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Ross Thomson

Our colleague and friend Ross Thomson died on February 12, 2015. His passing is deeply mourned by his family, colleagues, and students. He was an extraordinary individual who brought a keen intellect, sunny disposition, quick wit, and steadfast sense of what is right and just to everything that he did. Ross is survived by his wife, Floria, also an economist, his son, Justin, and Justin’s family. The core relationships in his life were well tended and strong.

Ross excelled in his academic career; his engine fired on all cylinders, all the time. He was an outstanding scholar, teacher, faculty union leader, and – deliberately last, administrator.

After earning his Ph.D. in Economics from Yale in 1976, Ross spent the first 15 years of his career at the New School for Social Research, where he was an important member of an intellectually diverse, high-powered, and hard-working faculty, and worked closely with many graduate students who became life long colleagues and friends. The University of Vermont was fortunate to attract him in 1991 to lead the Economics Department, a role he carried out with integrity and imagination. His administrative talents did not go unnoticed; he was soon recruited into the office of the Dean of the College of Arts and Sciences as Associate Dean, where he initiated programmatic and administrative innovations that survive to this day. But a permanent career in administration was not for Ross; he left that and turned his service attentions to United Academics, the faculty union at UVM, where he applied his skills of economic analysis to the betterment of the material conditions of UVM faculty across campus.

Ross was a dedicated and productive scholar of invention, innovation, and technological change in the nineteenth century U.S. His economic history was rich with institutional detail and new data, painstakingly constructed, and informed by his deep knowledge of theories of growth and accumulation, starting with the Classical economists, particularly Marx. He was the author of 3 books, The Path to Mechanized Shoe Production in the United States (University of North Carolina Press, 1989), Learning and Technological Change (ed.) (St. Martin’s, 1993), and Structures of Change in the Mechanical Age: Technological Innovation in the United States, 1790 to 1865 (Johns Hopkins University Press, 2009). He also authored numerous journal articles and book chapters. At the time of his death, he was well into another book project, about the role of government in undertaking and organizing technological innovation in the period between the Civil War and the outbreak of the second World War. The arc of his research is one of deepening refinement of his core ideas about the economic and social institutions that have fostered innovation and productivity growth.

Ross was equally dedicated to his students, who are bereft at losing him. He was the founder of the Integrated Social Science Program for first-year students, and directed it for the past 20 years. His hallmark seminar course, Capitalism and Human Welfare, was the launchpad to self-directed, critical study in the social sciences for hundreds of UVM students. Those of his students who live in Burlington continue to talk about his course, and how important he was to their intellectual development, decades later. In Economics Department meetings, his was always the voice of reason and sanity.

The Economics Department at UVM extends its deep condolences to Ross’s family, honors his many contributions and accomplishments, and is greatly diminished by his loss.

A memorial service will be held at the University of Vermont’s Ira Allen Chapel on Tuesday, February 24, at 4 pm. Ross’s family and colleagues are establishing an award in his name for students in the Integrated Social Sciences Program. To make a contribution, please donate via check or online at the UVM Foundation website, being sure to direct your contribution to “Economics Fund in memory of Ross Thomson.” For further information about the service or the scholarship, please contact Jane Knodell at Jane.Knodell@uvm.edu or (802) 656-0189.

Jane Knodell

The Roots of American Industrialization, 1790-1860

David R. Meyer, Brown University

The Puzzle of Industrialization

In a society which is predominantly agricultural, how is it possible for industrialization to gain a foothold? One view is that the demand of farm households for manufactures spurs industrialization, but such an outcome is not guaranteed. What if farm households can meet their own food requirements, and they choose to supply some of their needs for manufactures by engaging in small-scale craft production in the home? They might supplement this production with limited purchases of goods from local craftworkers and purchases of luxuries from other countries. This local economy would be relatively self-sufficient, and there is no apparent impetus to alter it significantly through industrialization, that is, the growth of workshop and factory production for larger markets. Others would claim that limited gains might come from specialization, once demand passed some small threshold. Finally, it has been argued that if the farmers are impoverished, some of them would be available for manufacturing and this would provide an incentive to industrialize. However, this argument begs the question as to who would purchase the manufactures. One possibility is that non-farm rural dwellers, such as trade people, innkeepers, and professionals, as well as a small urban population, might provide an impetus to limited industrialization.

The problem with the “impoverished agriculture” theory

The industrialization of the eastern United States from 1790 to 1860 raises similar conundrums. For a long time, scholars thought that the agriculture was mostly poor quality. Thus, the farm labor force left agriculture for workshops, such as those which produced shoes, or for factories, such as the cotton textile mills of New England. These manufactures provided employment for women and children, who otherwise had limited productive possibilities because the farms were not economical. Yet, the market for manufactures remained mostly in the East prior to 1860. Consequently, it is unclear who would have purchased the products to support the growth of manufactures before 1820, as well as to undergird the large-scale industrialization of the East during the two decades following 1840. Even if the impoverished-agriculture explanation of the East’s industrialization is rejected, we are still left with the curiosity that as late as 1840, about eighty percent of the population lived in rural areas, though some of them were in nonfarm occupations.

In brief, the puzzle of eastern industrialization between 1790 and 1860 can be resolved – the East had a prosperous agriculture. Farmers supplied low-cost agricultural products to rural and urban dwellers, and this population demanded manufactures, which were supplied by vigorous local and subregional manufacturing sectors. Some entrepreneurs shifted into production for larger market areas, and this transformation occurred especially in sectors such as shoes, selected light manufactures produced in Connecticut (such as buttons, tinware, and wooden clocks), and cotton textiles. Transportation improvements exerted little impact on these agricultural and industrial developments, primarily because the lowly wagon served effectively as a transport medium and much of the East’s most prosperous areas were accessible to cheap waterway transportation. The metropolises of Boston, New York, Philadelphia, and, to a lesser extent, Baltimore, and the satellites of each (together, each metropolis and its satellites is called a metropolitan industrial complex), became leading manufacturing centers, and other industrial centers emerged in prosperous agricultural areas distant from these complexes. The East industrialized first, and, subsequently, the Midwest began an agricultural and industrial growth process which was underway by the 1840s. Together, the East and the Midwest constituted the American Manufacturing Belt, which was formed by the 1870s, whereas the South failed to industrialize commensurately.

Synergy between Agriculture and Manufacturing

The solution to the puzzle of how industrialization can occur in a predominantly agricultural economy recognizes the possibility of synergy between agriculture and manufacturing. During the first three decades following 1790, prosperous agricultural areas emerged in the eastern United States. Initially, these areas were concentrated near the small metropolises of Boston, New York, and Philadelphia, and in river valleys such as the Connecticut Valley in Connecticut and Massachusetts, the Hudson and Mohawk Valleys in New York, the Delaware Valley bordering Pennsylvania and New Jersey, and the Susquehanna Valley in eastern Pennsylvania. These agricultural areas had access to cheap, convenient transport which could be used to reach markets; the farms supplied the growing urban populations in the cities and some of the products were exported. Furthermore, the farmers supplied the nearby, growing non-farm populations in the villages and small towns who provided goods and services to farmers. These non-farm consumers included retailers, small mill owners, teamsters, craftspeople, and professionals (clergy, physicians, and lawyers).

Across every decade from 1800 to 1860, the number of farm laborers grew, thus testifying to the robustness of eastern agriculture (see Table 1). And, this increase occurred in the face of an expanding manufacturing sector, as increasing numbers of rural dwellers left the farms to work in the factories, especially after 1840. Even New England, the region which presumably was the epitome of declining agriculture, witnessed a rise in the number of farm laborers all the way up to 1840, and, as of 1860, the drop off from the peak was small. Massachusetts and Connecticut, which had vigorous small workshops and increasing numbers of small factories before 1840, followed by a surge in manufacturing after 1840, matched the trajectory of farm laborers in New England as a whole. The numbers in these two states peaked in 1840 and fell off only modestly over the next twenty years. The Middle Atlantic region witnessed an uninterrupted rise in the number of farm laborers over the sixty-year period. New York and Pennsylvania, the largest states, followed slightly different paths. In New York, the number of farm laborers peaked around 1840 and then stabilized near that level for the next two decades, whereas in Pennsylvania the number of farm laborers rose in an uninterrupted fashion.

Table 1
Number of Farm Laborers by Region and Selected States, 1800-1860

Year 1800 1810 1820 1830 1840 1850 1860
New England 228,100 257,700 303,400 353,800 389,100 367,400 348,100
Massachusetts 73,200 72,500 73,400 78,500 87,900 80,800 77,700
Connecticut 50,400 49,300 51,500 55,900 57,000 51,400 51,800
Middle Atlantic 375,700 471,400 571,700 715,000 852,800 910,400 966,600
New York 111,800 170,100 256,000 356,300 456,000 437,100 449,100
Pennsylvania 112,600 141,000 164,900 195,200 239,000 296,300 329,000
East 831,900 986,800 1,178,500 1,422,600 1,631,000 1,645,200 1,662,800

Source: Thomas Weiss, “U.S. Labor Force Estimates and Economic Growth, 1800-1860,”American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis (Chicago, IL: University of Chicago Press, 1992), table 1A.9, p. 51.

The farmers, retailers, professionals, and others in these prosperous agricultural areas accumulated capital which became available for other economic sectors, and manufacturing was one of the most important to receive this capital. Entrepreneurs who owned small workshops and factories obtained capital to turn out a wide range of goods such as boards, boxes, utensils, building hardware, furniture, and wagons, which were in demand in the agricultural areas. And, some of these workshops and factories enlarged their market areas to a subregion as they gained production efficiencies; but, this did not account for all industrial development. Selected manufactures such as shoes, tinware, buttons, and cotton textiles were widely demanded by urban and rural residents of prosperous agricultural areas and by residents of the large cities. These products were high value relative to their weight; thus, the cost to ship them long distances was low. Astute entrepreneurs devised production methods and marketing approaches to sell these goods in large market areas, including New England and the Middle Atlantic regions of the East.

Manufactures Which Were Produced for Large Market Areas

Shoes and Tinware

Small workshops turned out shoes. Massachusetts entrepreneurs devised an integrated shoe production complex based on a division of labor among shops, and they established a marketing arm of wholesalers, principally in Boston, who sold the shoes throughout New England, to the Middle Atlantic, and to the South (particularly, to slave plantations). Businesses in Connecticut drew on the extensive capital accumulated by the well-to-do rural and urban dwellers of that state and moved into tinware, plated ware, buttons, and wooden clocks. These products, like shoes, also were manufactured in small workshops, but a division of labor among shops was less important than the organization of production within shops. Firms producing each good tended to agglomerate in a small subregion of the state. These clusters arose because entrepreneurs shared information about production techniques and specialized skills which they developed, and this knowledge was communicated as workers moved among shops. Initially, a marketing system of peddlers emerged in the tinware sector, and they sold the goods, first throughout Connecticut, and then they extended their travels to the rest of New England and to the Middle Atlantic. Workshops which made other types of light, high-value goods soon took advantage of the peddler distribution system to enlarge their market areas. At first, these peddlers operated part-time during the year, but as the supply of goods increased and market demand grew, peddlers operated for longer periods of the year and they traveled farther.

Cotton Textiles

Cotton textile manufacturing was an industry built on low-wage, especially female, labor; presumably, this industry offered opportunities in areas where farmers were unsuccessful. Yet, similar to the other manufactures which enlarged their market areas to the entire East before 1820, cotton textile production emerged in prosperous agricultural areas. That is not surprising, because this industry required substantial capital, technical skills, and, initially, nearby markets. These requirements were met in rich farming areas, which also could draw on wealthy merchants in large cities who contributed capital and provided sale outlets beyond nearby markets as output grew. The production processes in cotton textile manufacturing, however, diverged from the approaches to making shoes and small metal and wooden products. From the start, production processes included textile machinery, which initially consisted of spinning machines to make yarn, and later (after 1815), weaving machines and other mechanical equipment were added. Highly skilled mechanics were required to build the machines and to maintain them. The greater capital requirements for cotton mills, compared to shoes and small goods’ manufactures in Connecticut, meant that merchant wholesalers and wealthy retailers, professionals, mill owners, and others, were important underwriters of the factories.

Starting in the 1790s, New England, and, especially, Rhode Island, housed the leaders in early cotton textile manufacturing. Providence merchants funded some of the first successful cotton spinning mills, and they drew on the talents of Samuel Slater, an immigrant British machinist. He trained many of the first important textile mechanics, and investors in various parts of Rhode Island, Connecticut, Massachusetts, New Hampshire, and New York hired them to build mills. Between 1815 and 1820, power-loom weaving began to be commercially feasible, and this effort was led by firms in Rhode Island and, especially, in Massachusetts. Boston merchants, starting with the Boston Manufacturing Company at Waltham, devised a business plan which targeted large-scale, integrated cotton textile manufacturing, with a marketing/sales arm housed in a separate firm. They enlarged their effort significantly after 1820, and much of the impetus to the growth of the cotton textile industry came from the success entrepreneurs had in lowering the cost of production.

The Impact of Transportation Improvements

Following 1820, government and private sources invested substantial sums in canals, and after 1835, railroad investment increased rapidly. Canals required huge volumes of low-value commodities in order to pay operating expenses, cover interest on the bonds which were issued for construction, and retire the bonds at maturity. These conditions were only met in the richest agricultural and resource (lumbering and coal mining, for example) areas traversed by the Erie and Champlain Canals in New York and the coal canals in eastern Pennsylvania and New Jersey. The vast majority of the other canals failed to yield benefits for agriculture and industry, and most were costly debacles. Early railroads mainly carried passengers, especially within fifty to one hundred miles of the largest cities – Boston, New York, Philadelphia, and Baltimore. Industrial products were not carried in large volumes until after 1850; consequently, railroads built before that time had little impact on industrialization in the East.

Canals and railroads had minor impacts on agricultural and industrial development because the lowly wagon provided withering competition. Wagons offered flexible, direct connections between origins and destinations, without the need to transship goods, as was the case with canals and railroads; these modes required wagons at their end points. Within a distance of about fifty miles, the cost of wagon transport was competitive with alternative transport modes, so long as the commodities were high value relative to their weight. And, infrequent transport of these goods could occur over distances of as much as one hundred miles. This applied to many manufactures, and agricultural commodities could be raised to high value by processing prior to shipment. Thus, wheat was turned into flour, corn and other grains were fed to cattle and pigs and these were processed into beef and pork prior to shipment, and milk was converted into butter and cheese. Most of the richest agricultural and industrial areas of the East were less than one hundred miles from the largest cities or these areas were near low-cost waterway transport along rivers, bays, and the Atlantic Coast. Therefore, canals and railroads in these areas had difficulty competing for freight, and outside these areas the limited production generated little demand for long distant transport services.

Agricultural Prosperity Continues

After 1820, eastern farmers seized the increasing market opportunities in the prosperous rural areas as nonfarm processing expanded and village and small town populations demanded greater amounts of farm products. The large number of farmers who were concentrated around the rapidly growing metropolises (Boston, New York, Philadelphia, and Baltimore) and near urban agglomerations such as Albany-Troy, New York, developed increasing specialization in urban market goods such as fluid milk, fresh vegetables, fruit, butter, and hay (for horse transport). Farmers farther away responded to competition by shifting into products which could be transported long distances to market, including wheat into flour, cattle which walked to market, or pigs which were converted into pork. During the winter these farms sent butter, and cheese was a specialty which could be lucrative for long periods of the year when temperatures were cool.

These changes swept across the East, and, after 1840, farmers increasingly adjusted their production to compete with cheap wheat, cattle, and pork arriving over the Erie Canal from the Midwest. Wheat growing became less profitable, and specialized agriculture expanded, such as potatoes, barley, and hops in central New York and cigar tobacco in the Connecticut Valley. Farmers near the largest cities intensified their specialization in urban market products, and as the railroads expanded, fluid milk was shipped longer distances to these cities. Farmers in less accessible areas and on poor agricultural land which was infertile or too hilly, became less competitive. If these farmers and their children stayed, their incomes declined relative to others in the East, but if they moved to the Midwest or to the burgeoning industrial cities of the East, they had the chance of participating in the rising prosperity.

Metropolitan Industrial Complexes

The metropolises of Boston, New York, Philadelphia, and, to a lesser extent, Baltimore, led the industrial expansion after 1820, because they were the greatest concentrated markets, they had the most capital, and their wholesalers provided access to subregional and regional markets outside the metropolises. By 1840, each of them was surrounded by industrial satellites – manufacturing centers in close proximity to, and economically integrated with, the metropolis. Together, these metropolises and their satellites formed metropolitan industrial complexes, which accounted for almost one-quarter of the nation’s manufacturing (see Table 2). For example, metropolises and satellites included Boston and Lowell, New York and Paterson (New Jersey), Philadelphia and Reading (Pennsylvania), and Baltimore and Wilmington (Delaware), which also was a satellite of Philadelphia. Among the four leading metropolises, New York and Philadelphia housed, by far, the largest share of the nation’s manufacturing workers, and their satellites had large numbers of industrial workers. Yet, Boston’s satellites contained the greatest concentration of industrial workers in the nation, with almost seven percent of the national total. The New York, Philadelphia, and Boston metropolitan industrial complexes each had approximately the same share of the nation’s manufacturing workers. These complexes housed a disproportionate share of the nation’s commerce-serving manufactures such as printing-publishing and paper and of local, regional, and national market manufactures such as glass, drugs and paints, textiles, musical instruments, furniture, hardware, and machinery.

Table 2
Manufacturing Employment in the Metropolitan Industrial Complexes
of New York, Philadelphia, Boston, and Baltimore
as a Percentage of National Manufacturing Employment in 1840

Metropolis Satellites Complex
New York 4.1% 3.4% 7.4%
Philadelphia 3.9 2.9 6.7
Boston 0.5 6.6 7.1
Baltimore 2.0 0.2 2.3
Four Complexes 10.5 13.1 23.5

Note: Metropolitan county is defined as the metropolis for each complex and “outside” comprises nearby counties; those included in each complex were the following. New York: metropolis (New York, Kings, Queens, Richmond); outside (Connecticut: Fairfield; New York: Westchester, Putnam, Rockland, Orange; New Jersey: Bergen, Essex, Hudson, Middlesex, Morris, Passaic, Somerset). Philadelphia: metropolis (Philadelphia); outside (Pennsylvania: Bucks, Chester, Delaware, Montgomery; New Jersey: Burlington, Gloucester, Mercer; Delaware: New Castle). Boston: metropolis (Suffolk); outside (Essex, Middlesex, Norfolk, Plymouth). Baltimore: metropolis (Baltimore); outside (Anne Arundel, Harford).

Source: U.S. Bureau of the Census, Compendium of the Sixth Census, 1840 (Washington, D.C.: Blair and Rives, 1841).

Also, by 1840, prosperous agricultural areas farther from these complexes, such as the Connecticut Valley in New England, the Hudson Valley, the Erie Canal Corridor across New York state, and southeastern Pennsylvania, housed significant amounts of manufacturing in urban places. At the intersection of the Hudson and Mohawk rivers, the Albany-Troy agglomeration contained one of the largest concentrations of manufacturing outside the metropolitan complexes. And, industrial towns such as Utica, Syracuse, Rochester, and Buffalo were strung along the Erie Canal Corridor. Many of the manufactures (such as furniture, wagons, and machinery) served subregional markets in the areas of prosperous agriculture, but some places also developed specialization in manufactures (textiles and hardware) for larger regional and interregional market areas (the East as a whole). The Connecticut Valley, for example, housed many firms which produced cotton textiles, hardware, and cutlery.

Manufactures for Eastern and National Markets

Shoes

In several industrial sectors whose firms had expanded before 1820 to regional, and even, multiregional markets, in the East, firms intensified their penetration of eastern markets and reached to markets in the rapidly growing Midwest between 1820 and 1860. In eastern Massachusetts, a production complex of shoe firms innovated methods of organizing output within and among firms, and they developed a wide array of specialized tools and components to increase productivity and to lower manufacturing costs. In addition, a formidable wholesaling, marketing, and distribution complex, headed by Boston wholesalers, pushed the ever-growing volume of shoes into sales channels which reached throughout the nation. Machinery did not come into use until the 1850s, and, by 1860, Massachusetts accounted for half of the value of the nation’s shoe production.

Cotton Textiles

In contrast, machinery constituted an important factor of production which drove down the price of cotton textile goods, substantially enlarging the quantity consumers demanded. Before 1820, most of the machinery innovations improved the spinning process for making yarn, and in the five years following 1815, innovations in mechanized weaving generated an initial substantial drop in the cost of production as the first integrated spinning-weaving mills emerged. During the next decade and a half the price of cotton goods collapsed by over fifty percent as large integrated spinning-weaving mills became the norm for the production of most cotton goods. Therefore, by the mid-1830s vast volumes of cotton goods were pouring out of textile mills, and a sophisticated set of specialized wholesaling firms, mostly concentrated in Boston, and secondarily, in New York and Philadelphia, channeled these items into the national market.

Prior to 1820, the cotton textile industry was organized into three cores. The Providence core dominated and the Boston core occupied second place; both of these were based mostly on mechanized spinning. A third core in the city of Philadelphia was based on hand spinning and weaving. Within about fifteen years after 1820, the Boston core soared to a commanding position in cotton textile production as a group of Boston merchants and their allies relentlessly replicated their business plan at various sites in New England, including at Lowell, Chicopee, and Taunton in Massachusetts, at Nashua, Manchester, and Dover in New Hampshire, and at Saco in Maine. The Providence core continued to grow, but its investors did not seem to fully grasp the strategic, multi-faceted business plan which the Boston merchants implemented. Similarly, investors in an emerging core within about fifty to seventy-five miles of New York City in the Hudson Valley and northern New Jersey likewise did not seem to fully understand the Boston merchants’ plan, and these New York City area firms never reached the scale of the firms of the Boston Core. The Philadelphia core enlarged to nearby areas southwest of the city and in Delaware, but these firms stayed small, and the Philadelphia firms created a small-scale, flexible production system which turned out specialized goods, not the mass-market commodity textiles of the other cores.

Capital Investment in Cotton Textiles

The distribution of capital investment in cotton textiles across the regions and states of the East between 1820 and 1860 capture the changing prominence of the cores of cotton textile production (see Table 3). The New England and the Middle Atlantic regions contained approximately similar shares (almost half each) of the nation’s capital investment. However, during the 1820s the cotton textile industry restructured to a form which was maintained for the next three decades. New England’s share of capital investment surged to about seventy percent, and it maintained that share until 1860, whereas the Middle Atlantic region’s share fell to around twenty percent by 1840 and remained near that until 1860. The rest of the nation, primarily the South, reached about ten percent of total capital investment around 1840 and continued at that level for the next two decades. Massachusetts became the leading cotton textile state by 1831 and Rhode Island, the early leader, gradually slipped to a level of about ten percent by the 1850s; New Hampshire and Pennsylvania housed approximately similar shares as Rhode Island by that time.

