentally-friendly agricultural practices in return for additional payments. This change in policy direction, then, started to ameliorate the CAP’s impact on the environment. The Agenda 2000 reform – agreed in 1999 – extended the MacSharry reforms, with additional compensated cuts in institutional prices and reinforced rural development/agri-environmental schemes becoming the “second pillar” of the CAP.

The latest major policy reform was the Mid-Term Review of Agenda 2000 (or Fischler reforms), agreed in 2003. (Subsequent CAP reforms have been sector-specific, such as the changes to the hitherto unreformed sugar regime in 2005 and the 2007 reform of the measures operating in the fruit and vegetable sector.) Pressures arose from the agreed entry to the EU of ten central and eastern European countries with large farming industries (this enlargement occurred in 2004), and especially from demands for further liberalization of the protectionist CAP from Europe’s trading partners in the World Trade Organisation’s Doha Development Agenda negotiations. The most fundamental alteration was the introduction of the “single farm payment,” an annual lump sum grant which replaced the area and headage direct payments historically received on each farm. Crucially, unlike the previous system, the single farm payment can be claimed more-or-less regardless of changes in the scale and type of farm production (although member states were given limited flexibility over the extent to which they undertook this additional “decoupling”). EU farmers, then, should generally now be making their production decisions based on market demand and production costs, rather than “farming for subsidies,” and this should cause less distortion to international trade. Receipt of the single farm payment, though, is conditional on farmers meeting “cross-compliance” requirements which ensure a high standard of environmental protection and animal welfare. In short, a consensus has now emerged in Europe around granting farmers financial assistance in exchange for undertaking rural stewardship activities such as environmentally-friendly farming, instead of subsidizing commodity production. This “European model of agriculture” therefore aligns farm support with the public’s concerns about the environment, food safety and animal welfare.

Yet many criticisms of the “new CAP” remain, for instance, over its continued inequity since the biggest single farm payments are distributed to the largest (and typically richest) farm owners. At the time of writing, further substantive reform is being mooted in the Doha Development Round and in the lead up to the CAP “Health Check” in 2008. Probable reforms in the latter include the abolition of arable set-aside to allow this land to be utilized to produce biomass for biofuels, and additional allocation of funds from the (now fixed) CAP budget to help to finance rural development programs such as local tourism initiatives. If a breakthrough is finally achieved, a Doha Round Agreement on Agriculture is likely to include the elimination of CAP export subsidies by about 2013 and an overall average cut in its import levies of a little over 50 percent, which would further reduce the CAP’s adverse impact on non-EU producers.

Bibliography

Ackrill, Robert.The Common Agricultural Policy. Sheffield: Sheffield Academic Press, 2000.

Baldwin, Richard and Charles Wyplosz. The Economics of European Integration. London: McGraw-Hill (second edition), 2006. Chapter 9 on “The Common Agricultural Policy.”

EuroChoices, passim.

Fennell, Rosemary. The Common Agricultural Policy: Continuity and Change. Oxford: Clarendon Press, 1997.

“Reforming the CAP.” Symposium in Economic Affairs 20 (June 2000): 2-48.

Ritson, Christopher and David Harvey, editors. The Common Agricultural Policy. Wallingford: CAB International (second edition), 1997.

Swinbank, Alan and Carsten Daugbjerg. “The 2003 CAP Reform: Accommodating WTO Pressures.” Comparative European Politics 4 (2006): 47-64.

Websites:

EUROPA [European Union’s web site] Agriculture and Rural Development pages, http://ec.europa.eu/agriculture/index_en.htm

Wyn Grant’s CAP blog,

http://commonagpolicy.blogspot.com/

Online Learning Center of Baldwin and Wyplosz (2006),

http://highered.mcgraw-hill.com/sites/0077111192/student_view0/chapter9/

Citation: Stead, David. “Common Agricultural Policy”. EH.Net Encyclopedia, edited by Robert Whaples. June 21, 2007. URL http://eh.net/encyclopedia/common-agricultural-policy/

