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Alcohol Prohibition

Jeffrey A. Miron, Boston University

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 Many of these prohibitions were subsequently repealed, however, and those that persisted were widely regarded as ineffective.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was popular for many years, but beginning in the late 1920s support began to erode.3 In 1933 the 21st Amendment repealed the 18th, ending Prohibition.

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

The Effects of Prohibitions

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

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

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

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

Alcohol Consumption and Prices under Prohibition

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

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

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

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

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

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

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

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

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

Alcohol Prohibition and Crime

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

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

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

Real per Capita Expenditures for Enforcement of Alcohol and Drug Prohibition

Note: Vertical axis is measured in 1992 dollars.

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

Conclusions

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

References

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economic History of Tractors in the United States

William J. White, Research Triangle Institute

The farm tractor is one of the most important and easily recognizable technological components of modern agriculture in the United States. Its development in the first half of the twentieth century fundamentally changed the nature of farm work, significantly altered the structure of rural America, and freed up millions of workers to be absorbed into the rapidly growing manufacturing and service sectors of the country. The tractor represents an important application of the internal combustion engine, rivaling the automobile and the truck in its economic impact.

A tractor is basically a machine that provides machine power for performing agricultural tasks. Tractors can be used to pull a variety of farm implements for plowing, planting, cultivating, fertilizing, and harvesting crops, and can also be used for hauling materials and personal transportation. In the provision of motive power, tractors were a replacement for human effort and that of draft animals, both of which are still used extensively in other parts of the world.

Technical Description

The heart of a farm tractor is a powerful internal combustion engine that drives the wheels to provide forward motion. Direct ignition (diesel) and spark-driven engines are both found on tractors, just as with cars and light trucks. Power from the engine can be transmitted to the implement being used through a power take-off (PTO) shaft or belt pulley. The engine also provides energy for the electrical system, including the ignition system and lights, and for the most recent models, air conditioner, stereo system, and other creature comforts.

The drawing below, taken from an undated John Deere operating manual, shows a typical general-purpose tractor from the period around 1940. The machine is little more than an engine on wheels, with a seat for the operator and a hitch for pulling implements centered in the rear. Later models would feature an enclosed cab to keep the operator out of the weather, but this model features only simple controls and the metal seat. The drawing shows a wheel-tractor, which comprised more than 95% of machines sold for farm use. Tracked units, also called crawler tractors, were common in California, and of course, dominated construction and other non-farm uses for tractors.

Background and Technological History

Farmers in 1900, whether engaged in growing wheat, corn, or cotton, raising livestock, producing dairy products, or combining a variety of these or other products, had only two sources of power aside from their own strength: steam engines and draft animals. Steam boilers provided motive power for threshing small grains, and a very small number of farmers were using recently-developed steam traction engines for plowing and other arduous tasks. Draft animals provided most of the power on all types of farms, however. As of 1910, there were more than 24 million horses and mules on American farms, about three or four animals for the average farm. In addition to supplying farm power, the horses were also relied upon for transportation, of both goods and people.

Horses and mules pulled an impressive variety of farm implements at the turn of the century, including plows, disks, harrows, planters, cultivators, mowers, and reapers. Several important farm tasks were typically done by hand at this time, including picking of corn and cotton. The greatest amount of power was needed for plowing, often forcing farmers to keep one or two extra horses above the number needed for the remainder of the year. As an example, power requirements during plowing have been estimated at 60% of the annual total needs for growing wheat at that time. A new source of power, then, would be valuable to the farmer if it could replace the horsepower requirements of plowing, as long as the cost was less than that of maintaining one to two extra horses. It would be even more valuable if it could economically replace all of the functions currently performed by draft animals, and further if it could facilitate automation of the cotton and corn picking operations.

As early as the 1870s, engineers had succeeded in producing steam traction engines, referred to today as steam tractors. These monsters, weighing in excess of 30,000 pounds (excluding water), could move under their own power, and had impressive horsepower capacity. Unfortunately, their size, mechanical complexity, and constant danger of explosion made these traction engines unusable for most farms in North America. In all but the driest soils, steam traction engines tended to become mired in the mud and refuse to move. Because of these handicaps, the use of steam tractors increased slowly in the United States during the last two decades of the nineteenth century. Annual production of less than 2000 units per year in the 1890s had increased to around 4000 in the ten years after 1900. Nonetheless, the rate of growth of steam horsepower was far smaller than the growth in animal horsepower. For the reasons mentioned above, adoption of steam power was clearly not a candidate to replace the horse.

The First Gasoline Tractors

With the commercialization of the internal combustion engine, a more practical alternative emerged. Farmers bought large numbers of stationary gasoline engines in the first decade of the twentieth century, and quickly became familiar with their operation. A wide variety of household chores were simplified by the use of stationary engines, including pumping water, washing clothes, and churning butter. Companies began developing gasoline-powered traction engines during the same period; the first commercial machines were sold in 1902, and quickly became known as ‘tractors’.

The first tractors shared similar traits to the steam traction engines. Weighing between 20,000 and 30,000 pounds, with huge steel wheels or tracks, these models were large and expensive. Fairly quickly, the large manufacturers, including Hart-Parr, International Harvester, Case, and Rumely had reduced the size and cost. By the time Ford introduced its Fordson model, the first successful small tractor, average weights were down to 2000-6000 pounds, and prices were under $1000. These tractors proved to be excellent at plowing, and were quite capable of driving mowers and reapers. The large steel wheels, low clearance, and substantial weight made them unsuitable for cultivating growing crops like corn and cotton, however.

Technological Improvements

Henry Ford, who had tinkered with steam and gasoline tractors prior to achieving his success with automobile production, introduced a small, inexpensive model which he called the Fordson during the World War I. This model sold well for several years, aided considerably by a war-caused shortage of horses. After a post-war crash in farm prices drastically reduced sales in 1920-21, Ford initiated a price war in 1922 by cutting the price of its Fordson from $625 to $395. Alone of the large competitors, International Harvester matched Ford’s price, and sales boomed for those two firms throughout the rest of the 1920s. Ford’s production of tractors were always a sidelight to his main business of manufacturing automobiles, however, and when the Fordson production lines were needed for the critical Model-A launch in 1928, Ford decided to leave the tractor business.

The competition with Ford drove International Harvester to make significant improvements in its tractors. The first innovation to appear was the power take-off, offered after 1922. This device, a metal shaft turned by the rotation of the tractor motor, allowed implements to be driven directly by the tractor engine, as opposed to obtaining power from a wheel rolling along the ground. The power take-off quickly became a standard feature on all tractors, and implement makers began the process of re-designing their equipment to take advantage of this innovation.

An even more important improvement by International Harvester was the introduction of a general-purpose tractor, the Farmall, in 1925. This model, with high ground clearance, small front wheels, and minimal weight, was designed for cultivating, as well as for plowing and cutting. It was tested in Texas in 1923, and was released for broad scale distribution in 1925. Competitors, such as Deere, Massey-Harris, and Case rushed to develop a general-purpose tractor (a ‘GP’) of their own, and by the mid-1930s, GPs had replaced the standard Fordson-type tractor. In addition, these same firms began the process of modifying their implements for these tractors, and the wholesale replacement of the horse began in earnest.

A Dominant Design Emerges

Three other improvements were critical in completing the technology base for the tractor. Deere released a power lift for its models beginning in 1927. This device allowed the implement to be raised before every turn by pulling a lever. Prior to this, the farmer had to lift the implement by hand at each turn, which was a time-consuming and enervating task. As with the power takeoff, the power lift was rapidly adopted by other tractor makers. Rubber tires first became available for tractors in 1932, and by 1938 had largely replaced steel wheels. The low-pressure tires not only did less damage to fields, but also allowed a higher forward speed, due to reduced friction. Finally, the development of diesel engines in the mid-1930s gave farmers access to a lower-cost fuel for their machines. Many tractors from that time forward had a small gasoline tank for cold starts, and a large diesel tank for the majority of the operation.

International Harvester pioneered a ‘one plow’ tractor at about this time, and began selling it in 1934. This tractor was smaller and less expensive than the original Farmall, but had the same general-purpose capabilities. Its introduction offered operators on small farms the chance to replace their one horse or mule with a tractor, and was responsible for the beginnings of the tractor’s diffusion in the South. These small tractors often featured adjustable front wheels and high ground clearance, which made them considerably more flexible than the larger models. Within a few more years, manufacturers were offering their larger models in ‘high-clearance’ versions as well.

A final innovation was responsible for bringing Ford back into the tractor business in 1937. In that year, the firm agreed to enter into a joint venture with Irish inventor Harry Ferguson. Ferguson had worked for almost 20 years to perfect a ‘three-point hitch,’ a device that produced superior plowing by continuously leveling the implement as it traveled over uneven terrain. The Ford-Ferguson tractors quickly amassed a significant market share (14% by 1940), and the hitch design was rapidly imitated.

By about 1938, the technology of tractor development had achieved what is known as a ‘dominant design.’ The Farmall-type general-purpose tractors, both large and small, would change little, except for increasing in size and horsepower, over the next 30 years. Beginning in the mid-1930s, and despite the ongoing depression in the United States, tractor sales increased rapidly. Figure 1 shows the number of tractors on farms from 1910 through 1960. By the latter date, the process of technological diffusion was essentially complete. With the exception of the deep South, the increase in percent of farms with tractors from year to year had stopped.

Development of Related Equipment

The general-purpose tractor proved to be an excellent replacement for the horse in plowing, soil preparation, planting, and cultivating tasks for a wide variety of field crops. In addition, the tractor was fully capable of providing power for mowing hay and for harvesting of wheat and other small grains. In the latter application, it facilitated the practice known as ‘combining,’ the simultaneous reaping and threshing of wheat. Horse-drawn combines had been available since the 1880s, and had found limited acceptance on the larger farms of the arid West. However, a large team of horses was required to drag the heavy, complex machine through the fields. The tractors of the 1930s and 1940s had no trouble pulling a re-designed combine, and they began a process of rapid adoption in the Midwest. Eventually, a self-propelled combine was produced, with the tractor engine and cab subsumed into the combine apparatus.

The general-purpose tractor was not capable of bringing mechanization to the corn and cotton harvest until separate, but related innovations produced a corn picker in the 1920s and a mechanical cotton picker after the Second World War. Prior to the development and adoption of the corn picker, corn was often cut with a binder, followed by manual shelling. One of the more important uses of stationary gas engines early in the twentieth century was for the shelling of corn. The picker combined the operations of cutting and shelling, and also distributed the stalks back onto the field, eliminating an additional step.

Mechanical cotton pickers fundamentally altered not only the harvesting of cotton, but the very nature of cotton growing in the United States. The mechanical picker, even after extensive development, produced higher crop losses than hand picking in the hot, humid areas where most cotton was grown — Mississippi, Alabama, and east Texas. In the dry areas of west Texas, however, the picker was very efficient, both in terms of labor effort and crop yields. The mechanical cotton picker thus precipitated a relocation of cotton production westward, resulting in large-scale migration out of the deep South in the years after World War II.

As with the combine, self-propelled corn and cotton pickers were soon developed, combining the power train and cab of the tractor within the implement’s apparatus. For this reason, pickers and combines are often considered as separate machines, and their development and diffusion are not included in discussions of the impact of the tractor. It should be pointed out, however, that none of these devices could have been powered efficiently by horses or steam; the gasoline-powered tractor was necessary for their development. As such, I will include combines and mechanical pickers in assessing the impact of the tractor on inputs to agriculture.

Recent Developments

The recent history of tractor development is less dramatic than the first 50 years. The peak year of tractor production was 1951, during which 564,000 units were made. From that time, the approaching saturation of the market produced a steady fall in production and sales. As one might expect, manufacturers responded by developing ever-larger tractors to supply farms that were growing in size. Interestingly enough, this pursuit of size left the small end of the market open to foreign competition, and, as in the case of the U.S. automobile industry, imports grew to dominate the small-tractor market.

Creature comforts have been improved markedly since the 1950s as well. Enclosed cabs soon had heating and air conditioning, and are now likely to be supplied with a television and stereo-CD. As a result, modern tractors are quite comfortable in comparison with the machines of 40 years ago, let alone versus the monsters of the early tractor era.

Production and Corporate History

From a slow start in the 1920s and 1930s, tractor production grew through the late Depression years, as farmers increasingly parted with their horses and mules. Figure 2 shows the annual output of farm tractors from 1909 to 1970, including the peak years of the early 1950s. It is likely that this peak would have been reached much sooner, had it not been for the disruption of the Second World War. Not only were raw materials such as steel, copper, and rubber severely limited due to wartime production needs, but the government actually limited the total number of machines that could be built each year, and allocated only the raw materials needed for that production. Many of the tractor factories were converted over to production of tanks, airplanes, vehicles, and other military goods.

Despite the presence of corporate giants such as International Harvester and Ford in the early development of the farm tractor, there were hundreds of firms that began producing or selling machines in the first two decades of the twentieth century. As is the case with many emerging industries, inventors, entrepreneurs, and promoters were attracted to this important and rapidly-growing field. The agricultural depressions of 1920-21 and 1930-32 drove many of these firms into mergers or out of business, and by the early 1930s seven companies dominated the industry. These firms, along with Ford, would make almost all of the wheel-tractors sold in the United States from 1930 through 1955.

The dominance of the seven firms is shown in Table 1, which presents market share data by decade for the key years of tractor industry growth. As discussed above, Ford dominated the market in the 1920s, then left the business to create production capacity for the Model A; upon returning to tractors in the 1940s, Ford once again became an important presence. International Harvester was the largest consistent seller, as well as being the technological leader, while Deere would grow into the most significant challenger. By 1963, Deere overtook International Harvester in a declining market, and remains the largest presence in agricultural equipment today.

Table 1. Market Share of Leading Wheel Tractor Manufacturers by Decade
1910s 1920s 1930s 1940s 1950-55 Overall

Deere

4.0% 6.4% 21.7% 17.0% 14.5% 14.5%
International Harvester 21.4% 28.6% 44.3% 32.7% 30.6% 32.5%
Ford 20.1% 44.2% 0.0% 7.9% 19.3% 16.7%
Massey-Ferguson 2.9% 1.9% 2.9% 14.7% 10.8% 9.1%
Case 7.2% 3.6% 7.4% 7.6% 5.1% 6.2%
Allis Chalmers 6.2% 3.5% 12.6% 9.7% 10.3% 9.1%
Oliver 2.1% 2.2% 5.0% 4.8% 5.4% 4.4%
Minneapolis Moline 8.0% 0.7% 2.9% 3.2% 3.6% 3.1%
All Others 28.0% 9.0% 3.2% 2.5% 0.2% 4.4%
Source: White (2000)
Note: Totals include production of predecessor companies

Social and Economic Significance

The farm tractor had made a major impact on the social and economic fabric of the United States. By increasing the productivity of agricultural labor, mechanization freed up millions of farm operators, unpaid family workers, and farm hands. After the Second World War, many of these people relocated to the growing cities across the country and provided technically-skilled, hard-working labor to the manufacturing and service industries. Millions of others remained in rural areas, working off-farm either part-time or full-time in a variety of professions.

The landscape of the country has changed as a result. Farms have grown larger as one proprietor can manage to cultivate the land that several families would have worked in 1900. Small market towns, especially in the Plains states, have almost ceased to exist as the customer base for local businesses has dwindled. Land formerly devoted to raising and feeding horses has been converted to alternate uses or reverted to grassland or forest. Several generations of agricultural families have experienced the sadness of giving up the farm and the rural way of life.

On balance, however, the tractor has had a markedly positive economic impact. Horses and mules, while providing farm power, ate up more than twenty percent of the food they helped farmers grow! By replacing them with machines that consumed much less expensive quantities of fuel, oil, and hydraulic fluid, farmers were able to reduce their costs and pass these social savings along to food buyers. More importantly, the millions of farm workers freed up by the technology were able to contribute their labor elsewhere in the economy, creating large economic benefits. According to a recent estimate by the author, the U.S. would have been almost ten percent poorer in 1955 in the absence of the farm tractor. Along with the revolution in yields generated by the advances in biological and chemical research, the farm tractor has helped agriculture make a significant contribution to economic growth in the United States.

References for Further Study

Ankli, Robert E. “Horses vs. Tractors on the Corn Belt” Agricultural History 54 (1980): 134-148.

Berardi, Gigi M., and Charles C. Geisler, editors. Social Consequences and Challenges of New Agricultural Technology. Boulder, CO: Westview Press, 1984.

Broehl, Wayne G., Jr. John Deere’s Company. New York: Doubleday, 1984.

Clarke, Sally H. Regulation and the Revolution in United States Farm Productivity. Cambridge: Cambridge University Press, 1994.

Danbom, David B. Born in the Country: A History of Rural America. Baltimore: Johns Hopkins University Press, 1995.

Gray, R. B. The Agricultural Tractor: 1855 – 1950. St. Joseph, Michigan: American Society of Agricultural Engineers, 1954 (revised, 1975).

Griliches, Zvi. “The Demand for a Durable Input: Farm Tractors in the United States, 1921-57.” In The Demand for Durable Goods, edited by Arnold C. Harberger. Chicago: University of Chicago Press, 1960.

Hayami, Yujiro, and Vernon W. Ruttan. Agricultural Development: An International Perspective. Baltimore: Johns Hopkins Press, 1971.

Jasny, Naum. Research Methods on Farm Use of Tractors. New York: Columbia University Press, 1938.

Jones, Fred R. Farm Gas Engines and Tractors, fourth edition. New York: McGraw-Hill, 1966.

McCormick, Cyrus. The Century of the Reaper. Boston: Houghton Mifflin, 1931.

Rogin, Leo. The Introduction of Farm Machinery in Its Relation to the Productivity of Labor in the Agriculture of the United States during the Nineteenth Century. University of California Publications in Economics: Volume 9. Berkeley: University of California Press, 1931.

Sargen, Nicholas Peter. “Tractorizationin the United States and Its Relevance for the Developing Countries. New York: Garland Publishing, 1979.

Schultz, Theodore W. “Reflections on Agricultural Production, Output, and Supply.” Journal of Farm Economics 38 (1956): 748-62.

Whatley, Warren C. “Institutional Change and Mechanization in the Cotton South.” Ph.D. dissertation, Stanford University, 1983.

White, William J. “An Unsung Hero: The Farm Tractor’s Contribution to Twentieth-century United States Economic Growth.” Ph.D. dissertation, Ohio State University, 2000.