Table 3
Capital Invested in Cotton Textiles
by Region and State as a Percentage of the Nation
1820-1860

Region/state 1820 1831 1840 1850 1860
New England 49.6% 69.8% 68.4% 72.3% 70.3%
Maine 1.6 1.9 2.7 4.5 6.1
New Hampshire 5.6 13.1 10.8 14.7 12.8
Vermont 1.0 0.7 0.2 0.3 0.3
Massachusetts 14.3 31.7 34.1 38.2 34.2
Connecticut 11.6 7.0 6.2 5.7 6.7
Rhode Island 15.4 15.4 14.3 9.0 10.2
Middle Atlantic 46.2 29.5 22.7 17.3 19.0
New York 18.8 9.0 9.6 5.6 5.5
New Jersey 4.7 5.0 3.4 2.0 1.3
Pennsylvania 6.3 9.3 6.5 6.1 9.3
Delaware 4.0 0.9 0.6 0.6 0.6
Maryland 12.4 5.3 2.6 3.0 2.3
Rest of nation 4.3 0.7 9.0 10.4 10.7
Nation 100.0% 100.0% 100.0% 100.0% 100.0%
Total capital (thousands) $10,783 $40,613 $51,102 $74,501 $98,585

Sources: David J. Jeremy, Transatlantic Industrial Revolution: The Diffusion of Textile Technologies Between Britain and America, 1790-1830s (Cambridge, MA: MIT Press, 1981), appendix D, table D.1, p. 276; U.S. Bureau of the Census, Compendium of the Sixth Census, 1840 (Washington, D.C.: Blair and Rives, 1841); U.S. Bureau of the Census, Report on the Manufactures of the United States at the Tenth Census, 1880 (Washington, D.C.: Government Printing Office, 1883).

Connecticut’s Industries

In Connecticut, industrialists built on their successful production and sales prior to 1820 and expanded into a wider array of products which they sold in the East and South, and, after 1840, they acquired more sales in the Midwest. This success was not based on a mythical “Yankee ingenuity,” which, typically, has been framed in terms of character. Instead, this ingenuity rested on fundamental assets: a highly educated population linked through wide-ranging social networks which communicated information about technology, labor opportunities, and markets; and the abundant supplies of capital in the state supported the entrepreneurs. The peddler distribution system provided efficient sales channels into the mid-1830s, but, after that, firms took advantage of more traditional wholesaling channels. In some sectors, such as the brass industry, firms followed the example of the large Boston-core textile firms, and the brass companies founded their own wholesale distribution agencies in Boston and New York City. The achievements of Connecticut’s firms were evident by 1850. As a share of the nation’s value of production, they accounted for virtually all of the clocks, pins, and suspenders, close to half of the buttons and rubber goods, and about one-third of the brass foundry products, Britannia and plated ware, and hardware.

Difficulty of Duplicating Eastern Methods in the Midwest

The East industrialized first, based on a prosperous agricultural and industrialization process, as some of its entrepreneurs shifted into the national market manufactures of shoes, cotton textiles, and diverse goods turned out in Connecticut. These industrialists made this shift prior to 1820, and they enhanced their dominance of these products during the subsequent two decades. Manufacturers in the Midwest did not have sufficient intraregional markets to begin producing these goods before 1840; therefore, they could not compete in these national market manufactures. Eastern firms had developed technologies and organizations of production and created sales channels which could not be readily duplicated, and these light, high-value goods were transported cheaply to the Midwest. When midwestern industrialists faced choices about which manufactures to enter, the eastern light, high-value goods were being sold in the Midwest at prices which were so low that it was too risky for midwestern firms to attempt to compete. Instead, these firms moved into a wide range of local and regional market manufactures which also existed in the East, but which cost too much to transport to the Midwest. These goods included lumber and food products (e.g., flour and whiskey), bricks, chemicals, machinery, and wagons.

The American Manufacturing Belt

The Midwest Joins the American Manufacturing Belt after 1860

Between 1840 and 1860, Midwestern manufacturers made strides in building an industrial infrastructure, and they were positioned to join with the East to constitute the American Manufacturing Belt, the great concentration of manufacturing which would sprawl from the East Coast to the edge of the Great Plains. This Belt became mostly set within a decade or so after 1860, because technologies and organizations of production and of sales channels had lowered costs across a wide array of manufactures, and improvements in transportation (such as an integrated railroad system) and communication (such as the telegraph) reduced distribution costs. Thus, increasing shares of industrial production were sold in interregional markets.

Lack of Industrialization in the South

Although the South had prosperous farms, it failed to build a deep and broad industrial infrastructure prior to 1860, because much of its economy rested on a slave agricultural system. In this economy, investments were heavily concentrated in slaves rather than in an urban and industrial infrastructure. Local and regional demand remained low across much of the South, because slaves were not able to freely express their consumption demands and population densities remained low, except in a few agricultural areas. Thus, the market thresholds for many manufactures were not met, and, if thresholds were met, the demand was insufficient to support more than a few factories. By the 1870s, when the South had recovered from the Civil War and its economy was reconstructed, eastern and midwestern industrialists had built strong positions in many manufactures. And, as new industries emerged, the northern manufacturers had the technological and organizational infrastructure and distribution channels to capture dominance in the new industries.

In a similar fashion, the Great Plains, the Southwest, and the West were settled too late for their industrialists to be major producers of national market goods. Manufacturers in these regions focused on local and regional market manufactures. Some low wage industries (such as textiles) began to move to the South in significant numbers after 1900, and the emergence of industries based on high technology after 1950 led to new manufacturing concentrations which rested on different technologies. Nonetheless, the American Manufacturing Belt housed the majority of the nation’s industry until the middle of the twentieth century.

This essay is based on David R. Meyer, The Roots of American Industrialization, Baltimore: Johns Hopkins University Press, 2003.

Additional Readings

Atack, Jeremy, and Fred Bateman. To Their Own Soil: Agriculture in the Antebellum North. Ames, IA: Iowa State University Press, 1987.

Baker, Andrew H., and Holly V. Izard. “New England Farmers and the Marketplace, 1780-1865: A Case Study.” Agricultural History 65 (1991): 29-52.

Barker, Theo, and Dorian Gerhold. The Rise and Rise of Road Transport, 1700-1990. New York: Cambridge University Press, 1995.

Bodenhorn, Howard. A History of Banking in Antebellum America: Financial Markets and Economic Development in an Era of Nation-Building. New York: Cambridge University Press, 2000.

Brown, Richard D. Knowledge is Power: The Diffusion of Information in Early America, 1700-1865. New York: Oxford University Press, 1989.

Clark, Christopher. The Roots of Rural Capitalism: Western Massachusetts, 1780-1860. Ithaca, NY: Cornell University Press, 1990.

Dalzell, Robert F., Jr. Enterprising Elite: The Boston Associates and the World They Made. Cambridge, MA: Harvard University Press, 1987.

Durrenberger, Joseph A. Turnpikes: A Study of the Toll Road Movement in the Middle Atlantic States and Maryland. Cos Cob, CT: John E. Edwards, 1968.

Field, Alexander J. “On the Unimportance of Machinery.” Explorations in Economic History 22 (1985): 378-401.

Fishlow, Albert. American Railroads and the Transformation of the Ante-Bellum Economy. Cambridge, MA: Harvard University Press, 1965.

Fishlow, Albert. “Antebellum Interregional Trade Reconsidered.” American Economic Review 54 (1964): 352-64.

Goodrich, Carter, ed. Canals and American Economic Development. New York: Columbia University Press, 1961.

Gross, Robert A. “Culture and Cultivation: Agriculture and Society in Thoreau’s Concord.” Journal of American History 69 (1982): 42-61.

Hoke, Donald R. Ingenious Yankees: The Rise of the American System of Manufactures in the Private Sector. New York: Columbia University Press, 1990.

Hounshell, David A. From the American System to Mass Production, 1800-1932: The Development of Manufacturing Technology in the United States. Baltimore: Johns Hopkins University Press, 1984.

Jeremy, David J. Transatlantic Industrial Revolution: The Diffusion of Textile Technologies between Britain and America, 1790-1830s. Cambridge, MA: MIT Press, 1981.

Jones, Chester L. The Economic History of the Anthracite-Tidewater Canals. University of Pennsylvania Series on Political Economy and Public Law, no. 22. Philadelphia: John C. Winston, 1908.

Karr, Ronald D. “The Transformation of Agriculture in Brookline, 1770-1885.” Historical Journal of Massachusetts 15 (1987): 33-49.

Lindstrom, Diane. Economic Development in the Philadelphia Region, 1810-1850. New York: Columbia University Press, 1978.

McClelland, Peter D. Sowing Modernity: America’s First Agricultural Revolution. Ithaca, NY: Cornell University Press, 1997.

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Citation: Meyer, David. “American Industrialization”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-roots-of-american-industrialization-1790-1860/

The U.S. Economy in the 1920s

Gene Smiley, Marquette University

Introduction

The interwar period in the United States, and in the rest of the world, is a most interesting era. The decade of the 1930s marks the most severe depression in our history and ushered in sweeping changes in the role of government. Economists and historians have rightly given much attention to that decade. However, with all of this concern about the growing and developing role of government in economic activity in the 1930s, the decade of the 1920s often tends to get overlooked. This is unfortunate because the 1920s are a period of vigorous, vital economic growth. It marks the first truly modern decade and dramatic economic developments are found in those years. There is a rapid adoption of the automobile to the detriment of passenger rail travel. Though suburbs had been growing since the late nineteenth century their growth had been tied to rail or trolley access and this was limited to the largest cities. The flexibility of car access changed this and the growth of suburbs began to accelerate. The demands of trucks and cars led to a rapid growth in the construction of all-weather surfaced roads to facilitate their movement. The rapidly expanding electric utility networks led to new consumer appliances and new types of lighting and heating for homes and businesses. The introduction of the radio, radio stations, and commercial radio networks began to break up rural isolation, as did the expansion of local and long-distance telephone communications. Recreational activities such as traveling, going to movies, and professional sports became major businesses. The period saw major innovations in business organization and manufacturing technology. The Federal Reserve System first tested its powers and the United States moved to a dominant position in international trade and global business. These things make the 1920s a period of considerable importance independent of what happened in the 1930s.

National Product and Income and Prices

We begin the survey of the 1920s with an examination of the overall production in the economy, GNP, the most comprehensive measure of aggregate economic activity. Real GNP growth during the 1920s was relatively rapid, 4.2 percent a year from 1920 to 1929 according to the most widely used estimates. (Historical Statistics of the United States, or HSUS, 1976) Real GNP per capita grew 2.7 percent per year between 1920 and 1929. By both nineteenth and twentieth century standards these were relatively rapid rates of real economic growth and they would be considered rapid even today.

There were several interruptions to this growth. In mid-1920 the American economy began to contract and the 1920-1921 depression lasted about a year, but a rapid recovery reestablished full-employment by 1923. As will be discussed below, the Federal Reserve System’s monetary policy was a major factor in initiating the 1920-1921 depression. From 1923 through 1929 growth was much smoother. There was a very mild recession in 1924 and another mild recession in 1927 both of which may be related to oil price shocks (McMillin and Parker, 1994). The 1927 recession was also associated with Henry Ford’s shut-down of all his factories for six months in order to changeover from the Model T to the new Model A automobile. Though the Model T’s market share was declining after 1924, in 1926 Ford’s Model T still made up nearly 40 percent of all the new cars produced and sold in the United States. The Great Depression began in the summer of 1929, possibly as early as June. The initial downturn was relatively mild but the contraction accelerated after the crash of the stock market at the end of October. Real total GNP fell 10.2 percent from 1929 to 1930 while real GNP per capita fell 11.5 percent from 1929 to 1930.

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Price changes during the 1920s are shown in Figure 2. The Consumer Price Index, CPI, is a better measure of changes in the prices of commodities and services that a typical consumer would purchase, while the Wholesale Price Index, WPI, is a better measure in the changes in the cost of inputs for businesses. As the figure shows the 1920-1921 depression was marked by extraordinarily large price decreases. Consumer prices fell 11.3 percent from 1920 to 1921 and fell another 6.6 percent from 1921 to 1922. After that consumer prices were relatively constant and actually fell slightly from 1926 to 1927 and from 1927 to 1928. Wholesale prices show greater variation. The 1920-1921 depression hit farmers very hard. Prices had been bid up with the increasing foreign demand during the First World War. As European production began to recover after the war prices began to fall. Though the prices of agricultural products fell from 1919 to 1920, the depression brought on dramatic declines in the prices of raw agricultural produce as well as many other inputs that firms employ. In the scramble to beat price increases during 1919 firms had built up large inventories of raw materials and purchased inputs and this temporary increase in demand led to even larger price increases. With the depression firms began to draw down those inventories. The result was that the prices of raw materials and manufactured inputs fell rapidly along with the prices of agricultural produce—the WPI dropped 45.9 percent between 1920 and 1921. The price changes probably tend to overstate the severity of the 1920-1921 depression. Romer’s recent work (1988) suggests that prices changed much more easily in that depression reducing the drop in production and employment. Wholesale prices in the rest of the 1920s were relatively stable though they were more likely to fall than to rise.

Economic Growth in the 1920s

Despite the 1920-1921 depression and the minor interruptions in 1924 and 1927, the American economy exhibited impressive economic growth during the 1920s. Though some commentators in later years thought that the existence of some slow growing or declining sectors in the twenties suggested weaknesses that might have helped bring on the Great Depression, few now argue this. Economic growth never occurs in all sectors at the same time and at the same rate. Growth reallocates resources from declining or slower growing sectors to the more rapidly expanding sectors in accordance with new technologies, new products and services, and changing consumer tastes.

Economic growth in the 1920s was impressive. Ownership of cars, new household appliances, and housing was spread widely through the population. New products and processes of producing those products drove this growth. The combination of the widening use of electricity in production and the growing adoption of the moving assembly line in manufacturing combined to bring on a continuing rise in the productivity of labor and capital. Though the average workweek in most manufacturing remained essentially constant throughout the 1920s, in a few industries, such as railroads and coal production, it declined. (Whaples 2001) New products and services created new markets such as the markets for radios, electric iceboxes, electric irons, fans, electric lighting, vacuum cleaners, and other laborsaving household appliances. This electricity was distributed by the growing electric utilities. The stocks of those companies helped create the stock market boom of the late twenties. RCA, one of the glamour stocks of the era, paid no dividends but its value appreciated because of expectations for the new company. Like the Internet boom of the late 1990s, the electricity boom of the 1920s fed a rapid expansion in the stock market.

Fed by continuing productivity advances and new products and services and facilitated by an environment of stable prices that encouraged production and risk taking, the American economy embarked on a sustained expansion in the 1920s.

Population and Labor in the 1920s

At the same time that overall production was growing, population growth was declining. As can be seen in Figure 3, from an annual rate of increase of 1.85 and 1.93 percent in 1920 and 1921, respectively, population growth rates fell to 1.23 percent in 1928 and 1.04 percent in 1929.

These changes in the overall growth rate were linked to the birth and death rates of the resident population and a decrease in foreign immigration. Though the crude death rate changed little during the period, the crude birth rate fell sharply into the early 1930s. (Figure 4) There are several explanations for the decline in the birth rate during this period. First, there was an accelerated rural-to-urban migration. Urban families have tended to have fewer children than rural families because urban children do not augment family incomes through their work as unpaid workers as rural children do. Second, the period also saw continued improvement in women’s job opportunities and a rise in their labor force participation rates.

Immigration also fell sharply. In 1917 the federal government began to limit immigration and in 1921 an immigration act limited the number of prospective citizens of any nationality entering the United States each year to no more than 3 percent of that nationality’s resident population as of the 1910 census. A new act in 1924 lowered this to 2 percent of the resident population at the 1890 census and more firmly blocked entry for people from central, southern, and eastern European nations. The limits were relaxed slightly in 1929.

The American population also continued to move during the interwar period. Two regions experienced the largest losses in population shares, New England and the Plains. For New England this was a continuation of a long-term trend. The population share for the Plains region had been rising through the nineteenth century. In the interwar period its agricultural base, combined with the continuing shift from agriculture to industry, led to a sharp decline in its share. The regions gaining population were the Southwest and, particularly, the far West.— California began its rapid growth at this time.

 Real Average Weekly or Daily Earnings for Selected=During the 1920s the labor force grew at a more rapid rate than population. This somewhat more rapid growth came from the declining share of the population less than 14 years old and therefore not in the labor force. In contrast, the labor force participation rates, or fraction of the population aged 14 and over that was in the labor force, declined during the twenties from 57.7 percent to 56.3 percent. This was entirely due to a fall in the male labor force participation rate from 89.6 percent to 86.8 percent as the female labor force participation rate rose from 24.3 percent to 25.1 percent. The primary source of the fall in male labor force participation rates was a rising retirement rate. Employment rates for males who were 65 or older fell from 60.1 percent in 1920 to 58.0 percent in 1930.

With the depression of 1920-1921 the unemployment rate rose rapidly from 5.2 to 8.7 percent. The recovery reduced unemployment to an average rate of 4.8 percent in 1923. The unemployment rate rose to 5.8 percent in the recession of 1924 and to 5.0 percent with the slowdown in 1927. Otherwise unemployment remained relatively low. The onset of the Great Depression from the summer of 1929 on brought the unemployment rate from 4.6 percent in 1929 to 8.9 percent in 1930. (Figure 5)

Earnings for laborers varied during the twenties. Table 1 presents average weekly earnings for 25 manufacturing industries. For these industries male skilled and semi-skilled laborers generally commanded a premium of 35 percent over the earnings of unskilled male laborers in the twenties. Unskilled males received on average 35 percent more than females during the twenties. Real average weekly earnings for these 25 manufacturing industries rose somewhat during the 1920s. For skilled and semi-skilled male workers real average weekly earnings rose 5.3 percent between 1923 and 1929, while real average weekly earnings for unskilled males rose 8.7 percent between 1923 and 1929. Real average weekly earnings for females rose on 1.7 percent between 1923 and 1929. Real weekly earnings for bituminous and lignite coal miners fell as the coal industry encountered difficult times in the late twenties and the real daily wage rate for farmworkers in the twenties, reflecting the ongoing difficulties in agriculture, fell after the recovery from the 1920-1921 depression.

The 1920s were not kind to labor unions even though the First World War had solidified the dominance of the American Federation of Labor among labor unions in the United States. The rapid growth in union membership fostered by federal government policies during the war ended in 1919. A committee of AFL craft unions undertook a successful membership drive in the steel industry in that year. When U.S. Steel refused to bargain, the committee called a strike, the failure of which was a sharp blow to the unionization drive. (Brody, 1965) In the same year, the United Mine Workers undertook a large strike and also lost. These two lost strikes and the 1920-21 depression took the impetus out of the union movement and led to severe membership losses that continued through the twenties. (Figure 6)

Under Samuel Gompers’s leadership, the AFL’s “business unionism” had attempted to promote the union and collective bargaining as the primary answer to the workers’ concerns with wages, hours, and working conditions. The AFL officially opposed any government actions that would have diminished worker attachment to unions by providing competing benefits, such as government sponsored unemployment insurance, minimum wage proposals, maximum hours proposals and social security programs. As Lloyd Ulman (1961) points out, the AFL, under Gompers’ direction, differentiated on the basis of whether the statute would or would not aid collective bargaining. After Gompers’ death, William Green led the AFL in a policy change as the AFL promoted the idea of union-management cooperation to improve output and promote greater employer acceptance of unions. But Irving Bernstein (1965) concludes that, on the whole, union-management cooperation in the twenties was a failure.

To combat the appeal of unions in the twenties, firms used the “yellow-dog” contract requiring employees to swear they were not union members and would not join one; the “American Plan” promoting the open shop and contending that the closed shop was un-American; and welfare capitalism. The most common aspects of welfare capitalism included personnel management to handle employment issues and problems, the doctrine of “high wages,” company group life insurance, old-age pension plans, stock-purchase plans, and more. Some firms formed company unions to thwart independent unionization and the number of company-controlled unions grew from 145 to 432 between 1919 and 1926.

Until the late thirties the AFL was a voluntary association of independent national craft unions. Craft unions relied upon the particular skills the workers had acquired (their craft) to distinguish the workers and provide barriers to the entry of other workers. Most craft unions required a period of apprenticeship before a worker was fully accepted as a journeyman worker. The skills, and often lengthy apprenticeship, constituted the entry barrier that gave the union its bargaining power. There were only a few unions that were closer to today’s industrial unions where the required skills were much less (or nonexistent) making the entry of new workers much easier. The most important of these industrial unions was the United Mine Workers, UMW.

The AFL had been created on two principles: the autonomy of the national unions and the exclusive jurisdiction of the national union.—Individual union members were not, in fact, members of the AFL; rather, they were members of the local and national union, and the national was a member of the AFL. Representation in the AFL gave dominance to the national unions, and, as a result, the AFL had little effective power over them. The craft lines, however, had never been distinct and increasingly became blurred. The AFL was constantly mediating jurisdictional disputes between member national unions. Because the AFL and its individual unions were not set up to appeal to and work for the relatively less skilled industrial workers, union organizing and growth lagged in the twenties.

Agriculture

The onset of the First World War in Europe brought unprecedented prosperity to American farmers. As agricultural production in Europe declined, the demand for American agricultural exports rose, leading to rising farm product prices and incomes. In response to this, American farmers expanded production by moving onto marginal farmland, such as Wisconsin cutover property on the edge of the woods and hilly terrain in the Ozark and Appalachian regions. They also increased output by purchasing more machinery, such as tractors, plows, mowers, and threshers. The price of farmland, particularly marginal farmland, rose in response to the increased demand, and the debt of American farmers increased substantially.

This expansion of American agriculture continued past the end of the First World War as farm exports to Europe and farm prices initially remained high. However, agricultural production in Europe recovered much faster than most observers had anticipated. Even before the onset of the short depression in 1920, farm exports and farm product prices had begun to fall. During the depression, farm prices virtually collapsed. From 1920 to 1921, the consumer price index fell 11.3 percent, the wholesale price index fell 45.9 percent, and the farm products price index fell 53.3 percent. (HSUS, Series E40, E42, and E135)

Real average net income per farm fell over 72.6 percent between 1920 and 1921 and, though rising in the twenties, never recovered the relative levels of 1918 and 1919. (Figure 7) Farm mortgage foreclosures rose and stayed at historically high levels for the entire decade of the 1920s. (Figure 8) The value of farmland and buildings fell throughout the twenties and, for the first time in American history, the number of cultivated acres actually declined as farmers pulled back from the marginal farmland brought into production during the war. Rather than indicators of a general depression in agriculture in the twenties, these were the results of the financial commitments made by overoptimistic American farmers during and directly after the war. The foreclosures were generally on second mortgages rather than on first mortgages as they were in the early 1930s. (Johnson, 1973; Alston, 1983)

A Declining Sector

A major difficulty in analyzing the interwar agricultural sector lies in separating the effects of the 1920-21 and 1929-33 depressions from those that arose because agriculture was declining relative to the other sectors. A relatively very slow growing demand for basic agricultural products and significant increases in the productivity of labor, land, and machinery in agricultural production combined with a much more rapid extensive economic growth in the nonagricultural sectors of the economy required a shift of resources, particularly labor, out of agriculture. (Figure 9) The market induces labor to voluntarily move from one sector to another through income differentials, suggesting that even in the absence of the effects of the depressions, farm incomes would have been lower than nonfarm incomes so as to bring about this migration.

The continuous substitution of tractor power for horse and mule power released hay and oats acreage to grow crops for human consumption. Though cotton and tobacco continued as the primary crops in the south, the relative production of cotton continued to shift to the west as production in Arkansas, Missouri, Oklahoma, Texas, New Mexico, Arizona, and California increased. As quotas reduced immigration and incomes rose, the demand for cereal grains grew slowly—more slowly than the supply—and the demand for fruits, vegetables, and dairy products grew. Refrigeration and faster freight shipments expanded the milk sheds further from metropolitan areas. Wisconsin and other North Central states began to ship cream and cheeses to the Atlantic Coast. Due to transportation improvements, specialized truck farms and the citrus industry became more important in California and Florida. (Parker, 1972; Soule, 1947)

The relative decline of the agricultural sector in this period was closely related to the highly inelastic income elasticity of demand for many farm products, particularly cereal grains, pork, and cotton. As incomes grew, the demand for these staples grew much more slowly. At the same time, rising land and labor productivity were increasing the supplies of staples, causing real prices to fall.