The US Coal Industry in the Nineteenth Century

Sean Patrick Adams, University of Florida

Introduction

The coal industry was a major foundation for American industrialization in the nineteenth century. As a fuel source, coal provided a cheap and efficient source of power for steam engines, furnaces, and forges across the United States. As an economic pursuit, coal spurred technological innovations in mine technology, energy consumption, and transportation. When mine managers brought increasing sophistication to the organization of work in the mines, coal miners responded by organizing into industrial trade unions. The influence of coal was so pervasive in the United States that by the advent of the twentieth century, it became a necessity of everyday life. In an era where smokestacks equaled progress, the smoky air and sooty landscape of industrial America owed a great deal to the growth of the nation’s coal industry. By the close of the nineteenth century, many Americans across the nation read about the latest struggle between coal companies and miners by the light of a coal-gas lamp and in the warmth of a coal-fueled furnace, in a house stocked with goods brought to them by coal-fired locomotives. In many ways, this industry served as a major factor of American industrial growth throughout the nineteenth century.

The Antebellum American Coal Trade

Although coal had served as a major source of energy in Great Britain for centuries, British colonists had little use for North America’s massive reserves of coal prior to American independence. With abundant supplies of wood, water, and animal fuel, there was little need to use mineral fuel in seventeenth and eighteenth-century America. But as colonial cities along the eastern seaboard grew in population and in prestige, coal began to appear in American forges and furnaces. Most likely this coal was imported from Great Britain, but a small domestic trade developed in the bituminous fields outside of Richmond, Virginia and along the Monongahela River near Pittsburgh, Pennsylvania.

The Richmond Basin

Following independence from Britain, imported coal became less common in American cities and the domestic trade became more important. Economic nationalists such as Tench Coxe, Albert Gallatin, and Alexander Hamilton all suggested that the nation’s coal trade — at that time centered in the Richmond coal basin of eastern Virginia — would serve as a strategic resource for the nation’s growth and independence. Although it labored under these weighty expectations, the coal trade of eastern Virginia was hampered by its existence on the margins of the Old Dominion’s plantation economy. Colliers of the Richmond Basin used slave labor effectively in their mines, but scrambled to fill out their labor force, especially during peak periods of agricultural activity. Transportation networks in the region also restricted the growth of coal mining. Turnpikes proved too expensive for the coal trade and the James River and Kanawha Canal failed to make necessary improvements in order to accommodate coal barge traffic and streamline the loading, conveyance, and distribution of coal at Richmond’s tidewater port. Although the Richmond Basin was nation’s first major coalfield, miners there found growth potential to be limited.

The Rise of Anthracite Coal

At the same time that the Richmond Basin’s coal trade declined in importance, a new type of mineral fuel entered urban markets of the American seaboard. Anthracite coal has higher carbon content and is much harder than bituminous coal, thus earning the nickname “stone coal” in its early years of use. In 1803, Philadelphians watched a load of anthracite coal actually squelch a fire during a trial run, and city officials used the load of “stone coal” as attractive gravel for sidewalks. Following the War of 1812, however, a series of events paved the way for anthracite coal’s acceptance in urban markets. Colliers like Jacob Cist saw the shortage of British and Virginia coal in urban communities as an opportunity to promote the use of “stone coal.” Philadelphia’s American Philosophical Society and Franklin Institute enlisted the aid of the area’s scientific community to disseminate information to consumers on the particular needs of anthracite. The opening of several links between Pennsylvania’s anthracite fields via the Lehigh Coal and Navigation Company (1820), the Schuylkill Navigation Company (1825), and the Delaware and Hudson (1829) insured that the flow of anthracite from mine to market would be cheap and fast. “Stone coal” became less a geological curiosity by the 1830s and instead emerged as a valuable domestic fuel for heating and cooking, as well as a powerful source of energy for urban blacksmiths, bakers, brewers, and manufacturers. As demonstrated in Figure 1, Pennsylvania anthracite dominated urban markets by the late 1830s. By 1840, annual production had topped one million tons, or about ten times the annual production of the Richmond bituminous field.

Figure One: Percentage of Seaboard Coal Consumption by Origin, 1822-1842

Sources:
Hunt’s Merchant’s Magazine and Commercial Review 8 (June 1843): 548;
Alfred Chandler, “Anthracite Coal and the Beginnings of the Industrial Revolution,” p. 154.