Wik, Reynold M. Steam Power on the American Farm. Philadelphia: University of Pennsylvania Press, 1953.

Wik, Reynold M. Benjamin Holt & Caterpillar: Tracks & Combines. St. Joseph, Michigan: American Society of Agricultural Engineers, 1984.

Williams, Robert C. Fordson, Farmall, and Poppin’ Johnny. Urbana, Illinois: University of Illinois Press, 1987.

Citation: White, William. “Economic History of Tractors in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL
http://eh.net/encyclopedia/economic-history-of-tractors-in-the-united-states/

U.S. Agriculture in the Twentieth Century

Bruce Gardner, University of Maryland

Considering that the basic facts about twentieth century agriculture are not seriously in dispute, it is surprising how differently they are seen by different observers. One constellation of views sees the farm sector as a chronically troubled place, with farmers typically hard pressed to survive economically and continually decreasing in number. Moreover, pessimistic assessments see unwelcome trends developing over recent years, with methods of farm production environmentally suspect, farm laborers exploited, the wealth farming generates increasingly concentrated on relatively few large farms, and billions of dollars taxed from the general public for the benefit principally of those large farms. Some economists have argued that even large commercial farms constitute a sector in decline (see Blank, 1998).

An alternative constellation of views is more optimistic. It focuses on the increased acreage and output of the average farm, the sustained growth of agricultural productivity even through the general productivity slump of the 1980s, the substantial improvements in income and wealth of commercial farmers, the predominant role of the United States in world commodity markets, and American leadership in supplying both technological innovation and food aid for the developing world. As Heady (1976) put the case, “the U.S. has had the best, the most logical and the most successful program of agricultural development of any country in the world” (p. 77).

Basic Facts and Trends

The generally accepted facts include[1]:

Rising Productivity

Between 1930 and 2000 U.S. agricultural output approximately quadrupled, while the United States Department of Agriculture’s (USDA) index of aggregate inputs (land, labor, capital and other material inputs) remained essentially unchanged. Thus, multifactor productivity (output divided by all inputs) rose by an average of about 2 percent annually over this period. This rate substantially exceeds the rate of multifactor productivity growth in manufacturing, and the agricultural rate did not experience the slowdown that occurred in the rest of the U.S. economy during the last quarter of the century.

Falling Real Prices

Prices received by farmers for products they sell decreased by an average of 1 percent annually in real (inflation-adjusted) terms between 1900 and 2000. Real food prices paid by consumers also decreased. The percentage of U.S. disposable income spent on food prepared at home decreased, from 22 percent as late as 1950 to 7 percent by the end of the century.

Declining Number of Farms

The number of farms decreased from a peak of close to 7 million in the mid-1930s to just over 2 million in 2000. The rate of decline was most rapid in the 1950s and 1960s, and dropped off thereafter until the 1990s, when the number stayed about constant. The U.S. had an estimated 2.16 million farms in 2002 as compared to 2.11 million in 1992 (USDA, 2003, p. 2).

Rising Relative Farm Household Income

Average farm household income was substantially lower than the nonfarm average during almost the whole of the century, but between the end of World War II and the mid-1960s had risen to about 70 percent of the nonfarm level, and continued to rise thereafter until achieving parity or slightly more in the 1990s. The principal cause of this increase in average income was a rise in earnings from off-farm employment of farmer operators and farm family members. By the 1990s a substantial majority of farm household income came from off-farm sources.

Increased Concentration of Production on Large Farms

Agricultural production has become highly concentrated on large farms. In 1930, when the Agriculture Census first asked about the value of farm product sales from each farm, sales per farm in the largest 10 percent of farms were 14 times the sales per farm of the smallest 10 percent. By 1992, sales in the largest 10 percent were 152 times sales in the smallest 10 percent the largest 10 percent of farms accounted for 70 percent of all farm product sales, while at the lower end, half of all farms accounted for only 2 percent of product sales. Large farms, those with more than $250,000 of annual sales by USDA’s definition, are wealthy. Their assets, mostly land owned, had a mean value of $1.8 million according to the 1997 Census of Agriculture, which with $0.4 million average debt means a mean net worth of $1.4 million per farm.

Explanations

The driving forces behind these events that have received most attention are technological progress in farming and nonfarm economic development. Technological progress in farming results in less input required per unit output, fewer and larger farms, and lower costs of production. With competition in product markets, lower costs mean lower commodity prices. Nonetheless, returns to labor in commercial agriculture have been maintained and even increased through the opportunities provided by rising nonfarm real wages. In an “integrated” labor market, worker mobility between sectors equates wages for comparable labor in farm and nonfarm work. The integration is not only between rural and urban employment at a given location, but also between sections of the country. In 1910 farm wage rates in the Pacific Coast states were almost 3 times the level of farm wages in the South. By 1997 the difference was only 10 percent (Gardner, 2002, p. 173). For farm operator households, the USDA estimates that in 2000 mean household income was $62,000 compared to $57,000 for nonfarm households. But over 90 percent of farm household income was estimated to have come from off-farm sources (USDA 2002, p. 54).

Again, there are two different interpretations of the facts. The pessimistic view is that off-farm jobs are taken out of desperation to cushion the blow of inadequate returns from farming, and that the increasing importance of such jobs reflects the increasingly precarious status of small farms. The optimistic view is that the increase in off-farm work was a response to its greater availability, as commuting became easier and nonfarm industries moved into rural areas, and that this has become a means for farmers to enjoy the desirable aspects of farm living without having to subsist on an income well below the U.S. household average. In 1997, as estimated in the Census of Agriculture, 1.2 million (59 percent) of farms had sales of less than $20,000, so even if they had zero costs, their net farm incomes would have been less than half the median U.S. household income.

Evidence for the optimistic interpretation is that the decline in farm numbers stopped in the 1990s, indicating that off-farm income is not a means of postponing small-farm business failure, but rather a long-term means of small-farm survival. The pessimistic response is that those farms may be surviving but their operators are stressed and unhappy. A similar divergence of interpretation pertains to large farms. On average they are wealthy, with incomes well above those of the average U.S. household. But the large farmer’s situation is not an economic idyll. Their incomes are variable, subject to vagaries of weather and markets, and several thousand face financial failure every year. A balanced assessment, incorporating both economic information and surveys of farmers’ views of the broader situation of their farms and communities, is that of Danbom (1995), which concludes on a guardedly optimistic note.

A complicating factor is economic instability in the agricultural economy. The trend of decreasing real farm prices has not been steady, and most notably was punctuated by price spikes during three periods in which the annual average of USDA’s index of prices received by farmers remained well above the long-term trend (1917-19, 1943-48, and 1973-74 (Figure 1). High-price periods have led farmers to take on debt and invest to an extent which has proven unsustainable, particularly in driving up land prices. This has led to periods of widespread financial distress in farming. The “farm crisis” of the 1980s is the most recent example.

Role of Government

Since the Great Depression, the fate of hard-working farmers facing low prices has drawn a governmental response in the form of commodity support programs. Even earlier, governmental involvement in the form of investment in rural roads, irrigation works, utilities, agricultural research, and education was important in farm productivity growth. From the Progressive Era of the early twentieth century, federal and state regulation has attempted to increase the market power of farmers, reduce that of processors and suppliers of farm inputs, protect food quality and safety, and provide public services such as market information and improved soil conservation and environmental quality. The extent to which governmental activity has generated benefits that exceed the costs is a matter of controversy in every area. Best accepted have been activities in research, education, and food quality and safety regulation. Most central in political debate, most costly to taxpayers, and most controversial have been commodity programs.

Commodity Support Programs

Commodity support programs have aimed to boost farmers’ receipts from commodity production in all but the highest-price years. The bulk of support has gone to the main traditional crops (grains, cotton, peanuts, tobacco) and milk; other livestock products and most fruit and vegetable crops have received only sporadic and small-scale support. Between the 1930s and the 1960s, the main mechanisms of support involved increasing the U.S. market prices of these commodities, through government purchases, supply controls, import restrictions, or export promotion. Since the 1960s, the support mechanism has increasingly been government subsidy payments made directly to farmers. From the 1930s through the 1950s, annual government payments to farmers averaged about $3 billion (in 1996 dollars). In the 1980s these payments averaged about $11 billion. In 1998-2001 they averaged $20 billion (USDA 2002, p. 54, adjusted to 1996 dollars).

Supply Reduction Programs versus Subsidies

The increase in payments does not indicate an increase in governmental direction of U.S. agriculture. The supply management programs of earlier decades had bigger market effects; indeed, the mechanism by which they supported farm income was principally by holding up the prices paid by buyers of farm products. A key reason these programs fell from favor politically is the belief that supply controls created a world market price umbrella under which other countries, most notably in Latin America, expanded their own crop acreages and reduced the demand for U.S. exports. Subsidy payments not tied to acreage reductions will instead tend to increase U.S. output and thus drive down both U.S. and world prices. Some of the strongest objectors to recent U.S. farm programs have, for this reason, been representatives of foreign agricultural producers. However, the U.S. programs have evolved over time to be less and less tied to production decisions. This “decoupling” of payments reached its peak in the Farm Act of 1996, which replaced the former “deficiency payment” program with payments that were fixed for each farmer based on the farm’s past receipt of payments. This system of payments was argued to provide little if any incentive to produce, since if a grower increased production the payments did not rise, and if a grower decreased production they did not fall. It has been argued that the main economic effect of the payments is to increase the value of cropland to which the payments are tied (for discussion see chapters in Tweeten and Thompson, 2002).

Role of Markets

Despite the salience of commodity programs in public perceptions of U.S. agriculture, the majority of farm output (by value) has no price support or other direct market intervention. Even for the program crops, it is arguable that their production history over the longer term has been little influenced by commodity programs. Market conditions, according to this view, have been more important in determining the product mix, land, labor and other inputs used, as well as innovations in production and the economic organization of farming. Throughout the twentieth century the sector remained a reasonably close approximation of the competitive supply-and-demand model.

Impact of Technological Progress and Competitive Markets

Consequently, the explanations outlined above can be well understood in basic supply-demand terms. Technological progress reduced the cost of producing farm products, and profit-seeking farmers therefore adopted the innovations embodying new technology. Competition ensured that the resulting profits were squeezed out of farmers’ hands and accrued largely to buyers of those products, with a consequent decrease in consumers’ real costs of food. Returns to farm labor, land, and capital investment were governed by changes in demand generated by technological innovation, buyers’ responses to lower prices (notably the responses of foreign buyers, evident in increased agricultural exports), and the supply conditions of the factors of production (notably the availability of non-agricultural alternatives for labor, capital, and land).

Political Economy

Farmers as an interest group in the political arena have done well in achieving legislation providing support for commodity prices and returns, public investment in rural infrastructure, and exemption from some regulatory and tax burdens that have fallen on other business sectors. This is understandable under conditions of the 1930s, when farmers’ incomes were well below those of nonfarm people and they constituted 25 percent of the nation’s population But farmers’ political clout was more puzzling at the end of the century, when they constituted less than 2 percent of the population and on average had higher incomes and wealth than nonfarm people.

The Puzzle of Farmers’ Continued Political Clout

Disproportional representation of rural people in the U.S. Senate — inherent in a system where low-population rural states each have the same number of Senators as high-population urban states — is a source of political benefit. For many years the system of powerful authorizing and appropriations committees whose chairs were determined by seniority was seen as giving extraordinary power to long-serving Southerners with strong agricultural ties. But this advantage largely ended with the Congressional reforms of the 1960s and 1970s, so the trends in political institutions as well as economic and demographic evolution would appear to work against agriculture in the political arena. Yet outlays in support of agriculture were higher in real terms at the end of the twentieth century than at any earlier time. Why? Aspects of the situation that are likely to play a role are the organizational capability and cohesiveness of farm groups, their willingness to spend time and funds lobbying, and the general lack of serious opposition to farm interests. But an applicable and testable theory of farmers’ political influence remains out of reach. For discussion and analysis see, for example, Olson 1985, Winters, 1987, Browne 1988, Abler 1989, Swinnen and van der Zee 1993, and Orden, Paarlberg, and Roe 1999.

References

Abler, David. “Vote Trading on Farm Legislation in the U.S. House.” American Journal of Agricultural Economics 71(1989): 583-591.

Blank, Steven. The End of Agriculture in the American Portfolio. Westport, CT: Quorum Books, Greenwood Publishing Group, 1998.

Browne, William P. Private Interests, Public Policy, and American Agriculture. Lawrence, KS: University Press of Kansas, 1988.

Danbom, David B. Born in the Country: A History of Rural America. Baltimore: Johns Hopkins University Press, 1995.

Gardner, Bruce L. American Agriculture in the Twentieth Century: How It Flourished and What It Cost. Cambridge, MA: Harvard University Press, 2002.

Heady, Earl O. “The Agriculture of the U.S.” In Food and Agriculture, A Scientific American Book, pp. 77-86, San Francisco: W.H. Freeman, 1976.

Hurt, R. Douglas. Problems of Plenty: The American Farmer in the Twentieth Century. Chicago: Ivan R. Dee, 2002.

Olson, Mancur. “Space, Agriculture, and Organization.” American Journal of Agricultural Economics 67(1985): 928-937.

Orden, David, Robert Paarlberg, and Terry Roe. Policy Reform in American Agriculture. Chicago: University of Chicago Press, 1999.

Swinnen, Jo, and Frans A. van der Zee. “The Political Economy of Agricultural Policies: A Survey.” European Review of Agricultural Economics 20 (1993): 261-290.

Tweeten, Luther, and Stanley R. Thompson. Agricultural Policy for the 21st Century. Ames: Iowa State Press, 2002.

Winters, L.A. “The Political Economy of the Agricultural Policy of the Industrial Countries.” European Review of Agricultural Economics 14 (1987): 285-304.

United States Department of Agriculture. Agricultural Outlook, Economic Research Service, July-August, 2002.

United States Department of Agriculture. “Farms and Land in Farms.” National Agricultural Statistics Service, February 2003.

[1] Sources: Unless otherwise specified, see U.S. Department of Agriculture, Agricultural Statistics (annual) and Agricultural Outlook (tables at rear of each monthly publication).

Citation: Gardner, Bruce. “U.S. Agriculture in the Twentieth Century”. EH.Net Encyclopedia, edited by Robert Whaples. March 20, 2003. URL http://eh.net/encyclopedia/u-s-agriculture-in-the-twentieth-century/

Agricultural Tenures and Tithes

David R. Stead, University of York

The Tenurial Ladder

Agricultural land tenures, the arrangements under which farmers occupied farmland, continue to be the subject of extensive study by agricultural historians and economists. They have identified a “ladder” of tenures broadly classified by the degree of independence each type offered the farmer. Some of the key features of the main forms of tenurial agreements are briefly described below. In practice, though, the characteristics of these different tenures shaded into one another and they often had their own particular local features, ensuring that the distinctions among them were frequently blurred.

At the top of the tenurial ladder was owner occupation, where the farmer owned and farmed his property as a peasant proprietor or capitalist producer. All other types of tenure involved a separation between the ownership and the use of land. On the next rung were hereditary tenures, which gave the occupant quasi-ownership of the farm. The hereditary tenant had a lifelong right to cultivate the holding, and was allowed to bequeath it to his direct heirs. However, his freedom of action was subject to various restrictions imposed by the superior landowner, whose permission may have been needed to adopt a new course of husbandry, for example, and who might have levied a payment when the farm changed hands. Under some circumstances the landlord could also possess the right to evict the hereditary tenant, for instance if the property was not kept in a good state of maintenance.

After owner occupation and hereditary tenures was leasehold, where the tenant occupied under a lease either lasting until a number of persons named in the contract had died, or for some certain term of years (for example, “tacks” for nineteen years were prevalent in Scotland around the turn of the nineteenth century). In the former case the names stated were often those of the farmer, his wife and son, and thus this kind of lease approached hereditary tenure. The typical leaseholder for years was charged a fixed cash rent per annum which was equal or close to the yearly economic value of the land (a rack rent). In contrast, the typical leaseholder for lives paid a small annual rent that was well below the rack rent, together with a much larger “fine” levied when the landlord granted a new lease or when the sitting tenant wished to add another name to the contract after an existing life had ended.

On a lower rung of the tenurial ladder was sharecropping (the modern preference is for “cropsharing”). Here, the landlord took the rent in kind, instead of in cash, as some share of the farm’s annual produce (predominately one half). The sharecropping landlord tended to be closely involved in the management of farming operations, and met part of the production costs. Tenancy-at-will was the next broad category of tenure. The farmer did not have a written lease but instead held from year to year at the will of the landowner, who in theory could evict the occupant at short notice for no reason. In practice, however, many landlords tended to leave tenants-at-will undisturbed so long as their husbandry was satisfactory. Changing tenants was costly for the landowner if only because the incumbent occupier possessed specialist knowledge of the idiosyncrasies of the farm’s soil, which would take a newcomer time to learn.

Serfdom and slavery were on the lowest rungs of the tenurial ladder because under these tenures the farmer was compelled to till the soil and often received little of the returns from his labors. In the feudal system in medieval Europe, even servile peasants were not the property of their manorial lord (unlike slaves), but they were – to varying degrees – bound to the land because they usually could not move (or marry) without their lord’s permission. Feudal tenants were generally required to pay some form of rent and also render personal labor services to their lord, most commonly working on his land a few days a week. Over time, these labor services were gradually commuted to a money payment. Finally, it is probably not unreasonable to include most communal forms of land tenure near the bottom of the tenurial ladder. Where land was owned or used by multiple persons, as on the village common and under Soviet collectivization, the communal nature of decision-making must have curbed the freedom of action of the enterprising farmer.

Tenurial Choice

It is possible to identify, as a very rough worldwide generalization, at least three main changes over the centuries in the types of tenure employed. First, with the gradual decline or abolition of communism, feudalism and slavery, there has been a shift towards tenurial systems based on market relations rather than collectivism or coercion. The second change has been the progressive substitution of leases for lives with leases for years, and the third has been a move towards owner occupation and fixed rent leasing at the expense of sharecropping. These shifts have occurred at different rates in different regions, and the progression has not always been linear, but sometimes characterized by reversals. This has produced enormous variation in the popularity of the various tenures. For example, in the eighteenth century sharecropping was common throughout much of the European Continent but was almost unknown in England and Ireland. Indeed, it was not uncommon for multiple forms of tenure to co-exist in the same village at the same time. After the emancipation of slaves in the American South, for instance, a diverse mix of tenures was employed: the traditional assertion that sharecropping replaced slavery in the postbellum countryside is an oversimplification.