Table 3 presents selected agricultural productivity statistics for these years. Those data indicate that there were greater gains in labor productivity than in land productivity (or per acre yields). Per acre yields in wheat and hay actually decreased between 1915-19 and 1935-39. These productivity increases, which released resources from the agricultural sector, were the result of technological improvements in agriculture.

Technological Improvements In Agricultural Production

In many ways the adoption of the tractor in the interwar period symbolizes the technological changes that occurred in the agricultural sector. This changeover in the power source that farmers used had far-reaching consequences and altered the organization of the farm and the farmers’ lifestyle. The adoption of the tractor was land saving (by releasing acreage previously used to produce crops for workstock) and labor saving. At the same time it increased the risks of farming because farmers were now much more exposed to the marketplace. They could not produce their own fuel for tractors as they had for the workstock. Rather, this had to be purchased from other suppliers. Repair and replacement parts also had to be purchased, and sometimes the repairs had to be undertaken by specialized mechanics. The purchase of a tractor also commonly required the purchase of new complementary machines; therefore, the decision to purchase a tractor was not an isolated one. (White, 2001; Ankli, 1980; Ankli and Olmstead, 1981; Musoke, 1981; Whatley, 1987). These changes resulted in more and more farmers purchasing and using tractors, but the rate of adoption varied sharply across the United States.

Technological innovations in plants and animals also raised productivity. Hybrid seed corn increased yields from an average of 40 bushels per acre to 100 to 120 bushels per acre. New varieties of wheat were developed from the hardy Russian and Turkish wheat varieties which had been imported. The U.S. Department of Agriculture’s Experiment Stations took the lead in developing wheat varieties for different regions. For example, in the Columbia River Basin new varieties raised yields from an average of 19.1 bushels per acre in 1913-22 to 23.1 bushels per acre in 1933-42. (Shepherd, 1980) New hog breeds produced more meat and new methods of swine sanitation sharply increased the survival rate of piglets. An effective serum for hog cholera was developed, and the federal government led the way in the testing and eradication of bovine tuberculosis and brucellosis. Prior to the Second World War, a number of pesticides to control animal disease were developed, including cattle dips and disinfectants. By the mid-1920s a vaccine for “blackleg,” an infectious, usually fatal disease that particularly struck young cattle, was completed. The cattle tick, which carried Texas Fever, was largely controlled through inspections. (Schlebecker, 1975; Bogue, 1983; Wood, 1980)

Federal Agricultural Programs in the 1920s

Though there was substantial agricultural discontent in the period from the Civil War to late 1890s, the period from then to the onset of the First World War was relatively free from overt farmers’ complaints. In later years farmers dubbed the 1910-14 period as agriculture’s “golden years” and used the prices of farm crops and farm inputs in that period as a standard by which to judge crop and input prices in later years. The problems that arose in the agricultural sector during the twenties once again led to insistent demands by farmers for government to alleviate their distress.

Though there were increasing calls for direct federal government intervention to limit production and raise farm prices, this was not used until Roosevelt took office. Rather, there was a reliance upon the traditional method to aid injured groups—tariffs, and upon the “sanctioning and promotion of cooperative marketing associations.” In 1921 Congress attempted to control the grain exchanges and compel merchants and stockyards to charge “reasonable rates,” with the Packers and Stockyards Act and the Grain Futures Act. In 1922 Congress passed the Capper-Volstead Act to promote agricultural cooperatives and the Fordney-McCumber Tariff to impose high duties on most agricultural imports.—The Cooperative Marketing Act of 1924 did not bolster failing cooperatives as it was supposed to do. (Hoffman and Liebcap, 1991)

Twice between 1924 and 1928 Congress passed “McNary-Haugan” bills, but President Calvin Coolidge vetoed both. The McNary-Haugan bills proposed to establish “fair” exchange values (based on the 1910-14 period) for each product and to maintain them through tariffs and a private corporation that would be chartered by the government and could buy enough of each commodity to keep its price up to the computed fair level. The revenues were to come from taxes imposed on farmers. The Hoover administration passed the Hawley-Smoot tariff in 1930 and an Agricultural Marketing Act in 1929. This act committed the federal government to a policy of stabilizing farm prices through several nongovernment institutions but these failed during the depression. Federal intervention in the agricultural sector really came of age during the New Deal era of the 1930s.

Manufacturing

Agriculture was not the only sector experiencing difficulties in the twenties. Other industries, such as textiles, boots and shoes, and coal mining, also experienced trying times. However, at the same time that these industries were declining, other industries, such as electrical appliances, automobiles, and construction, were growing rapidly. The simultaneous existence of growing and declining industries has been common to all eras because economic growth and technological progress never affect all sectors in the same way. In general, in manufacturing there was a rapid rate of growth of productivity during the twenties. The rise of real wages due to immigration restrictions and the slower growth of the resident population spurred this. Transportation improvements and communications advances were also responsible. These developments brought about differential growth in the various manufacturing sectors in the United States in the 1920s.

Because of the historic pattern of economic development in the United States, the northeast was the first area to really develop a manufacturing base. By the mid-nineteenth century the East North Central region was creating a manufacturing base and the other regions began to create manufacturing bases in the last half of the nineteenth century resulting in a relative westward and southern shift of manufacturing activity. This trend continued in the 1920s as the New England and Middle Atlantic regions’ shares of manufacturing employment fell while all of the other regions—excluding the West North Central region—gained. There was considerable variation in the growth of the industries and shifts in their ranking during the decade. The largest broadly defined industries were, not surprisingly, food and kindred products; textile mill products; those producing and fabricating primary metals; machinery production; and chemicals. When industries are more narrowly defined, the automobile industry, which ranked third in manufacturing value added in 1919, ranked first by the mid-1920s.

Productivity Developments

Gavin Wright (1990) has argued that one of the underappreciated characteristics of American industrial history has been its reliance on mineral resources. Wright argues that the growing American strength in industrial exports and industrialization in general relied on an increasing intensity in nonreproducible natural resources. The large American market was knit together as one large market without internal barriers through the development of widespread low-cost transportation. Many distinctively American developments, such as continuous-process, mass-production methods were associated with the “high throughput” of fuel and raw materials relative to labor and capital inputs. As a result the United States became the dominant industrial force in the world 1920s and 1930s. According to Wright, after World War II “the process by which the United States became a unified ‘economy’ in the nineteenth century has been extended to the world as a whole. To a degree, natural resources have become commodities rather than part of the ‘factor endowment’ of individual countries.” (Wright, 1990)

In addition to this growing intensity in the use of nonreproducible natural resources as a source of productivity gains in American manufacturing, other technological changes during the twenties and thirties tended to raise the productivity of the existing capital through the replacement of critical types of capital equipment with superior equipment and through changes in management methods. (Soule, 1947; Lorant, 1967; Devine, 1983; Oshima, 1984) Some changes, such as the standardization of parts and processes and the reduction of the number of styles and designs, raised the productivity of both capital and labor. Modern management techniques, first introduced by Frederick W. Taylor, were introduced on a wider scale.

One of the important forces contributing to mass production and increased productivity was the transfer to electric power. (Devine, 1983) By 1929 about 70 percent of manufacturing activity relied on electricity, compared to roughly 30 percent in 1914. Steam provided 80 percent of the mechanical drive capacity in manufacturing in 1900, but electricity provided over 50 percent by 1920 and 78 percent by 1929. An increasing number of factories were buying their power from electric utilities. In 1909, 64 percent of the electric motor capacity in manufacturing establishments used electricity generated on the factory site; by 1919, 57 percent of the electricity used in manufacturing was purchased from independent electric utilities.

The shift from coal to oil and natural gas and from raw unprocessed energy in the forms of coal and waterpower to processed energy in the form of internal combustion fuel and electricity increased thermal efficiency. After the First World War energy consumption relative to GNP fell, there was a sharp increase in the growth rate of output per labor-hour, and the output per unit of capital input once again began rising. These trends can be seen in the data in Table 3. Labor productivity grew much more rapidly during the 1920s than in the previous or following decade. Capital productivity had declined in the decade previous to the 1920s while it also increased sharply during the twenties and continued to rise in the following decade. Alexander Field (2003) has argued that the 1930s were the most technologically progressive decade of the twentieth century basing his argument on the growth of multi-factor productivity as well as the impressive array of technological developments during the thirties. However, the twenties also saw impressive increases in labor and capital productivity as, particularly, developments in energy and transportation accelerated.

 Average Annual Rates of Labor Productivity and Capital Productivity Growth.

Warren Devine, Jr. (1983) reports that in the twenties the most important result of the adoption of electricity was that it would be an indirect “lever to increase production.” There were a number of ways in which this occurred. Electricity brought about an increased flow of production by allowing new flexibility in the design of buildings and the arrangement of machines. In this way it maximized throughput. Electric cranes were an “inestimable boon” to production because with adequate headroom they could operate anywhere in a plant, something that mechanical power transmission to overhead cranes did not allow. Electricity made possible the use of portable power tools that could be taken anywhere in the factory. Electricity brought about improved illumination, ventilation, and cleanliness in the plants, dramatically improving working conditions. It improved the control of machines since there was no longer belt slippage with overhead line shafts and belt transmission, and there were less limitations on the operating speeds of machines. Finally, it made plant expansion much easier than when overhead shafts and belts had been relied upon for operating power.

The mechanization of American manufacturing accelerated in the 1920s, and this led to a much more rapid growth of productivity in manufacturing compared to earlier decades and to other sectors at that time. There were several forces that promoted mechanization. One was the rapidly expanding aggregate demand during the prosperous twenties. Another was the technological developments in new machines and processes, of which electrification played an important part. Finally, Harry Jerome (1934) and, later, Harry Oshima (1984) both suggest that the price of unskilled labor began to rise as immigration sharply declined with new immigration laws and falling population growth. This accelerated the mechanization of the nation’s factories.

Technological changes during this period can be documented for a number of individual industries. In bituminous coal mining, labor productivity rose when mechanical loading devices reduced the labor required from 24 to 50 percent. The burst of paved road construction in the twenties led to the development of a finishing machine to smooth the surface of cement highways, and this reduced the labor requirement from 40 to 60 percent. Mechanical pavers that spread centrally mixed materials further increased productivity in road construction. These replaced the roadside dump and wheelbarrow methods of spreading the cement. Jerome (1934) reports that the glass in electric light bulbs was made by new machines that cut the number of labor-hours required for their manufacture by nearly half. New machines to produce cigarettes and cigars, for warp-tying in textile production, and for pressing clothes in clothing shops also cut labor-hours. The Banbury mixer reduced the labor input in the production of automobile tires by half, and output per worker of inner tubes increased about four times with a new production method. However, as Daniel Nelson (1987) points out, the continuing advances were the “cumulative process resulting from a vast number of successive small changes.” Because of these continuing advances in the quality of the tires and in the manufacturing of tires, between 1910 and 1930 “tire costs per thousand miles of driving fell from $9.39 to $0.65.”

John Lorant (1967) has documented other technological advances that occurred in American manufacturing during the twenties. For example, the organic chemical industry developed rapidly due to the introduction of the Weizman fermentation process. In a similar fashion, nearly half of the productivity advances in the paper industry were due to the “increasingly sophisticated applications of electric power and paper manufacturing processes,” especially the fourdrinier paper-making machines. As Avi Cohen (1984) has shown, the continuing advances in these machines were the result of evolutionary changes to the basic machine. Mechanization in many types of mass-production industries raised the productivity of labor and capital. In the glass industry, automatic feeding and other types of fully automatic production raised the efficiency of the production of glass containers, window glass, and pressed glass. Giedion (1948) reported that the production of bread was “automatized” in all stages during the 1920s.

Though not directly bringing about productivity increases in manufacturing processes, developments in the management of manufacturing firms, particularly the largest ones, also significantly affected their structure and operation. Alfred D. Chandler, Jr. (1962) has argued that the structure of a firm must follow its strategy. Until the First World War most industrial firms were centralized, single-division firms even when becoming vertically integrated. When this began to change the management of the large industrial firms had to change accordingly.

Because of these changes in the size and structure of the firm during the First World War, E. I. du Pont de Nemours and Company was led to adopt a strategy of diversifying into the production of largely unrelated product lines. The firm found that the centralized, divisional structure that had served it so well was not suited to this strategy, and its poor business performance led its executives to develop between 1919 and 1921 a decentralized, multidivisional structure that boosted it to the first rank among American industrial firms.

General Motors had a somewhat different problem. By 1920 it was already decentralized into separate divisions. In fact, there was so much decentralization that those divisions essentially remained separate companies and there was little coordination between the operating divisions. A financial crisis at the end of 1920 ousted W. C. Durant and brought in the du Ponts and Alfred Sloan. Sloan, who had seen the problems at GM but had been unable to convince Durant to make changes, began reorganizing the management of the company. Over the next several years Sloan and other GM executives developed the general office for a decentralized, multidivisional firm.

Though facing related problems at nearly the same time, GM and du Pont developed their decentralized, multidivisional organizations separately. As other manufacturing firms began to diversify, GM and du Pont became the models for reorganizing the management of the firms. In many industrial firms these reorganizations were not completed until well after the Second World War.

Competition, Monopoly, and the Government

The rise of big businesses, which accelerated in the postbellum period and particularly during the first great turn-of-the-century merger wave, continued in the interwar period. Between 1925 and 1939 the share of manufacturing assets held by the 100 largest corporations rose from 34.5 to 41.9 percent. (Niemi, 1980) As a public policy, the concern with monopolies diminished in the 1920s even though firms were growing larger. But the growing size of businesses was one of the convenient scapegoats upon which to blame the Great Depression.

However, the rise of large manufacturing firms in the interwar period is not so easily interpreted as an attempt to monopolize their industries. Some of the growth came about through vertical integration by the more successful manufacturing firms. Backward integration was generally an attempt to ensure a smooth supply of raw materials where that supply was not plentiful and was dispersed and firms “feared that raw materials might become controlled by competitors or independent suppliers.” (Livesay and Porter, 1969) Forward integration was an offensive tactic employed when manufacturers found that the existing distribution network proved inadequate. Livesay and Porter suggested a number of reasons why firms chose to integrate forward. In some cases they had to provide the mass distribution facilities to handle their much larger outputs; especially when the product was a new one. The complexity of some new products required technical expertise that the existing distribution system could not provide. In other cases “the high unit costs of products required consumer credit which exceeded financial capabilities of independent distributors.” Forward integration into wholesaling was more common than forward integration into retailing. The producers of automobiles, petroleum, typewriters, sewing machines, and harvesters were typical of those manufacturers that integrated all the way into retailing.

In some cases, increases in industry concentration arose as a natural process of industrial maturation. In the automobile industry, Henry Ford’s invention in 1913 of the moving assembly line—a technological innovation that changed most manufacturing—lent itself to larger factories and firms. Of the several thousand companies that had produced cars prior to 1920, 120 were still doing so then, but Ford and General Motors were the clear leaders, together producing nearly 70 percent of the cars. During the twenties, several other companies, such as Durant, Willys, and Studebaker, missed their opportunity to become more important producers, and Chrysler, formed in early 1925, became the third most important producer by 1930. Many went out of business and by 1929 only 44 companies were still producing cars. The Great Depression decimated the industry. Dozens of minor firms went out of business. Ford struggled through by relying on its huge stockpile of cash accumulated prior to the mid-1920s, while Chrysler actually grew. By 1940, only eight companies still produced cars—GM, Ford, and Chrysler had about 85 percent of the market, while Willys, Studebaker, Nash, Hudson, and Packard shared the remainder. The rising concentration in this industry was not due to attempts to monopolize. As the industry matured, growing economies of scale in factory production and vertical integration, as well as the advantages of a widespread dealer network, led to a dramatic decrease in the number of viable firms. (Chandler, 1962 and 1964; Rae, 1984; Bernstein, 1987)

It was a similar story in the tire industry. The increasing concentration and growth of firms was driven by scale economies in production and retailing and by the devastating effects of the depression in the thirties. Although there were 190 firms in 1919, 5 firms dominated the industry—Goodyear, B. F. Goodrich, Firestone, U.S. Rubber, and Fisk, followed by Miller Rubber, General Tire and Rubber, and Kelly-Springfield. During the twenties, 166 firms left the industry while 66 entered. The share of the 5 largest firms rose from 50 percent in 1921 to 75 percent in 1937. During the depressed thirties, there was fierce price competition, and many firms exited the industry. By 1937 there were 30 firms, but the average employment per factory was 4.41 times as large as in 1921, and the average factory produced 6.87 times as many tires as in 1921. (French, 1986 and 1991; Nelson, 1987; Fricke, 1982)

The steel industry was already highly concentrated by 1920 as U.S. Steel had around 50 percent of the market. But U. S. Steel’s market share declined through the twenties and thirties as several smaller firms competed and grew to become known as Little Steel, the next six largest integrated producers after U. S. Steel. Jonathan Baker (1989) has argued that the evidence is consistent with “the assumption that competition was a dominant strategy for steel manufacturers” until the depression. However, the initiation of the National Recovery Administration (NRA) codes in 1933 required the firms to cooperate rather than compete, and Baker argues that this constituted a training period leading firms to cooperate in price and output policies after 1935. (McCraw and Reinhardt, 1989; Weiss, 1980; Adams, 1977)

Mergers

A number of the larger firms grew by merger during this period, and the second great merger wave in American industry occurred during the last half of the 1920s. Figure 10 shows two series on mergers during the interwar period. The FTC series included many of the smaller mergers. The series constructed by Carl Eis (1969) only includes the larger mergers and ends in 1930.

This second great merger wave coincided with the stock market boom of the twenties and has been called “merger for oligopoly” rather than merger for monopoly. (Stigler, 1950) This merger wave created many larger firms that ranked below the industry leaders. Much of the activity in occurred in the banking and public utilities industries. (Markham, 1955) In manufacturing and mining, the effects on industrial structure were less striking. Eis (1969) found that while mergers took place in almost all industries, they were concentrated in a smaller number of them, particularly petroleum, primary metals, and food products.

The federal government’s antitrust policies toward business varied sharply during the interwar period. In the 1920s there was relatively little activity by the Justice Department, but after the Great Depression the New Dealers tried to take advantage of big business to make business exempt from the antitrust laws and cartelize industries under government supervision.

With the passage of the FTC and Clayton Acts in 1914 to supplement the 1890 Sherman Act, the cornerstones of American antitrust law were complete. Though minor amendments were later enacted, the primary changes after that came in the enforcement of the laws and in swings in judicial decisions. Their two primary areas of application were in the areas of overt behavior, such as horizontal and vertical price-fixing, and in market structure, such as mergers and dominant firms. Horizontal price-fixing involves firms that would normally be competitors getting together to agree on stable and higher prices for their products. As long as most of the important competitors agree on the new, higher prices, substitution between products is eliminated and the demand becomes much less elastic. Thus, increasing the price increases the revenues and the profits of the firms who are fixing prices. Vertical price-fixing involves firms setting the prices of intermediate products purchased at different stages of production. It also tends to eliminate substitutes and makes the demand less elastic.

Price-fixing continued to be considered illegal throughout the period, but there was no major judicial activity regarding it in the 1920s other than the Trenton Potteries decision in 1927. In that decision 20 individuals and 23 corporations were found guilty of conspiring to fix the prices of bathroom bowls. The evidence in the case suggested that the firms were not very successful at doing so, but the court found that they were guilty nevertheless; their success, or lack thereof, was not held to be a factor in the decision. (Scherer and Ross, 1990) Though criticized by some, the decision was precedent setting in that it prohibited explicit pricing conspiracies per se.

The Justice Department had achieved success in dismantling Standard Oil and American Tobacco in 1911 through decisions that the firms had unreasonably restrained trade. These were essentially the same points used in court decisions against the Powder Trust in 1911, the thread trust in 1913, Eastman Kodak in 1915, the glucose and cornstarch trust in 1916, and the anthracite railroads in 1920. The criterion of an unreasonable restraint of trade was used in the 1916 and 1918 decisions that found the American Can Company and the United Shoe Machinery Company innocent of violating the Sherman Act; it was also clearly enunciated in the 1920 U. S. Steel decision. This became known as the rule of reason standard in antitrust policy.

Merger policy had been defined in the 1914 Clayton Act to prohibit only the acquisition of one corporation’s stock by another corporation. Firms then shifted to the outright purchase of a competitor’s assets. A series of court decisions in the twenties and thirties further reduced the possibilities of Justice Department actions against mergers. “Only fifteen mergers were ordered dissolved through antitrust actions between 1914 and 1950, and ten of the orders were accomplished under the Sherman Act rather than Clayton Act proceedings.”

Energy

The search for energy and new ways to translate it into heat, light, and motion has been one of the unending themes in history. From whale oil to coal oil to kerosene to electricity, the search for better and less costly ways to light our lives, heat our homes, and move our machines has consumed much time and effort. The energy industries responded to those demands and the consumption of energy materials (coal, oil, gas, and fuel wood) as a percent of GNP rose from about 2 percent in the latter part of the nineteenth century to about 3 percent in the twentieth.

Changes in the energy markets that had begun in the nineteenth century continued. Processed energy in the forms of petroleum derivatives and electricity continued to become more important than “raw” energy, such as that available from coal and water. The evolution of energy sources for lighting continued; at the end of the nineteenth century, natural gas and electricity, rather than liquid fuels began to provide more lighting for streets, businesses, and homes.

In the twentieth century the continuing shift to electricity and internal combustion fuels increased the efficiency with which the American economy used energy. These processed forms of energy resulted in a more rapid increase in the productivity of labor and capital in American manufacturing. From 1899 to 1919, output per labor-hour increased at an average annual rate of 1.2 percent, whereas from 1919 to 1937 the increase was 3.5 percent per year. The productivity of capital had fallen at an average annual rate of 1.8 percent per year in the 20 years prior to 1919, but it rose 3.1 percent a year in the 18 years after 1919. As discussed above, the adoption of electricity in American manufacturing initiated a rapid evolution in the organization of plants and rapid increases in productivity in all types of manufacturing.

The change in transportation was even more remarkable. Internal combustion engines running on gasoline or diesel fuel revolutionized transportation. Cars quickly grabbed the lion’s share of local and regional travel and began to eat into long distance passenger travel, just as the railroads had done to passenger traffic by water in the 1830s. Even before the First World War cities had begun passing laws to regulate and limit “jitney” services and to protect the investments in urban rail mass transit. Trucking began eating into the freight carried by the railroads.

These developments brought about changes in the energy industries. Coal mining became a declining industry. As Figure 11 shows, in 1925 the share of petroleum in the value of coal, gas, and petroleum output exceeded bituminous coal, and it continued to rise. Anthracite coal’s share was much smaller and it declined while natural gas and LP (or liquefied petroleum) gas were relatively unimportant. These changes, especially the declining coal industry, were the source of considerable worry in the twenties.