The Spread of Coalmining

The antebellum period also saw the expansion of coal mining into many more states than Pennsylvania and Virginia, as North America contains a variety of workable coalfields. Ohio’s bituminous fields employed 7,000 men and raised about 320,000 tons of coal in 1850 — only three years later the state’s miners had increased production to over 1,300,000 tons. In Maryland, the George’s Creek bituminous region began to ship coal to urban markets by the Baltimore and Ohio Railroad (1842) and the Chesapeake and Ohio Canal (1850). The growth of St. Louis provided a major boost to the coal industries of Illinois and Missouri, and by 1850 colliers in the two states raised about 350,000 tons of coal annually. By the advent of the Civil War, coal industries appeared in at least twenty states.

Organization of Antebellum Mines

Throughout the antebellum period, coal mining firms tended to be small and labor intensive. The seams that were first worked in the anthracite fields of eastern Pennsylvania or the bituminous fields in Virginia, western Pennsylvania, and Ohio tended to lie close to the surface. A skilled miner and a handful of laborers could easily raise several tons of coal a day through the use of a “drift” or “slope” mine that intersected a vein of coal along a hillside. In the bituminous fields outside of Pittsburgh, for example, coal seams were exposed along the banks of the Monongahela and colliers could simply extract the coal with a pickax or shovel and roll it down the riverbank via a handcart into a waiting barge. Once the coal left the mouth of the mine, however, the size of the business handling it varied. Proprietary colliers usually worked on land that was leased for five to fifteen years — often from a large landowner or corporation. The coal was often shipped to market via a large railroad or canal corporation such as the Baltimore and Ohio Railroad, or the Delaware and Hudson Canal. Competition between mining firms and increases in production kept prices and profit margins relatively low, and many colliers slipped in and out of bankruptcy. These small mining firms were typical of the “easy entry, easy exit” nature of American business competition in the antebellum period.

Labor Relations

Since most antebellum coal mining operations were often limited to a few skilled miners aided by lesser skilled laborers, the labor relations in American coal mining regions saw little extended conflict. Early coal miners also worked close to the surface, often in horizontal drift mines, which meant that work was not as dangerous in the era before deep shaft mining. Most mining operations were far-flung enterprises away from urban centers, which frustrated attempts to organize miners into a “critical mass” of collective power — even in the nation’s most developed anthracite fields. These factors, coupled with the mine operator’s belief that individual enterprise in the anthracite regions insured a harmonious system of independent producers, had inhibited the development of strong labor organizations in Pennsylvania’s antebellum mining industry. In less developed regions, proprietors often worked in the mines themselves, so the lines between ownership, management, and labor were often blurred.

Early Unions

Most disputes, when they did occur, were temporary affairs that focused upon the low wages spurred by the intense competition among colliers. The first such action in the anthracite industry occurred in July of 1842 when workers from Minersville in Schuylkill County marched on Pottsville to protest low wages. This short-lived strike was broken up by the Orwigsburgh Blues, a local militia company. In 1848 John Bates enrolled 5,000 miners and struck for higher pay in the summer of 1849. But members of the “Bates Union” found themselves locked out of work and the movement quickly dissipated. In 1853, the Delaware and Hudson Canal Company’s miners struck for a 2½ cent per ton increase in their piece rate. This strike was successful, but failed to produce any lasting union presence in the D&H’s operations. Reports of disturbances in the bituminous fields of western Pennsylvania and Ohio follow the same pattern, as antebellum strikes tended to be localized and short-lived. Production levels thus remained high, and consumers of mineral fuel could count upon a steady supply reaching market.