Of the tenures listed above, it is the choice of sharecropping that has most fascinated agricultural economists. Its popularity appeared puzzling after many eighteenth and nineteenth century writers argued that this arrangement acted as a check on agrarian improvement because the farmer did not receive the full amount of any increase in farm output. More recently, however, the benefits of share tenancy have been recognised. For example, by dividing the crop, the sharecropping landlord shared the risks of a bad harvest with the tenant, thereby providing partial insurance to farmers who disliked being exposed to risk whilst still preserving some incentive for the occupier to undertake improvements. (By contrast, the fixed rent tenant contracted to pay the same amount irrespective of whether the harvest was profitable or poor.) Another sharecropping puzzle was why the output split was predominately 50/50 – indeed the French and Italian words for share tenancy, metayage and mezzadria respectively, mean splitting in half – when it might be expected that the landlord’s cut would have varied far more from farm to farm. This “easy” and “fair” fraction appears to have been a natural focal point that landlords and tenants were drawn to, thereby avoiding potentially protracted haggling that might have scarred their subsequent relationship.

Tenurial choice over the past century or so can be described using the (albeit imperfect) available body of statistics. Table 1 provides benchmarks of the percentage of agricultural land leased by farmers in several western European countries since the late nineteenth century (land not leased was owner occupied). Almost all farmland in England and Wales and Ireland at the beginning of the period covered by the table was owned by large landowners who divided their estates into farm-sized pieces which were rented out. The farm tenancy sectors of the three Continental countries in 1880 were noticeably smaller. One common factor among the various possible explanations for this was the 1804 Napoleonic Code, introduced in France and the then French empire which included Belgium and the Netherlands. The Code created inheritance laws that split the deceased’s landholdings equally among all heirs rather than, as elsewhere, the eldest son inheriting the whole property. This legal pressure for the fragmentation of landownership helped to produce a sizeable class of small owner occupying farmers on the Continent.

Table 1

Share of Land Leased by Tenant Farmers
in Selected Western European Countries, 1880-1997
(% of total agricultural land)

Belgium England & Wales France Ireland Netherlands
1880 64 85a 40 96b 40
1910 72 89 n/a 42 53
1930 62 63 40 6 49
1950 67 62 44 5 56
1980 71 47 51 8 41
1997 68 33 58 13 34

Source: Swinnen (2002), table 2.
Notes: a figure for 1885; b figure for 1870. Land not leased was owner occupied.

The most striking change since the late nineteenth century has been the rapid shrinkage of the English and Welsh, and especially Irish, tenancy sectors by 1930. In England and Wales, higher taxation (including increased death duties) combined with the legacy of an agricultural depression and the deaths of many landlords or their heirs in World War One to produce a situation where numerous owners were forced to sell to tenant farmers who had profited during the wartime agricultural boom. The even more dramatic decline of tenancy in Ireland was chiefly due to a series of state legislation beginning in 1870 that provided subsidized government loans – made on increasingly favorable terms – to help tenants purchase their holdings: the 1923 Land Act made such sales compulsory. Since the Second World War, most of the countries covered by Table 1 have enacted legal changes increasing rent controls and especially the security of leases. These restrictions have made tenancy more attractive for tenants but more importantly less so for landowners, which helps explain the post-war shrinkage of the tenancy sectors in England and Wales and the Netherlands. By contrast, in France the proportion of land leased has risen in recent years partly in response to government policies encouraging leasing, such as lower taxes on land rents.

The general prevalence of owner occupation in the second half of the twentieth century suggested by Table 1 is supported by Figure 1, which gives a snapshot of the global situation in 1970 using data from the world census of agriculture. The first of each pair of columns shows the percentage of all farmland in each region held under owner occupation. Usually the majority of land was cultivated by its owner, although in Africa communal tenures were more widespread. The second of each pair of columns shows the proportion of land in just the tenancy sector of each region that was let under a sharecropping contract. Despite its traditional association with poverty, sharecropping remains persistently popular even in modern advanced farming sectors, notably in North America where nearly a third of tenanted land in 1970 was occupied by sharecroppers.

Figure 1
Percentage of Total Farmland Held under Owner Cultivation, and the Percentage of Tenanted Land Held under Sharecropping, Various Regions, 1970

Source: Otsuka et al. (1992), table 1

The Historical Role of the Lease

A number of contemporaries and historians have suggested that the lease played an important role in influencing farming practices. Short leases, especially tenancies at will, were loudly criticized by the eighteenth-century English writers Arthur Young and William Marshall on the grounds that these contracts did not provide the tenant with sufficient security to make long-term investments to the farm, such as draining the land. If the benefits from these types of expenditures were not fully realized until after the original lease expired, then there was a danger that the tenant would lose part of his investment returns if the landlord acted opportunistically by evicting him, or by renewing his lease but at a higher rent. Tenants may therefore have been wary of making large expenditures for fear of the later consequences, inhibiting agricultural improvement. How serious a problem the potential insecurity of short leases was in practice is a moot point. Landlords not lessees undertook much of the long-term investments, and for those expenditures that were made by tenants, legal or customary rights existing outside the tenancy agreement might have provided at least some security. Outgoing farmers, for instance, could be due compensation for their “unexhausted improvements,” as under Ulster (Ireland) and English tenant right, and some landlords might have been able to establish a reputation for not unfairly treating their tenantry. Furthermore, when the economic conditions faced by farmers were depressed or uncertain, many tenants actually preferred a short lease because this ensured that they were not tied to the holding if it turned out to be unprofitable.

Leases could have promoted innovative, or at least best practice, farming if the landowner had used these documents to insist on the tenantry adopting certain types of crops and crop rotations. Evidence from England during the long eighteenth century, however, indicates that the husbandry clauses written into leases were primarily designed to restrict tenants from engaging in a course of farming that would be deleterious to long-term soil fertility, rather than stipulating that the latest agricultural methods be employed. Thus instead of demanding that (say) turnips be cultivated, popular covenants in English leases included those prohibiting the growing of more than two successive cereal crops on the same field or the plowing of pasture land without the landowner’s prior written consent.

Tithes

Landlords and tenants were not the only parties with a close interest in the produce of the soil. Farmers frequently had to pay tithe, a tax payable for the support of the church. Probably originating as a voluntary payment in early Christian communities, tithes became a legally enforced obligation in many countries – particularly in western Europe – during the Middle Ages. The tithe was supposedly levied at one tenth of the gross value of the farm’s annual produce and was traditionally paid in kind, whereby the clergyman would claim every tenth sheaf of corn (etc.). In practice, a complex combination of case law and custom exempted various types of land and products. Moreover, frequently the tithe owner was not actually a member of the clergy, often because a layperson had purchased church-owned land that had tithing rights attached to it. Many contemporary agricultural writers, not without some justification, criticized tithes in kind on the grounds that they acted as a disincentive to agrarian improvement because, as with a sharecropping agreement, the farmer did not receive the full amount of any rise in farm output. Payment of tithes in kind also offered substantial scope for friction between tithe payers and collectors, for example over whether new crops, such as potatoes, were titheable. To thwart those farmers who sought to under-report their produce, or give poor quality products as tithe (one milkmaid urinated in the tithe milk), the tithing man typically collected his due from the fields rather than allowing the payer to deliver it to the tithe barn.

On account of these disputes and inconveniences, tithes in kind were often commuted to a fixed or variable annual cash payment. Alternatively an allotment of land or a lump sum might be given in return for the church extinguishing tithes. Many of these substitutions were achieved under government legislation, such as the 1836 and 1936 Tithe Acts in England. Yet cash payment was far from being free from conflict arising, for instance, when the church attempted to annul a fixed money charge that, owing to inflation, had fallen to a trifling amount. The underlying friction peaked in so-called tithe wars, which were characterized by demonstrations by payers and varying degrees of violent clashes with collectors; examples include Ireland in the 1830s and England and Wales in the 1930s. In short, the multiplicity of tithing customs and seemingly endless disputes over payment suggest that some tithe owners at some times got closer to obtaining their tenth than others.

Bibliography

Alston, Lee J. and Robert Higgs. “Contractual Mix in Southern Agriculture since the Civil War: Facts, Hypotheses, and Tests.” Journal of Economic History 42 (1982): 327-53.

Blum, Jerome. The End of the Old Order in Rural Europe. Princeton: Princeton University Press, 1978.

Brinkman, Carl, Heinrich Cunow, Fritz Heichelheim, Robert H. Lowie, George McCutchen McBride, David Mitrany, Radha Kamal Mukerjee, Peter Struve and Yosaburo Takekoshi. “Land Tenure.” In The Encyclopaedia of the Social Sciences, Volume 9, 73-127. London: Macmillan, 1933.

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Citation: Stead, David. “Agricultural Tenures and Tithes”. EH.Net Encyclopedia, edited by Robert Whaples. January 25, 2004. URL http://eh.net/encyclopedia/agricultural-tenures-and-tithes/

African Americans in the Twentieth Century

Thomas N. Maloney, University of Utah

The nineteenth century was a time of radical transformation in the political and legal status of African Americans. Blacks were freed from slavery and began to enjoy greater rights as citizens (though full recognition of their rights remained a long way off). Despite these dramatic developments, many economic and demographic characteristics of African Americans at the end of the nineteenth century were not that different from what they had been in the mid-1800s. Tables 1 and 2 present characteristics of black and white Americans in 1900, as recorded in the Census for that year. (The 1900 Census did not record information on years of schooling or on income, so these important variables are left out of these tables, though they will be examined below.) According to the Census, ninety percent of African Americans still lived in the Southern US in 1900 — roughly the same percentage as lived in the South in 1870. Three-quarters of black households were located in rural places. Only about one-fifth of African American household heads owned their own homes (less than half the percentage among whites). About half of black men and about thirty-five percent of black women who reported an occupation to the Census said that they worked as a farmer or a farm laborer, as opposed to about one-third of white men and about eight percent of white women. Outside of farm work, African American men and women were greatly concentrated in unskilled labor and service jobs. Most black children had not attended school in the year before the Census, and white children were much more likely to have attended. So the members of a typical African American family at the start of the twentieth century lived and worked on a farm in the South and did not own their home. Children in these families were unlikely to be in school even at very young ages.

By 1990 (the most recent Census for which such statistics are available at the time of this writing), the economic conditions of African Americans had changed dramatically (see Tables 1 and 2). They had become much less concentrated in the South, in rural places, and in farming jobs and had entered better blue-collar jobs and the white-collar sector. They were nearly twice as likely to own their own homes at the end of the century as in 1900, and their rates of school attendance at all ages had risen sharply. Even after this century of change, though, African Americans were still relatively disadvantaged in terms of education, labor market success, and home ownership.

Table 1: Characteristics of Households in 1900 and 1990

1900 1990
Black White Black White
A. Region of Residence
South 90.1% 23.5% 53.0% 32.9%
Northeast 3.6% 31.8% 18.9% 20.9%
Midwest 5.8% 38.5% 18.9% 25.3%
West 0.5% 6.2% 9.2% 21.0%
B. Share Rural
75.8% 56.1% 11.9% 25.7%
C. Share of Homes Owner-Occupied
22.1% 49.2% 43.4% 67.3%

Based on household heads in Integrated Public Use Microdata Series Census samples for 1900 and 1990.

Table 2: Characteristics of Individuals in 1900 and 1990

1900 1990
Male Female Male Female
Black White Black White Black White Black White
A. Occupational Distribution
Professional/Technical 1.3% 3.8% 1.6% 10.7% 9.9% 17.2% 16.6% 21.9%
Proprietor/Manager/Official 0.8 6.9 0.2 2.6 6.5 14.7 5.4 10.0
Clerical 0.2 4.0 0.2 5.6 10.7 7.2 29.7 31.9
Sales 0.3 4.2 0.2 4.1 2.9 6.7 4.1 7.3
Craft 4.2 15.9 0 3.1 17.4 20.7 2.3 2.1
Operative 7.3 13.4 1.8 24.5 20.7 14.9 12.4 8.0
Laborer 25.5 14.0 6.5 1.5 12.2 7.2 2.0 1.5
Private Service 2.2 0.4 33.0 33.2 0.1 0 2.0 0.8
Other Service 4.8 2.4 20.6 6.6 18.5 9.0 25.3 15.8
Farmer 30.8 23.9 6.7 6.1 0.2 1.4 0.1 0.4
Farm Laborer 22.7 11.0 29.4 2.0 1.0 1.0 0.4 0.5
B. Percent Attending School by Age
Ages 6 to 13 37.8% 72.2% 41.9% 71.9% 94.5% 95.3% 94.2% 95.5
Ages 14 to 17 26.7 47.9 36.2 51.5 91.1 93.4 92.6 93.5
Ages 18 to 21 6.8 10.4 5.9 8.6 47.7 54.3 52.9 57.1

Based on Integrated Public Use Microdata Series Census samples for 1900 and 1990. Occupational distributions based on individuals aged 18 to 64 with recorded occupation. School attendance in 1900 refers to attendance at any time in the previous year. School attendance in 1990 refers to attendance since February 1 of that year.

These changes in the lives of African Americans did not occur continuously and steadily throughout the twentieth century. Rather, we can divide the century into three distinct eras: (1) the years from 1900 to 1915, prior to large-scale movement out of the South; (2) the years from 1916 to 1964, marked by migration and urbanization, but prior to the most important government efforts to reduce racial inequality; and (3) the years since 1965, characterized by government antidiscrimination efforts but also by economic shifts which have had a great impact on racial inequality and African American economic status.

1900-1915: Continuation of Nineteenth-Century Patterns

As was the case in the 1800s, African American economic life in the early 1900s centered on Southern cotton agriculture. African Americans grew cotton under a variety of contracts and institutional arrangements. Some were laborers hired for a short period for specific tasks. Many were tenant farmers, renting a piece of land and some of their tools and supplies, and paying the rent at the end of the growing season with a portion of their harvest. Records from Southern farms indicate that white and black farm laborers were paid similar wages, and that white and black tenant farmers worked under similar contracts for similar rental rates. Whites in general, however, were much more likely to own land. A similar pattern is found in Southern manufacturing in these years. Among the fairly small number of individuals employed in manufacturing in the South, white and black workers were often paid comparable wages if they worked at the same job for the same company. However, blacks were much less likely to hold better-paying skilled jobs, and they were more likely to work for lower-paying companies.

While the concentration of African Americans in cotton agriculture persisted, Southern black life changed in other ways in the early 1900s. Limitations on the legal rights of African Americans grew more severe in the South in this era. The 1896 Supreme Court decision in the case of Plessy v. Ferguson provided a legal basis for greater explicit segregation in American society. This decision allowed for the provision of separate facilities and services to blacks and whites as long as the facilities and services were equal. Through the early 1900s, many new laws, known as Jim Crow laws, were passed in Southern states creating legally segregated schools, transportation systems, and lodging. The requirement of equality was not generally enforced, however. Perhaps the most important and best-known example of separate and unequal facilities in the South was the system of public education. Through the first decades of the twentieth century, resources were funneled to white schools, raising teacher salaries and per-pupil funding while reducing class size. Black schools experienced no real improvements of this type. The result was a sharp decline in the relative quality of schooling available to African-American children.

1916-1964: Migration and Urbanization

The mid-1910s witnessed the first large-scale movement of African Americans out of the South. The share of African Americans living in the South fell by about four percentage points between 1910 and 1920 (with nearly all of this movement after 1915) and another six points between 1920 and 1930 (see Table 3). What caused this tremendous relocation of African Americans? The worsening political and social conditions in the South, noted above, certainly played a role. But the specific timing of the migration appears to be connected to economic factors. Northern employers in many industries faced strong demand for their products and so had a great need for labor. Their traditional source of cheap labor, European immigrants, dried up in the late 1910s as the coming of World War I interrupted international migration. After the end of the war, new laws limiting immigration to the US would keep the flow of European labor at a low level. Northern employers thus needed a new source of cheap labor, and they turned to Southern blacks. In some cases, employers would send recruiters to the South to find workers and to pay their way North. In addition to this pull from the North, economic events in the South served to push out many African Americans. Destruction of the cotton crop by the boll weevil, an insect that feeds on cotton plants, and poor weather in some places during these years made new opportunities in the North even more attractive.

Table 3: Share of African Americans Residing in the South

Year Share Living in South
1890 90%
1900 90%
1910 89%
1920 85%
1930 79%
1940 77%
1950 68%
1960 60%
1970 53%
1980 53%
1990 53%

Sources: 1890 to 1960: Historical Statistics of the United States, volume 1, pp. 22-23; 1970: Statistical Abstract of the United States, 1973, p. 27; 1980: Statistical Abstract of the United States, 1985, p. 31; 1990: Statistical Abstract of the United States, 1996, p. 31.

Pay was certainly better, and opportunities were wider, in the North. Nonetheless, the region was not entirely welcoming to these migrants. As the black population in the North grew in the 1910s and 1920s, residential segregation grew more pronounced, as did school segregation. In some cases, racial tensions boiled over into deadly violence. The late 1910s were scarred by severe race riots in a number of cities, including East St. Louis (1917) and Chicago (1919).

Access to Jobs in the North

Within the context of this broader turmoil, black migrants did gain entry to new jobs in Northern manufacturing. As in Southern manufacturing, pay differences between blacks and whites working the same job at the same plant were generally small. However, black workers had access to a limited set of jobs and remained heavily concentrated in unskilled laborer positions. Black workers gained admittance to only a limited set of firms, as well. For instance, in the auto industry, the Ford Motor Company hired a tremendous number of black workers, while other auto makers in Detroit typically excluded these workers. Because their alternatives were limited, black workers could be worked very intensely and could also be used in particularly unpleasant and dangerous settings, such as the killing and cutting areas of meat packing plants, foundry departments in auto plants, and blast furnaces in steel plants.

Unions

Through the 1910s and 1920s, relations between black workers and Northern labor unions were often antagonistic. Many unions in the North had explicit rules barring membership by black workers. When faced with a strike (or the threat of a strike), employers often hired in black workers, knowing that these workers were unlikely to become members of the union or to be sympathetic to its goals. Indeed, there is evidence that black workers were used as strike breakers in a great number of labor disputes in the North in the 1910s and 1920s. Beginning in the mid-1930s, African Americans gained greater inclusion in the union movement. By that point, it was clear that black workers were entrenched in manufacturing, and that any broad-based organizing effort would have to include them.