Coal

One of the industries considered to be “sick” in the twenties was coal, particularly bituminous, or soft, coal. Income in the industry declined, and bankruptcies were frequent. Strikes frequently interrupted production. The majority of the miners “lived in squalid and unsanitary houses, and the incidence of accidents and diseases was high.” (Soule, 1947) The number of operating bituminous coal mines declined sharply from 1923 through 1932. Anthracite (or hard) coal output was much smaller during the twenties. Real coal prices rose from 1919 to 1922, and bituminous coal prices fell sharply from then to 1925. (Figure 12) Coal mining employment plummeted during the twenties. Annual earnings, especially in bituminous coal mining, also fell because of dwindling hourly earnings and, from 1929 on, a shrinking workweek. (Figure 13)

The sources of these changes are to be found in the increasing supply due to productivity advances in coal production and in the decreasing demand for coal. The demand fell as industries began turning from coal to electricity and because of productivity advances in the use of coal to create energy in steel, railroads, and electric utilities. (Keller, 1973) In the generation of electricity, larger steam plants employing higher temperatures and steam pressures continued to reduce coal consumption per kilowatt hour. Similar reductions were found in the production of coke from coal for iron and steel production and in the use of coal by the steam railroad engines. (Rezneck, 1951) All of these factors reduced the demand for coal.

Productivity advances in coal mining tended to be labor saving. Mechanical cutting accounted for 60.7 percent of the coal mined in 1920 and 78.4 percent in 1929. By the middle of the twenties, the mechanical loading of coal began to be introduced. Between 1929 and 1939, output per labor-hour rose nearly one third in bituminous coal mining and nearly four fifths in anthracite as more mines adopted machine mining and mechanical loading and strip mining expanded.

The increasing supply and falling demand for coal led to the closure of mines that were too costly to operate. A mine could simply cease operations, let the equipment stand idle, and lay off employees. When bankruptcies occurred, the mines generally just turned up under new ownership with lower capital charges. When demand increased or strikes reduced the supply of coal, idle mines simply resumed production. As a result, the easily expanded supply largely eliminated economic profits.

The average daily employment in coal mining dropped by over 208,000 from its peak in 1923, but the sharply falling real wages suggests that the supply of labor did not fall as rapidly as the demand for labor. Soule (1947) notes that when employment fell in coal mining, it meant fewer days of work for the same number of men. Social and cultural characteristics tended to tie many to their home region. The local alternatives were few, and ignorance of alternatives outside the Appalachian rural areas, where most bituminous coal was mined, made it very costly to transfer out.

Petroleum

In contrast to the coal industry, the petroleum industry was growing throughout the interwar period. By the thirties, crude petroleum dominated the real value of the production of energy materials. As Figure 14 shows, the production of crude petroleum increased sharply between 1920 and 1930, while real petroleum prices, though highly variable, tended to decline.

The growing demand for petroleum was driven by the growth in demand for gasoline as America became a motorized society. The production of gasoline surpassed kerosene production in 1915. Kerosene’s market continued to contract as electric lighting replaced kerosene lighting. The development of oil burners in the twenties began a switch from coal toward fuel oil for home heating, and this further increased the growing demand for petroleum. The growth in the demand for fuel oil and diesel fuel for ship engines also increased petroleum demand. But it was the growth in the demand for gasoline that drove the petroleum market.

The decline in real prices in the latter part of the twenties shows that supply was growing even faster than demand. The discovery of new fields in the early twenties increased the supply of petroleum and led to falling prices as production capacity grew. The Santa Fe Springs, California strike in 1919 initiated a supply shock as did the discovery of the Long Beach, California field in 1921. New discoveries in Powell, Texas and Smackover Arkansas further increased the supply of petroleum in 1921. New supply increases occurred in 1926 to 1928 with petroleum strikes in Seminole, Oklahoma and Hendricks, Texas. The supply of oil increased sharply in 1930 to 1931 with new discoveries in Oklahoma City and East Texas. Each new discovery pushed down real oil prices, and the prices of petroleum derivatives, and the growing production capacity led to a general declining trend in petroleum prices. McMillin and Parker (1994) argue that supply shocks generated by these new discoveries were a factor in the business cycles during the 1920s.

The supply of gasoline increased more than the supply of crude petroleum. In 1913 a chemist at Standard Oil of Indiana introduced the cracking process to refine crude petroleum; until that time it had been refined by distillation or unpressurized heating. In the heating process, various refined products such as kerosene, gasoline, naphtha, and lubricating oils were produced at different temperatures. It was difficult to vary the amount of the different refined products produced from a barrel of crude. The cracking process used pressurized heating to break heavier components down into lighter crude derivatives; with cracking, it was possible to increase the amount of gasoline obtained from a barrel of crude from 15 to 45 percent. In the early twenties, chemists at Standard Oil of New Jersey improved the cracking process, and by 1927 it was possible to obtain twice as much gasoline from a barrel of crude petroleum as in 1917.

The petroleum companies also developed new ways to distribute gasoline to motorists that made it more convenient to purchase gasoline. Prior to the First World War, gasoline was commonly purchased in one- or five-gallon cans and the purchaser used a funnel to pour the gasoline from the can into the car. Then “filling stations” appeared, which specialized in filling cars’ tanks with gasoline. These spread rapidly, and by 1919 gasoline companies werebeginning to introduce their own filling stations or contract with independent stations to exclusively distribute their gasoline. Increasing competition and falling profits led filling station operators to expand into other activities such as oil changes and other mechanical repairs. The general name attached to such stations gradually changed to “service stations” to reflect these new functions.

Though the petroleum firms tended to be large, they were highly competitive, trying to pump as much petroleum as possible to increase their share of the fields. This, combined with the development of new fields, led to an industry with highly volatile prices and output. Firms desperately wanted to stabilize and reduce the production of crude petroleum so as to stabilize and raise the prices of crude petroleum and refined products. Unable to obtain voluntary agreement on output limitations by the firms and producers, governments began stepping in. Led by Texas, which created the Texas Railroad Commission in 1891, oil-producing states began to intervene to regulate production. Such laws were usually termed prorationing laws and were quotas designed to limit each well’s output to some fraction of its potential. The purpose was as much to stabilize and reduce production and raise prices as anything else, although generally such laws were passed under the guise of conservation. Although the federal government supported such attempts, not until the New Deal were federal laws passed to assist this.

Electricity

By the mid 1890s the debate over the method by which electricity was to be transmitted had been won by those who advocated alternating current. The reduced power losses and greater distance over which electricity could be transmitted more than offset the necessity for transforming the current back to direct current for general use. Widespread adoption of machines and appliances by industry and consumers then rested on an increase in the array of products using electricity as the source of power, heat, or light and the development of an efficient, lower cost method of generating electricity.

General Electric, Westinghouse, and other firms began producing the electrical appliances for homes and an increasing number of machines based on electricity began to appear in industry. The problem of lower cost production was solved by the introduction of centralized generating facilities that distributed the electric power through lines to many consumers and business firms.

Though initially several firms competed in generating and selling electricity to consumers and firms in a city or area, by the First World War many states and communities were awarding exclusive franchises to one firm to generate and distribute electricity to the customers in the franchise area. (Bright, 1947; Passer, 1953) The electric utility industry became an important growth industry and, as Figure 15 shows, electricity production and use grew rapidly.

The electric utilities increasingly were regulated by state commissions that were charged with setting rates so that the utilities could receive a “fair return” on their investments. Disagreements over what constituted a “fair return” and the calculation of the rate base led to a steady stream of cases before the commissions and a continuing series of court appeals. Generally these court decisions favored the reproduction cost basis. Because of the difficulty and cost in making these calculations, rates tended to be in the hands of the electric utilities that, it has been suggested, did not lower rates adequately to reflect the rising productivity and lowered costs of production. The utilities argued that a more rapid lowering of rates would have jeopardized their profits. Whether or not this increased their monopoly power is still an open question, but it should be noted, that electric utilities were hardly price-taking industries prior to regulation. (Mercer, 1973) In fact, as Figure 16 shows, the electric utilities began to systematically practice market segmentation charging users with less elastic demands, higher prices per kilowatt-hour.

Energy in the American Economy of the 1920s

The changes in the energy industries had far-reaching consequences. The coal industry faced a continuing decline in demand. Even in the growing petroleum industry, the periodic surges in the supply of petroleum caused great instability. In manufacturing, as described above, electrification contributed to a remarkable rise in productivity. The transportation revolution brought about by the rise of gasoline-powered trucks and cars changed the way businesses received their supplies and distributed their production as well as where they were located. The suburbanization of America and the beginnings of urban sprawl were largely brought about by the introduction of low-priced gasoline for cars.

Transportation

The American economy was forever altered by the dramatic changes in transportation after 1900. Following Henry Ford’s introduction of the moving assembly production line in 1914, automobile prices plummeted, and by the end of the 1920s about 60 percent of American families owned an automobile. The advent of low-cost personal transportation led to an accelerating movement of population out of the crowded cities to more spacious homes in the suburbs and the automobile set off a decline in intracity public passenger transportation that has yet to end. Massive road-building programs facilitated the intercity movement of people and goods. Trucks increasingly took over the movement of freight in competition with the railroads. New industries, such as gasoline service stations, motor hotels, and the rubber tire industry, arose to service the automobile and truck traffic. These developments were complicated by the turmoil caused by changes in the federal government’s policies toward transportation in the United States.

With the end of the First World War, a debate began as to whether the railroads, which had been taken over by the government, should be returned to private ownership or nationalized. The voices calling for a return to private ownership were much stronger, but doing so fomented great controversy. Many in Congress believed that careful planning and consolidation could restore the railroads and make them more efficient. There was continued concern about the near monopoly that the railroads had on the nation’s intercity freight and passenger transportation. The result of these deliberations was the Transportation Act of 1920, which was premised on the continued domination of the nation’s transportation by the railroads—an erroneous presumption.

The Transportation Act of 1920 presented a marked change in the Interstate Commerce Commission’s ability to control railroads. The ICC was allowed to prescribe exact rates that were to be set so as to allow the railroads to earn a fair return, defined as 5.5 percent, on the fair value of their property. The ICC was authorized to make an accounting of the fair value of each regulated railroad’s property; however, this was not completed until well into the 1930s, by which time the accounting and rate rules were out of date. To maintain fair competition between railroads in a region, all roads were to have the same rates for the same goods over the same distance. With the same rates, low-cost roads should have been able to earn higher rates of return than high-cost roads. To handle this, a recapture clause was inserted: any railroad earning a return of more than 6 percent on the fair value of its property was to turn the excess over to the ICC, which would place half of the money in a contingency fund for the railroad when it encountered financial problems and the other half in a contingency fund to provide loans to other railroads in need of assistance.

In order to address the problem of weak and strong railroads and to bring better coordination to the movement of rail traffic in the United States, the act was directed to encourage railroad consolidation, but little came of this in the 1920s. In order to facilitate its control of the railroads, the ICC was given two additional powers. The first was the control over the issuance or purchase of securities by railroads, and the second was the power to control changes in railroad service through the control of car supply and the extension and abandonment of track. The control of the supply of rail cars was turned over to the Association of American Railroads. Few extensions of track were proposed, but as time passed, abandonment requests grew. The ICC, however, trying to mediate between the conflicting demands of shippers, communities and railroads, generally refused to grant abandonments, and this became an extremely sensitive issue in the 1930s.

As indicated above, the premises of the Transportation Act of 1920 were wrong. Railroads experienced increasing competition during the 1920s, and both freight and passenger traffic were drawn off to competing transport forms. Passenger traffic exited from the railroads much more quickly. As the network of all weather surfaced roads increased, people quickly turned from the train to the car. Harmed even more by the move to automobile traffic were the electric interurban railways that had grown rapidly just prior to the First World War. (Hilton-Due, 1960) Not surprisingly, during the 1920s few railroads earned profits in excess of the fair rate of return.

The use of trucks to deliver freight began shortly after the turn of the century. Before the outbreak of war in Europe, White and Mack were producing trucks with as much as 7.5 tons of carrying capacity. Most of the truck freight was carried on a local basis, and it largely supplemented the longer distance freight transportation provided by the railroads. However, truck size was growing. In 1915 Trailmobile introduced the first four-wheel trailer designed to be pulled by a truck tractor unit. During the First World War, thousands of trucks were constructed for military purposes, and truck convoys showed that long distance truck travel was feasible and economical. The use of trucks to haul freight had been growing by over 18 percent per year since 1925, so that by 1929 intercity trucking accounted for more than one percent of the ton-miles of freight hauled.

The railroads argued that the trucks and buses provided “unfair” competition and believed that if they were also regulated, then the regulation could equalize the conditions under which they competed. As early as 1925, the National Association of Railroad and Utilities Commissioners issued a call for the regulation of motor carriers in general. In 1928 the ICC called for federal regulation of buses and in 1932 extended this call to federal regulation of trucks.

Most states had began regulating buses at the beginning of the 1920s in an attempt to reduce the diversion of urban passenger traffic from the electric trolley and railway systems. However, most of the regulation did not aim to control intercity passenger traffic by buses. As the network of surfaced roads expanded during the twenties, so did the routes of the intercity buses. In 1929 a number of smaller bus companies were incorporated in the Greyhound Buslines, the carrier that has since dominated intercity bus transportation. (Walsh, 2000)

A complaint of the railroads was that interstate trucking competition was unfair because it was subsidized while railroads were not. All railroad property was privately owned and subject to property taxes, whereas truckers used the existing road system and therefore neither had to bear the costs of creating the road system nor pay taxes upon it. Beginning with the Federal Road-Aid Act of 1916, small amounts of money were provided as an incentive for states to construct rural post roads. (Dearing-Owen, 1949) However, through the First World War most of the funds for highway construction came from a combination of levies on the adjacent property owners and county and state taxes. The monies raised by the counties were commonly 60 percent of the total funds allocated, and these primarily came from property taxes. In 1919 Oregon pioneered the state gasoline tax, which then began to be adopted by more and more states. A highway system financed by property taxes and other levies can be construed as a subsidization of motor vehicles, and one study for the period up to 1920 found evidence of substantial subsidization of trucking. (Herbst-Wu, 1973) However, the use of gasoline taxes moved closer to the goal of users paying the costs of the highways. Neither did the trucks have to pay for all of the highway construction because automobiles jointly used the highways. Highways had to be constructed in more costly ways in order to accommodate the larger and heavier trucks. Ideally the gasoline taxes collected from trucks should have covered the extra (or marginal) costs of highway construction incurred because of the truck traffic. Gasoline taxes tended to do this.

The American economy occupies a vast geographic region. Because economic activity occurs over most of the country, falling transportation costs have been crucial to knitting American firms and consumers into a unified market. Throughout the nineteenth century the railroads played this crucial role. Because of the size of the railroad companies and their importance in the economic life of Americans, the federal government began to regulate them. But, by 1917 it appeared that the railroad system had achieved some stability, and it was generally assumed that the post-First World War era would be an extension of the era from 1900 to 1917. Nothing could have been further from the truth. Spurred by public investments in highways, cars and trucks voraciously ate into the railroad’s market, and, though the regulators failed to understand this at the time, the railroad’s monopoly on transportation quickly disappeared.

Communications

Communications had joined with transportation developments in the nineteenth century to tie the American economy together more completely. The telegraph had benefited by using the railroads’ right-of-ways, and the railroads used the telegraph to coordinate and organize their far-flung activities. As the cost of communications fell and information transfers sped, the development of firms with multiple plants at distant locations was facilitated. The interwar era saw a continuation of these developments as the telephone continued to supplant the telegraph and the new medium of radio arose to transmit news and provide a new entertainment source.

Telegraph domination of business and personal communications had given way to the telephone as long distance telephone calls between the east and west coasts with the new electronic amplifiers became possible in 1915. The number of telegraph messages handled grew 60.4 percent in the twenties. The number of local telephone conversations grew 46.8 percent between 1920 and 1930, while the number of long distance conversations grew 71.8 percent over the same period. There were 5 times as many long distance telephone calls as telegraph messages handled in 1920, and 5.7 times as many in 1930.

The twenties were a prosperous period for AT&T and its 18 major operating companies. (Brooks, 1975; Temin, 1987; Garnet, 1985; Lipartito, 1989) Telephone usage rose and, as Figure 19 shows, the share of all households with a telephone rose from 35 percent to nearly 42 percent. In cities across the nation, AT&T consolidated its system, gained control of many operating companies, and virtually eliminated its competitors. It was able to do this because in 1921 Congress passed the Graham Act exempting AT&T from the Sherman Act in consolidating competing telephone companies. By 1940, the non-Bell operating companies were all small relative to the Bell operating companies.

Surprisingly there was a decline in telephone use on the farms during the twenties. (Hadwiger-Cochran, 1984; Fischer 1987) Rising telephone rates explain part of the decline in rural use. The imposition of connection fees during the First World War made it more costly for new farmers to hook up. As AT&T gained control of more and more operating systems, telephone rates were increased. AT&T also began requiring, as a condition of interconnection, that independent companies upgrade their systems to meet AT&T standards. Most of the small mutual companies that had provided service to farmers had operated on a shoestring—wires were often strung along fenceposts, and phones were inexpensive “whoop and holler” magneto units. Upgrading to AT&T’s standards raised costs, forcing these companies to raise rates.

However, it also seems likely that during the 1920s there was a general decline in the rural demand for telephone services. One important factor in this was the dramatic decline in farm incomes in the early twenties. The second reason was a change in the farmers’ environment. Prior to the First World War, the telephone eased farm isolation and provided news and weather information that was otherwise hard to obtain. After 1920 automobiles, surfaced roads, movies, and the radio loosened the isolation and the telephone was no longer as crucial.

Othmar Merganthaler’s development of the linotype machine in the late nineteenth century had irrevocably altered printing and publishing. This machine, which quickly created a line of soft, lead-based metal type that could be printed, melted down and then recast as a new line of type, dramatically lowered the costs of printing. Previously, all type had to be painstakingly set by hand, with individual cast letter matrices picked out from compartments in drawers to construct words, lines, and paragraphs. After printing, each line of type on the page had to be broken down and each individual letter matrix placed back into its compartment in its drawer for use in the next printing job. Newspapers often were not published every day and did not contain many pages, resulting in many newspapers in most cities. In contrast to this laborious process, the linotype used a keyboard upon which the operator typed the words in one of the lines in a news column. Matrices for each letter dropped down from a magazine of matrices as the operator typed each letter and were assembled into a line of type with automatic spacers to justify the line (fill out the column width). When the line was completed the machine mechanically cast the line of matrices into a line of lead type. The line of lead type was ejected into a tray and the letter matrices mechanically returned to the magazine while the operator continued typing the next line in the news story. The first Merganthaler linotype machine was installed in the New York Tribune in 1886. The linotype machine dramatically lowered the costs of printing newspapers (as well as books and magazines). Prior to the linotype a typical newspaper averaged no more than 11 pages and many were published only a few times a week. The linotype machine allowed newspapers to grow in size and they began to be published more regularly. A process of consolidation of daily and Sunday newspapers began that continues to this day. Many have termed the Merganthaler linotype machine the most significant printing invention since the introduction of movable type 400 years earlier.

For city families as well as farm families, radio became the new source of news and entertainment. (Barnouw, 1966; Rosen, 1980 and 1987; Chester-Garrison, 1950) It soon took over as the prime advertising medium and in the process revolutionized advertising. By 1930 more homes had radio sets than had telephones. The radio networks sent news and entertainment broadcasts all over the country. The isolation of rural life, particularly in many areas of the plains, was forever broken by the intrusion of the “black box,” as radio receivers were often called. The radio began a process of breaking down regionalism and creating a common culture in the United States.

The potential demand for radio became clear with the first regular broadcast of Westinghouse’s KDKA in Pittsburgh in the fall of 1920. Because the Department of Commerce could not deny a license application there was an explosion of stations all broadcasting at the same frequency and signal jamming and interference became a serious problem. By 1923 the Department of Commerce had gained control of radio from the Post Office and the Navy and began to arbitrarily disperse stations on the radio dial and deny licenses creating the first market in commercial broadcast licenses. In 1926 a U.S. District Court decided that under the Radio Law of 1912 Herbert Hoover, the secretary of commerce, did not have this power. New stations appeared and the logjam and interference of signals worsened. A Radio Act was passed in January of 1927 creating the Federal Radio Commission (FRC) as a temporary licensing authority. Licenses were to be issued in the public interest, convenience, and necessity. A number of broadcasting licenses were revoked; stations were assigned frequencies, dial locations, and power levels. The FRC created 24 clear-channel stations with as much as 50,000 watts of broadcasting power, of which 21 ended up being affiliated with the new national radio networks. The Communications Act of 1934 essentially repeated the 1927 act except that it created a permanent, seven-person Federal Communications Commission (FCC).

Local stations initially created and broadcast the radio programs. The expenses were modest, and stores and companies operating radio stations wrote this off as indirect, goodwill advertising. Several forces changed all this. In 1922, AT&T opened up a radio station in New York City, WEAF (later to become WNBC). AT&T envisioned this station as the center of a radio toll system where individuals could purchase time to broadcast a message transmitted to other stations in the toll network using AT&T’s long distance lines and an August 1922 broadcast by a Long Island realty company became the first conscious use of direct advertising.

Though advertising continued to be condemned, the fiscal pressures on radio stations to accept advertising began rising. In 1923 the American Society of Composers and Publishers (ASCAP), began demanding a performance fee anytime ASCAP-copyrighted music was performed on the radio, either live or on record. By 1924 the issue was settled, and most stations began paying performance fees to ASCAP. AT&T decided that all stations broadcasting with non AT&T transmitters were violating their patent rights and began asking for annual fees from such stations based on the station’s power. By the end of 1924, most stations were paying the fees. All of this drained the coffers of the radio stations, and more and more of them began discreetly accepting advertising.

RCA became upset at AT&T’s creation of a chain of radio stations and set up its own toll network using the inferior lines of Western Union and Postal Telegraph, because AT&T, not surprisingly, did not allow any toll (or network) broadcasting on its lines except by its own stations. AT&T began to worry that its actions might threaten its federal monopoly in long distance telephone communications. In 1926 a new firm was created, the National Broadcasting Company (NBC), which took over all broadcasting activities from AT&T and RCA as AT&T left broadcasting. When NBC debuted in November of 1926, it had two networks: the Red, which was the old AT&T network, and the Blue, which was the old RCA network. Radio networks allowed advertisers to direct advertising at a national audience at a lower cost. Network programs allowed local stations to broadcast superior programs that captured a larger listening audience and in return received a share of the fees the national advertiser paid to the network. In 1927 a new network, the Columbia Broadcasting System (CBS) financed by the Paley family began operation and other new networks entered or tried to enter the industry in the 1930s.

Communications developments in the interwar era present something of a mixed picture. By 1920 long distance telephone service was in place, but rising rates slowed the rate of adoption in the period, and telephone use in rural areas declined sharply. Though direct dialing was first tried in the twenties, its general implementation would not come until the postwar era, when other changes, such as microwave transmission of signals and touch-tone dialing, would also appear. Though the number of newspapers declined, newspaper circulation generally held up. The number of competing newspapers in larger cities began declining, a trend that also would accelerate in the postwar American economy.

Banking and Securities Markets

In the twenties commercial banks became “department stores of finance.”— Banks opened up installment (or personal) loan departments, expanded their mortgage lending, opened up trust departments, undertook securities underwriting activities, and offered safe deposit boxes. These changes were a response to growing competition from other financial intermediaries. Businesses, stung by bankers’ control and reduced lending during the 1920-21 depression, began relying more on retained earnings and stock and bond issues to raise investment and, sometimes, working capital. This reduced loan demand. The thrift institutions also experienced good growth in the twenties as they helped fuel the housing construction boom of the decade. The securities markets boomed in the twenties only to see a dramatic crash of the stock market in late 1929.