Use of Anthracite in the Iron Industry

The most important technological development in the antebellum American coal industry was the successful adoption of anthracite coal to iron making techniques. Since the 1780s, bituminous coal or coke — which is bituminous coal with the impurities burned away — had been the preferred fuel for British iron makers. Once anthracite had nearly successfully entered American hearths, there seemed to be no reason why stone coal could not be used to make iron. As with its domestic use, however, the industrial potential of anthracite coal faced major technological barriers. In British and American iron furnaces of the early nineteenth century, the high heat needed to smelt iron ore required a blast of excess air to aid the combustion of the fuel, whether it was coal, wood, or charcoal. While British iron makers in the 1820s attempted to increase the efficiency of the process by using superheated air, known commonly as a “hot blast,” American iron makers still used a “cold blast” to stoke their furnaces. The density of anthracite coal resisted attempts to ignite it through the cold blast and therefore appeared to be an inappropriate fuel for most American iron furnaces.

Anthracite iron first appeared in Pennsylvania in 1840, when David Thomas brought Welsh hot blast technology into practice at the Lehigh Crane Iron Company. The firm had been chartered in 1839 under the general incorporation act. The Allentown firm’s innovation created a stir in iron making circles, and iron furnaces for smelting ore with anthracite began to appear across eastern and central Pennsylvania. In 1841, only a year after the Lehigh Crane Iron Company’s success, Walter Johnson found no less than eleven anthracite iron furnaces in operation. That same year, an American correspondent of London bankers cited savings on iron making of up to twenty-five percent after the conversion to anthracite and noted that “wherever the coal can be procured the proprietors are changing to the new plan; and it is generally believed that the quality of the iron is much improved where the entire process is affected with anthracite coal.” Pennsylvania’s investment in anthracite iron paid dividends for the industrial economy of the state and proved that coal could be adapted to a number of industrial pursuits. By 1854, forty-six percent of all American pig iron had been smelted with anthracite coal as a fuel, and by 1860 anthracite’s share of pig iron was more than fifty-six percent.

Rising Levels of Coal Output and Falling Prices

The antebellum decades saw the coal industry emerge as a critical component of America’s industrial revolution. Anthracite coal became a fixture in seaboard cities up and down the east coast of North America — as cities grew, so did the demand for coal. To the west, Pittsburgh and Ohio colliers shipped their coal as far as Louisville, Cincinnati, or New Orleans. As wood, animal, and waterpower became scarcer, mineral fuel usually took their place in domestic consumption and small-scale manufacturing. The structure of the industry, many small-scale firms working on short-term leases, meant that production levels remained high throughout the antebellum period, even in the face of falling prices. In 1840, American miners raised 2.5 million tons of coal to serve these growing markets and by 1850 increased annual production to 8.4 million tons. Although prices tended to fluctuate with the season, in the long run, they fell throughout the antebellum period. For example, in 1830 anthracite coal sold for about $11 per ton. Ten years later, the price had dropped to $7 per ton and by 1860 anthracite sold for about $5.50 a ton in New York City. Annual production in 1860 also passed twenty million tons for the first time in history. Increasing production, intense competition, low prices, and quiet labor relations all were characteristics of the antebellum coal trade in the United States, but developments during and after the Civil War would dramatically alter the structure and character of this critical industrial pursuit.

Coal and the Civil War

The most dramatic expansion of the American coal industry occurred in the late antebellum decades but the outbreak of the Civil War led to some major changes. The fuel needs of the federal army and navy, along with their military suppliers, promised a significant increase in the demand for coal. Mine operators planned for rising, or at least stable, coal prices for the duration of the war. Their expectations proved accurate. Even when prices are adjusted for wartime inflation, they increased substantially over the course of the conflict. Over the years 1860 to 1863, the real (i.e., inflation-adjusted) price of a ton of anthracite rose by over thirty percent, and in 1864 the real price had increased to forty-five percent above its 1860 level. In response, the production of coal increased to over twelve million tons of anthracite and over twenty-four million tons nationwide by 1865.

The demand for mineral fuel in the Confederacy led to changes in southern coalfields as well. In 1862, the Confederate Congress organized the Niter and Mining Bureau within the War Department to supervise the collection of niter (also known as saltpeter) for the manufacture of gunpowder and the mining of copper, lead, iron, coal, and zinc. In addition to aiding the Richmond Basin’s production, the Niter and Mining Bureau opened new coalfields in North Carolina and Alabama and coordinated the flow of mineral fuel to Confederate naval stations along the coast. Although the Confederacy was not awash in coal during the conflict, the work of the Niter and Mining Bureau established the groundwork for the expansion of mining in the postbellum South.