Conditions around 1940

As is apparent in Table 3, black migration slowed in the 1930s, due to the onset of the Great Depression and the resulting high level of unemployment in the North in the 1930s. Beginning in about 1940, preparations for war again created tight labor markets in Northern cities, though, and, as in the late 1910s, African Americans journeyed north to take advantage of new opportunities. In some ways, moving to the North in the 1940s may have appeared less risky than it had during the World War I era. By 1940, there were large black communities in a number of Northern cities. Newspapers produced by these communities circulated in the South, providing information about housing, jobs, and social conditions. Many Southern African Americans now had friends and relatives in the North to help with the transition.

In other ways, though, labor market conditions were less auspicious for black workers in 1940 than they had been during the World War I years. Unemployment remained high in 1940, with about fourteen percent of white workers either unemployed or participating in government work relief programs. Employers hired these unemployed whites before turning to African American labor. Even as labor markets tightened, black workers gained little access to war-related employment. The President issued orders in 1941 that companies doing war-related work had to hire in a non-discriminatory way, and the Fair Employment Practice Committee was created to monitor the hiring practices of these companies. Initially, few resources were devoted to this effort, but in 1943 the government began to enforce fair employment policies more aggressively. These efforts appear to have aided black employment, at least for the duration of the war.

Gains during the 1940s and 1950s

In 1940, the Census Bureau began to collect data on individual incomes, so we can track changes in black income levels and in black/white income ratios in more detail from this date forward. Table 4 provides annual earnings figures for black and white men and women from 1939 (recorded in the 1940 Census) to 1989 (recorded in the 1990 Census). The big gains of the 1940s, both in level of earnings and in the black/white income ratio, are very obvious. Often, we focus on the role of education in producing higher earnings, but the gap between average schooling levels for blacks and whites did not change much in the 1940s (particularly for men), so schooling levels could not have contributed too much to the relative income gains for blacks in the 1940s (see Table 5). Rather, much of the improvement in the black/white pay ratio in this decade simply reflects ongoing migration: blacks were leaving the South, a low-wage region, and entering the North, a high-wage region. Some of the improvement reflects access to new jobs and industries for black workers, due to the tight labor markets and antidiscrimination efforts of the war years.

Table 4: Mean Annual Earnings of Wage and Salary Workers

Aged 20 and Over

Male

Female

Black White Ratio Black White Ratio
1939 $537.45 $1234.41 .44 $331.32 $771.69 .43
1949 1761.06 2984.96 .59 992.35 1781.96 .56
1959 2848.67 5157.65 .55 1412.16 2371.80 .59
1969 5341.64 8442.37 .63 3205.12 3786.45 .85
1979 11404.46 16703.67 .68 7810.66 7893.76 .99
1989 19417.03 28894.69 .67 15319.29 16135.65 .95

Source: Integrated Public Use Microdata Series Census samples for 1940, 1950, 1960, 1970, 1980, and 1990. Includes only those with non-zero earnings who were not in school. All figures are in current (nominal) dollars.

Table 5: Years of School Attended for Individuals 20 and Over

Male

Female

Black White Difference Black White Difference
1940 5.9 9.1 3.2 6.9 10.5 3.6
1950 6.8 9.8 3 7.8 10.8 3
1960 7.9 10.5 2.6 8.8 11.0 2.2
1970 9.4 11.4 2.0 10.3 11.7 1.4
1980 11.2 12.5 1.3 11.8 12.4 0.6

Source: Integrated Public Use Microdata Series Census samples for 1940, 1950, 1960, 1970, and 1980. Based on highest grade attended by wage and salary workers aged 20 and over who had non-zero earnings in the previous year and who were not in school at the time of the census. Comparable figures are not available in the 1990 Census.

Black workers relative incomes were also increased by some general changes in labor demand and supply and in labor market policy in the 1940s. During the war, demand for labor was particularly strong in the blue-collar manufacturing sector. Workers were needed to build tanks, jeeps, and planes, and these jobs did not require a great deal of formal education or skill. In addition, the minimum wage was raised in 1945, and wartime regulations allowed greater pay increases for low-paid workers than for highly-paid workers. After the war, the supply of college-educated workers increased dramatically. The GI Bill, passed in 1944, provided large subsidies to help pay the expenses of World War II veterans who wanted to attend college. This policy helped a generation of men further their education and get a college degree. So strong labor demand, government policies that raised wages at the bottom, and a rising supply of well-educated workers meant that less-educated, less-skilled workers received particularly large wage increases in the 1940s. Because African Americans were concentrated among the less-educated, low-earning workers, these general economic forces were especially helpful to African Americans and served to raise their pay relative to that of whites.

The effect of these broader forces on racial inequality helps to explain the contrast between the 1940s and 1950s evident in Table 4. The black-white pay ratio may have actually fallen a bit for men in the 1950s, and it rose much more slowly in the 1950s than in the 1940s for women. Some of this slowdown in progress reflects weaker labor markets in general, which reduced black access to new jobs. In addition, the general narrowing of the wage distribution that occurred in the 1940s stopped in the 1950s. Less-educated, lower-paid workers were no longer getting particularly large pay increases. As a result, blacks did not gain ground on white workers. It is striking that pay gains for black workers slowed in the 1950s despite a more rapid decline in the black-white schooling gap during these years (Table 5).

Unemployment

On the whole, migration and entry to new industries played a large role in promoting black relative pay increases through the years from World War I to the late 1950s. However, these changes also had some negative effects on black labor market outcomes. As black workers left Southern agriculture, their relative rate of unemployment rose. For the nation as a whole, black and white unemployment rates were about equal as late as 1930. This equality was to a great extent the result of lower rates of unemployment for everyone in the rural South relative to the urban North. Farm owners and sharecroppers tended not to lose their work entirely during weak markets, whereas manufacturing employees might be laid off or fired during downturns. Still, while unemployment was greater for everyone in the urban North, it was disproportionately greater for black workers. Their unemployment rates in Northern cities were much higher than white unemployment rates in the same cities. One result of black migration, then, was a dramatic increase in the ratio of black unemployment to white unemployment. The black/white unemployment ratio rose from about 1 in 1930 (indicating equal unemployment rates for blacks and whites) to about 2 by 1960. The ratio remained at this high level through the end of the twentieth century.

1965-1999: Civil Rights and New Challenges

In the 1960s, black workers again began to experience more rapid increases in relative pay levels (see Table 4). These years also marked a new era in government involvement in the labor market, particularly with regard to racial inequality and discrimination. One of the most far-reaching changes in government policy regarding race actually occurred a bit earlier, in the 1954 Supreme Court decision in the case of Brown v. the Board of Education of Topeka, Kansas. In that case, the Supreme Court ruled that racial segregation of schools was unconstitutional. However, substantial desegregation of Southern schools (and some Northern schools) would not take place until the late 1960s and early 1970s.

School desegregation, therefore, was probably not a primary force in generating the relative pay gains of the 1960s and 1970s. Other anti-discrimination policies enacted in the mid-1960s did play a large role, however. The Civil Rights Act of 1964 outlawed discrimination in a broad set of social arenas. Title VII of this law banned discrimination in hiring, firing, pay, promotion, and working conditions and created the Equal Employment Opportunity Commission to investigate complaints of workplace discrimination. A second policy, Executive Order 11246 (issued by President Johnson in 1965), set up more stringent anti-discrimination rules for businesses working on government contracts. There has been much debate regarding the importance of these policies in promoting better jobs and wages for African Americans. There is now increasing agreement that these policies had positive effects on labor market outcomes for black workers at least through the mid-1970s. Several pieces of evidence point to this conclusion. First, the timing is right. Many indicators of employment and wage gains show marked improvement beginning in 1965, soon after the implementation of these policies. Second, job and wage gains for black workers in the 1960s were, for the first time, concentrated in the South. Enforcement of anti-discrimination policy was targeted on the South in this era. It is also worth noting that rates of black migration out of the South dropped substantially after 1965, perhaps reflecting a sense of greater opportunity there due to these policies. Finally, these gains for black workers occurred simultaneously in many industries and many places, under a variety of labor market conditions. Whatever generated these improvements had to come into effect broadly at one point in time. Federal antidiscrimination policy fits this description.

Return to Stagnation in Relative Income

The years from 1979 to 1989 saw the return of stagnation in black relative incomes. Part of this stagnation may reflect the reversal of the shifts in wage distribution that occurred during the 1940s. In the late 1970s and especially in the 1980s, the US wage distribution grew more unequal. Individuals with less education, particularly those with no college education, saw their pay decline relative to the better-educated. Workers in blue-collar manufacturing jobs were particularly hard hit. The concentration of black workers, especially black men, in these categories meant that their pay suffered relative to that of whites. Another possible factor in the stagnation of black relative pay in the 1980s was weakened enforcement of antidiscrimination policies at this time.

While black relative incomes stagnated on average, black residents of urban centers suffered particular hardships in the 1970s and 1980s. The loss of blue-collar manufacturing jobs was most severe in these areas. For a variety of reasons, including the introduction of new technologies that required larger plants, many firms relocated their production facilities outside of central cities, to suburbs and even more peripheral areas. Central cities increasingly became information-processing and financial centers. Jobs in these industries generally required a college degree or even more education. Despite decades of rising educational levels, African Americans were still barely half as likely as whites to have completed four years of college or more: in 1990, 11.3% of blacks over the age of 25 had four years of college or more, versus 22% of whites. As a result of these developments, many blacks in urban centers found themselves surrounded by jobs for which they were poorly qualified, and at some distance from the types of jobs for which they were qualified, the jobs their parents had moved to the city for in the first place. Their ability to relocate near these blue-collar jobs seems to have been limited both by ongoing discrimination in the housing market and by a lack of resources. Those African Americans with the resources to exit the central city often did so, leaving behind communities marked by extremely high rates of poverty and unemployment.

Over the fifty years from 1939 to 1989, through these episodes of gain and stagnation, the ratio of black mens average annual earnings to white mens average annual earnings rose about 23 points, from .44 to .67. The timing of improvement in the black female/ white female income ratio was similar. However, black women gained much more ground overall: the black-white income ratio for women rose 50 points over these fifty years and stood at .95 in 1989 (down from .99 in 1979). The education gap between black women and white women declined more than the education gap between black and white men, which contributed to the faster pace of improvement in black womens relative earnings. Furthermore, black female workers were more likely to be employed full-time than were white female workers, which raised their annual income. The reverse was true among men: white male workers were somewhat more likely to be employed full time than were black male workers.

Comparable data on annual incomes from the 2000 Census are not available at the time of this writing. Evidence from other labor market surveys suggests that the tight labor markets of the late 1990s may have brought renewed relative pay gains for black workers. Black workers also experienced sharp declines in unemployment during these years, though black unemployment remained about twice as great as white unemployment.

Beyond the Labor Market: Persistent Gaps in Wealth and Health

When we look beyond these basic measures of labor market success, we find more disturbingly large and persistent gaps between African Americans and white Americans. Wealth differences between blacks and whites continue to be very large. In the mid-1990s, black households held only about one-quarter the amount of wealth that white households held, on average. If we leave out equity in ones home and personal possessions and focus on more strictly financial, income-producing assets, black households held only about ten to fifteen percent as much wealth as white households. Big differences in wealth holding remain even if we compare black and white households with similar incomes.

Much of this wealth gap reflects the ongoing effects of the historical patterns described above. When freed from slavery, African Americans held no wealth, and their lower incomes prevented them from accumulating wealth at the rate whites did. African Americans found it particularly difficult to buy homes, traditionally a households most important asset, due to discrimination in real estate markets. Government housing policies in the 1930s and 1940s may have also reduced their rate of home-buying. While the federal government made low interest loans and loan insurance available through the Home Owners Loan Corporation and the Federal Housing Authority, these programs generally could not be used to acquire homes in black or mixed neighborhoods, usually the only neighborhoods in which blacks could buy, because these were considered to be areas of high-risk for loan default. Because wealth is passed on from parents to children, the wealth differences of the mid-twentieth century continue to have an important impact today.

Differences in life expectancy have also proven to be remarkably stubborn. Certainly, black and white mortality patterns are more similar today than they once were. In 1929, the first year for which national figures are available, white life expectancy at birth was 58.6 years and black life expectancy was 46.7 years (for men and women combined). By 2000, white life expectancy had risen to 77.4 years and black life expectancy was 71.8 years. Thus, the black-white gap had fallen from about twelve years to less than six. However, almost all of this reduction in the gap was completed by the early 1960s. In 1961, the black-white gap was 6.5 years. The past forty years have seen very little change in the gap, though life expectancy has risen for both groups.

Some of this remaining difference in life expectancy can be traced to income differences between blacks and whites. Black children face a particularly high risk of accidental death in the home, often due to dangerous conditions in low-quality housing. African Americans of all ages face a high risk of homicide, which is related in part to residence in poor neighborhoods. Among older people, African Americans face high risk of death due to heart disease, and the incidence of heart disease is correlated with income. Still, black-white mortality differences, especially those related to disease, are complex and are not yet fully understood.

Infant mortality is a particularly large and particularly troubling form of health difference between blacks and whites.

In 2000 the white infant mortality rate (5.7 per 1000 live births) was less than half the rate for African Americans (14.0 per 1000). Again, some of this mortality difference is related to the effect of lower incomes on the nutrition, medical care, and living conditions available to African American mothers and newborns. However, the full set of relevant factors is the subject of ongoing research.

Summary and Conclusions

It is undeniable that the economic fortunes of African Americans changed dramatically during the twentieth century. African Americans moved from tremendous concentration in Southern agriculture to much greater diversity in residence and occupation. Over the period in which income can be measured, there are large increases in black incomes in both relative and absolute terms. Schooling differentials between blacks and whites fell sharply, as well. When one looks beyond the starting and ending points, though, more complex realities present themselves. The progress that we observe grew out of periods of tremendous social upheaval, particularly during the world wars. It was shaped in part by conflict between black workers and white workers, and it coincided with growing residential segregation. It was not continuous and gradual. Rather, it was punctuated by periods of rapid gain and periods of stagnation. The rapid gains are attributable to actions on the part of black workers (especially migration), broad economic forces (especially tight labor markets and narrowing of the general wage distribution), and specific antidiscrimination policy initiatives (such as the Fair Employment Practice Committee in the 1940s and Title VII and contract compliance policy in the 1960s). Finally, we should note that this century of progress ended with considerable gaps remaining between African Americans and white Americans in terms of income, unemployment, wealth, and life expectancy.

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The History of the Aerospace Industry

Glenn E. Bugos, The Prologue Group

The aerospace industry ranks among the world’s largest manufacturing industries in terms of people employed and value of output. Yet even beyond its shear size, the aerospace industry was one of the defining industries of the twentieth century. As a socio-political phenomenon, aerospace has inflamed the imaginations of youth around the world, inspired new schools of industrial design, decisively bolstered both the self-image and power of the nation state, and shrunk the effective size of the globe. As an economic phenomenon, aerospace has consumed the major amount of research and development funds across many fields, subsidized innovation in a vast array of component technologies, evoked new forms of production, spurred construction of enormous manufacturing complexes, inspired technology-sensitive managerial techniques, supported dependent regional economies, and justified the deeper incursion of national governments into their economies. No other industry has so persistently and intimately interacted with the bureaucratic apparatus of the nation state.

Aerospace technology permeates many other industries — travel and tourism, logistics, telecommunications, electronics and computing, advanced materials, civil construction, capital goods manufacture, and defense supply. Here, the aerospace industry is defined by those firms that design and build vehicles that fly through our atmosphere and outer space.

The First Half-Century

Aircraft remained experimental apparatus for five years after the Wright brother’s famous first flight in December 1903. In 1908 the Wrights secured a contract to make a single aircraft from the U.S. Army, and also licensed their patents to allow the Astra Company to manufacture aircraft in France. Glenn Curtiss of New York began selling his own aircraft in 1909, prompting many American aircraft hobbyists to turn entrepreneurial.

Europeans took a clear early lead in aircraft manufacture. By the outbreak of the Great War in August 1914, French firms had built more than 2,000 aircraft, German firms had built about 1,000, and Britain slightly fewer. American firms had built less than a hundred, most of these one of a kind. Even then aircraft embodied diverse materials at close tolerances, and those who mismanaged the American wartime manufacturing effort failed to realize the need for special facilities and trained workers. American warplanes ultimately arrived too late to have much military impact or to impart much momentum to an industry. When contracts were cancelled with the armistice the industry collapsed, leading to the reconfiguration of every significant aircraft firm. By contrast, seven firms built more than 22,500 of the 400-horsepower Liberty engines, and their efforts laid the foundation for an efficient and well-concentrated aircraft engine industry — led by Wright Aeronautical Company and Curtiss Aeroplane and Motor.

Still, the war induced some infrastructure that moved the industry beyond its fragmented roots. National governments funded testing laboratories — like the National Advisory Committee for Aeronautics established in May 1915 in the United States — that also disseminated scientific information of explicit use to industry. Universities began to offer engineering degrees specific to aircraft. American aircraft designers formed a patent pool in July 1917 — administered by the Aircraft Manufacturers Association — whereby all aircraft firms cross-licensed key patents and paid into the pool without fear of infringement suits. The post-war glut of light aircraft, like the Curtiss Jenny trainers in America, allowed anyone who dreamed of flying to become a pilot.

Most of the companies that survived the war remained entrepreneurial in spirit, led by designers more interested in advancing the state of the art than in mass production. During the 1920s, aircraft assumed their modern shape. Monoplanes superceded biplanes, stressed-skin cantilevered wings replaced externally braced wings, radial air-cooled engines turned variable pitch propellers, and enclosed fuselages and cowlings gave aircraft their sleek aerodynamic shape. By the mid-1930s, metal replaced wood as the material of choice in aircraft construction so new types of component suppliers fed the aircraft manufacturers.

Likewise, the customers of aircraft grew more sophisticated in matching designs to their needs. Militaries formed air arms specifically to exploit this new technology, which became dedicated procurers of aircrafts. Air transport companies began flying passengers in the 1920s, though all those airlines were kept afloat by government airmail contracts. European nations developed airmail routes around their colonies — served by flag-carriers like the British Overseas Airways Corporation, Lufthansa, and Aeropostale. Pan Am’s routes to Asia and Latin America, linked by flying boats built by Sikorsky, Douglas and Lockheed, was the equivalent in the American empire.