There were two broad classes of commercial banks; those that were nationally chartered and those that were chartered by the states. Only the national banks were required to be members of the Federal Reserve System. (Figure 21) Most banks were unit banks because national regulators and most state regulators prohibited branching. However, in the twenties a few states began to permit limited branching; California even allowed statewide branching.—The Federal Reserve member banks held the bulk of the assets of all commercial banks, even though most banks were not members. A high bank failure rate in the 1920s has usually been explained by “overbanking” or too many banks located in an area, but H. Thomas Johnson (1973-74) makes a strong argument against this. (Figure 22)— If there were overbanking, on average each bank would have been underutilized resulting in intense competition for deposits and higher costs and lower earnings. One common reason would have been the free entry of banks as long as they achieved the minimum requirements then in force. However, the twenties saw changes that led to the demise of many smaller rural banks that would likely have been profitable if these changes had not occurred. Improved transportation led to a movement of business activities, including banking, into the larger towns and cities. Rural banks that relied on loans to farmers suffered just as farmers did during the twenties, especially in the first half of the twenties. The number of bank suspensions and the suspension rate fell after 1926. The sharp rise in bank suspensions in 1930 occurred because of the first banking crisis during the Great Depression.

Prior to the twenties, the main assets of commercial banks were short-term business loans, made by creating a demand deposit or increasing an existing one for a borrowing firm. As business lending declined in the 1920s commercial banks vigorously moved into new types of financial activities. As banks purchased more securities for their earning asset portfolios and gained expertise in the securities markets, larger ones established investment departments and by the late twenties were an important force in the underwriting of new securities issued by nonfinancial corporations.

The securities market exhibited perhaps the most dramatic growth of the noncommercial bank financial intermediaries during the twenties, but others also grew rapidly. (Figure 23) The assets of life insurance companies increased by 10 percent a year from 1921 to 1929; by the late twenties they were a very important source of funds for construction investment. Mutual savings banks and savings and loan associations (thrifts) operated in essentially the same types of markets. The Mutual savings banks were concentrated in the northeastern United States. As incomes rose, personal savings increased, and housing construction expanded in the twenties, there was an increasing demand for the thrifts’ interest earning time deposits and mortgage lending.

But the dramatic expansion in the financial sector came in new corporate securities issues in the twenties—especially common and preferred stock—and in the trading of existing shares of those securities. (Figure 24) The late twenties boom in the American economy was rapid, highly visible, and dramatic. Skyscrapers were being erected in most major cities, the automobile manufacturers produced over four and a half million new cars in 1929; and the stock market, like a barometer of this prosperity, was on a dizzying ride to higher and higher prices. “Playing the market” seemed to become a national pastime.

The Dow-Jones index hit its peak of 381 on September 3 and then slid to 320 on October 21. In the following week the stock market “crashed,” with a record number of shares being traded on several days. At the end of Tuesday, October, 29th, the index stood at 230, 96 points less than one week before. On November 13, 1929, the Dow-Jones index reached its lowest point for the year at 198—183 points less than the September 3 peak.

The path of the stock market boom of the twenties can be seen in Figure 25. Sharp price breaks occurred several times during the boom, and each of these gave rise to dark predictions of the end of the bull market and speculation. Until late October of 1929, these predictions turned out to be wrong. Between those price breaks and prior to the October crash, stock prices continued to surge upward. In March of 1928, 3,875,910 shares were traded in one day, establishing a record. By late 1928, five million shares being traded in a day was a common occurrence.

New securities, from rising merger activity and the formation of holding companies, were issued to take advantage of the rising stock prices.—Stock pools, which were not illegal until the 1934 Securities and Exchange Act, took advantage of the boom to temporarily drive up the price of selected stocks and reap large gains for the members of the pool. In stock pools a group of speculators would pool large amounts of their funds and then begin purchasing large amounts of shares of a stock. This increased demand led to rising prices for that stock. Frequently pool insiders would “churn” the stock by repeatedly buying and selling the same shares among themselves, but at rising prices. Outsiders, seeing the price rising, would decide to purchase the stock whose price was rising. At a predetermined higher price the pool members would, within a short period, sell their shares and pull out of the market for that stock. Without the additional demand from the pool, the stock’s price usually fell quickly bringing large losses for the unsuspecting outside investors while reaping large gains for the pool insiders.

Another factor commonly used to explain both the speculative boom and the October crash was the purchase of stocks on small margins. However, contrary to popular perception, margin requirements through most of the twenties were essentially the same as in previous decades. Brokers, recognizing the problems with margin lending in the rapidly changing market, began raising margin requirements in late 1928, and by the fall of 1929, margin requirements were the highest in the history of the New York Stock Exchange. In the 1920s, as was the case for decades prior to that, the usual margin requirements were 10 to 15 percent of the purchase price, and, apparently, more often around 10 percent. There were increases in this percentage by 1928 and by the fall of 1928, well before the crash and at the urging of a special New York Clearinghouse committee, margin requirements had been raised to some of the highest levels in New York Stock Exchange history. One brokerage house required the following of its clients. Securities with a selling price below $10 could only be purchased for cash. Securities with a selling price of $10 to $20 had to have a 50 percent margin; for securities of $20 to $30 a margin requirement of 40 percent; and, for securities with a price above $30 the margin was 30 percent of the purchase price. In the first half of 1929 margin requirements on customers’ accounts averaged a 40 percent margin, and some houses raised their margins to 50 percent a few months before the crash. These were, historically, very high margin requirements. (Smiley and Keehn, 1988)—Even so, during the crash when additional margin calls were issued, those investors who could not provide additional margin saw the brokers’ sell their stock at whatever the market price was at the time and these forced sales helped drive prices even lower.

The crash began on Monday, October 21, as the index of stock prices fell 3 points on the third-largest volume in the history of the New York Stock Exchange. After a slight rally on Tuesday, prices began declining on Wednesday and fell 21 points by the end of the day bringing on the third call for more margin in that week. On Black Thursday, October 24, prices initially fell sharply, but rallied somewhat in the afternoon so that the net loss was only 7 points, but the volume of thirteen million shares set a NYSE record. Friday brought a small gain that was wiped out on Saturday. On Monday, October 28, the Dow Jones index fell 38 points on a volume of nine million shares—three million in the final hour of trading. Black Tuesday, October 29, brought declines in virtually every stock price. Manufacturing firms, which had been lending large sums to brokers for margin loans, had been calling in these loans and this accelerated on Monday and Tuesday. The big Wall Street banks increased their lending on call loans to offset some of this loss of loanable funds. The Dow Jones Index fell 30 points on a record volume of nearly sixteen and a half million shares exchanged. Black Thursday and Black Tuesday wiped out entire fortunes.

Though the worst was over, prices continued to decline until November 13, 1929, as brokers cleaned up their accounts and sold off the stocks of clients who could not supply additional margin. After that, prices began to slowly rise and by April of 1930 had increased 96 points from the low of November 13,— “only” 87 points less than the peak of September 3, 1929. From that point, stock prices resumed their depressing decline until the low point was reached in the summer of 1932.

 

—There is a long tradition that insists that the Great Bull Market of the late twenties was an orgy of speculation that bid the prices of stocks far above any sustainable or economically justifiable level creating a bubble in the stock market. John Kenneth Galbraith (1954) observed, “The collapse in the stock market in the autumn of 1929 was implicit in the speculation that went before.”—But not everyone has agreed with this.

In 1930 Irving Fisher argued that the stock prices of 1928 and 1929 were based on fundamental expectations that future corporate earnings would be high.— More recently, Murray Rothbard (1963), Gerald Gunderson (1976), and Jude Wanniski (1978) have argued that stock prices were not too high prior to the crash.—Gunderson suggested that prior to 1929, stock prices were where they should have been and that when corporate profits in the summer and fall of 1929 failed to meet expectations, stock prices were written down.— Wanniski argued that political events brought on the crash. The market broke each time news arrived of advances in congressional consideration of the Hawley-Smoot tariff. However, the virtually perfect foresight that Wanniski’s explanation requires is unrealistic.— Charles Kindleberger (1973) and Peter Temin (1976) examined common stock yields and price-earnings ratios and found that the relative constancy did not suggest that stock prices were bid up unrealistically high in the late twenties.—Gary Santoni and Gerald Dwyer (1990) also failed to find evidence of a bubble in stock prices in 1928 and 1929.—Gerald Sirkin (1975) found that the implied growth rates of dividends required to justify stock prices in 1928 and 1929 were quite conservative and lower than post-Second World War dividend growth rates.

However, examination of after-the-fact common stock yields and price-earning ratios can do no more than provide some ex post justification for suggesting that there was not excessive speculation during the Great Bull Market.— Each individual investor was motivated by that person’s subjective expectations of each firm’s future earnings and dividends and the future prices of shares of each firm’s stock. Because of this element of subjectivity, not only can we never accurately know those values, but also we can never know how they varied among individuals. The market price we observe will be the end result of all of the actions of the market participants, and the observed price may be different from the price almost all of the participants expected.

In fact, there are some indications that there were differences in 1928 and 1929. Yields on common stocks were somewhat lower in 1928 and 1929. In October of 1928, brokers generally began raising margin requirements, and by the beginning of the fall of 1929, margin requirements were, on average, the highest in the history of the New York Stock Exchange. Though the discount and commercial paper rates had moved closely with the call and time rates on brokers’ loans through 1927, the rates on brokers’ loans increased much more sharply in 1928 and 1929.— This pulled in funds from corporations, private investors, and foreign banks as New York City banks sharply reduced their lending. These facts suggest that brokers and New York City bankers may have come to believe that stock prices had been bid above a sustainable level by late 1928 and early 1929. White (1990) created a quarterly index of dividends for firms in the Dow-Jones index and related this to the DJI. Through 1927 the two track closely, but in 1928 and 1929 the index of stock prices grows much more rapidly than the index of dividends.

The qualitative evidence for a bubble in the stock market in 1928 and 1929 that White assembled was strengthened by the findings of J. Bradford De Long and Andre Shleifer (1991). They examined closed-end mutual funds, a type of fund where investors wishing to liquidate must sell their shares to other individual investors allowing its fundamental value to be exactly measurable.— Using evidence from these funds, De Long and Shleifer estimated that in the summer of 1929, the Standard and Poor’s composite stock price index was overvalued about 30 percent due to excessive investor optimism. Rappoport and White (1993 and 1994) found other evidence that supported a bubble in the stock market in 1928 and 1929. There was a sharp divergence between the growth of stock prices and dividends; there were increasing premiums on call and time brokers’ loans in 1928 and 1929; margin requirements rose; and stock market volatility rose in the wake of the 1929 stock market crash.

There are several reasons for the creation of such a bubble. First, the fundamental values of earnings and dividends become difficult to assess when there are major industrial changes, such as the rapid changes in the automobile industry, the new electric utilities, and the new radio industry.— Eugene White (1990) suggests that “While investors had every reason to expect earnings to grow, they lacked the means to evaluate easily the future path of dividends.” As a result investors bid up prices as they were swept up in the ongoing stock market boom. Second, participation in the stock market widened noticeably in the twenties. The new investors were relatively unsophisticated, and they were more likely to be caught up in the euphoria of the boom and bid prices upward.— New, inexperienced commission sales personnel were hired to sell stocks and they promised glowing returns on stocks they knew little about.

These observations were strengthened by the experimental work of economist Vernon Smith. (Bishop, 1987) In a number of experiments over a three-year period using students and Tucson businessmen and businesswomen, bubbles developed as inexperienced investors valued stocks differently and engaged in price speculation. As these investors in the experiments began to realize that speculative profits were unsustainable and uncertain, their dividend expectations changed, the market crashed, and ultimately stocks began trading at their fundamental dividend values. These bubbles and crashes occurred repeatedly, leading Smith to conjecture that there are few regulatory steps that can be taken to prevent a crash.

Though the bubble of 1928 and 1929 made some downward adjustment in stock prices inevitable, as Barsky and De Long have shown, changes in fundamentals govern the overall movements. And the end of the long bull market was almost certainly governed by this. In late 1928 and early 1929 there was a striking rise in economic activity, but a decline began somewhere between May and July of that year and was clearly evident by August of 1929. By the middle of August, the rise in stock prices had slowed down as better information on the contraction was received. There were repeated statements by leading figures that stocks were “overpriced” and the Federal Reserve System sharply increased the discount rate in August 1929 was well as continuing its call for banks to reduce their margin lending. As this information was assessed, the number of speculators selling stocks increased, and the number buying decreased. With the decreased demand, stock prices began to fall, and as more accurate information on the nature and extent of the decline was received, stock prices fell more. The late October crash made the decline occur much more rapidly, and the margin purchases and consequent forced selling of many of those stocks contributed to a more severe price fall. The recovery of stock prices from November 13 into April of 1930 suggests that stock prices may have been driven somewhat too low during the crash.

There is now widespread agreement that the 1929 stock market crash did not cause the Great Depression. Instead, the initial downturn in economic activity was a primary determinant of the ending of the 1928-29 stock market bubble. The stock market crash did make the downturn become more severe beginning in November 1929. It reduced discretionary consumption spending (Romer, 1990) and created greater income uncertainty helping to bring on the contraction (Flacco and Parker, 1992). Though stock market prices reached a bottom and began to recover following November 13, 1929, the continuing decline in economic activity took its toll and by May 1930 stock prices resumed their decline and continued to fall through the summer of 1932.

Domestic Trade

In the nineteenth century, a complex array of wholesalers, jobbers, and retailers had developed, but changes in the postbellum period reduced the role of the wholesalers and jobbers and strengthened the importance of the retailers in domestic trade. (Cochran, 1977; Chandler, 1977; Marburg, 1951; Clewett, 1951) The appearance of the department store in the major cities and the rise of mail order firms in the postbellum period changed the retailing market.

Department Stores

A department store is a combination of specialty stores organized as departments within one general store. A. T. Stewart’s huge 1846 dry goods store in New York City is often referred to as the first department store. (Resseguie, 1965; Sobel-Sicilia, 1986) R. H. Macy started his dry goods store in 1858 and Wanamaker’s in Philadelphia opened in 1876. By the end of the nineteenth century, every city of any size had at least one major department store. (Appel, 1930; Benson, 1986; Hendrickson, 1979; Hower, 1946; Sobel, 1974) Until the late twenties, the department store field was dominated by independent stores, though some department stores in the largest cities had opened a few suburban branches and stores in other cities. In the interwar period department stores accounted for about 8 percent of retail sales.

The department stores relied on a “one-price” policy, which Stewart is credited with beginning. In the antebellum period and into the postbellum period, it was common not to post a specific price on an item; rather, each purchaser haggled with a sales clerk over what the price would be. Stewart posted fixed prices on the various dry goods sold, and the customer could either decide to buy or not buy at the fixed price. The policy dramatically lowered transactions costs for both the retailer and the purchaser. Prices were reduced with a smaller markup over the wholesale price, and a large sales volume and a quicker turnover of the store’s inventory generated profits.

Mail Order Firms

What changed the department store field in the twenties was the entrance of Sears Roebuck and Montgomery Ward, the two dominant mail order firms in the United States. (Emmet-Jeuck, 1950; Chandler, 1962, 1977) Both firms had begun in the late nineteenth century and by 1914 the younger Sears Roebuck had surpassed Montgomery Ward. Both located in Chicago due to its central location in the nation’s rail network and both had benefited from the advent of Rural Free Delivery in 1896 and low cost Parcel Post Service in 1912.

In 1924 Sears hired Robert C. Wood, who was able to convince Sears Roebuck to open retail stores. Wood believed that the declining rural population and the growing urban population forecast the gradual demise of the mail order business; survival of the mail order firms required a move into retail sales. By 1925 Sears Roebuck had opened 8 retail stores, and by 1929 it had 324 stores. Montgomery Ward quickly followed suit. Rather than locating these in the central business district (CBD), Wood located many on major streets closer to the residential areas. These moves of Sears Roebuck and Montgomery Ward expanded department store retailing and provided a new type of chain store.

Chain Stores

Though chain stores grew rapidly in the first two decades of the twentieth century, they date back to the 1860s when George F. Gilman and George Huntington Hartford opened a string of New York City A&P (Atlantic and Pacific) stores exclusively to sell tea. (Beckman-Nolen, 1938; Lebhar, 1963; Bullock, 1933) Stores were opened in other regions and in 1912 their first “cash-and-carry” full-range grocery was opened. Soon they were opening 50 of these stores each week and by the 1920s A&P had 14,000 stores. They then phased out the small stores to reduce the chain to 4,000 full-range, supermarket-type stores. A&P’s success led to new grocery store chains such as Kroger, Jewel Tea, and Safeway.

Prior to A&P’s cash-and-carry policy, it was common for grocery stores, produce (or green) grocers, and meat markets to provide home delivery and credit, both of which were costly. As a result, retail prices were generally marked up well above the wholesale prices. In cash-and-carry stores, items were sold only for cash; no credit was extended, and no expensive home deliveries were provided. Markups on prices could be much lower because other costs were much lower. Consumers liked the lower prices and were willing to pay cash and carry their groceries, and the policy became common by the twenties.

Chains also developed in other retail product lines. In 1879 Frank W. Woolworth developed a “5 and 10 Cent Store,” or dime store, and there were over 1,000 F. W. Woolworth stores by the mid-1920s. (Winkler, 1940) Other firms such as Kresge, Kress, and McCrory successfully imitated Woolworth’s dime store chain. J.C. Penney’s dry goods chain store began in 1901 (Beasley, 1948), Walgreen’s drug store chain began in 1909, and shoes, jewelry, cigars, and other lines of merchandise also began to be sold through chain stores.

Self-Service Policies

In 1916 Clarence Saunders, a grocer in Memphis, Tennessee, built upon the one-price policy and began offering self-service at his Piggly Wiggly store. Previously, customers handed a clerk a list or asked for the items desired, which the clerk then collected and the customer paid for. With self-service, items for sale were placed on open shelves among which the customers could walk, carrying a shopping bag or pushing a shopping cart. Each customer could then browse as he or she pleased, picking out whatever was desired. Saunders and other retailers who adopted the self-service method of retail selling found that customers often purchased more because of exposure to the array of products on the shelves; as well, self-service lowered the labor required for retail sales and therefore lowered costs.

Shopping Centers

Shopping Centers, another innovation in retailing that began in the twenties, was not destined to become a major force in retail development until after the Second World War. The ultimate cause of this innovation was the widening ownership and use of the automobile. By the 1920s, as the ownership and use of the car began expanding, population began to move out of the crowded central cities toward the more open suburbs. When General Robert Wood set Sears off on its development of urban stores, he located these not in the central business district, CBD, but as free-standing stores on major arteries away from the CBD with sufficient space for parking.

At about the same time, a few entrepreneurs began to develop shopping centers. Yehoshua Cohen (1972) says, “The owner of such a center was responsible for maintenance of the center, its parking lot, as well as other services to consumers and retailers in the center.” Perhaps the earliest such shopping center was the Country Club Plaza built in 1922 by the J. C. Nichols Company in Kansas City, Missouri. Other early shopping centers appeared in Baltimore and Dallas. By the mid-1930s the concept of a planned shopping center was well known and was expected to be the means to capture the trade of the growing number of suburban consumers.

International Trade and Finance

In the twenties a gold exchange standard was developed to replace the gold standard of the prewar world. Under a gold standard, each country’s currency carried a fixed exchange rate with gold, and the currency had to be backed up by gold. As a result, all countries on the gold standard had fixed exchange rates with all other countries. Adjustments to balance international trade flows were made by gold flows. If a country had a deficit in its trade balance, gold would leave the country, forcing the money stock to decline and prices to fall. Falling prices made the deficit countries’ exports more attractive and imports more costly, reducing the deficit. Countries with a surplus imported gold, which increased the money stock and caused prices to rise. This made the surplus countries’ exports less attractive and imports more attractive, decreasing the surplus. Most economists who have studied the prewar gold standard contend that it did not work as the conventional textbook model says, because capital flows frequently reduced or eliminated the need for gold flows for long periods of time. However, there is no consensus on whether fortuitous circumstances, rather than the gold standard, saved the international economy from periodic convulsions or whether the gold standard as it did work was sufficient to promote stability and growth in international transactions.

After the First World War it was argued that there was a “shortage” of fluid monetary gold to use for the gold standard, so some method of “economizing” on gold had to be found. To do this, two basic changes were made. First, most nations, other than the United States, stopped domestic circulation of gold. Second, the “gold exchange” system was created. Most countries held their international reserves in the form of U.S. dollars or British pounds and international transactions used dollars or pounds, as long as the United States and Great Britain stood ready to exchange their currencies for gold at fixed exchange rates. However, the overvaluation of the pound and the undervaluation of the franc threatened these arrangements. The British trade deficit led to a capital outflow, higher interest rates, and a weak economy. In the late twenties, the French trade surplus led to the importation of gold that they did not allow to expand the money supply.

Economizing on gold by no longer allowing its domestic circulation and by using key currencies as international monetary reserves was really an attempt to place the domestic economies under the control of the nations’ politicians and make them independent of international events. Unfortunately, in doing this politicians eliminated the equilibrating mechanism of the gold standard but had nothing with which to replace it. The new international monetary arrangements of the twenties were potentially destabilizing because they were not allowed to operate as a price mechanism promoting equilibrating adjustments.

There were other problems with international economic activity in the twenties. Because of the war, the United States was abruptly transformed from a debtor to a creditor on international accounts. Though the United States did not want reparations payments from Germany, it did insist that Allied governments repay American loans. The Allied governments then insisted on war reparations from Germany. These initial reparations assessments were quite large. The Allied Reparations Commission collected the charges by supervising Germany’s foreign trade and by internal controls on the German economy, and it was authorized to increase the reparations if it was felt that Germany could pay more. The treaty allowed France to occupy the Ruhr after Germany defaulted in 1923.

Ultimately, this tangled web of debts and reparations, which was a major factor in the course of international trade, depended upon two principal actions. First, the United States had to run an import surplus or, on net, export capital out of the United States to provide a pool of dollars overseas. Germany then had either to have an export surplus or else import American capital so as to build up dollar reserves—that is, the dollars the United States was exporting. In effect, these dollars were paid by Germany to Great Britain, France, and other countries that then shipped them back to the United States as payment on their U.S. debts. If these conditions did not occur, (and note that the “new” gold standard of the twenties had lost its flexibility because the price adjustment mechanism had been eliminated) disruption in international activity could easily occur and be transmitted to the domestic economies.

In the wake of the 1920-21 depression Congress passed the Emergency Tariff Act, which raised tariffs, particularly on manufactured goods. (Figures 26 and 27) The Fordney-McCumber Tariff of 1922 continued the Emergency Tariff of 1921, and its protection on many items was extremely high, ranging from 60 to 100 percent ad valorem (or as a percent of the price of the item). The increases in the Fordney-McCumber tariff were as large and sometimes larger than the more famous (or “infamous”) Smoot-Hawley tariff of 1930. As farm product prices fell at the end of the decade presidential candidate Herbert Hoover proposed, as part of his platform, tariff increases and other changes to aid the farmers. In January 1929, after Hoover’s election, but before he took office, a tariff bill was introduced into Congress. Special interests succeeded in gaining additional (or new) protection for most domestically produced commodities and the goal of greater protection for the farmers tended to get lost in the increased protection for multitudes of American manufactured products. In spite of widespread condemnation by economists, President Hoover signed the Smoot-Hawley Tariff in June 1930 and rates rose sharply.