In addition to increases in production, the Civil War years accelerated some qualitative changes in the structure of the industry. In the late 1850s, new railroads stretched to new bituminous coalfields in states like Maryland, Ohio, and Illinois. In the established anthracite coal regions of Pennsylvania, railroad companies profited immensely from the increased traffic spurred by the war effort. For example, the Philadelphia & Reading Railroad’s margin of profit increased from $0.88 per ton of coal in 1861 to $1.72 per ton in 1865. Railroad companies emerged from the Civil War as the most important actors in the nation’s coal trade.

The American Coal Trade after the Civil War

Railroads and the Expansion of the Coal Trade

In the years immediately following the Civil War, the expansion of the coal trade accelerated as railroads assumed the burden of carrying coal to market and opening up previously inaccessible fields. They did this by purchasing coal tracts directly and leasing them to subsidiary firms or by opening their own mines. In 1878, the Baltimore and Ohio Railroad shipped three million tons of bituminous coal from mines in Maryland and from the northern coalfields of the new state of West Virginia. When the Chesapeake and Ohio Railroad linked Huntington, West Virginia with Richmond, Virginia in 1873, the rich bituminous coal fields of southern West Virginia were open for development. The Norfolk and Western developed the coalfields of southwestern Virginia by completing their railroad from tidewater to remote Tazewell County in 1883. A network of smaller lines linking individual collieries to these large trunk lines facilitated the rapid development of Appalachian coal.

Railroads also helped open up the massive coal reserves west of the Mississippi. Small coal mines in Missouri and Illinois existed in the antebellum years, but were limited to the steamboat trade down the Mississippi River. As the nation’s web of railroad construction expanded across the Great Plains, coalfields in Colorado, New Mexico, and Wyoming witnessed significant development. Coal had truly become a national endeavor in the United States.

Technological Innovations

As the coal industry expanded, it also incorporated new mining methods. Early slope or drift mines intersected coal seams relatively close to the surface and needed only small capital investments to prepare. Most miners still used picks and shovels to extract the coal, but some miners used black powder to blast holes in the coal seams, then loaded the broken coal onto wagons by hand. But as miners sought to remove more coal, shafts were dug deeper below the water line. As a result, coal mining needed larger amounts of capital as new systems of pumping, ventilation, and extraction required the implementation of steam power in mines. By the 1890s, electric cutting machines replaced the blasting method of loosening the coal in some mines, and by 1900 a quarter of American coal was mined using these methods. As the century progressed, miners raised more and more coal by using new technology. Along with this productivity came the erosion of many traditional skills cherished by experienced miners.

The Coke Industry

Consumption patterns also changed. The late nineteenth century saw the emergence of coke — a form of processed bituminous coal in which impurities are “baked” out under high temperatures — as a powerful fuel in the iron and steel industry. The discovery of excellent coking coal in the Connellsville region of southwestern Pennsylvania spurred the aggressive growth of coke furnaces there. By 1880, the Connellsville region contained more than 4,200 coke ovens and the national production of coke in the United States stood at three million tons. Two decades later, the United States consumed over twenty million tons of coke fuel.

Competition and Profits

The successful incorporation of new mining methods and the emergence of coke as a major fuel source served as both a blessing and a curse to mining firms. With the new technology they raised more coal, but as more coalfields opened up and national production neared eighty million tons by 1880, coal prices remained relatively low. Cheap coal undoubtedly helped America’s rapidly industrializing economy, but it also created an industry structure characterized by boom and bust periods, low profit margins, and cutthroat competition among firms. But however it was raised, the United States became more and more dependent upon coal as the nineteenth century progressed, as demonstrated by Figure 2.

Figure 2: Coal as a Percentage of American Energy Consumption, 1850-1900

Source: Sam H. Schurr and Bruce C. Netschert, Energy in the American Economy, 1850-1975 (Baltimore: Johns Hopkins Press, 1960), 36-37.