The United States was the only country with a large indigenous airmail system, and it drove the structure of the industry during the 1920s. The Kelly Air Mail Act of 1925 gave airmail business to hundreds of small pilot-owned firms that hopped from airport and airport. Gradually, these operations were consolidated into larger airlines. In 1928 — in a mix of stock market euphoria and aviation enthusiasm following Charles Lindbergh’s transatlantic flight — Wall Street financiers formed holding companies that integrated airlines with the manufacture of aircraft and engines. United Aircraft and Transport, for example, combined United Airlines with Boeing, North American Aviation, and the Aviation Corporation. These holding companies struggled for profitability following the stock market crash of 1929, and were ultimately undone in 1934 through legislation that split manufacturers and airlines — a separation that continued thereafter.

The United States was also the only country large enough for air travel to challenge rail travel, and in the 1930s airlines competed for passengers by forging alliances with aircraft manufacturers. The Boeing 247 airliner, based on its B-9 bomber design, marked the start of American dominance in transport aircraft. The Douglas DC-3, introduced in 1935, gave airlines their first shot at solvency by carrying people rather than mail. Many advances in aircraft design during the 1930s addressed the comfort, efficiency and safety of air travel — cabin pressurization, retractable landing gear, better instrumentation and better navigational devices around airports. Britain and Germany produced the best large bombers at the start of the 1930s, though by the start of the World War II American designs were better. American firms, by contrast though, were producing very few of them.

During the 1930s, the European states had begun ramping up production of military aircraft, training pilots to fly them, and building airfields to host them. Once the war began, though, factories were bombed and supply lines cut off. As it became less likely they would overwhelm their enemies with vast fleets of aircraft, German and British aircraft firms instead invested in research and engineering to create better aircraft. Under the exigency of war, Europeans developed the strategic missile, the jet engine, better radar, all-weather navigation aids, and more nimble fighters. The German Messerschmitt 262 fighter aircraft — which combined a strong turbine engine with the innovation of swept wings — approached the speed of sound. The Europeans also innovated in tactics and logistics to use fewer aircraft more effectively. The discipline of operations research grew out of British needs to use patrol aircraft more efficiently. Though American designers also proved innovative in the crucible of war, American firms clearly triumphed in mass production.

In the six-year period 1940 through 1945, American firms built 300,718 military aircraft, including 95,272 in 1944 alone. In the previous six-year period, American firms built only 19,587 aircraft, most of those civil. In 1943, the aviation industry was America’s largest producer and employer — with 1,345,600 people bent to the task of making aircraft. A vast array of firms — especially automobile makers — fed this rapid escalation of production. Engineers disaggregated aircraft into smaller parts to parcel out to subcontractors, managed distributed manufacturing, and devised the concept of the learning curve to forecast when cost reductions kicked in. By the end of the war, Americans firmly believed in the doctrine of air power. They invested in their belief, and for the next half-century Americans would set the agenda for the aircraft industry around the world. Mass production, though, slipped from that agenda. On VJ Day the American military cancelled all orders for aircraft, and assembly lines ground to a halt. Total sales by American aircraft firms were $16 billion in 1944; by 1947 they were only $1.2 billion. Production never again reached World War II levels, despite a minor blip for the wars in Korea and Vietnam. Instead, research ruled the industry.

The Cold War

The Berlin airlift of 1947 marked the start of the Cold War between the United States and the Soviet Union, a symbolic conflict in which perceptions of aerial might played a key role. Once they divested themselves of their surplus plants, American aircraft firms rushed to incorporate into their designs the technological advances of World War II. The preeminent symbol of these efforts, and of the nature of the Cold War, was the massive Boeing B-47 long-range strategic bomber, with six engines and swept wings. Boeing built 2,000 B-47s, following its first flight in December 1947, and emerged as the dominant builder of strategic bombers and large airliners — like the B-52 and the 707. Also symbolizing this conflict was the needle-thin rocket-powered Bell X-1 which, in December 1947, became the first aircraft to break the sound barrier. The X-1 was the first in the X-series of experimental aircraft – sleek, specially built research aircraft that jousted with Soviet aircraft to set speed and altitude records. More importantly, the aerospace industry made new types of vehicles to join the half-century old propeller-driven airplane in the skies.

New technologies prompted a massive restructuring of the industry. Established airframe firms shifted from manufacturing to research, while the military channeled funds to technology-specific startup firms. For example, Sikorsky, Hiller and Bell quickly dominated the market for new type of airframe known as a helicopter. Electronics specialists like Raytheon, Sperry, and Hughes became prime contractors for the new guided missiles, while airframe manufacturers subcontracted to them. Turbojet engines were the most disruptive new technology. Turbojets shared little in common with piston engines so two firms specializing in steam turbines — General Electric and Westinghouse — grabbed the bulk of jet engine orders until Pratt & Whitney caught up. Aircraft firms also struggled to modify their airframes for the greater speeds and altitudes possible with jet engines. Those firms that failed were superceded by those that succeeded — notably McDonnell Aircraft and Lockheed.

Intercontinental ballistic missile programs, started in 1954, fueled the micro-level restructuring of the industry. ICBMs were touted as “winning weapons” to replace massive numbers of aircraft, so missile firms invested in smaller but better factories — with clean rooms and test chambers — rather than in cavernous assembly buildings. Because of the complexity of the designs, the reliability required of each part, and the hurry in which the missiles had to be designed and built, new management models emerged from the military and aerospace firms. The Aerospace Corporation, Space Technology Laboratories of TRW Inc., and Lockheed Missiles & Space were three firms that proclaimed proprietary expertise in this new aerospace management. The ICBM efforts introduced, to all high-tech industries worldwide, the ideal and techniques of program management and systems engineering. When Europeans fretted over The American Challenge in the 1960s, they meant not so much American technology as management methods like these that generated technical innovation so relentlessly. Young men flocked to aerospace because it was cool and cutting-edge.

Also revolutionary were the spacecraft and the rockets that lifted them into orbit. The neologism “aerospace” reflected the shape of the money that flowed into the industry following the Soviet launch of Sputnik in October 1957. The U.S. Aircraft Industries Association changed its name to the Aerospace Industries Association of America, so the public might think it natural that the firms that built aircraft should also build vehicles to travel through air-less space. Furthermore, the laboratories of the National Advisory Committee for Aeronautics formed the kernel of the National Aeronautics and Space Administration, then bent the efforts of academic aeronautics toward hypersonics and space travel. In 1961, NASA got the mission to send an American to the Moon and return him safely to Earth before the decade was out. NASA built enormous space ports in Florida and Texas, enhanced its arsenal of research laboratories, bolstered its own network of hardware contractors, opened up new areas of material science, and pioneered new methods of reliability testing. Following the success of Apollo, in the 1970s NASA invested ahead of demand to create the space shuttle for regular access to space, then struggled to find ways to industrialize space.

Program management and systems engineering were applied to military aircraft in the 1960s, as the Defense Department took a more active role in telling the industry what to make and how to make it. Because of a uniformity in contracting rules, this was one of the few epochs in which the aerospace industry approached monopsony — dominated by a single customer. This systems engineering mentality drove greater design costs up-front. Aircraft grew more expensive, so the fewer produced were expected to have longer lives with more frequent remanufacturing. To get more diverse types of engineering talent involved in design, the Defense Department insisted that airframe firms — former competitors — team to win aircraft contracts. Key members in these teams were avionics firms, as airframes became little more than platforms to take electronic equipment aloft. Fewer contracts meant that Congress, voicing concern over the defense industrial base, made more procurement decisions than experts in the military or NASA. Meanwhile, profits among American aerospace firms remained high compared with almost any other industry.

Amidst all the other shocks to the American economy in the 1970s, in 1975 the United States would record its last trade surplus of the twentieth century. While other American industries lost ground to European or Japanese competitors, American aircraft have remained in consistent demand. Since the mid-1960s, aerospace products have comprised between six and ten percent of all American merchandise exports. The U.S. Export-Import Bank was nicknamed the “Boeing Bank” for its willingness to lend other countries money to buy American airliners. Yet increasingly, the aerospace industry was seen as a cause of American economic failure. So much federal research and development funding filtering through the aerospace firms distorted innovation so that American consumer products suffered. Conglomerates formed in the late 1960s around aerospace firms — like LTV and Litton — suggested that their core competence was not aerospace systems but the ability to read government contracting trends. Aerospace firms that were not consolidated in the mid-1970s, after aircraft lost in Vietnam were replaced, pursued diversification strong in the belief that the engineering skill that made American aircraft so dominant could also make world-class busses and microwave ovens. They failed. Waste, fraud and abuse dominated discussion of military aerospace. Persistent cost overruns and delays suggested no one in the industry took efficiency seriously.

Matters got worse in the 1980s. Republican administrations channeled enormous funds into the aerospace firms dotting the American sunbelt, without a concomitant increase in aircraft actually built. Efforts to build a space-based missile defense system symbolized the accepted futility of this spend-up. Likewise, NASA poured money into Space Shuttle operations without an increase in flights. NASA engineers sketched, then resketched plans for an international space station to create a permanent base in space. American aerospace firms seemed overly mature, and European firms took advantage.

An International Industry

International politics has always played a role in aviation. Aircraft in flight easily transcended national borders, so governments jointly developed navigation systems and airspace protocols. Spacecraft overflew national borders within seconds so nations set up international bodies to allocate portions of near-earth space. INTELSAT, an international consortium modeled on COMSAT (the American consortium that governed operations of commercial satellites) standardized the operation of geosynchronous satellites to start the commercialization of space. Those who dreamed of space colonization also dreamed it might be free of earthly politics. Internationalization more clearly reshaped aerospace by helping firms from other countries find the economies of scale they needed to forge a place in an industry so clearly dominated by American firms.

Only the Soviet Union challenged the American aerospace industry. In some areas, like heavy lifting rockets and space medicine, the Soviets outpaced the Americans. But the Soviets and Americans fought solely in the realm of perceptions of military might, not on any military or economic battleground. The Soviets also sold military aircraft and civil transports but, with few exceptions, an airline bought either Soviet or American aircraft because of alliance politics rather than efficiencies in the marketplace. Even in civil aircraft, the Soviet Union invested far more than their returns. In 1991, when the Soviet Union fractured into smaller states and the subsidies disappeared, the once mighty Soviet aerospace firms were reduced to paupers. European firms then stood as more serious competitors, largely because they had developed a global understanding of the industry.

Following World War II, the European aircraft industry was in shards. Germany, Italy, and Japan were prohibited from making any aircraft of significance. French and British firms remained strong and innovative, though these firms sold mostly to their nation’s militaries and airlines. Neither could buy as many aircraft as their American counterparts, and European firms could not sufficiently amortize their engineering costs. During the 1960s, European governments allowed aircraft and missile firms to fail or consolidate into clear “national champions:” British Aircraft Corporation, Hawker Siddely Aviation, and Rolls-Royce in Britain; Aerospatiale, Dassault, SNECMA and Matra in France; Messerschmit-Bölkow-Blohm and VFW in Germany; and CASA in Spain. Then governments asked their national champions to join transnational consortia intent on building specific types of aircraft — like the PANAVIA Tornado fighter, the launch vehicles and satellites of the European Space Agency or, most successfully, the Airbus airliners. The matrix of many national firms participating variously in many transnational projects meant that the European industry operated neither as monopoly nor monopsony.

Meanwhile international travel grew rapidly, and airlines became some of the world’s largest employers. By the late 1950s, the major airlines had transitioned to Boeing or Douglas-built jet airliners — which carried twice as many passengers at twice the speed in greater comfort. Between 1960 and 1974 passenger volume on international flights grew six fold. The Boeing 747, a jumbo jet with 360 seats, took international air travel to a new level of excitement when introduced in January 1970. Each nation had at least one airline, and each airline had slightly different requirements for the aircraft they used. Boeing and McDonnell Douglas pioneered new methods of mass customization to build aircraft to these specifications. The Airbus A300 first flew in September 1972, and European governments continued to subsidize the Airbus Industrie consortium as it struggled for customers. In the 1980s, air travel again enjoyed a growth spurt that Boeing and Douglas could not immediately satisfy, and Airbus found its market. By the 1990s, the Airbus consortium had built a contractor network with tentacles around the world, had developed a family of successful airliners, and split the market with American producers.

Aerospace extends beyond the most industrialized nations. Walt Rostow in his widely read book on economic development used aviation imagery to suggest a trajectory of industrial growth. The imagery was not lost on newly industrializing countries like Brazil, Israel, Taiwan, South Korea, Singapore or Indonesia. They too entered the industry, opportunistically, by setting up depots to maintain the aircraft they bought abroad. Then, they took subcontracts from American and European firms to learn how to manage their own projects to high standards. Nations at war — in the Middle East, Africa, and Asia — proved ready customers for these simple and inexpensive aircraft. Missiles, likewise, if derived from proven designs, were generally easy and cheap to produce. By 1971, fourteen nations could build short-range and air-defense missiles. By the 1990s more than thirty nations had some capacity to manufacture complete aircraft. Some made only small, general-purpose aircraft — which represent a tiny fraction of the total dollar value of the industry but proved immensely important to a military and communication needs of developing states. The leaders of almost every nation have seen aircraft as a leading sector — one that creates spin offs and sets the pace of technological advance in an entire economy.

A Post-Cold War World

When the Cold War ended, the aerospace industry changed dramatically. After the record run up in the federal deficit during the 1980s, by 1992 the United States Congress demanded a peace dividend and slashed funding for defense procurement. By 1994, the demand for civil airliners also underwent a cyclical downturn. Aerospace-dependent regions — notably Los Angeles and Seattle — suffered recession then rebuilt their economies around different industries. Aerospace employed 1.3 million Americans in 1989 or 8.8 percent of everyone working in manufacturing; by 1995 aerospace employed only 796,000 people or 4.3 percent of everyone working in a manufacturing industry. As it had for decades, in 1985 aerospace employed about one-fifth of all American scientists and engineers engaged in research and development; by 1999 it employed only seven percent.

Rather than diversify or shed capacity haphazardly, aerospace firms focused. They divested or merged feverishly in 1995 and 1996, hoping to find the best consolidation partners before the federal government feared that competition would suffer. GE sold its aerospace division to Martin Marietta, which then sold itself to Lockheed. Boeing bought the aerospace units of Rockwell International, and then acquired McDonnell Douglas. Northrop bought Grumman. Lockheed Martin and Boeing both ended up with about ten percent of all government aerospace contracts, though joint ventures and teaming remained significant. The concentration in the American industry made it look like European industry, except that in the margins new venture-backed firms sprang up to develop new hybrid aircraft. Funding for space vehicles held fairly steady as new firms found new uses for satellites in communications, defense, and remote sensing of the earth. NASA reconfigured its relations with industry around the mantra of “faster, better, and cheaper,” especially in the creation of reusable launch vehicles.

Throughout the Cold War, total sales by aerospace firms has divided one-half aircraft, with that amount split fairly evenly between military and civil, one quarter space vehicles, one-tenth missiles, and the rest ground support equipment. When spending for aerospace recovered in the late 1990s, there was the first significant shift toward sales of civil aircraft. After a century of development, there are strong signs that the aircraft and space industries are finally breaking free of their military vassalage. There are also strong signs that the industry is becoming global — trans-Atlantic mergers, increasing standardization of parts and operations, aerospace imports and exports rising in lockstep. More likely, as it has been for a century, aerospace will remain intimately tied to the nation state.

Bibliography

Aerospace Industries Association of America, Inc., Washington D.C. Aerospace Facts & Figures. This is an annual statistical series, dating back to 1945, about developments in the aerospace industry.

Bilstein, Roger E. The American Aerospace Industry: From Workshop to Global Enterprise. New York: Twayne Publishers, 1996.

Brumberg, Joan Lisa. NASA and the Space Industry. Baltimore: Johns Hopkins University Press, 1999.

Bugos, Glenn E. Engineering the F-4 Phantom II: Parts Into Systems. Annapolis: Naval Institute Press, 1996.

Hayward, Keith. The World Aerospace Industry: Collaboration and Competition. London: Duckworth, 1994.

Pattilo, Donald M. Pushing the Envelope: The American Aircraft Industry. Ann Arbor: University of Michigan Press, 1998.

Pisano, Dominick and Cathleen Lewis, editors. Air and Space History: An Annotated Bibliography. New York: Garland, 1988.

Rae, John B. Climb to Greatness: The American Aircraft Industry, 1920-1960. Cambridge: MIT Press, 1968.

Stekler, Herman O. The Structure and Performance of the Aerospace Industry. Berkeley: University of California Press, 1965.

Vander Meulen, Jacob. The Politics of Aircraft: Building an American Military Industry. Lawrence: University Press of Kansas, 1991.

Citation: Bugos, Glenn. “History of the Aerospace Industry”. EH.Net Encyclopedia, edited by Robert Whaples. August 28, 2001. URL http://eh.net/encyclopedia/the-history-of-the-aerospace-industry/

Advertising Bans in the United States

Jon P. Nelson, Pennsylvania State University

Freedom of expression has always ranked high on the American scale of values and fundamental rights. This essay addresses regulation of “commercial speech,” which is defined as speech or messages that propose a commercial transaction. Regulation of commercial advertising occurs in several forms, but it is often controversial. In 1938, the Federal Trade Commission (FTC) was given the authority to regulate “unfair or deceptive” advertising. Congressional hearings were first held in 1939 on proposals to ban radio advertising of alcohol beverages (Russell 1940; U.S. Congress 1939, 1952). Actions by the FTC during 1964-69 led to the 1971 ban of radio and television advertising of cigarettes. In 1997, the distilled spirits industry reversed a six decade-old policy and began using cable television advertising. Numerous groups immediately called for removal of the ads, and Rep. Joseph Kennedy II (D, MA) introduced a “Just Say No” bill that would have banned all alcohol advertisements from the airways. In 1998, the Master Settlement Agreement between that state attorneys general and the tobacco industry put an end to billboard advertising of cigarettes. Do these regulations make any difference for the demand for alcohol or cigarettes? When will an advertising ban increase consumer welfare? What legal standards apply to commercial speech that affect the extent and manner in which governments can restrict advertising?