Following the First World War, the U.S. government actively promoted American exports, and in each of the postwar years through 1929, the United States recorded a surplus in its balance of trade. (Figure 28) However, the surplus declined in the 1930s as both exports and imports fell sharply after 1929. From the mid-1920s on finished manufactures were the most important exports, while agricultural products dominated American imports.

The majority of the funds that allowed Germany to make its reparations payments to France and Great Britain and hence allowed those countries to pay their debts to the United States came from the net flow of capital out of the United States in the form of direct investment in real assets and investments in long- and short-term foreign financial assets. After the devastating German hyperinflation of 1922 and 1923, the Dawes Plan reformed the German economy and currency and accelerated the U.S. capital outflow. American investors began to actively and aggressively pursue foreign investments, particularly loans (Lewis, 1938) and in the late twenties there was a marked deterioration in the quality of foreign bonds sold in the United States. (Mintz, 1951)

The system, then, worked well as long as there was a net outflow of American capital, but this did not continue. In the middle of 1928, the flow of short-term capital began to decline. In 1928 the flow of “other long-term” capital out of the United States was 752 million dollars, but in 1929 it was only 34 million dollars. Though arguments now exist as to whether the booming stock market in the United States was to blame for this, it had far-reaching effects on the international economic system and the various domestic economies.

The Start of the Depression

The United States had the majority of the world’s monetary gold, about 40 percent, by 1920. In the latter part of the twenties, France also began accumulating gold as its share of the world’s monetary gold rose from 9 percent in 1927 to 17 percent in 1929 and 22 percent by 1931. In 1927 the Federal Reserve System had reduced discount rates (the interest rate at which they lent reserves to member commercial banks) and engaged in open market purchases (purchasing U.S. government securities on the open market to increase the reserves of the banking system) to push down interest rates and assist Great Britain in staying on the gold standard. By early 1928 the Federal Reserve System was worried about its loss of gold due to this policy as well as the ongoing boom in the stock market. It began to raise the discount rate to stop these outflows. Gold was also entering the United States so that foreigners could obtain dollars to invest in stocks and bonds. As the United States and France accumulated more and more of the world’s monetary gold, other countries’ central banks took contractionary steps to stem the loss of gold. In country after country these deflationary strategies began contracting economic activity and by 1928 some countries in Europe, Asia, and South America had entered into a depression. More countries’ economies began to decline in 1929, including the United States, and by 1930 a depression was in force for almost all of the world’s market economies. (Temin, 1989; Eichengreen, 1992)

Monetary and Fiscal Policies in the 1920s

Fiscal Policies

As a tool to promote stability in aggregate economic activity, fiscal policy is largely a post-Second World War phenomenon. Prior to 1930 the federal government’s spending and taxing decisions were largely, but not completely, based on the perceived “need” for government-provided public goods and services.

Though the fiscal policy concept had not been developed, this does not mean that during the twenties no concept of the government’s role in stimulating economic activity existed. Herbert Stein (1990) points out that in the twenties Herbert Hoover and some of his contemporaries shared two ideas about the proper role of the federal government. The first was that federal spending on public works could be an important force in reducin Smiley and Keehn, 1995.  investment. Both concepts fit the ideas held by Hoover and others of his persuasion that the U.S. economy of the twenties was not the result of laissez-faire workings but of “deliberate social engineering.”

The federal personal income tax was enacted in 1913. Though mildly progressive, its rates were low and topped out at 7 percent on taxable income in excess of $750,000. (Table 4) As the United States prepared for war in 1916, rates were increased and reached a maximum marginal rate of 12 percent. With the onset of the First World War, the rates were dramatically increased. To obtain additional revenue in 1918, marginal rates were again increased. The share of federal revenue generated by income taxes rose from 11 percent in 1914 to 69 percent in 1920. The tax rates had been extended downward so that more than 30 percent of the nation’s income recipients were subject to income taxes by 1918. However, through the purchase of tax exempt state and local securities and through steps taken by corporations to avoid the cash distribution of profits, the number of high income taxpayers and their share of total taxes paid declined as Congress kept increasing the tax rates. The normal (or base) tax rate was reduced slightly for 1919 but the surtax rates, which made the income tax highly progressive, were retained. (Smiley-Keehn, 1995)

President Harding’s new Secretary of the Treasury, Andrew Mellon, proposed cutting the tax rates, arguing that the rates in the higher brackets had “passed the point of productivity” and rates in excess of 70 percent simply could not be collected. Though most agreed that the rates were too high, there was sharp disagreement on how the rates should be cut. Democrats and  Smiley and Keehn, 1995.  Progressive Republicans argued for rate cuts targeted for the lower income taxpayers while maintaining most of the steep progressivity of the tax rates. They believed that remedies could be found to change the tax laws to stop the legal avoidance of federal income taxes. Republicans argued for sharper cuts that reduced the progressivity of the rates. Mellon proposed a maximum rate of 25 percent.

Though the federal income tax rates were reduced and made less progressive, it took three tax rate cuts in 1921, 1924, and 1925 before Mellon’s goal was finally achieved. The highest marginal tax rate was reduced from 73 percent to 58 percent to 46 percent and finally to 25 percent for the 1925 tax year. All of the other rates were also reduced and exemptions increased. By 1926, only about the top 10 percent of income recipients were subject to federal income taxes. As tax rates were reduced, the number of high income tax returns increased and the share of total federal personal income taxes paid rose. (Tables 5 and 6) Even with the dramatic income tax rate cuts and reductions in the number of low income taxpayers, federal personal income tax revenue continued to rise during the 1920s. Though early estimates of the distribution of personal income showed sharp increases in income inequality during the 1920s (Kuznets, 1953; Holt, 1977), more recent estimates have found that the increases in inequality were considerably less and these appear largely to be related to the sharp rise in capital gains due to the booming stock market in the late twenties. (Smiley, 1998 and 2000)

Each year in the twenties the federal government generated a surplus, in some years as much as 1 percent of GNP. The surpluses were used to reduce the federal deficit and it declined by 25 percent between 1920 and 1930. Contrary to simple macroeconomic models that argue a federal government budget surplus must be contractionary and tend to stop an economy from reaching full employment, the American economy operated at full-employment or close to it throughout the twenties and saw significant economic growth. In this case, the surpluses were not contractionary because the dollars were circulated back into the economy through the purchase of outstanding federal debt rather than pulled out as currency and held in a vault somewhere.

Monetary Policies

In 1913 fear of the “money trust” and their monopoly power led Congress to create 12 central banks when they created the Federal Reserve System. The new central banks were to control money and credit and act as lenders of last resort to end banking panics. The role of the Federal Reserve Board, located in Washington, D.C., was to coordinate the policies of the 12 district banks; it was composed of five presidential appointees and the current secretary of the treasury and comptroller of the currency. All national banks had to become members of the Federal Reserve System, the Fed, and any state bank meeting the qualifications could elect to do so.

The act specified fixed reserve requirements on demand and time deposits, all of which had to be on deposit in the district bank. Commercial banks were allowed to rediscount commercial paper and given Federal Reserve currency. Initially, each district bank set its own rediscount rate. To provide additional income when there was little rediscounting, the district banks were allowed to engage in open market operations that involved the purchasing and selling of federal government securities, short-term securities of state and local governments issued in anticipation of taxes, foreign exchange, and domestic bills of exchange. The district banks were also designated to act as fiscal agents for the federal government. Finally, the Federal Reserve System provided a central check clearinghouse for the entire banking system.

When the Federal Reserve System was originally set up, it was believed that its primary role was to be a lender of last resort to prevent banking panics and become a check-clearing mechanism for the nation’s banks. Both the Federal Reserve Board and the Governors of the District Banks were bodies established to jointly exercise these activities. The division of functions was not clear, and a struggle for power ensued, mainly between the New York Federal Reserve Bank, which was led by J. P. Morgan’s protege, Benjamin Strong, through 1928, and the Federal Reserve Board. By the thirties the Federal Reserve Board had achieved dominance.

There were really two conflicting criteria upon which monetary actions were ostensibly based: the Gold Standard and the Real Bills Doctrine. The Gold Standard was supposed to be quasi-automatic, with an effective limit to the quantity of money. However, the Real Bills Doctrine (which required that all loans be made on short-term, self-liquidating commercial paper) had no effective limit on the quantity of money. The rediscounting of eligible commercial paper was supposed to lead to the required “elasticity” of the stock of money to “accommodate” the needs of industry and business. Actually the rediscounting of commercial paper, open market purchases, and gold inflows all had the same effects on the money stock.

The 1920-21 Depression

During the First World War, the Fed kept discount rates low and granted discounts on banks’ customer loans used to purchase V-bonds in order to help finance the war. The final Victory Loan had not been floated when the Armistice was signed in November of 1918: in fact, it took until October of 1919 for the government to fully sell this last loan issue. The Treasury, with the secretary of the treasury sitting on the Federal Reserve Board, persuaded the Federal Reserve System to maintain low interest rates and discount the Victory bonds necessary to keep bond prices high until this last issue had been floated. As a result, during this period the money supply grew rapidly and prices rose sharply.

A shift from a federal deficit to a surplus and supply disruptions due to steel and coal strikes in 1919 and a railroad strike in early 1920 contributed to the end of the boom. But the most—common view is that the Fed’s monetary policy was the main determinant of the end of the expansion and inflation and the beginning of the subsequent contraction and severe deflation. When the Fed was released from its informal agreement with the Treasury in November of 1919, it raised the discount rate from 4 to 4.75 percent. Benjamin Strong (the governor of the New York bank) was beginning to believe that the time for strong action was past and that the Federal Reserve System’s actions should be moderate. However, with Strong out of the country, the Federal Reserve Board increased the discount rate from 4.75 to 6 percent in late January of 1920 and to 7 percent on June 1, 1920. By the middle of 1920, economic activity and employment were rapidly falling, and prices had begun their downward spiral in one of the sharpest price declines in American history. The Federal Reserve System kept the discount rate at 7 percent until May 5, 1921, when it was lowered to 6.5 percent. By June of 1922, the rate had been lowered yet again to 4 percent. (Friedman and Schwartz, 1963)

The Federal Reserve System authorities received considerable criticism then and later for their actions. Milton Friedman and Anna Schwartz (1963) contend that the discount rate was raised too much too late and then kept too high for too long, causing the decline to be more severe and the price deflation to be greater. In their opinion the Fed acted in this manner due to the necessity of meeting the legal reserve requirement with a safe margin of gold reserves. Elmus Wicker (1966), however, argues that the gold reserve ratio was not the main factor determining the Federal Reserve policy in the episode. Rather, the Fed knowingly pursued a deflationary policy because it felt that the money supply was simply too large and prices too high. To return to the prewar parity for gold required lowering the price level, and there was an excessive stock of money because the additional money had been used to finance the war, not to produce consumer goods. Finally, the outstanding indebtedness was too large due to the creation of Fed credit.

Whether statutory gold reserve requirements to maintain the gold standard or domestic credit conditions were the most important determinant of Fed policy is still an open question, though both certainly had some influence. Regardless of the answer to that question, the Federal Reserve System’s first major undertaking in the years immediately following the First World War demonstrated poor policy formulation.

Federal Reserve Policies from 1922 to 1930

By 1921 the district banks began to recognize that their open market purchases had effects on interest rates, the money stock, and economic activity. For the next several years, economists in the Federal Reserve System discussed how this worked and how it could be related to discounting by member banks. A committee was created to coordinate the open market purchases of the district banks.

The recovery from the 1920-1921 depression had proceeded smoothly with moderate price increases. In early 1923 the Fed sold some securities and increased the discount rate from 4 percent as they believed the recovery was too rapid. However, by the fall of 1923 there were some signs of a business slump. McMillin and Parker (1994) argue that this contraction, as well as the 1927 contraction, were related to oil price shocks. By October of 1923 Benjamin Strong was advocating securities purchases to counter this. Between then and September 1924 the Federal Reserve System increased its securities holdings by over $500 million. Between April and August of 1924 the Fed reduced the discount rate to 3 percent in a series of three separate steps. In addition to moderating the mild business slump, the expansionary policy was also intended to reduce American interest rates relative to British interest rates. This reversed the gold flow back toward Great Britain allowing Britain to return to the gold standard in 1925. At the time it appeared that the Fed’s monetary policy had successfully accomplished its goals.

By the summer of 1924 the business slump was over and the economy again began to grow rapidly. By the mid-1920s real estate speculation had arisen in many urban areas in the United States and especially in Southeastern Florida. Land prices were rising sharply. Stock market prices had also begun rising more rapidly. The Fed expressed some worry about these developments and in 1926 sold some securities to gently slow the real estate and stock market boom. Amid hurricanes and supply bottlenecks the Florida real estate boom collapsed but the stock market boom continued.

The American economy entered into another mild business recession in the fall of 1926 that lasted until the fall of 1927. One of the factors in this was Henry’s Ford’s shut down of all of his factories to changeover from the Model T to the Model A. His employees were left without a job and without income for over six months. International concerns also reappeared. France, which was preparing to return to the gold standard, had begun accumulating gold and gold continued to flow into the United States. Some of this gold came from Great Britain making it difficult for the British to remain on the gold standard. This occasioned a new experiment in central bank cooperation. In July 1927 Benjamin Strong arranged a conference with Governor Montagu Norman of the Bank of England, Governor Hjalmar Schacht of the Reichsbank, and Deputy Governor Charles Ritt of the Bank of France in an attempt to promote cooperation among the world’s central bankers. By the time the conference began the Fed had already taken steps to counteract the business slump and reduce the gold inflow. In early 1927 the Fed reduced discount rates and made large securities purchases. One result of this was that the gold stock fell from $4.3 billion in mid-1927 to $3.8 billion in mid-1928. Some of the gold exports went to France and France returned to the gold standard with its undervalued currency. The loss of gold from Britain eased allowing it to maintain the gold standard.

By early 1928 the Fed was again becoming worried. Stock market prices were rising even faster and the apparent speculative bubble in the stock market was of some concern to Fed authorities. The Fed was also concerned about the loss of gold and wanted to bring that to an end. To do this they sold securities and, in three steps, raised the discount rate to 5 percent by July 1928. To this point the Federal Reserve Board had largely agreed with district Bank policy changes. However, problems began to develop.

During the stock market boom of the late 1920s the Federal Reserve Board preferred to use “moral suasion” rather than increases in discount rates to lessen member bank borrowing. The New York City bank insisted that moral suasion would not work unless backed up by literal credit rationing on a bank by bank basis which they, and the other district banks, were unwilling to do. They insisted that discount rates had to be increased. The Federal Reserve Board countered that this general policy change would slow down economic activity in general rather than be specifically targeted to stock market speculation. The result was that little was done for a year. Rates were not raised but no open market purchases were undertaken. Rates were finally raised to 6 percent in August of 1929. By that time the contraction had already begun. In late October the stock market crashed, and America slid into the Great Depression.

In November, following the stock market crash the Fed reduced discount rates to 4.5 percent. In January they again decreased discount rates and began a series of discount rate decreases until the rate reached 2.5 percent at the end of 1930. No further open market operations were undertaken for the next six months. As banks reduced their discounting in 1930, the stock of money declined. There was a banking crisis in the southeast in November and December of 1930, and in its wake the public’s holding of currency relative to deposits and banks’ reserve ratios began to rise and continued to do so through the end of the Great Depression.

Conclusion

Though some disagree, there is growing evidence that the behavior of the American economy in the 1920s did not cause the Great Depression. The depressed 1930s were not “retribution” for the exuberant growth of the 1920s. The weakness of a few economic sectors in the 1920s did not forecast the contraction from 1929 to 1933. Rather it was the depression of the 1930s and the Second World War that interrupted the economic growth begun in the 1920s and resumed after the Second World War. Just as the construction of skyscrapers that began in the 1920s resumed in the 1950s, so did real economic growth and progress resume. In retrospect we can see that the introduction and expansion of new technologies and industries in the 1920s, such as autos, household electric appliances, radio, and electric utilities, are echoed in the 1990s in the effects of the expanding use and development of the personal computer and the rise of the internet. The 1920s have much to teach us about the growth and development of the American economy.

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Matthew Boulton: Enterprising Industrialist of the Enlightenment

Reviewer(s):Martello, Robert

Published by EH.Net (July 2013)
?
Kenneth Quickenden, Sally Baggott and Malcolm Dick, editors, Matthew Boulton: Enterprising Industrialist of the Enlightenment.? Farnham, UK: Ashgate, 2013.? xviii + 294 pp.? $125 (hardcover), ISBN: 978-1-4094-2218-1.

Reviewed for EH.Net by Robert Martello, Olin College of Engineering.

Matthew Boulton?s name triggers an immediate connection to the Boulton and Watt steam engine.? This epic invention vaulted Boulton and his partner James Watt into the pantheon of innovators who helped inaugurate the Industrial Revolution, and most studies credit the partners’ success to their complementary skills and teamwork.? After all, Boulton discovered, financed, and promoted Watt, which enabled the brilliant Scottish inventor to develop and improve his technical creation.? This well-told tale oversimplifies Boulton?s record of technical and managerial techniques and achievements, which stretch well beyond steam engines.

In Matthew Boulton: Enterprising Industrialist of the Enlightenment, Kenneth Quickenden (Birmingham Institute of Art and Design), Sally Baggott (Research Facilitator of the University of Birmingham’s College of Arts and Law), and Malcolm Dick (Director of the Centre for West Midlands History at the University of Birmingham) present an array of perspectives on Boulton’s life, legacy, and career, highlighting his multifaceted impacts upon the Industrial Revolution, the city of Birmingham, and the larger society of the English-speaking world.? This edited volume consists of an introduction and fifteen chapters that emerged from a 2009 conference run in Boulton?s home city of Birmingham to mark the 200th anniversary of his death.

Matthew Boulton reads like a set of refereed journal papers.? The introduction offers a brief understanding of Boulton?s life and context and standalone chapters make a number of independent analyses, but the book lacks a conclusion and overarching take-home message.? Fortunately, the individual chapters draw analytical techniques from disciplines ranging from archaeology to the history of science and technology, cultural history, art history, and others.? While few readers will find all of these chapters relevant, there is something for everyone.? An interdisciplinary perspective might have suggested new directions for study and a more nuanced and connected analysis, but the volume?s multidisciplinary approach still offers a compelling testament to Boulton?s diverse interests, activities, and impacts.

The wide-ranging chapters can be grouped into three broad categories.? The largest category deals with technological issues and some of the products manufactured by Boulton.? His famous steam engine, for example, succeeded for thermodynamic reasons not understood at the time, but Boulton?s scientific notes and experimental approach refute the belief that he subcontracted all technical issues to Watt.? Similarly, his silver production illustrates how his proto-industrial operations unsuccessfully challenged the hegemony of London?s silverworking guilds.? Even the evolving architectural design of Boulton?s manufactory offers clues regarding his business?s increasing size, diversity, and sophistication.? Other chapters investigate aspects of his ?mechanical? paintings, minted copper items, and technical innovation style; and one chapter even poses the question ?Was Matthew Boulton a Scientist??? We are left with the understanding that he was a scientist-entrepreneur whose genius lay ?between the abstract and the entrepreneurial? (p. 58): he was a master of productive risk taking, experimentation, and transferring innovations from one field to another, and used his technical knowledge to effectively promote his firm to clients, lawmakers, and potential employees.

A second set of chapters explores managerial and networking topics.? These chapters assert that Boulton’s reputation as a gifted manager-entrepreneur is well deserved.? For example, two chapters investigate his relationship with his foremen and with the workers in the mint.? Together they paint a picture of Boulton’s deft managerial tightrope walking, as he used incentives and a positive work environment to maintain the highest possible output quality without relinquishing his total control over intellectual property or shop discipline.? Other chapters highlight aspects of his business operations such as his successful campaign to lobby for an assaying office in Birmingham and his productive relationship with Jewish merchants.

Finally, several chapters untangle questions related to Boulton?s values and legacy.? Two chapters explore the importance of Enlightenment ideals in Boulton’s decision-making: many of his actions were not only oriented at profit, but also at his mission to ?civilize? Birmingham.? These efforts ultimately failed, and even though his workers produced innumerable products of a ?refined? nature, they were ?immune to the cultural messages enshrined in such articles? (p. 30).? Other chapters deal with Boulton’s pictorial legacy and posthumous commemoration; fitting topics for a man so concerned with self-promotion.

What is the net impact of all of these studies?? Matthew Boulton portrays a competent manager who also made technical contributions; an innovator with a particular genius for promotion, networking, and connecting different ideas; and an elitist who loved style and status for both himself and for the people and town of Birmingham.? One of the major implications of Boulton’s career is the interconnection between managerial and technical competence; two essential skills in short supply at the time. Boulton’s ability to serve both technical and strategic roles supports historian Thomas Hughes’ “technological systems” framework, which posits the importance of inventor-entrepreneurs and manager-entrepreneurs at different stages in the evolution of a large technological operation.? This book also affirms the importance of intellectual property issues at the end of the eighteenth century through narratives of the benefits derived from patent protection; the partners? endless fear of clever employees who might “steal” credit for their own contributions; and their ongoing (and ultimately unsuccessful) battle against industrial espionage.? Readers will also observe a balance between ideals and pragmatism: Enlightenment principles unquestionably shaped Boulton?s activities, but his desire to increase his society?s “civility” was always tempered by more pressing business and profit concerns.?

Although this book would benefit from a clear identification of coherent themes and larger implications that might connect the chapters, Matthew Boulton achieves its primary intention by commemorating Boulton’s nuanced high-impact career in a multidisciplinary manner without succumbing to hagiography.? Boulton’s personal values, labor and managerial practices, approach towards innovations, social networking, and manufacturing output are addressed with thoroughness and insight.? This book will prove useful for readers with general familiarity or interest in Boulton who wish to advance their understanding, and will also provide historians of technology, enlightenment scholars, and business and labor historians with a range of case studies that showcase the analytical techniques of different fields.

Robert Martello (robert.martello@olin.edu) is a Professor of the History of Science and Technology at Olin College of Engineering.? He published Midnight Ride, Industrial Dawn: Paul Revere and the Rise of American Enterprise in 2010.

Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Business History
History of Technology, including Technological Change
Industry: Manufacturing and Construction
Geographic Area(s):Europe
Time Period(s):18th Century
19th Century

Jesse Ramsden (1735-1800): London?s Leading Scientific Instrument Maker

Author(s):McConnell, Anita
Reviewer(s):MacLeod, Christine

———— EH.NET BOOK REVIEW ————– Published by EH.NET (August 2008)

Anita McConnell, Jesse Ramsden (1735-1800): London?s Leading Scientific Instrument Maker. Aldershot, UK: Ashgate, 2007. xxi + 318 pp. $100 (cloth), ISBN: 978-0-7546-6136-8.

Reviewed for EH.NET by Christine MacLeod, Department of History, University of Bristol.

?London?s leading scientific instrument maker? at a time when London occupied the pinnacle of Europe?s instrument-making trades, Jesse Ramsden styled himself simply ?optician.? From 1786 he was entitled, as were few other craftsmen, to add ?FRS?; he could secure an audience with George III at a moment?s notice; and he would probably have defeated his friend James Watt in any contemporary competition to identify Britain?s greatest inventor. Ramsden emerges from McConnell?s splendid biography as an ingenious perfectionist, notorious in equal measure across Europe for his unparalleled skill and woefully unpunctual delivery (these traits were not unrelated).