The Rise of Labor Unions

As coal mines became more capital intensive over the course of the nineteenth century, the role of miners changed dramatically. Proprietary mines usually employed skilled miners as subcontractors in the years prior to the Civil War; by doing so they abdicated a great deal of control over the pace of mining. Corporate reorganization and the introduction of expensive machinery eroded the traditional authority of the skilled miner. By the 1870s, many mining firms employed managers to supervise the pace of work, but kept the old system of paying mine laborers per ton rather than an hourly wage. Falling piece rates quickly became a source of discontent in coal mining regions.

Miners responded to falling wages and the restructuring of mine labor by organizing into craft unions. The Workingmen’s Benevolent Association founded in Pennsylvania in 1868, united English, Irish, Scottish, and Welsh anthracite miners. The WBA won some concessions from coal companies until Franklin Gowen, acting president of the Philadelphia and Reading Railroad led a concerted effort to break the union in the winter of 1874-75. When sporadic violence plagued the anthracite fields, Gowen led the charge against the “Molly Maguires,” a clandestine organization supposedly led by Irish miners. After the breaking of the WBA, most coal mining unions served to organize skilled workers in specific regions. In 1890, a national mining union appeared when delegates from across the United States formed the United Mine Workers of America. The UMWA struggled to gain widespread acceptance until 1897, when widespread strikes pushed many workers into union membership. By 1903, the UMWA listed about a quarter of a million members, raised a treasury worth over one million dollars, and played a major role in industrial relations of the nation’s coal industry.

Coal at the Turn of the Century

By 1900, the American coal industry was truly a national endeavor that raised fifty-seven million tons of anthracite and 212 million tons of bituminous coal. (See Tables 1 and 2 for additional trends.) Some coal firms grew to immense proportions by nineteenth-century standards. The U.S. Coal and Oil Company, for example, was capitalized at six million dollars and owned the rights to 30,000 acres of coal-bearing land. But small mining concerns with one or two employees also persisted through the turn of the century. New developments in mine technology continued to revolutionize the trade as more and more coal fields across the United States became integrated into the national system of railroads. Industrial relations also assumed nationwide dimensions. John Mitchell, the leader of the UMWA, and L.M. Bowers of the Colorado Fuel and Iron Company, symbolized a new coal industry in which hard-line positions developed in both labor and capital’s respective camps. Since the bituminous coal industry alone employed over 300,000 workers by 1900, many Americans kept a close eye on labor relations in this critical trade. Although “King Coal” stood unchallenged as the nation’s leading supplier of domestic and industrial fuel, tension between managers and workers threatened the stability of the coal industry in the twentieth century.

Table 1: Coal Production in the United States, 1829-1899

Year Coal Production (thousands of tons) Percent Increase over Decade Tons per capita
Anthracite Bituminous
1829 138 102 0.02
1839 1008 552 550 0.09
1849 3995 2453 313 0.28
1859 9620 6013 142 0.50
1869 17,083 15,821 110 0.85
1879 30,208 37,898 107 1.36
1889 45,547 95,683 107 2.24
1899 60,418 193,323 80 3.34

Source: Fourteenth Census of the United States, Vol. XI, Mines and Quarries, 1922, Tables 8 and 9, pp. 258 and 260.

Table 2: Leading Coal Producing States, 1889

State Coal Production (thousands of tons)
Pennsylvania 81,719
Illinois 12,104
Ohio 9977
West Virginia 6232
Iowa 4095
Alabama 3573
Indiana 2845
Colorado 2544
Kentucky 2400
Kansas 2221
Tennessee 1926

Source: Thirteenth Census of the United States, Vol. XI, Mines and Quarries, 1913, Table 4, p. 187

Suggestions for Further Reading

Adams, Sean Patrick. “Different Charters, Different Paths: Corporations and Coal in Antebellum Pennsylvania and Virginia,” Business and Economic History 27 (Fall 1998): 78-90.

Adams, Sean Patrick. Old Dominion, Industrial Commonwealth: Coal, Politics, and Economy in Antebellum America. Baltimore: Johns Hopkins University Press, 2004.