For many years, the Supreme Court held that the broad powers of government to regulate commerce included the “lesser power” to restrict commercial speech.1 In Valentine (1942), the Court held that the First Amendment does not protect “purely commercial advertising.” This view was applied when the courts upheld the ban of broadcast advertising of cigarettes, 333 F. Supp 582 (1971), affirmed per curiam, 405 U.S. 1000 (1972). However, in the mid-1970s this view began to change as the Court invalidated several state regulations affecting advertising of services and products such as abortion providers and pharmaceutical drugs. In Virginia State Board of Pharmacy (1976), the Court struck down a Virginia law that prohibited the advertising of prices for prescription drugs, and held that the First Amendment protects the right to receive information as well as the right to speak. Responding to the claim that advertising bans improved the public image of pharmacists, Justice Blackmun wrote that “an alternative [exists] to this highly paternalistic approach . . . people will perceive their own best interests if only they are well enough informed, and the best means to that end is to open the channels of communication rather than to close them” (425 U.S. 748, at 770). In support of its change in direction, the Court asserted two main arguments: (1) truthful advertising coveys information that consumers need to make informed choices in a free enterprise economy; and (2) such information is indispensable as to how the economic system should be regulated or governed. In Central Hudson Gas & Electric (1980), the Court refined its approach and laid out a four-prong test for “intermediate” scrutiny of restrictions on commercial speech. First, the message content cannot be misleading and must be concerned with a lawful activity or product. Second, the government’s interest in regulating the speech in question must be substantial. Third, the regulation must directly and materially advance that interest. Fourth, the regulation must be no more extensive than necessary to achieve its goal. That is, there must be a “reasonable fit” between means and ends, with the means narrowly tailored to achieve the desired objective. Applying the third and fourth-prongs, in 44 Liquormart (1996) the Court struck down a Rhode Island law that banned retail price advertising of beverage alcohol. In doing so, the Court made clear that the state’s power to ban alcohol entirely did not include the lesser power to restrict advertising. More recently, in Lorillard Tobacco (2001) the Supreme Court invalidated a state regulation on placement of outdoor and in-store tobacco displays. In summary, Central Hudson requires the use of a “balancing” test to examine censorship of commercial speech. The test weighs the government’s obligations toward freedom of expression with its interest in limiting the content of some advertisements. Reasonable constraints on time, place, and manner are tolerated, and false advertising remains illegal.

This article provides a brief economic history of advertising bans, and uses the basic framework contained in the Central Hudson decision. The first section discusses the economics of advertising and addresses the economic effects that might be expected from regulations that prohibit or restrict advertising. Applying the Central Hudson test, the second section reviews the history and empirical evidence on advertising bans for alcohol beverages. The third section reviews bans of cigarette advertising and discusses the regulatory powers that reside with the Federal Trade Commission as the main government agency with the authority to regulate unfair or deceptive advertising claims.

The Economics of Advertising

Judged by the magnitude of exposures and expenditures, advertising is a vital and important activity. A rule of thumb in the advertising industry is that the average American is exposed to more than 1,000 advertising messages every day, but actively notices fewer than 80 ads. According to Advertising Age (http://www.adage.com), advertising expenditures in 2002 in all media totaled $237 billion, including $115 billion in 13 measured media. Ads in newspapers accounted for 19.2% of measured spending, followed by network TV (17.3%), magazines (15.6%), spot TV (14.0%), yellow pages (11.9%), and cable/syndicated TV (11.9%). Internet advertising now accounts for about 5.0% of spending. By product category, automobile producers were the largest advertisers ($16 billion of measured media), followed by retailing ($13.5 billion), movies and media ($6 billion), and food, beverages, and candies ($6.0 billion). Beverage alcohol producers ranked 17th ($1.7 billion) and tobacco producers ranked 23rd ($284 million). Among the top 100 advertisers, Anheuser-Busch occupied the 38th spot and Altria Group (which includes Philip Morris) ranked 17th. Total advertising expenditures in 2002 were about 2.3% of U.S. gross domestic product (GDP). Ad spending tends to vary directly with general economy activity as illustrated by spending reductions during the 2000-2001 recession (Wall Street Journal, Aug. 14, 2001; Nov. 28, 2001; Dec. 12, 2001; Apr. 25, 2002). This pro-cyclical feature is contrary to Galbraith’s view that business firms use advertising to control or manage aggregate consumer demand.

National advertising of branded products developed in the early 1900s as increased urbanization and improvements in communication, transportation, and packaging permitted the development of mass markets for branded products (Chandler 1977). In 1900, the advertising-to-GDP ratio was about 3.1% (Simon 1970). The ratio stayed around 3% until 1929, but declined to 2% during the 1930s and has fluctuated around that value since then. The growth of major national industries was associated with increased promotion, although other economic changes often preceded the use of mass media advertising. For example, refrigeration of railroad cars in the late 1870s resulted in national advertising by meat packers in the 1890s (Pope 1983). Around the turn-of-the-century, Sears Roebuck and Montgomery Ward utilized low-cost transportation and mail-order catalogs to develop efficient systems of national distribution of necessities. By 1920 more Americans were living in urban areas than in rural areas. The location of retailers began to change, with a shift first to downtown shopping districts and later to suburban shopping malls. Commercial radio began in 1922, and advertising expenditures grew from $113 million in 1935 to $625 million in 1952. Commercial television was introduced in 1941, but wartime delayed the diffusion of televison. By 1954, half of the households in the U.S. had at least one television set. Expenditures on TV advertising grew rapidly from $454 million in 1952 to $2.5 billion in 1965 (Backman 1968). These changes affected the development of markets — for instance, new products could be introduced more rapidly and the available range of products was enhanced (Borden 1942).

Market Failure: Incomplete and Asymmetric Information

Because it is costly to acquire and process, the information held by buyers and sellers is necessarily incomplete and possibly unequal as well. However, full or “perfect” information is one of the analytical requirements for the proper functioning of competitive markets — so what happens when information is imperfect or unequal? Suppose, for example, that firms charge different prices for identical products, but some consumers (tourists) are ignorant of the dispersion of prices available in the marketplace. For many years, this question was largely ignored by economists, but two contributions sparked a revolution in economic thinking. Stigler (1961) showed that because information is costly to acquire, consumer search for lower prices will be less than complete. As a result, a dispersion of prices can persist and the “law of one price” is violated. The dispersion will be less if the product represents a large expenditure (e.g., autos), since more individual search is supported and suppliers have an extra incentive to promote the product. Because information has public good characteristics, imperfect information provides a rationale for government intervention, but profit-seeking firms also have reasons to reduce search costs through advertising and brand names. Akerlof (1970) took the analysis a step further by focusing on material aspects of a product that are known to the seller, but not by potential buyers. In Akerlof’s “lemons model,” the seller of a used car has private knowledge of defects, but potential buyers have difficulty distinguishing between good used cars (“creampuffs”) and bad used cars (“lemons”). Under these circumstances, Akerlof showed that a market may not exist or only lower-quality products are offered for sale. Hence, asymmetric information can result in market failure, but a reputation for quality can reduce the uncertainty that consumers face due to hidden defects (Akerlof 1970; Richardson 2000; Stigler 1961).

Under some conditions, branding and advertising of products, including targeting of customer groups, can help reduce market imperfections. Because advertising has several purposes or functions, there is always uncertainty regarding its effects. First, advertising may help inform consumers of the existence of products and brands, better inform them about price and quality dimensions, or better match customers and brands (Nelson 1975). Indeed, the basic message in many advertisements is simply that the brand is available. Consumer valuations can reflect a joint product, which is the product itself and the information about it. However, advertising tends to focus on only the positive aspects of a product, and ignores the negatives. In various ways, advertisers sometimes inform consumers that their brand is “less bad” (Calfee 1997b). An advertisement that announces a particular automobile is more crash resistant also is a reminder that all cars are less than perfectly safe. Second, persuasive or “combative” advertising can serve to differentiate one firm’s brand from those of its rivals. As a consequence, a successful advertiser may gain some discretion over the price it charges (“market power”). Furthermore, reactions by rivals may drive industry advertising to excessive levels or beyond the point where net social benefits of advertising are maximized. In other words, excessive advertising may result from the inability of each firm to reduce advertising without similar reductions by its rivals. Because it illustrates a breakdown of desirable coordination, this outcome is an example of the “prisoners’ dilemma game.” Third, the costs of advertising and promotion by existing or incumbent firms can make it more difficult for new firms to enter a market and compete successfully due to an advertising-cost barrier to entry. Investments in customer loyalty or intangible brand equity are largely sunk costs. Smaller incumbents also may be at a disadvantage relative to their larger rivals, and consequently face a “barrier to mobility” within the industry. However, banning advertising can have much the same effect by making it more difficult for smaller firms and entrants to inform customers of the existence of their brands and products. For example, Russian cigarette producers were successful in banning television advertising by new western rivals. Given multiple effects, systematic empirical evidence is needed to help resolve the uncertainties regarding the effects of advertising (Bagwell 2005).

Substantial empirical evidence demonstrates that advertising of prices increases competition and lowers the average market price and variance of prices. Conversely, banning price advertising can have the opposite effect, but consumers might derive information from other sources — such as direct observation and word-of-mouth — or firms can compete more on quality (Kwoka 1984). Bans of price advertising also affect product quality indirectly by making it difficult to inform consumers of price-quality tradeoffs. Products for which empirical evidence demonstrates that advertising reduces the average price include toys, drugs, eyeglasses, optometric services, gasoline, and grocery products. Thus, for relatively homogeneous goods, banning price advertising is expected to increase average prices and make entry more difficult. A partial offset occurs if significant costs of advertising increases product prices.

The effects of a ban of persuasive advertising also are uncertain. In a differentiated product industry, it is possible that advertising expenditures are so large that an advertising ban reduces costs and product prices, thereby offsetting or defeating the purpose of the ban. For products that are well known to consumers (“mature” products), the presumption is that advertising primarily affects brand shares and has little impact on primary demand (Dekimpe and Hanssens 1995; Scherer and Ross 1990). Advertising bans tend to solidify market shares. Furthermore, most advertising bans are less than complete, such as the ban of broadcast advertising of cigarettes. Producers can substitute other media or use other forms of promotion, such as discount coupons, articles of apparel, and event sponsorship. Thus, government limitations on commercial speech for one product or media often lead to additional efforts to limit other promotions. This “slippery slope” effect is illustrated by the Federal Communications Commission’s fairness doctrine for advertising of cigarettes (discussed below).

The Industry Advertising-Sales Response Function

The effect of a given ban on market demand depends importantly on the nature of the relationship between advertising expenditures and aggregate sales. This relationship is referred to as the industry advertising-sales response function. Two questions regarding this function have been debated. First, it is not clear that a well-defined function exists at the industry level, since persuasive advertising primarily affects brand shares. The issue is the spillover, if any, from brand advertising to aggregate (primary) market demand. Two studies of successful brand advertising in the alcohol industry failed to reveal a spillover effect on market demand (Gius 1996; Nelson 2001). Second, if an industry-level response function exists, it should be subject to diminishing marginal returns, but it is unclear where diminishing returns begin (the inflection point) or the magnitude of this effect. Some analysts argue that diminishing returns only begin at high levels of industry advertising, and sharply increasing returns exist at moderate to low levels (Saffer 1993). According to this view, comprehensive bans of advertising will reduce market demand importantly. However, this argument is at odds with empirical evidence for a variety of mature products, which demonstrates diminishing returns over a broad range of outlays (Assmus et al. 1984; Tellis 2004). Simon and Arndt (1980) found that diminishing returns began immediately for a majority of 100-plus products. Furthermore, average advertising elasticities for most mature products are only about 0.1 in magnitude (Sethuraman and Tellis 1991). As a result, limited bans of advertising will not reduce sales of mature products or the effect is likely to be extremely small in magnitude. It is unlikely that elasticities this small could support the third prong of the Central Hudson test.

Suppose that advertising for a particular product convinces some consumers to use Brand X, and this results in more sales of the brand at a higher price. Are consumers better or worse off as a consequence? A shift in consumer preferences toward a fortified brand of breakfast cereal might be described as either a “shift in tastes,” an increase in demand for nutrition, or an increase in joint demand for the cereal and information. Because it concerns individual utility, it is not clear whether a “shift in tastes” reduces or increases consumer satisfaction. Social commentators usually respond that consumers just think they are better off or the demand effect is spurious in nature. Much of the social criticism of advertising is concerned with its pernicious effect on consumer beliefs, tastes, and desires. Vance Packard’s, The Hidden Persuaders (1957), was an early, but possibly misguided, effort along these lines (Rogers 1992). Packard wrote that advertisers can “channel our unthinking habits, our purchasing decisions, and our thought processes by the use of insights gleaned from psychiatry and the social sciences.” Of course, once a “hidden secret” is revealed, such manipulation is less effective in the marketplace for products due to cynicism toward advertisers or outright rejection of the advertising claims.

Dixit and Norman (1978) argued that because profit-maximizing firms tend to over-advertise, small decreases in advertising will raise consumer welfare. In their analysis, this result holds regardless of the change in tastes or what product features are being advertised. Becker and Murphy (1993) responded that advertising is usually a complement to products, so it is unclear that equilibrium prices will always be higher as advertising increases. Further, it does not follow that social welfare is higher without any advertising. Targeting by advertisers also helps to increase the efficiency of advertising and reduces the tendency to waste advertising dollars on uninterested consumers through redundant ads. Nevertheless, this common practice also is criticized by social commentators and regulatory agencies. In summary, the evaluation of advertising bans requires empirical evidence. Much of the evidence on advertising bans is econometric and most of it concerns two products, alcohol beverages and cigarettes.

Advertising Bans: Beverage Alcohol

In an interesting way, the history of alcohol consumption follows the laws of supply and demand. The consumption of ethyl alcohol as a beverage began some 10,000 years ago. Due to the uncertainties of contaminated water supplies in the West, alcohol is believed to have been the most popular and safe daily beverage for centuries (Valle 1998). In the East, boiled water in the form of teas solved the problem of potable beverages. Throughout the Middle Ages, beer and ale were drunk by common folk and wine by the affluent. Following the decline of the Roman Empire, the Catholic Church entered the profitable production of wines. Distillation of alcohol was developed in the Arab world in 700 A.D. and gradually spread to Europe, where distilled spirits were used ineffectively as a cure for plague in the 14th century. During the 17th century, several non-alcohol beverages became popular, including coffee, tea, and cocoa. In the late eighteenth century, religious sentiment turned against alcohol and temperance activity figured prominently in the concerns of the Baptist, Friends, Methodist, Mormon, Presbyterian, and Unitarian churches. It was not until the late nineteenth century that filtration and treatment made safe drinking water supplies more widely available.

During the colonial period, retail alcohol sellers were licensed by states, local courts, or town councils (Byse 1940). Some colonies fixed the number of licenses or bonded the retailer. Fixing of maximum prices by legislatures and the courts encouraged adulteration and misbranding by retailers. In 1829, the state of Maine passed the first local option law and in 1844, the territory of Oregon enacted a general prohibition law. Experimentation with statewide monopoly of the retail sale of alcohol began in 1893 in South Carolina. As early as 1897, federal regulation of labeling was enacted through the Bottling in Bond Act. Following the repeal of Prohibition in 1933, the Federal Alcohol Control Administration was created by executive order (O’Neill 1940). The Administration immediately set about creating “fair trade codes” that governed false and misleading advertising, unfair trade practices, and prices that were “oppressively high or destructively low.” These codes discouraged price and advertising competition, and encouraged shipping expansion by the major midwestern brewers (McGahan 1991). The Administration ceased to function in 1935 when the National Industrial Recovery Act was declared unconstitutional. The passage of Federal Alcohol Administration Act in 1935 created the Federal Alcohol Administration (FAA) within the Treasury Department, which regulated trade practices and enforced the producer permit system required by the Act. In 1939, the FAA was abolished and its duties were transferred to the Alcohol Tax Unit of the Internal Revenue Service (later named the Bureau of Alcohol, Tobacco, and Firearms). The ATF presently administers a broad range of provisions regarding the formulation, labeling, and advertising of alcohol beverages.

Alcohol Advertising: Analytical Methods

Three types of econometric studies examine the effects of advertising on the market demand for beverage alcohol. First, time-series studies examine the relationship between alcohol consumption and annual or quarterly advertising expenditures. Recent examples of such studies include Calfee and Scheraga (1994), Coulson et al. (2001), Duffy (1995, 2001), Lariviere et al. (2000), Lee and Tremblay (1992), and Nelson (1999). All of these studies find that advertising has no effect on total alcohol consumption and small or nonexistent effects on beverage demand (Nelson 2001). This result is not affected by disaggregating advertising to account for different effects by media (Nelson 1999). Second, cross-sectional and panel studies examine the relationship between alcohol consumption and state regulations, such as state bans of billboards. Panel studies combine cross-sectional (e.g., all 50 states) and time-series information (50 states for the period 1980-2000), which alters the amount of variation in the data. Third, cross-national studies examine the relationship between alcohol consumption and advertising bans for a panel of countries. This essay discusses results obtained in the second and third types of studies.

Background: State Regulation of Billboard Advertising

In the United States, the distribution and retail sale of alcohol beverages is regulated by the individual states. The Twenty-First Amendment, passed in 1933, repealed Prohibition and granted the states legal powers over the sale of alcohol, thereby resolving the conflicting interests of “wets” and “drys” (Goff and Anderson 1994; Munger and Schaller 1997; Shipman 1940; Strumpf and Oberholzer-Gee 2000). As a result, alcohol laws vary importantly by state, and these differences represent a natural experiment with regard to the economic effects of regulation. Long-standing differences in state laws potentially affect the organization of the industry and alcohol demand, reflecting incentives that alter or shape individual behaviors. State laws also differ by beverage, suggesting that substitution among beverages is one possible consequence of regulation. For example, state laws for distilled spirits typically are more stringent than similar laws applied to beer and wine. While each state has adopted its own unique regulatory system, several broad categories can be identified. Following repeal, eighteen states adopted public monopoly control of the distribution of distilled spirits. Thirteen of these states operate off-premise retail stores for the sale of spirits, and two states also control retail sales of table wine. In five states, only the wholesale distribution of distilled spirits is controlled. No state has monopolized beer sales, but laws in three states provide for restrictions on private beer sales by alcohol content. In the private license states, an Alcohol Beverage Control (ABC) agency determines the number and type of retail licenses, subject to local wet-dry options. Because monopoly states have broad authority to restrict the marketing of alcohol, the presumption is that total alcohol consumption will be lower in the control states compared to the license states. Monopoly control also raises search costs by restricting outlet numbers, hours of operation, and product variety. Because beer and wine are substitutes or complements for spirits, state monopoly control can increase or decrease total alcohol use, or the net effect may be zero (Benson et al. 1997; Nelson 1990, 2003a).