With no personal or business papers to work from, McConnell has been assiduous in pursuit of archival evidence, not least from Ramsden?s customers, associates, competitors, and industrial spies, which she integrates with her expert knowledge of his products. She depends for insights into Ramsden?s character and personal life chiefly on two contemporary memoirs (reprinted in full as appendices) both of which are fairly discreet, and is scrupulous in avoiding speculation as a substitute for evidence. Her focus is consequently on Ramsden?s better documented business life. McConnell?s primary audience is fellow researchers of instruments and the eighteenth-century instrument trade: she gives little quarter to readers who do not already understand the function and significance of Ramsden?s products, or the nature of the trade (for which, see A. D. Morrison-Low, Making Scientific Instruments in the Industrial Revolution, Ashgate, 2007). She does emphasize, however, the uniqueness of his business strategy.

Ramsden was by no means unique among leading instrument-makers in having arrived from the provinces: he was born in Halifax (Yorks.) and initially apprenticed to the local cloth trade, close to the time of Defoe?s famous account. Yet, while most London instrument makers engaged in a form of putting-out, Ramsden concentrated his exceptionally large labor force of forty to fifty in a spacious workshop, first on Haymarket then at 196 Piccadilly, in the fashionable heart of Westminster, where he could supervise them closely and intervene immediately to resolve technical problems. McConnell suggests he may have been inspired by Matthew Boulton?s division of labor at his Soho factory. Like Boulton, Ramsden required his workers to specialize in a single operation, and turned out a huge quantity and range of standard (if regularly improved) instruments, from telescopes, sextants, and barometers to spectacles and spirit levels ? not forgetting repair work. Also crucial to this productivity was his invention of two dividing engines (one circular, one straight-line), with which a scale could be graduated accurately to one two-thousandth of an inch (engraving it remained a skilled, manual operation). Such mechanized precision was to transform not only astronomy and navigation but ultimately, of course, also industrial production.

It was not this ?off-the-shelf? output, however, that made Ramsden?s name but the dividing engines themselves and the bespoke trade in innovative, often large instruments ? too large for engine division ? that piggy-backed on its profits, skills and space, and preoccupied his waking thoughts. He equipped prestigious European observatories with astronomical instruments of unprecedented power and accuracy and expeditionary voyages with newly invented instruments for refining their measurements. Simultaneously, he drove numerous customers to distraction, as his search for perfection (compounded by illness, accident, competing orders, and the seasonality of precision workmanship) imposed delays of years, even decades, on the delivery of commissioned instruments. One quipped, ?Ramsden has already been ordered to make the trumpet for the Last Day so that it will be ready in time? (p. 231). Ramsden met his nemesis in General William Roy, for whose ambitious project of establishing the relative positions of the Greenwich and Paris observatories he agreed in 1784 to supply surveying instruments of the highest precision. Frustrated by the delays occasioned by slow delivery of his great geodetic theodolite, in 1790 Roy angrily denounced him to the Royal Society. For this history must ever be grateful, for it provoked Ramsden to pen a detailed rebuttal explaining at length his methods of working, which McConnell reprints in full.

The engineering careers of both James Watt and John Smeaton were rooted in the instrument-making trade, and it is evident that Ramsden?s mechanical talents could have led him along the same path. Like Watt, he was prompted to invent and improve by identifying design defects in instruments brought to him for repair. Unlike Watt (with Boulton at his shoulder), but in common with most contemporary engineers and instrument makers, he had little time for patents. He obtained one at an early point in his career ? prompted perhaps by his Dollond brothers-in-law, against whose controversial patent he was later to testify ? but appears to have been unassertive in its employment. Thereafter he found other ways to protect his ?intellectual property? ? through secrecy, contractual arrangements with the Board of Longitude, or the proprietor?s mark stamped on all instruments graduated by his dividing engines ? but apparently relied most on reputation. Ramsden?s ingenuity kept him at the head of the pack until his death in 1800, when his foreman, Matthew Berge inherited the business. He might have died wealthier (his assets totaled under ?5,000) and lived longer (contemporaries diagnosed overwork), but he could scarcely have been more esteemed ? or, it seems, cherished by friends and associates, if not family.

In 1795 the Royal Society awarded Ramsden the Copley medal, for his ?various inventions and improvements to philosophical instruments.? McCulloch leaves us in no doubt that it was fully deserved or that Ramsden?s was one of the greatest intellects of his, or any, age. Readers will likewise appreciate the great service to scholarship of this first full-length biography. Beautifully illustrated, skillfully researched, and lucidly written, McConnell?s book is certainly worthy of its remarkable subject.

Christine MacLeod is Professor of History at the University of Bristol and author of Heroes of Invention: Technology, Liberalism and British Identity, 1750-1914 (Cambridge University Press, 2007).

Copyright (c) 2008 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net; Telephone: 513-529-2229). Published by EH.Net (August 2008). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Industry: Manufacturing and Construction
Geographic Area(s):Europe
Time Period(s):18th Century

Economic Transformations: General Purpose Technologies and Long-term Economic Growth

Author(s):Lipsey, Richard G.
Carlaw, Kenneth I.
Bekar, Clifford T.
Reviewer(s):Mokyr, Joel

Published by EH.NET (August 2006)

Richard G. Lipsey, Kenneth I. Carlaw, and Clifford T. Bekar, Economic Transformations: General Purpose Technologies and Long-term Economic Growth. Oxford: Oxford University Press, 2005. xxi + 595 pp. $45 (paperback), ISBN: 0-19-929089-X.

Reviewed for EH.NET by Joel Mokyr, Departments of Economics and History, Northwestern University.

Richard G. Lipsey is one of the most distinguished general-purpose economists of his generation. This reviewer used his introductory textbook as an undergraduate, and in graduate school read many of his path-breaking papers in monetary theory, international trade, and industrial organization. Later in life Lipsey seems to have discovered his true love, namely Big-think economic history, and as if to make up for the time spent doing other things, has summarized his thoughts and ideas in a large, ambitious, sprawling book coauthored with two of his former graduate students. With apologies, this review partly subsumes them under the Lipsey name.

The book is hard to summarize because it is unusually rich and diverse. It contains long discussions of technological change, its nature, sources, and consequences. Lipsey maintains that technology is at the heart of modern economic growth and asks — once again — what the sources of Western success are. Among other things, the book also treats at length the economics of technological change, the history of science, and population dynamics. It is part grand synthesis, part textbook, part statement of the author’s idiosyncratic views, and throughout an excellent read — informed, curious, unafraid of being unconventional or politically incorrect. The book reflects both the unfailing deep economic intuition and the intellectual curiosity that are the hallmarks of Lipsey’s scholarly persona. Dick Lipsey, it might be said, has never met a black box he has not demanded be opened. With his coauthors, he makes a valiant attempt to do so in this book and offers us many brilliant new formulations.

Lipsey joins a large number of economists who, when thinking about the long run, feel that evolutionary models are more appropriate than standard neoclassical ones. No more than anyone before do the authors propose a satisfactory evolutionary model of technological progress that will explain all of history. Instead, they tell a theoretically informed tale that will join the growing literature on the topic of long-term growth, based on a number of interesting, if not wholly new, points of view on modern economic growth.

Arguably, this big volume contains at least two substantive books. One of them is about General Purpose Technologies (GPT), a theme that briefly rose to prominence a decade ago in the literature of the economics of technological change (of which Lipsey was one pioneer). The second is the “Rise of the West” and the beginning of sustained economic growth in Europe in the eighteenth and nineteenth centuries. If there is a connection between the two, however, this book does not stress it. GPT’s, it asserts, were not the driving force behind the Industrial Revolution, and the only GPT we can associate with the period 1760-1830, steam power, was a relatively minor factor in the Industrial Revolution. The absence of a direct link between the emergence of GPT’s and the book’s theories about the rise of the West reduces the coherence of this volume a bit, but does not diminish its ?lan.

Some will argue that GPT is just another name for events and phenomena we have always known about. The term does not, as the authors are the first to admit, constitute a theory. A GPT is in fact a technique that is complementary with a lot of other techniques. How many is a lot the reader must decide, and the nature of the complementarity is left a bit mysterious. A screw, one would think, is complementary to almost any mechanical construct one can think of, but the screw is not included in their list of GPT’s. Ships, on the other hand, are. As the authors argue, ships may seem to have only one use (to move objects from A to B) but they qualify as GPT’s, as do automobiles, because they can be used to transport almost anything and are thus complementary to nearly any other technique. The same is true for printing, presumably on the argument that almost any kind of information can be printed. But this seems somehow different from, say, electrical power or microprocessors, which are a direct input into the production of many other goods (whereas the printing press only reproduces information). Internal combustion engines do seem rather obvious GPT’s, but ships and printing presses only produce one final output, even if that has multiple uses. If the engine and the wheel are GPT’s, why not the ball-bearing, the pulley, the lever etc? The confusion between multiple-use inputs and multiple-use outputs weakens an otherwise tight and informed analysis. At the same time the idea of “factory production,” which they classify as an organizational GPT, may seem a bit too vague to qualify for GPT status. Is “factory production” a technique?

The interesting conceptual ?innovation proposed here is to differentiate GPT’s from what the authors call General Purpose Principles (GPP’s) which are not embodied in a specific technique. Thermodynamics or Galilean mechanics qualify as such GPP’s and they form the basis of much subsequent technological advance, though the connection is not always fully explicated. Here the authors might have found some use for the distinction proposed by this reviewer between prescriptive knowledge (which would include GPT’s) and propositional knowledge (GPP’s). Furthermore, the authors feel (pp. 189-90) that mechanization should also count as a GPP. This is something on which reasonable people could differ.

Such squabbles are inevitable, and the authors are wise to argue that the definitions are less important than the use to which they are put. At many junctures this reviewer found the categories and terms helpful and enlightening. Thus, the book vastly enriches the concept of macro-inventions by pointing out that there are two kind of “radical” inventions, what they call use-radical and technology-radical. The printing press was use-radical: it relied on principles and ideas that had been around and recombined them to produce an output in a way very different from previous techniques. The minting of coins, for example, was one of its identifiable ancestors. Technology-radical inventions produce a technology that has no obvious parents and is based on entirely new principles and components (such as mechanical clocks, hot-air ballooning, smallpox vaccination, or x-rays). The authors also point out that the importance of a GPT should not be measured just by its contemporaneous effect on productivity. Many of its applications can lie far in the future, and it might be important even without many externalities. The distinction between a positive externality (which is a “free lunch”) and a spillover effect (which involves the application of the GPT in another use) is one of the many important insights in this book, and the authors apply it well to their historical case studies. Electrical power is not an “externality” in the sense that its users pay for its use, but it has endless spillover effects, producing huge producer and consumer surpluses by making other techniques possible altogether, which, they maintain, is quite different than the standard treatment of complementarities.

The middle part of the book is devoted the question why the Industrial Revolution and modern growth began in the West and nowhere else. The authors have few doubts or qualms about being “teleological,” “Whiggish,” or “Eurocentric.” For them, the difference between the West and the Rest is that Europe created “modern science” and others did not. They dismiss the possibility that China or Islam could have created something similar or perhaps generated economic growth from a very different kind of science. They proceed to describe the rise of Western Science from its medieval roots and explain its absence in other societies. In so doing they rely heavily on the work of Toby Huff and Margaret Jacob, among others, and describe in considerable detail the special circumstances that led to these events. This reviewer differs with the authors on some of the details, but not on the essence of their message: that the Industrial Revolution without the continuing growth of useful knowledge in the West would have fizzled out and become just another efflorescence. Whether this knowledge was “modern science” or something more complex and subtle needs to be hashed out in more detail in future work.

Much of this account will make as much good sense to economists with an interest in economic history as it will annoy and irritate professional historians of science and technology and China experts who refuse to regard China’s “case” as one of failure and abhor Western “triumphalism.” It would be easy to point to lacunae in the arguments, especially the finer details about the interaction between science and technology in the Industrial Revolution. For the specialist, a sense of puzzlement keeps popping up here and there, especially about the pivotal role the authors attribute to “Newtonian mechanics” in the Industrial Revolution. Institutions matter to growth, in their view, largely because they facilitated the emergence of modern science. Western universities were self-governing semi-autonomous corporations, and the creation of a self-perpetuating but autonomous body of scholars helped create what they call “an institutional memory,” which assured that useful knowledge would be cumulative. There is little in this book that connects economic growth to institutional change as it has figured in the modern theory of growth — the rise of commerce, contract enforcement, the role of government, implicit codes of behavior and social norms, and so on. Technology is everything. Perhaps this is just as well: the book is long enough as it is, and others like it, with greater emphasis on institutions, will doubtlessly be written.

After all, whether one agrees with the main points made this book or not, it and books like it fill a need. The questions it poses so well are too important to be left alone as taboo by post-modern social constructivists. If historians of science and technology consider these issues to be politically incorrect, economists will do the work for them. Scholars in the vein of Dick Lipsey, David Landes, and Nathan Rosenberg will continue to ask “Why the West Grew Rich?” and “Why not Elsewhere?” As Robert Lucas once put it, once you have thought a bit about that question, it is hard to think of anything else.

References:

Helpman, Elhanan, ed. 1998. General Purpose Technologies and Economic Growth. Cambridge, MA: MIT Press.

Huff, Toby E. 1993. The Rise of Early Modern Science. Cambridge: Cambridge University Press.

Jacob, Margaret C. 1997. Scientific Culture and the Making of the Industrial West. New York and Oxford: Oxford University Press.

Landes, David S. 1998. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York: W. W. Norton.

Lucas, Robert E. 1988. “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22, pp. 3-42.

Mokyr, Joel. 2002. The Gifts of Athena: Historical Origins of the Knowledge Economy. Princeton: Princeton University Press.

Rosenberg, Nathan and Birdzell, L.E., Jr. 1986. How the West Grew

Rich: The Economic Transformation of the Industrial World. New York: Basic Books.

Joel Mokyr is the Robert H. Strotz Professor of Arts and Sciences and Professor of Economics and History at Northwestern University. His The Enlightened Economy will be published by Penguin Books in the near future.

Subject(s):History of Technology, including Technological Change
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Copyright and Other Fairy Tales: Hans Christian Andersen and the Commodification of Creativity

Author(s):Porsdam, Helle
Reviewer(s):Khan, B. Zorina

Published by EH.NET (June 2006)

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Helle Porsdam, editor, Copyright and Other Fairy Tales: Hans Christian Andersen and the Commodification of Creativity. Cheltenham, UK: Edward Elgar, 2006. vi + 172 pp. $85 (cloth), ISBN: 1-84542-601-0.

Reviewed for EH.NET by B. Zorina Khan, Department of Economics, Bowdoin College.

Once upon a time a professor of American Studies at the University of Southern Denmark had a cute idea. She would edit a volume of essays that employed the literary device of linking Hans Christian Andersen (1805-1875) to the authors’ own particular dicta on copyright policy. Helle Porsdam (for that is the name of our editor) herself would compose a preface to summarize the contributions of her essayists and to introduce Hans Christian (HCA) as the “best of story tellers” to those of us who were more familiar with Pikachu or Scooby Doo rather than the Little Match Girl. The truth is that the real HCA had little or nothing to do or say about copyright; but, rather than unpleasantly carping about minor details, let us, like all consumers of fables, ignore such inconvenient facts and turn our attention to the narration.

The first chapter is related by Lawrence Lessig, who starts out with the obligatory reference to HCA but cleverly employs a Dr. Seuss-like accent: “Knowledge is remix. Politics is remix. Remix is how we create. Remix is how we recreate. … Think a bit about this concept of ‘remix.’ Think a bit about ‘remix’ in particular before technology got into the mix. Think about it before Hollywood got in the mix” (p. 16). Lessig’s point is that we all recreate and reinterpret culture, either as writers, readers, viewers or commentators. Social constraints on our ability to reconstruct culture range from none (an animated discussion about a movie among friends) to state-imposed remedies (jail and a $250,000 fine for illegal copying of the same movie.) Technological innovations such as digitalization have had a dramatic impact on the culture of remixing: the “explosion” of copying on the Internet; the “war” and “battles” against piracy; and the “weapons” used to prevent illegal remixing. Copyright law, in this new regime, imposes prohibitively high costs on the creative process of remixing. The raconteur, as in all fairy tales, knows the way through this maze. One example is the nonprofit organization he founded, the Creative Commons, which specifies the commercial uses that can be made of works by the participants in the Commons.

Stina Teilmann, in the second chapter “On Real Nightingales and Mechanical Reproductions,” stays closer to the HCA trope (metalepsis?) and gives several examples of HCA’s fairy tales that centered on real versus imitation articles. Her article explores the issue of authenticity in the history of copyright laws in France and Britain. Initially a distinction was drawn between a copy (specific to printing and closely related to the original) and a reproduction (images that are clearly different from the original), but over time the two terms were conflated in copyright law. The Internet comprises the final stage of this conflation, where every copy is an original in itself, with the “same ontological status.” Since copyright law depends on the prohibition of the reproduction of originals, it “cannot cope with the order of sameness on the Internet” (p. 34). Leslie Kim Treiger-Bar-Am’s contribution, “Adaptations with Integrity,” can also be viewed as another facet of the issue of authenticity, since the essay examines one of the so-called moral rights of authors to control changes to their work. The chapter proposes (p. 62) that “modifications to all artforms, and of all types, ought potentially be actionable pursuant to the integrity right.”

In the realm of books, authenticity is frequently linked to the “authorization” of individual writers. Uma Suthersanen examines the way in which authors developed as stakeholders in the quest for an international copyright in the nineteenth century. The expansion of markets on both sides of the Atlantic enabled the emergence of a class of professional writers who lobbied for recognition of international copyrights. Charles Dickens was interested in international copyright and HCA knew Charles Dickens but the skeptical among us might have some trouble in viewing this as per se evidence that HCA was interested in copyright issues of the twenty-first century. Like the central characters in many HCA tales, Fiona Macmillan makes a virtue of necessity and acknowledges upfront that her article comprises “a flight of imaginative fancy” regarding what HCA might have to say about copyright rules today. She concludes by doubting that HCA “would have been sanguine about the picture of cultural homogenization and domination painted above” (p. 101), much less the commodification of culture. Michael Blakeney considers the “propertization of traditional knowledge” with an emphasis on the Australian experience.

Lee Davis, another contributor to this volume, is also concerned about digital cultural goods in the realm of copyright. The final chapter, by Marieke van Schijndel and Joost Smiers, imagines a (presumably better) “world without copyright.” Digital technologies, by “axing the roots of the copyright system,” have made copyright impossible or at least redundant; and for today’s developing countries, intellectual property “is nothing but a disaster” (p. 149). The alternative they propose is a model of usufruct without property rights, a model that might be applied equally to other forms of intellectual property, but they leave the working out of the technical details to a future date.

We may suppose that the editor of “Copyright and Other Fairy Tales” does not literally mean to imply that all claims in this book are akin to fairy tales. Still, as in effective fairy tales, at times the artless reader may be confused about the distinction between the authentic Hans Christian Andersen and HCA, the character created as a projection of the authors’ own views. The lack of recognition of his copyrights “sickened” Andersen; yet Porsdam is hopeful that he would agree with authors of the articles in her book who feel that “copyright is not and should not be considered as ‘property'” (p. 9). (An equally interesting literary exercise might be to assess what Edward Elgar would say about calls for the end of copyright.) As for copyright policy itself, this book is useful in offering several viewpoints, and if none of them is from an economist’s perspective we have only ourselves to blame for not paying more attention to this important subject. Moreover, I did learn the surprising fact that there is actually an HCA story that I have yet to read, called “Auntie Toothache.” Or was that just another abstruse metonym for intellectual property in the twenty first century?

B. Zorina Khan is Associate Professor of Economics at Bowdoin College, a member of the National Bureau of Economic Research, and the author of The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790-1920 (Cambridge University Press, 2005).

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Keynes, Chicago and Friedman

Author(s):Leeson, Robert
Reviewer(s):Samuels, Warren J.

Published by EH.NET (February 2005)

Robert Leeson, Keynes, Chicago and Friedman. London: Pickering & Chatto, 2003. xi + 381 pp. and vii + 534 pp. $325 (cloth), ISBN: 1-85196-767-2.

Reviewed for EH.NET by Warren J. Samuels, Department of Economics, Michigan State University.

I. The Controversy and its Possible Resolution Was there a “Chicago” Quantity-Theory oral tradition, or not; and if so, what was it?

Robert Leeson, of Murdoch University, has collected some fifty contributions to a narrow but intriguing topic in the history of the Chicago School and monetary economics: whether or not, prior to Milton Friedman’s publication in 1956 of his restatement of the quantity theory, there had been (as he claimed) an oral tradition at the University of Chicago of the quantity theory; and, if there was, of what did it consist? Friedman attributed to that oral tradition a model in which the quantity theory was “in the first instance” (vol. 1, p. 1, Leeson quoting Friedman) a theory of the demand for money; indeed, a stable demand for money. Friedman claimed that the tradition was spawned by Henry Simons and Lloyd Mints directly and by Frank Knight and Jacob Viner at one remove. Thirteen years later, Don Patinkin questioned the validity of Friedman’s interpretation of the quantity theory and his “Chicago” version (vol. 1, p. 87). Patinkin identified “The Other Chicago” version thusly: “The quantity theory is, first and foremost, not a theory of the demand for money, but a theory which relates the quantity of money (M) to the aggregate demand for goods and services (MV), and thence to the price level (P) and/or level of output (T); all this in accordance with Fisher’s MV=PT” (vol. 1, pp. 89, 91). After a further twenty-two years Patinkin held that the disagreement was not about “whether or not there was such an oral tradition, but what the nature of that tradition was” (vol. 1, p. 381). Friedman also has modified his position.

Leeson has gathered the important material pertinent to the questions about the Chicago “oral tradition.” He has mastered both that material and the intellectual environment in which the controversy took place, an environment dominated by Keynes’s General Theory. Of the two volumes’ total of 915 pages, some 180-plus pages contain Leeson’s essays on the contents of his four parts: The Initial Controversy, The Debate Widens, How Unique was the Chicago Tradition?, and Towards a Resolution of the Dispute. What does Leeson conclude?

Leeson places a great deal of interpretive weight on Friedman having taken Mints’s graduate course in money and banking (Economics 330) during his first year as a graduate student at Chicago in 1932-33. Leeson has been fortunate in having been given access by Friedman to his notes from Mints’s Economics 330. Leeson notes that “Friedman’s lecture notes are currently in his possession and have not been processed into his archives at the Hoover Institution” (vol. 2, p.515n.1). The next important round may well center on the notes. The course was organized around Keynes’s Treatise, one feature of which was “an increased emphasis on money demand in a revised quantity theory framework” (vol. 2, p. 486).

Additional interpretive weight is placed by Leeson on a private seminar held by graduate students; quite a group, for they included Friedman, Albert G. Hart, George Stigler, Allen Wallis, Kenneth Boulding, and others, as well as a stream of visiting economists.

Leeson concludes:It therefore seems likely that Friedman took the ideas he was exposed to in Economics 330 and used them as an organising framework with which to understand the ‘macroeconomic’ dislocation of the 1930s. If intense student discussion is admissible as an ‘oral tradition’ then Friedman’s assertion has some validity. A version of the quantity theory which was ‘in the first instance a theory of the demand for money’ was apparently ‘a central and vigorous part of the oral tradition’ at Chicago at least among graduate students in 1932-3 (and possibly until the General Theory made Keynes a suspect figure). (Vol. 2, p. 488)

One difficulty with Friedman’s initial position has to do with the concept of an “oral tradition.” Friedman was part of the 1932-33 (and beyond) discussion; the “oral” part of the concept is unobjectionable. But the “tradition” part is highly suspect, on which more below.