Binder, Frederick Moore. Coal Age Empire: Pennsylvania Coal and Its Utilization to 1860. Harrisburg: Pennsylvania Historical and Museum Commission, 1974.

Blatz, Perry. Democratic Miners: Work and Labor Relations in the Anthracite Coal Industry, 1875-1925. Albany: SUNY Press, 1994.

Broehl, Wayne G. The Molly Maguires. Cambridge, MA: Harvard University Press, 1964.

Bruce, Kathleen. Virginia Iron Manufacture in the Slave Era. New York: The Century Company, 1931.

Chandler, Alfred. “Anthracite Coal and the Beginnings of the ‘Industrial Revolution’ in the United States,” Business History Review 46 (1972): 141-181.

DiCiccio, Carmen. Coal and Coke in Pennsylvania. Harrisburg: Pennsylvania Historical and Museum Commission, 1996

Eavenson, Howard. The First Century and a Quarter of the American Coal Industry. Pittsburgh: Privately Printed, 1942.

Eller, Ronald. Miners, Millhands, and Mountaineers: Industrialization of the Appalachian South, 1880-1930. Knoxville: University of Tennessee Press, 1982.

Harvey, Katherine. The Best Dressed Miners: Life and Labor in the Maryland Coal Region, 1835-1910. Ithaca, NY: Cornell University Press, 1993.

Hoffman, John. “Anthracite in the Lehigh Valley of Pennsylvania, 1820-1845,” United States National Museum Bulletin 252 (1968): 91-141.

Laing, James T. “The Early Development of the Coal Industry in the Western Counties of Virginia,” West Virginia History 27 (January 1966): 144-155.

Laslett, John H.M. editor. The United Mine Workers: A Model of Industrial Solidarity? University Park: Penn State University Press, 1996.

Letwin, Daniel. The Challenge of Interracial Unionism: Alabama Coal Miners, 1878-1921 Chapel Hill: University of North Carolina Press, 1998.

Lewis, Ronald. Coal, Iron, and Slaves. Industrial Slavery in Maryland and Virginia, 1715-1865. Westport, Connecticut: Greenwood Press, 1979.

Long, Priscilla. Where the Sun Never Shines: A History of America’s Bloody Coal Industry. New York: Paragon, 1989.

Nye, David E.. Consuming Power: A Social History of American Energies. Cambridge: Massachusetts Institute of Technology Press, 1998.

Palladino, Grace. Another Civil War: Labor, Capital, and the State in the Anthracite Regions of Pennsylvania, 1840-1868. Urbana: University of Illinois Press, 1990.

Powell, H. Benjamin. Philadelphia’s First Fuel Crisis. Jacob Cist and the Developing Market for Pennsylvania Anthracite. University Park: The Pennsylvania State University Press, 1978.

Schurr, Sam H. and Bruce C. Netschert. Energy in the American Economy, 1850-1975: An Economic Study of Its History and Prospects. Baltimore: Johns Hopkins Press, 1960.

Stapleton, Darwin. The Transfer of Early Industrial Technologies to America. Philadelphia: American Philosophical Society, 1987.

Stealey, John E.. The Antebellum Kanawha Salt Business and Western Markets. Lexington: The University Press of Kentucky, 1993.

Wallace, Anthony F.C. St. Clair. A Nineteenth-Century Coal Town’s Experience with a Disaster-Prone Industry. New York: Alfred A. Knopf, 1981.

Warren, Kenneth. Triumphant Capitalism: Henry Clay Frick and the Industrial Transformation of America. Pittsburgh: University of Pittsburgh Press, 1996.

Woodworth, J. B.. “The History and Conditions of Mining in the Richmond Coal-Basin, Virginia.” Transactions of the American Institute of Mining Engineers 31 (1902): 477-484.

Yearley, Clifton K.. Enterprise and Anthracite: Economics and Democracy in Schuylkill County, 1820-1875. Baltimore: The

Citation: Adams, Sean. “US Coal Industry in the Nineteenth Century”. EH.Net Encyclopedia, edited by Robert Whaples. January 23, 2003. URL http://eh.net/encyclopedia/the-us-coal-industry-in-the-nineteenth-century/