A second broad experiment includes state regulations banning advertising of alcohol beverages or which restrict the advertising of prices. Following repeal, fourteen states banned billboard advertising of distilled spirits, including seven of the license states. Because the bans have been in existence for many years and change infrequently over time, these regulations provide evidence on the long-term effectiveness of advertising bans. It is often argued that billboards have an important effect on youth behaviors, and this belief has been a basis for municipal ordinances banning billboard advertising of tobacco and alcohol. Given long-standing bans, it might be expected that youth alcohol behaviors will show up as cross-state differences in adult per capita consumption. Indeed, these two variables are highly correlated (Cook and Moore 2000, 2001). Further, fifteen states banned price advertising by retailers using billboards, newspapers, and visible store displays. In general, a ban of price advertising reduces retail competition and increases search costs of consumers. However, these regulations were not intended to advance temperance, but rather were anti-competitive measures obtained by alcohol retailers (McGahan 1995). For example, in 44 Liquormart (1996) the lower court noted that Rhode Island’s ban of price advertising was designed to protect smaller retailers from in-state and out-of-state competition, and was closely monitored by the liquor retailers association. A price advertising ban could reduce alcohol consumption by elevating full prices (search costs plus monetary prices). Because many states banned only price advertising of spirits, substitution among beverages also is a possible outcome.

Table 1 illustrates historical changes since 1935 in alcohol consumption in the United States and three individual states. Also, Table 1 shows nominal and real advertising expenditures for the U.S. After peaking in the early 1980s, per capita alcohol consumption is now at roughly the level experienced in the early 1960s. Nationally, the decline in alcohol consumption from 1980 to 2000 was 21.0%. This decline has occurred despite continued high levels of advertising and promotion. At the state-level, the percentage changes in consumption are Illinois, -25.3%; Ohio, -15.5%; and Pennsylvania, -20.5%. Pennsylvania is a state monopoly for spirits and wines and also banned price advertising of alcohol, including beer, prior to 1997. However, the change in per capita consumption in Pennsylvania parallels what has occurred nationally.

Econometric Results: State-Level Studies of Billboard Bans

Seven econometric studies estimate the relationship between state billboard bans and alcohol consumption: Hoadley et al. (1984), Nelson (1990, 2003a), Ornstein and Hanssens (1985), Schweitzer et al. (1983), and Wilkinson (1985, 1987). Two studies used a single year, but the other five employed panel data covering five to 25 years. Two studies estimated demand functions for beer or distilled spirits only, which ignores substitution. None of the studies obtained a statistically significant reduction in total alcohol consumption due to bans of billboards. In several studies, billboard bans increased spirits consumption significantly. A positive effect of a ban is contrary to general expectations, but consistent with various forms of substitution. The study by Nelson (2003a) covered 45 states for the time period 1982-1997. In contrast to earlier studies, Nelson (2003a) focused on substitution among alcohol beverages and the resulting net effect on total ethanol consumption. Several subsamples were examined, including all 45 states, ABC-license states, and two time periods, 1982-1988 and 1989-1997. A number of other variables also were considered, including prices, income, tourism, age demographics, and the minimum drinking age. During both time periods, state billboard bans increased consumption of wine and spirits, and reduced consumption of beer. The net effect on total ethanol consumption was significantly positive during 1982-1988, and insignificant thereafter. During both time periods, bans of price advertising of spirits were associated with lower consumption of spirits, higher consumption of beer, and no effect on wine or total alcohol consumption. The results in this study demonstrate that advertising regulations have different effects by beverage, indicating the importance of substitution. Public policy statements that suggest that limited bans have a singular effect are ignoring market realities. The empirical results in Nelson (2003a) and other studies are consistent with the historic use of billboard bans as a device to suppress competition, with little or no effect on temperance.

Econometric Results: Cross-National Studies of Broadcast Bans

Many Western nations have restrictions on radio and television advertising of alcohol beverages, especially distilled spirits. These controls range from time-of-day restrictions and content guidelines to outright bans of broadcast advertising of all alcohol beverages. Until quite recently, the trend in most countries has been toward stricter rather than more lenient controls. Following repeal, U.S. producers of distilled spirits adopted a voluntary Code of Good Practice that barred radio advertising after 1936 and television advertising after 1948. When this voluntary agreement ended in late 1996, cable television stations began carrying ads for distilled spirits. The major TV networks continued to refuse such commercials. Voluntary or self-regulatory codes also have existed in a number of other countries, including Australia, Belgium, Germany, Italy, and Netherlands. By the end of the 1980s, a number of countries had banned broadcast advertising of spirits, including Austria, Canada, Denmark, Finland, France, Ireland, Norway, Spain, Sweden, and United Kingdom (Brewers Association of Canada 1997).

Table 1
Advertising and Alcohol Consumption (gallons of ethanol per capita, 14+ yrs)

Illinois Ohio Pennsylvania U.S. Alcohol Ads Real Ads Real Ads Percent
Year (gal. p.c.) (gal. p.c.) (gal. p.c.) (gal. p.c.) (mil. $) (mil. 96$) per capita Broadcast
1935 1.20
1940 1.56
1945 2.25
1950 2.04
1955 2.00
1960 2.07
1965 2.27 242.2 1018.5 7.50 38.7
1970 2.82 2.22 2.28 2.52 278.4 958.0 6.41 34.7
1975 2.99 2.21 2.35 2.69 395.6 979.9 5.99 44.0
1980 3.00 2.33 2.39 2.76 906.9 1580.5 8.83 55.1
1981 2.91 2.25 2.37 2.76 1014.9 1618.7 8.91 56.6
1982 2.83 2.28 2.36 2.72 1108.7 1667.0 9.07 58.1
1983 2.80 2.22 2.29 2.69 1182.9 1708.4 9.18 62.0
1984 2.77 2.26 2.25 2.65 1284.4 1788.9 9.50 66.0
1985 2.72 2.20 2.22 2.62 1293.0 1746.1 9.16 68.2
1986 2.68 2.17 2.23 2.58 1400.2 1850.6 9.61 73.5
1987 2.66 2.17 2.20 2.54 1374.7 1766.1 9.09 73.5
1988 2.64 2.11 2.11 2.48 1319.4 1639.8 8.37 74.4
1989 2.56 2.07 2.10 2.42 1200.4 1436.6 7.27 68.2
1990 2.62 2.09 2.15 2.45 1050.4 1209.7 6.10 64.8
1991 2.48 2.03 2.05 2.30 1119.5 1247.2 6.22 66.4
1992 2.43 1.98 1.99 2.30 1074.7 1172.0 5.78 68.5
1993 2.38 1.95 1.96 2.23 970.7 1030.9 5.04 70.4
1994 2.35 1.85 1.93 2.18 1000.9 1041.1 5.03 69.4
1995 2.29 1.90 1.86 2.15 1027.5 1046.4 5.00 68.2
1996 2.30 1.93 1.86 2.16 1008.8 1008.8 4.77 68.5
1997 2.26 1.91 1.84 2.14 1087.0 1069.2 5.01 66.5
1998 2.25 1.97 1.86 2.14 1187.6 1154.6 5.36 66.3
1999 2.27 2.00 1.87 2.16 1242.2 1189.5 5.45 64.2
2000 2.24 1.97 1.90 2.18 1422.6 1330.8 5.89 62.8

Sources: 1965-70 ad data from Adams-Jobson Handbooks; 1975-91 data from Impact; and 1992-2000 data from LNA/Competitive Media. Nominal data deflated by the GDP implicit price deflator (1996 = 100). Alcohol data from National Institute on Alcohol Abuse and Alcoholism, U.S. Apparent Consumption of Alcoholic Beverages (1997) and 2003 supplement. Real advertising per capita is for ages 14+ based on NIAAA and author’s population estimates.

The possible effects of broadcast bans are examined in four studies: Nelson and Young (2001), Saffer (1991), Saffer and Dave (2002), and Young (1993). Because alcohol behavior or “cultural sentiment” varies by country, it is important that the social setting is considered. In particular, the level of alcohol consumption in the wine-drinking countries is substantially greater. In France, Italy, Luxembourg, Portugal, and Spain, alcohol consumption is about one-third greater than average (Nelson and Young 2001). Further, 20 to 25% of consumption in the Scandinavian countries is systematically under-reported due to cross-border purchases, smuggling, and home production. In contrast to other studies, Nelson and Young (2001) accounted for these differences. The study examined alcohol demand and related behaviors in a sample of 17 OECD countries (western Europe, Canada, and the U.S.) for the period 1977 to 1995. Control variables included prices, income, tourism, age demographics, unemployment, and drinking sentiment. The results indicated that bans of broadcast advertising of spirits did not decrease per capita alcohol consumption. During the sample period, five countries adopted broadcast bans of all alcohol beverage advertisements, apart from light beer (Denmark, Finland, France, Norway, Sweden). The regression estimates for complete bans were insignificantly positive. The results indicated that bans of broadcast advertising had no effect on alcohol consumption relative to countries that did not ban broadcast advertising. For the U.S., the cross-country results are consistent with studies of successful brands, studies of billboard bans, and studies of advertising expenditures (Nelson 2001). The results are inconsistent with an advertising-response function with a well-defined inflection point.

Advertising Bans: Cigarettes

Prior to 1920, consumption of tobacco in the U.S. was mainly in the form of cigars, pipe tobacco, chewing tobacco, and snuff. It was not until 1923 that cigarette consumption by weight surpassed that of cigars (Forey et al. 2002). Several early developments contributed to the rise of the cigarette (Borden 1942). First, the Bonsak cigarette-making machine was patented in 1880 and perfected in 1884 by James Duke. Second, the federal excise tax on cigarettes, instituted to help pay for the Civil War, was reduced in 1883 from $1.75 to 50 cents a thousand pieces. Third, during World War I, cigarette consumption by soldiers was encouraged by ease of use and low cost. Fourth, the taboo against public smoking by women began to wane, although participation by women remained substantially below that of men. By 1935, about 50% of men smoked compared to only 20% of women. Fifth, advertising has been credited with expanding the market for lighter-blends of tobacco, although evidence in support of this claim is lacking (Tennant 1950). Some early advertising claims were linked to health, such as a 1928 ad for Lucky Strike that emphasized, “No Throat Irritation — No Cough.” During this time, the FTC banned numerous health claims by de-nicotine products and devices, e.g., 10 FTC 465 (1925).

Cigarette advertising has been especially controversial since the early 1950s, reflecting known health risks associated with smoking and the belief that advertising is a causal factor in smoking behaviors. Warning labels on cigarette packages were first proposed in 1955, following new health reports by the American Cancer Society, the British Medical Research Council, and Reader’s Digest (1952). Regulation of cigarette advertising and marketing, especially by the FTC, increased over the years to include content restrictions (1942, 1950-52); advertising guidelines (1955, 1960, 1966); package warning labels (1965, 1970, 1984); product testing and labeling (1967, 1970); public reporting on advertising trends (1964, 1967, 1981); warning messages in advertisements (1970); and advertising bans (1971, 1998). The history of these regulations is discussed below.

Background: Cigarette Prohibition and Early Health Reports

During the 17th century, several of the northern colonies banned public smoking. In 1638, the Plymouth colony passed a law forbidding smoking in the streets and, in 1798, Boston banned the carrying of a lighted pipe or cigar in public. Beginning around 1850, a number of anti-tobacco groups were formed (U.S. Surgeon General 2000), including the American Anti-Tobacco Society in 1849, American Health and Temperance Association (1878), Anti-Cigarette League (1899), Non-Smokers Protective League (1911), and the Department of Narcotics of the Women’s Christian Temperance Union (1883). The WCTU was a force behind the cigarette prohibition movement in Canada and the U.S. During the Progressive Era, fifteen states passed laws prohibiting the sale of cigarettes to adults and another twenty-one states considered such laws (Alston et al. 2002). North Dakota and Iowa were the first states to adopt smoking bans in 1896 and 1897, respectively. In West Virginia, cigarettes were taxed so heavily that they were de facto prohibited. In 1920, Lucy Page Gaston of the WCTU made a bid for the Republican nomination for president on an anti-tobacco platform. However, the movement waned as the laws were largely unenforceable. By 1928, cigarettes were again legal for sale to adults in every state.

As the popularity of cigarette smoking spread, so too did concerns about its health consequences. As a result, the hazards of smoking have long been common knowledge. A number of physicians took early notice of a tobacco-cancer relationship in their patients. In 1912, Isaac Adler published a book on lung cancer that implicated smoking. In 1928, adverse health effects of smoking were reported in the New England Journal of Medicine. A Scientific American report in 1933 tentatively linked cigarette “tars” to lung cancer. Writing in Science in 1938, Raymond Pearl of Johns Hopkins University demonstrated a statistical relationship between smoking and longevity (Pearl 1938). The addictive properties of nicotine were reported in 1942 in the British medical journal, The Lancet. These and other reports attracted little attention from the popular press, although Reader’s Digest (1924, 1941) was an early crusader against smoking. In 1950, three classic scientific papers appeared that linked smoking and lung cancer. Shortly thereafter, major prospective studies began to appear in 1953-54. At this time, the research findings were more widely reported in the popular press (e.g., Time 1953). In 1957, the Public Health Service accepted a causal relationship between smoking and lung cancer (Burney 1959; Joint Report 1957). Between 1950 and 1963, researchers published more than 3,000 articles on the health effects of smoking.

Cigarette Advertising: Analytical Methods

Given the rising concern about the health effects of smoking, it is not surprising that cigarette advertising would come under fire. The ability of advertising to stimulate primary demand is not debated by public health officials, since in their eyes cigarette advertising is inherently deceptive. The econometric evidence is much less clear. Three methods are used to assess the relationship between cigarette consumption and advertising. First, time-series studies examine the relationship between cigarette consumption and annual or quarterly advertising expenditures. These studies have been reviewed several times, including comprehensive surveys by Cameron (1998), Duffy (1996), Lancaster and Lancaster (2003), and Simonich (1991). Most time-series studies find little or no effect of advertising on primary demand for cigarettes. For example, Duffy (1996) concluded that “advertising restrictions (including bans) have had little or no effect upon aggregate consumption of cigarettes.” A meta-analysis by Andrews and Franke (1991) found that the average elasticity of cigarette consumption with respect to advertising expenditure was only 0.142 during 1964-1970, and declined to -0.007 thereafter. Second, cross-national studies examine the relationship between per capita cigarette consumption and advertising bans for a panel of countries. Third, several time-series studies examine the effects of health scares and the 1971 ban of broadcast advertising. This essay discusses results obtained in the second and third types of econometric studies.

Econometric Results: Cross-National Studies of Broadcast Bans

Systematic tests of the effect of advertising bans are provided by four cross-national panel studies that examine annual per capita cigarette consumption among OECD countries: Laugesen and Meads (1991); Stewart (1993); Saffer and Chaloupka (2000); and Nelson (2003b). Results in the first three studies are less than convincing for several reasons. First, advertising bans might be endogenously determined together with cigarette consumption, but earlier studies treated advertising bans as exogenous. In order to avoid the potential bias associated with endogenous regressors, Nelson (2003b) estimated a structural equation for the enabling legislation that restricts advertising. Second, annual data on cigarette consumption contain pronounced negative trends, and the data series in levels are unlikely to be stationary. Nelson (2003b) tested for unit roots and used consumption growth rates (log first-differences) to obtain stationary data series for a sample of 20 OECD countries. Third, the study also tested for structural change in the smoking-advertising relationship. The motivation was based on the following set of observations: by the mid-1960s the risks associated with smoking were well known and cigarette consumption began to decline in most countries. For example, per capita consumption in the United States increased to an all-time high in 1963 and declined modestly until about 1978. Between 1978 and 1995, cigarette consumption in the U.S. declined on average by -2.44% per year. Further, the decline in consumption was accompanied by reductions in smoking prevalence. In the U.S., male smoking prevalence declined from 52% of the population in 1965 to 33% in 1985 and 27% in 1995 (Forey et al. 2002). Smoking also is increasingly concentrated among individuals with lower incomes or lower levels of education (U.S. Public Health Service 1994). Changes in prevalence suggest that the sample of smokers will not be homogeneous over time, which implies that empirical estimates may not be robust across different time periods.

Nelson (2003b) focused on total cigarettes, defined as the sum of manufactured and hand-rolled cigarettes for 1970-1995. Data on cigarette and tobacco consumption were obtained from International Smoking Statistics (Forey et al. 2002). This comprehensive source includes estimates of sales in OECD countries for manufactured cigarettes, hand-rolled cigarettes, and total consumption by weight of all tobacco products. The data series begin around 1948 and extend to 1995. Regulatory information on advertising bans and health warnings were obtained from Health New Zealand’s International Tobacco Control Database and the World Health Organization’s International Digest of Health Legislation. For each country and year, HNZ reports the media in which cigarette advertising are banned. Nine media are covered, including television, radio, cinema, outdoor, newspapers, magazines, shop ads, sponsorships, and indirect advertising such as brand names on non-tobacco products. Based on these data, three dummy variables were defined: TV-RADIO (= 1 if only television and radio are banned, zero otherwise); MODERATE (= 1 if 3 or 4 media are banned); and STRONG (= 1 if 5 or more media are banned). On average, 4 to 5 media were banned in the 1990s compared to only 1 or 2 in the 1970s. Except for Austria, Japan and Spain, all OECD countries by 1995 had enacted moderate or strong bans of cigarette advertising. In 1995, there were 9 countries in the strong category compared to 5 in 1990, 4 in 1985, and only 3 countries in 1980 and earlier. Additional control variables in the study included prices, income, warning labels, unemployment rates, percent filter cigarettes, and demographics.

The results in Nelson (2003b) indicate that cigarette consumption is determined importantly by prices, income, and exogenous country-specific factors. The dummy variables for advertising bans were never significantly negative. The income elasticity was significantly positive and the price elasticity was significantly negative. The price elasticity estimate of -0.39 is identical to the consensus estimate of -0.4 for aggregate data (Chaloupka and Warner 2000). Beginning about 1985, the decline in smoking prevalence resulted in a shift in price and income elasticities. There also was a change in the political climate favoring additional restrictions on advertising that followed rather than caused reductions in smoking and smoking prevalence, which is “reverse causality.” Thus, advertising bans had no demonstrated influence on cigarette demand in the OECD countries, including the U.S. The advertising-response model that motivates past studies is not supported by these results. Data and estimation procedures used in three previous studies are picking-up the substantial declines in consumption that began in the late-1970s, which were unrelated to major changes in advertising restrictions.

Background: Regulation of Cigarettes by the Federal Trade Commission

At the urging of President Wilson, the Federal Trade Commission (FTC) was created by Congress in 1914. The Commission was given the broad mandate to prevent “unfair methods of competition.” From the very beginning, this mandate was interpreted to include false and deceptive advertising, even though advertising per se was not an antitrust issue. Indeed, the first cease-and-desist order issued by the FTC concerned false advertising, 1 FTC 13 (1916). It was the age of the patent medicines and health-claims devices. As early as 1925, FTC orders against false and misleading advertising constituted 75 percent of all orders issued each year. However, in Raladam (1931) the Supreme Court held that false advertising could be prevented only in situations where injury to a competitor could be demonstrated. The Wheeler-Lea Act of 1938 added a prohibition of “unfair or deceptive acts or practices” in or affecting commerce. This amendment broadened Section 5 of the FTC Act to include consumer interests as well as business concerns. The FTC could thereafter proceed against unfair and deceptive methods without regard to alleged effects on competitors.

As an independent regulatory agency, the FTC has rulemaking and adjudicatory authorities (Fritschler and Hoefler 1996). Its rulemaking powers are quasi-legislative, including the authority to hold hearings and trade practice conferences, subpoena witnesses, conduct investigations, and issue industry guidelines and proposals for legislation. Its adjudicatory powers are quasi-judicial, including the authority to issue cease-and-desist orders, consent decrees, injunctions, trade regulation rules, affirmative disclosure and substantiation orders, corrective advertising orders, and advisory opinions. Administrative complaints are adjudicated before an administrative law judge in trial-like proceedings. Rulemaking by the FTC is characterized by broad applicability to all firms in an industry, whereas judicial policy is based on a single case and affects directly only those named in the suit. Of course, once a precedent is established, it may affect other firms in the same situation. Lacking a well-defined constituency, except possibly small business, the FTC’s use of its manifest powers has always been controversial (Clarkson and Muris 1981; Hasin 1987; Miller 1989; Posner 1969, 1973; Stone 1977).

Beginning in 1938, the FTC used its authority to issue “unfair and deceptive” advertising complaints against the major cigarette companies. These actions, known collectively as the “health claims cases,” resulted in consent decrees or cease-and-desist orders involving several major brands during the 1940s and early 1950s. As several cases neared the final judgment phase, in September 1954 the FTC sent a letter to all companies proposing a seven-point list of advertising standards in light of “scientific developments with regard to the [health] effects of cigarette smoking.” A year later, the FTC issued its Cigarette Advertising Guides, which forbade any reference to physical effects of smoking and representations that a brand of cigarette is low in nicotine or tars that “has not been established by a competent scientific proof.” Following several articles in Reader’s Digest, cigarette advertising in 1957-1959 shifted to emphasis on tar and nicotine reduction during the “tar derby.” The FTC initially tolerated these ads if based on tests conducted by Reader’s Digest or Consumer Reports. In 1958, the FTC hosted a two-day conference on tar and nicotine testing, and in 1960 it negotiated a trade practice agreement that “all representations of low or reduced tar or nicotine, whether by filtration or otherwise, will be construed as health claims.” This action was blamed for halting a trend toward increased consumption of lower-tar cigarettes (Calfee 1997a; Neuberger 1963). The FTC vacated this agreement in 1966 when it informed the companies that it would no longer consider advertising that contained “a factual statement of tar and nicotine content” a violation of its Advertising Guides.

On January 11, 1964, the Surgeon General’s Advisory Committee on Smoking and Health issued its famous report on Smoking and Health (U.S. Surgeon General 1964). One week after the report’s release, the FTC initiated proceedings “for promulgation of trade regulation rules regarding unfair and deceptive acts or practices in the advertising and labeling of cigarettes” (notice, 29 Fed Reg 530, January 22, 1964; final rule, 29 Fed Reg 8325, July 2, 1964). The proposed Rule required that all cigarette packages and advertisements disclose prominently the statement, “Caution: Cigarette smoking is dangerous to health [and] may cause death from cancer and other diseases.” Failure to include the warning would be regarded as a violation of the FTC Act. The industry challenged the Rule on grounds that the FTC lacked the statutory authority to issue industry-wide trade rules, absent congressional guidance. The major companies also established their own Cigarette Advertising Code, which prohibited advertising aimed at minors, health-related claims, and celebrity endorsements.

The FTC’s Rule resulted in several congressional bills that culminated in the Federal Cigarette Labeling and Advertising Act of 1965 (P.L. 89-92, effective Jan. 1, 1966). The Labeling Act required each cigarette package to contain the statement, “Caution: Cigarette Smoking May Be Hazardous to Your Health.” According to the Act’s declaration of policy, the warnings were required so that “the public may be adequately informed that cigarette smoking may be hazardous to the health.” The Act also required the FTC to report annually to Congress concerning (a) the effectiveness of cigarette labeling, (b) current practices and methods of cigarette advertising and promotion, and (c) such recommendations for legislation as it may deem appropriate. Beginning in 1967, the FTC commenced its annual reporting to Congress on advertising of cigarettes. It recommended that health warning be extended to advertising and strengthened to conform to its original proposal, and it called for research on less-hazardous cigarettes. These recommendations were repeated in 1968 and 1969, and a recommendation was added that advertising on television and radio should be banned.

Several other important regulatory actions also took place in 1967-1970. First, the FTC established a laboratory to conduct standardized testing of tar and nicotine content for each brand. In November 1967, the FTC commenced public reporting of tar and nicotine levels by brand, together with reports of overall trends in smoking behaviors. Second, in June of 1967, the Federal Communications Commission (FCC) ruled that the “fairness doctrine” was applicable to cigarette advertising, which resulted in numerous free anti-smoking commercials by the American Cancer Society and other groups during July 1967 to December 1970.2 Third, in early 1969 the FCC issued a notice of proposed rulemaking to ban broadcast advertising of cigarettes (34 Fed Reg 1959, Feb. 11, 1969). The proposal was endorsed by the Television Code Review Board of the National Association of Broadcasters, and its enactment was anticipated by some industry observers. Following the FCC’s proposal, the FTC issued a notice of proposed rulemaking (34 Fed Reg 7917, May 20, 1969) to require more forceful statements on packages and extend the warnings to all advertising as a modification of its 1964 Rule in the “absence of contrary congressional direction.” Congress again superseded the FTC’s actions, and passed the Public Health Smoking Act of 1969 (P.L. 91-222, effective Nov. 1, 1970), which banned broadcast advertising after January 1, 1971 and modified the package label to read, “Warning: The Surgeon General Has Determined that Cigarette Smoking Is Dangerous to Your Health.” In 1970, the FTC negotiated agreements with the major companies to (1) disclose tar and nicotine levels in cigarette advertising using the FTC Test Method, and (2) include the health warning in advertising. By 1972, the FTC believed that it had achieved the recommendations in its initial reports to Congress.3

In summary, the FTC has engaged in continuous surveillance of cigarette advertising and marketing practices. Industry-wide regulation began in the early 1940s. As a result, the advertising of cigarettes in the U.S. is more restricted than other lawful consumer products. Some regulations are primarily informational (warning labels), while others affect advertising levels directly (broadcast ban). During a six-decade period, the FTC regulated the overall direction of cigarette marketing, including advertising content and placement, warning labels, and product development. Through its testing program, it has influenced the types of cigarettes produced and consumed. The FTC engaged in continuous monitoring of cigarette advertising practices and prepared in-depth reports on these practices; it held hearings on cigarette testing, advertising, and labeling; and it issued consumer advisories on smoking. Directly or indirectly, the FTC has initiated or influenced promotional and product developments in the cigarette industry. However, it remains to be shown that these actions had an important or noticeable effect on cigarette consumption and/or industry advertising expenditures. Is there empirical evidence that federal regulation has affected aggregate cigarette consumption or advertising? If the answer is negative or the effects are limited in magnitude, it suggests that the Congressional and FTC actions after 1964 did not add materially to information already in the marketplace or these actions were otherwise misguided.4

Table 2 displays information on smoking prevalence, cigarette consumption, and advertising. Smoking prevalence has declined considerably compared to the 1950s and 1960s. Consumption per capita reached an all-time high in 1963 (4,345 cigarettes per capita) and began a steep decline around 1978. By 1985, consumption was below the level experienced in 1947. Cigarette promotion has changed greatly over the years as producers substituted away from traditional advertising media. As reported by the FTC, the category of non-price promotions includes expenditures on point-of-sale displays, promotional allowances, samples, specialty items, public entertainment, direct mail, endorsements and testimonials, internet, and audio-visual ads. The shift away from media advertising reflects the broadcast and billboard bans as well as the controversies that surround advertising of cigarettes. As a result, spending on traditional media now amounts to only $356 million, or about 7% of the total marketing outlay of $5.0 billion. Clearly, regulation has affected the type of promotion, but not the overall expenditure.

Econometric Results: U.S. Time-Series Studies of the 1971 Advertising Ban

Several econometric studies examine the effects of the 1971 broadcast ban on cigarette demand, including Franke (1994), Gallet (1999), Ippolito et al. (1979), Kao and Tremblay (1988), and Simonich (1991). None of these studies found that the 1971 broadcast ban had a noticeable effect on cigarette demand. The studies by Franke and Simonich employed quarterly data on cigarette sales. The study by Ippolito et al. covered an extended time period from 1926 to 1975. The studies by Gallet and Kao and Tremblay employed simultaneous-equations methods, but each study concluded that the broadcast advertising ban did not have a significant effect on cigarette demand. Although health reports in 1953 and 1964 may have reduced the demand for tobacco, the results do not support a negative effect of the 1971 Congressional broadcast ban. By 1964 or earlier, the adverse effects of smoking appear to have been incorporated in consumers’ decisions regarding smoking. Hence, the advertising restrictions did not contribute to consumer information and therefore did not affect cigarette consumption.

Conclusions

The First Amendment protects commercial speech, although the degree of protection afforded is less than political speech. Commercial speech jurisprudence has changed profoundly since Congress passed a flat ban on broadcast advertising of cigarettes in 1971. The courts have recognized the vital need for consumers to be informed about market conditions — an environment that is conducive to operation of competitive markets. The Central Hudson test requires the courts and agencies to balance the benefits and costs of censorship. The third-prong of the test requires that censorship must directly and materially advance a substantial goal. This essay has discussed the difficulty of establishing a material effect of limited and comprehensive bans of alcohol and cigarette advertisements.

Sales per cap. 5-media Non-Price Total per cap.

Table 2
Advertising and Cigarette Consumption

Prevalence: Total Cig Sales Cigs
per cap.
Ad Spending:
5-media
Promotion:
Non-Price
Real Total Real Total
per cap.
Male Female
Year (%) (%) (bil.) (ages 18+) (mil. $) (mil. $) (mil 96$) (ages 18+)
1920 44.6 665
1925 79.8 1,085
1930 119.3 1,485 26.0 213.1
1935 53 18 134.4 1,564 29.2 286.3
1940 181.9 1,976 25.3 245.6
1947 345.4 3,416 44.1 269.7 2.70
1950 54 33 369.8 3,552 65.5 375.4 3.61
1955 50 24 396.4 3,597 104.6 528.8 4.83
1960 47 27 484.4 4,171 193.1 870.2 7.53
1965 52 34 528.8 4,258 249.9 1050.9 8.49
1970 44 31 536.5 3,985 296.6 64.4 1242.3 9.26
1975 39 29 607.2 4,122 330.8 160.5 1227.3 8.28
1980 38 29 631.5 3,849 790.1 452.2 2177.9 13.29
1985 33 28 594.0 3,370 932.0 1544.4 3360.6 19.09
1986 583.8 3,274 796.3 1586.1 3163.5 17.78
1987 32 27 575.0 3,197 719.2 1861.3 3326.2 18.49
1988 31 26 562.5 3,096 824.5 1576.3 2993.1 16.44
1989 540.0 2,926 868.3 1788.7 3190.8 17.35
1990 28 23 525.0 2,817 835.2 1973.0 3246.1 17.52
1991 28 24 510.0 2,713 772.6 2054.6 3153.2 16.86
1992 28 25 500.0 2,640 621.5 2435.0 3328.1 17.62
1993 28 23 485.0 2,539 542.1 2933.9 3695.9 19.38
1994 28 23 486.0 2,524 545.1 3039.5 3733.6 19.41
1995 27 23 487.0 2,505 564.2 2982.6 3615.5 18.62
1996 487.0 2,482 578.2 3220.8 3799.0 19.37
1997 28 22 480.0 2,423 575.7 3561.4 4058.0 20.47
1998 26 22 465.0 2,320 645.6 3908.0 4412.4 22.03
1999 26 22 435.0 2,136 487.7 4659.0 4918.0 24.29
2000 26 21 430.0 2,092 355.8 5015.0 5043.0 24.53
Sources: Smoking prevalence and cigarette sales from Forey et al (2002) and U.S. Public Health Service (1994). Data on advertising compiled by the author from FTC Reports to Congress (various issues); 1930-1940 data derived from Borden (1942). Nominal data deflated by the GDP implicit price deflator (1996=100). Advertising expenditures include TV, radio, newspapers, magazine, outdoor and transit ads. Promotions exclude price-promotions using discount coupons and retail value-added offers (“buy one, get one free”). Real total includes advertising and non-price promotions.

Law Cases

44 Liquormart, Inc., et al. v. Rhode Island and Rhode Island Liquor Stores Assoc., 517 U.S. 484 (1996).

Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980).

Federal Trade Commission v. Raladam Co., 283 U.S. 643 (1931).

Food and Drug Administration, et al. v. Brown & Williamson Tobacco Corp., et al., 529 U.S. 120 (2000).

Lorillard Tobacco Co., et al. v. Thomas F. Reilly, Attorney General of Massachusetts, et al., 533 U.S. 525 (2001).

Red Lion Broadcasting Co. Inc., et al. v. Federal Communications Commission, et al., 395 U.S. 367 (1969).

Valentine, Police Commissioner of the City of New York v. Chrestensen, 316 U.S. 52 (1942).

Virginia State Board of Pharmacy, et al. v. Virginia Citizens Consumer Council, Inc., et al., 425 U.S. 748 (1976).

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Endnotes

1. See, for example, Packer Corp. v. Utah, 285 U.S. 105 (1932); Breard v. Alexandria, 341 U.S. 622 (1951); E.F. Drew v. FTC, 235 F.2d 735 (1956), cert. denied, 352 U.S. 969 (1957).

2. In 1963, the Federal Communications Commission (FCC) notified broadcast stations that they would be required to give “fair coverage” to controversial public issues (40 FCC 571). The Fairness Doctrine ruling was upheld by the Supreme Court in Red Lion Broadcasting (1969). At the request of John Banzhaf, the FCC in 1967 applied the Fairness Doctrine to cigarette advertising (8 FCC 2d 381). The FCC opined that the cigarette advertising was a “unique situation” and extension to other products “would be rare,” but Commissioner Loevinger warned that the FCC would have difficulty distinguishing cigarettes from other products (9 FCC 2d 921). The FCC’s ruling was upheld by the D.C. Circuit Court, which argued that First Amendment rights were not violated because advertising was “marginal speech” (405 F.2d 1082). During the period 1967-70, broadcasters were required to include free antismoking messages as part of their programming. In February 1969, the FCC issued a notice of proposed rulemaking to ban broadcast advertising of cigarettes, absent voluntary action by cigarette producers (16 FCC 2d 284). In December 1969, Congress passed the Smoking Act of 1969, which contained the broadcast ban (effective Jan. 1, 1971). With regard to the Fairness Doctrine, Commissioner Loevinger’s “slippery slope” fears were soon realized. During 1969-1974, the FCC received thousands of petitions for free counter-advertising for diverse products, such as nuclear power, Alaskan oil development, gasoline additives, strip mining, electric power rates, clearcutting of forests, phosphate-based detergents, trash compactors, military recruitment, children’s toys, airbags, snowmobiles, toothpaste tubes, pet food, and the United Way. In 1974, the FCC began an inquiry into the Fairness Doctrine, which concluded that “standard product commercials, such as the old cigarette ads, make no meaningful contribution toward informing the public on any side of an issue . . . the precedent is not at all in keeping with the basic purposes of the fairness doctrine” (48 FCC 2d 1, at 24). After numerous inquires and considerations, the FCC finally announced in 1987 that the Fairness Doctrine had a “chilling effect,” on speech generally, and could no longer be sustained as an effective public policy (2 FCC Rcd 5043). Thus ended the FCC’s experiment with regulatory enforcement of a “right to be heard” (Hazlett 1989; Simmons 1978).

3. During the remainder of the 1970s, the FTC concentrated on enforcement of its advertising regulations. It issued consent orders for unfair and deceptive advertising to force companies to include health warnings “clearly and conspicuously in all cigarette advertising.” It required 260 newspapers and 40 magazines to submit information on cigarette advertisements, and established a task force with the Department of Health, Education and Welfare to determine if newspaper ads were deceptive. In 1976, the FTC announced that it was again investigating “whether there may be deception and unfairness in the advertising and promotion of cigarettes.” It subpoenaed documents from 28 cigarette manufacturers, advertising agencies, and other organizations, including copy tests, consumer surveys, and marketing plans. Five years later, it submitted to Congress the results of this investigation in its Staff Report on Cigarette Investigation (FTC 1981). The report proposed a system of stronger rotating warnings and covered issues that had emerged regarding low-tar cigarettes, including compensatory behaviors by smokers and the adequacy of the FTC’s Test Method for determining tar and nicotine content. In 1984, President Reagan signed the Comprehensive Smoking Education Act (P.L. 98-474, effective Oct.12, 1985), which required four rotating health warnings for packages and advertising. Also, in 1984, the FTC revised its definition of deceptive advertising (103 FTC 110). In 2000, the FTC finally acknowledged the shortcoming of its tar and nicotine test method.

4. The Food and Drug Administration (FDA) has jurisdiction over cigarettes as drugs in cases involving health claims for tobacco, additives, and smoking devices. Under Dr. David Kessler, the FDA in 1996 unsuccessfully attempted to regulate all cigarettes as addictive drugs and impose advertising and other restrictions designed to reduce the appeal and use of tobacco by children (notice, 60 Fed Reg 41313, Aug. 11, 1995; final rule, 61 Fed Reg 44395, Aug. 28, 1996); vacated by FDA v. Brown & Williamson Tobacco Corporation, et al., 529 U.S. 120 (2000)

Citation: Nelson, Jon. “Advertising Bans, US”. EH.Net Encyclopedia, edited by Robert Whaples. May 20, 2004. URL http://eh.net/encyclopedia/nelson-adbans/