A second difficulty is that many different readings were given the Treatise (not unlike the later General Theory), each reading stressing different combinations of variations within a general quantity theory framework. This meant, on the one hand, that a variety of oral “traditions” likely co-existed throughout the discipline and, on the other hand, that some or many of them included significant attention to the demand for money. Leeson stresses the latter: “Friedman’s initial assertion about Chicago uniqueness in this context must now appear unreliable. … It is therefore improbable that the Treatise — with its emphasis on money demand — informed ‘macroeconomic’ discussions in Chicago only. Indeed, Friedman in the preface to these volumes has retreated from his initial assertion about Chicago uniqueness” (vol. 2, pp. 488, 489). In his preface, Friedman begins his defense saying that he early “was baffled … at what all the fuss was about. … very little was at stake.” He then takes, correctly but irrelevantly, the position that if he has been “confused about the origin of the ideas … it would not affect by an iota the validity or usefulness of those ideas.” He concludes that he remains “persuaded that I was the beneficiary of a Chicago oral tradition, but this evidence convinces me that I gave Chicago more credit for uniqueness than was justified. “The issue,” he repeats, “is entirely about the origin of ideas, not about the validity of content” (vol. 1, p. x). Friedman seems to have taken too much for granted; Chicago was no more homogeneous than was the discipline as a whole on the quantity theory.

Leeson is claiming, therefore, only that Friedman’s assertion had “some” validity — in the sense that much “macroeconomic” discussion at Chicago and elsewhere in the early 1930s resembled his 1956 restatement, that “tradition” is too strong, and the uniqueness claim is wrong and must be dropped.

II. Historiographical Considerations

The collection bears on several historiographical considerations.

1. The historical record is uneven. Political history leaves many documents. Social and economic history, until relatively recently, left few lasting markers, but often sufficient indirect evidence to enable imaginative scholars to intuit larger patterns. With only sparse materials bearing on an interpretive problem, historians of thought and others may well find it easy to leap to conclusions. But where one has a vast body of evidence, such leaps seem presumptuous. With sparseness, the world may seem simpler than it actually was; with plentitude, the big, bloomin’ confusion is amply evident. So it is with the problem of the Chicago “oral tradition.”

The existence and content of an “oral tradition” plus our ability to discern them are highly problematical. Until very recently, as historical time goes, the technology to record oral communication did not exist. Even now, absent mechanical recording, the oral, once uttered, no longer endures (vide Adam Smith on unproductive labor). One result is false and/or biased memory.

Clarence E. Ayres, a long-time friend of Frank Knight, was like Knight an imposing and convincing lecturer. It turns out that institutionalists trained by Ayres had different views of institutionalist doctrine (such as the so-called Veblen-Ayres dichotomy) depending on when they sat in Ayres’s classes. There was an oral tradition at Texas centering on Ayres, but for that reason it registered important variations over time. I would expect the same at Chicago, the notable difference being that Friedman, Stigler et alia were more successful.

2. Schools of thought, one surmises, once were loosely and partly non-deliberately and partly deliberately formed. As schools became obvious vehicles for promoting ideas and reputations, they became more highly, if still loosely, organized. Friedman and Stigler, as part of their professional activity, engaged in the role of cheerleader for “Chicago.” Friedman’s claim may well have been an example of the Chicago propensity to promote itself by self-publicizing its beliefs. Stigler was the premier practitioner but rare is the public presentation — e.g., papers given at professional meetings — by a Chicagoan that does not make some claim for the unique brilliance of the Chicago point of view. Leeson aptly quotes Stigler “that it was both ‘true, and necessary to their survival’ that ‘learned bodies are each run by a self-perpetuating inner clique'” (Leeson, vol. 1, p. 296). The twin objectives were the promotion of ideas, a certain definition of reality with which to influence policy; and the quest for power in both the economics profession and the larger world. Such constitutes the deliberate invention of tradition, and the members of the Chicago School have much company, in the world of academic public relations, in constructing suitable advertisements for themselves and their ideas. With the Chicago School on the cutting edge of theoretical development, such promotion is to be expected.

When it comes, therefore, to “Friedman’s motives” — I would prefer “style” — Leeson opines that “If his ‘Restatement’ [of the quantity theory] exaggerated the degree of continuity with respect to earlier Chicago versions of the quantity theory this may have been a rhetorical flourish designed to provide an additional motivational stimulus to his students” (vol. 2, p. 490). True enough, as far as it goes; Leeson has gone further (Leeson 2000a and 2003, both dealing with Friedman’s and Stigler’s struggle for influence). The Stigler-Friedman strategy was directed not only to motivate students but to influence the discipline of economics and its world of policy. That Keynes and others also practiced this strategy (vol. 2, p. 491), enables us to identify and put it into perspective.

Moreover, Friedman’s methodological position served the purpose of erecting his economic theory, here his monetary theory, as the maintained hypothesis under the guise of “predictive power.”

In any event, the quantity theory in any form is no substitute for a comprehensive macroeconomics. There is more to history of the quantity theory than the price level as a function of either the supply of money or the demand for money. There also are several different “monetary theories of production.” There is less to the quantity theory than its devotees often would have us believe. The quantity theory is not alone in deriving its attractiveness from its utility for mobilizing political psychology.

3. Significant differences existed over what is “absolute truth” in monetary economics, whether such existed, and if it did, what it was; over the relative weight to be given to inflation and unemployment as policy goals; over what is “sound” or “proper” monetary policy; and the evaluation of current policies and current events.

Some authors treated the quantity theory as a matter of causal relation and explanation, often differing as to the content and direction of explanation, whereas others saw it as a truism, identity or tautology.

The epistemological nature of much discussion of the quantity theory was mixed. Some of it was theory as hypothesis. Some was comprised of declarative statements without supporting evidence or with carefully constructed evidence. Who is to say which version of the quantity theory is correct? Is there one correct version? What are the criteria of correctness — and the meta-criteria by which to chose from among the criteria, et seq.?

These questions are difficult to answer, for two reasons. First, consider W. H. Hutt’s distinctions between “rational-thought,” “custom-thought,” and “power-thought.” “Rational-thought” is disinterested objective inquiry leading to the accumulation of undisputed social-science knowledge (once class-driven ideology has been removed). “Custom-thought” is modes of thinking infused with implicit premises derived from tradition and customary ways of doing and looking at things. “Power-thought” is modes of thought and expression that are constructed to influence power, politics, and policy, through their service in psycho-political mobilization (Hutt 1990, p. 3 and passim). All three types of thought, especially the latter two, are found in the literature collected by Leeson. Second, inasmuch as no theory, or no version of a theory, can cover all pertinent variables and answer all our questions, correctness by any definition is elusive — especially when various versions of the quantity theory have been adopted to weaken if not destroy the targeted opponent, Keynesian economics. Here, power and persuasion rank well above scientificity (amply developed in Leeson 2000a and 2003).

Economic arguments are used to manipulate political psychology and political psychology is used to manipulate economic policy. Ideology and wishful thinking have relatively easy entry, especially for economists and politicians who favor creation of a certain felicitous picture in the public’s mind as part of the process of creating/manipulating public opinion.

Monetary theory and policy (like many other fields in economics) were characterized by over-intellectualization and economic politics, treated as if conducted cognitively and in sterile environments, whereas they existed in a real world of power play, selective perception, psychology, uncertainty, the quest for wealth and prestige, and efforts to influence the economic role of government. Monetary policy is a function of power, ideology, tradeoffs, power play over the distributions of opportunity, income and wealth. Each model of monetary theory was more or less attractive to particular ideologies and invoked as a weapon in support of policies based on ideology, practical politics, etc.

III. How Different Versions of the Quantity Theory Could Exist

The question of the existence of a Chicago oral tradition and its possible content must confront the variety of forms given the quantity theory. Many individual quantity theorists had their own positions to advance; they had different perspectives, and monetary theory comprised many different considerations on which their different, and changing, perspectives could be brought to bear. Quantity-theory formulations could vary among theorists and each was nested in a larger and variegated model of the money economy. It is impossible to cover all this in a short review but at least the following can be said in abbreviated form.

Sophisticated versions of the quantity theory were possible but because of the vast number of possible complications, advocates were often interested in simple versions easily discussed and taught. The quest for singular explanations of macroeconomic phenomena — real balance effects, sticky or inflexible prices, etc. — was also relevant. Notice the phrases “in the first instance” (Friedman) and “first and foremost” (Patinkin). What, if anything, comes afterward? The problem is, in part, that economists tend to adopt the simplest and most highly stylized versions of their theories, often caricatures of the sophisticated versions held by at least some leading theorists. Advocates were either unaware of the magnitude of possible complications or had their perception thereof narrowed and/or finessed by ideologically driven a priori beliefs, and so on.

The quantity theory exhibited highly variegated content. The quantity theory was ubiquitous. One formulation or another constituted the core of what most individual economists seem to have understood as monetary theory. While the quantity theory was its most conspicuous component, monetary theory included more than the quantity theory. Disagreements centered in part on different versions of the quantity theory using different elements of monetary theory. Ralph Hawtrey’s pure monetary theory of the business cycle had widespread impact for many years. Dennis Robertson, Irving Fisher, John H. Williams, Alfred Marshall, and pre-General Theory John Maynard Keynes, among others, were more conspicuous than any Chicagoan — with the exception of James Laurence Laughlin, who opposed the quantity theory.

It took centuries for the Fisherian and Cambridge versions of the quantity theory to become increasingly the analytical norm. Neither version emerged fully grown. When velocity of circulation (V) is used, attention is drawn to such technical matters as the facility with which the banking system transfers balances between accounts. When 1/K is substituted for V in Fisher’s version, it both resulted from and reinforced attention to the reasons for holding money. What looked to some to involve only a mathematical change, for others now meant that attention was directed to the reasons why people might want to hold money. What we now call real balances (or real balance effect) or liquidity preference was long appreciated and treated as hoarding.

The money economy could be examined in pure abstract terms, independent of monetary, banking and other financial institutions, or with an emphasis on the institutions that helped form and operated through the money economy. Significant disagreements existed as to the nature and substance of fundamental monetary and other macroeconomic processes, the nature and origin of actual monetary and macroeconomic problems, and the solutions to those problems. Considerable confusion results from some economists’ claims that their agenda for government monetary/macroeconomic policy constitutes non-interventionism whereas all other agendas are interventionist.

Major controversies were waged over what is money, the monetary standard, the role of reserves, what commercial banks do, the nature and role of a central bank; fractional reserves and the money multiplier; the Cambridge cash-balance approach, Wicksell’s monetary theory, and so on.

Some work postulated the economy to be fundamentally stable (e.g., through great weight given to Say’s Law); others postulated particular combinations of quantity-theory and business-cycle models. Changes in M could be deemed to affect only changes in P and nominal Y (i.e., T). Changes in Y (or T) could be seen as leading to changes in M and thence in P; or changes in Y (or T) could be seen as leading to changes in P and thence in M. Different supplementary assumptions might lead to changes in the direction of flows of causation or influence. Especially critical was whether an increase in Y (or T) was possible: whereas an increase in M and thence P could lead to an increase in Y (or T) at less than full employment, at full employment an engineered increase in M could not lead to an increase in real Y (or real T).

Much work seemed directly or indirectly influenced by monetary and banking arrangements existing within some form of gold standard. A monetary system predicated upon gold meant that changes in either gold or money meant a change in the other and in the price level. Currency and credit could be treated differently (as was done by Fisher, for example), influenced by differences in view of specie, paper and bank balances.

The relation of reserves to M could vary, as could the money multiplier, reasons for holding money or spending on consumer and/or capital goods, the respective roles of commercial banks and central banks (including targets), the relation of interest rates to the quantity theory variables, neutral versus non-neutral money, and so on.

Friedmanian monetarism — to the extent it can be meaningfully generalized — proposed that the private sector is stable, or would be stable in the absence of monetary and fiscal policy; that changes in the supply of money, vis-a-vis a stable demand for money (expectable in a stable economy) lead to changes in the interest rate and, especially, the price level; that changes in the supply of money generate changes in spending; that prices are generally flexible; and that vis-a-vis all other factors only money matters or money matters most (hard versus soft monetarism). The Keynesian fiscalist alternative — to the extent it too can be meaningfully generalized — proposes that the private sector is unstable, and that government can reinforce this instability, introduce its own instability, or counter instability; that changes in spending are governed by more than changes in the supply of money; that changes in the supply of money are the consequence, not the cause, of changes in spending — in part, the supply of money is a function of the demand for money; prices are generally inflexible; inflation is largely or typically a function of aggregate demand increasing beyond the full employment level; that increases in the supply of money can generate inflation but changes in the supply of money are not the critical factor governing changes in spending; that price-level instability is not the only monetary/macroeconomic problem, because full employment is not guaranteed and the supply of money is key to neither the price level nor the level of real income.

In addition, the two schools — monetarism and fiscalism — identify different transmission processes applicable to changes in the supply of money leading to increased spending. The fiscalist argues that increases in the supply of money are endogenous, resulting from increases in the demand for money by borrowers in order to spend more, and that the increases in the supply of money limit increases in interest rates (generated by the increased demand for money) and thereby increases investment and income. The monetarist argues that increases in the supply of money are exogenous (generated by the central bank), leading to excess money balances which leads to greater spending, to return monetary balances to desired levels. The differences turn on whether the increases in the supply of money are endogenous or exogenous, whether the increased supply of money is felt through the lowering of the interest rate or the creation of excess balances, and whether a stable economy and a stable demand for money is a suitable or a utopian premise.

Furthermore, modeling the demand for money is no simple matter. Even putting aside (and there is no conclusive reason to do so) the fiscalist-Keynesian model of transaction, speculative and precautionary motives, the monetarist demand for money has been modeled differently by different people and even by Friedman himself. The demand for money most generally is said to be a function of permanent income, wealth, price level, expected rate of inflation, and liquidity preference; more narrowing, it is a function of permanent income, wealth, and price level, all felt by Friedman to be relatively stable in the short run (i.e., if the economy is left to run well on its own), plus the interest rate.

Anyone not permanently wedded to either monetarism or fiscalism likely might consider a much more complex interplay of monetary and spending variables and relationships, including structural and expectational factors. Keynesian fiscalism is likely more capable of encompassing a wider range of variables than is the quantity theory. A major point, however, is that there are a multitude of possible complex interplays of all such variables, relationships and factors. An even more important general point is that all of the foregoing constitutes the social construction of economic theory. The argument over the content of the Chicago oral tradition is part of that process. Only in part is the argument a controversy about the actual economy. It is primarily, albeit not solely, a quest for a theory with which to successfully challenge Keynes and fiscalist economics and its policies. In very large part, the argument is about the control of government policy. It is the quest to define and then to enlist a Huttian custom-thought in the service of a Huttian power-thought. The quest for power and control over policy thus drives economic theory (a quest that pervades Friedman’s work; see Samuels 2000; Leeson 2000a and 2003).

The question thus arises as to whether the quantity theory — in whatever form — is itself (1) a definition of economic reality, (2) a tool of analysis with which to investigate economic reality or (3) an instrument of rhetoric with which to mobilize and manipulate political psychology. For example, Leeson says that James W. Angell (who taught Friedman monetary theory at Columbia) “used the quantity theory to advance the proposition that the principal cause of unemployment was ‘excessive variations in the volume of bank credit.’ Angell also prefaced his analysis with a statement about his preference for ‘planned economies …'” (vol. 1, p. 290). Economists of my generation will recall how Samuelson and Friedman, in their televised debates in the 1960s, each invoked aggregate demand and the supply of money; but Samuelson had changes in aggregate spending drive changes in the supply of money, whereas Friedman had changes in the supply of money drive changes in aggregate spending. More is at stake than a conflict about direction of causal flow, just as when advocates of both under-consumption and over-investment theories of the business cycle pointed to the same data to prove their case: unsold goods.

Perusal of several standard reference works confirms the foregoing argument that the quantity theory is not something given but a matter of social construction, a work in progress, and thus characterized by multiple specifications and interpretations. The entry in the Elgar Companion to Classical Economics indeed opens with the caution One of the conclusions drawn by Hugo Hegeland … from his thoroughgoing study of the historical development and interpretation of the quantity theory of money was that “the interpretation of the quantity theory shows almost as many variations as the number of its interpreters.” This assertion is hardly an exaggeration and even after half a century of further intensive research in this field it is probably as valid now as then. … the theory is like a chameleon. From the outset writers on the subject have understood [the] quantity theory of money to mean sometimes very different things …” (Rieter 1998, p. 230)

Why should the Chicago tradition, oral or otherwise, be different?

The opening of the entry in the Penguin Dictionary of Economics asserts that the theory states the relationship between the quantity of money and the price level. The entry goes on to mark the importance of what is or is not assumed, and says of Friedman that the theories of the demand for money, “based on a quantity theory of money approach, do not differ a great deal from the theories based on the Keynesian framework” (Bannock, Baxter and Rees 1972, p. 339). Is the Chicago tradition, a la Friedman, different (from Keynesian treatments)?

The Routledge Dictionary of Economics has Friedman reviving “interest in the [quantity] theory by expounding it as a theory of demand for real balances” (Rutherford 1995, p. 379). The MIT Dictionary of Modern Economics has the theory be one of the demand for money, saying that it “formed the most important component of macroeconomic analysis before Keynes’ General Theory …” (Pearce 1992, p. 356).

A careful reading of all the cited reference works will reveal different positions on whether full employment is an assumption or a conclusion, what else has to be assumed, and so on.

At least one reference work indicates how far the rationality assumption has come in monetary theory: “The underlying premise of the basic quantity theory is that no rational person holds money idle, for it produces nothing and yields no satisfaction,” adding some pages later, “that is, people demand money only for transaction purposes” (Johnson, Ley and Cate 1997, pp. 518, 525). These authors also write that “In the area of policy it would be easy to exaggerate the differences between the Keynesian and monetarist positions. … However, in general, the notion of policy ineffectiveness as elaborated and expanded over the past 30 years by Friedman and others may represent the monetarists’ greatest challenge to the Keynesian heritage. For good or ill, it is an opinion which has come to enjoy considerable support. Moreover, whether monetarism and the modified quantity theory represents a theory of money at all, or a monetary theory of trade and the business cycle, is an open question, one that in part depends on one’s macroeconomic perspective, of which they are certainly a number in fashion” (idem, p. 525). The Chicago tradition, oral or otherwise, is not alone in its attitude of pushing its perspective.

This book must be read, therefore, with cognizance of its elusive background. If a reader is tempted to agree with some statement made by an author included in Leeson’s collection, that reader must ask, on what narrowing premise(s) does this statement rest? The hermeneutic circle is involved between orienting perspective and conclusionary position. However, I am also convinced that my stricture about the hermeneutic circle is and must be self-referential.

IV. A Contribution to the Resolution of the Dispute

Mints was not the only instructor in Economics 330. In volume 23-C (2005) of Research in the History of Economic Thought and Methodology, I am publishing F. Taylor Ostrander’s notes from Charles O. Hardy’s course in Economics 330 given in 1933-34, the next academic year following Friedman’s enrollment in Mints’s course. The notes indicate that Hardy discussed the work of Hawtrey, Frederic Benham, Fisher, Keynes and Laughlin and suggest that the demand for money was part of the course but by no means as central as the notion of an oral tradition centering on the demand for money would have it be.

At the time Hardy taught the course taken by Ostrander during 1933-34, Friedman was a fellow student, and monetary economics was represented by Melchior Palyi and Lloyd Mints as well as Simon, Viner and Knight, in addition to Hardy. Hardy was clearly a leading student of monetary policy. Though apparently not regarded as a leading monetary theorist, he evidently knew his theory, as he easily grounded policy in theory and was respected for his contributions to policy analysis.[1] Each of the Chicago economists specializing, at least in part, in monetary economics went his own way, concentrating on some combination of what interested them and what they considered important. Peering over all their shoulders was the well-known anti-quantity theory orientation of the long-time chair of the Department of Economics, Laughlin.

Among Ostrander’s notes are the following statements:

  • The quantity theory is a truism …
  • For Fisher — V was fixed, any change in M forces a corresponding change in P.
  • T being unchanged — the habits of the people with respect to the money they will hold being unchanged — the Keynes formula is convertible into the Fisher formula.
  • Hardy has a preference for a commodity standard, but can not find a suitable commodity. – Even such a commodity theory would not invalidate the Quantity Theory. – Laughlin’s doctrine is essentially that of the 19th century English “Banking School;” the Quantity Theory is that of the “Currency School.”

The following are Ostrander’s notes bearing on the demand for money:

Problem of the Value of Money

  • Money defined by means of its functions – Classical theory emphasized medium of exchange — brings up turnover. But if exchange were always instantaneous, there would not be much need for money — it is not instantaneous. * Thus the function of money as a store of value. – Suspended purchasing power. – Where the real demand for money comes from. * The classical approach does not allow of any good connection between value theory and monetary theory. – Distinction between this use of money and hoarding is only one of degree. [In margin: “?”]

Big changes in prices over short periods are never the result of changes in the supply of money or the supply of goods — but of changes in the demand for money (or goods).

The prospect of a decline in value of money does not of itself overcome the desirability of money as a liquid factor in unsettled conditions. * Liquidity attained by holding goods — expecting price rise — attained by holding money — expecting price fall. – Why is it that people are still speculating on a price fall? The issue is whether the strongest government in the world is strong enough to devaluate its own currency. * Governments can raise prices by issuing greenbacks or by issuing bonds. – [Greenbacks] may be held as an investment — hoarded – no change in prices. – Bonds may be held as investment-no change in prices. – I.e., both bonds or money may be spent, and may be held as investment — only difference between gold and bonds is one of degree.

- Keynes assumes hoards to be unchanged if the demand schedule for hoarding remains unchanged. (Hardy, Hayek, Robertson had assumed the quantity of hoards to be unchanged.) – Thus there is a change in velocity.

This is Wicksell’s theory. Keynes enlarges it, saying it would be true only in a barter economy. In a monetary economy, there are 3 variables. The willingness to save, the willingness to borrow to produce new capital, the relative attractiveness, as a store of value, of monetary funds and of other investments. * Savings made by purchase of new securities, or hoarding. * Investment made by borrowing from investors, or drawing on investors’ hoards. – Equilibrium requires I = S, also — demand for cash balances to be in equilibrium to [sic: with] demand for securities.

Economics 330 was not the only monetary course given at Chicago. Taylor Ostrander also took Economics 332, Monetary Theory, from Melchior Palyi during his year in residence at Chicago. His notes from the class are published in Archival Supplement 23-B (2005). Among conclusions stated in my introductory comments are these: One facet of the lectures is Palyi’s general attitude toward the quantity theory, indeed substantially all monetary theory, as a theory of control. The aspect of quantity theory discussion that loomed so large, namely, automaticity, especially after World War Two, when the quantity theory (properly applied) was lauded as the non-interventionist alternative to Keynesian fiscal and monetary policy, is subdued, but not altogether absent.

Another is the evident variety of ways in which the quantity theory was operationalized, i.e., how M, V, and T were conceptualized and handled. This also contrasts somewhat with post-War usage, when the policy choices, hence exercise of control, latent in the different versions would have been conspicuous — though eclipsed by the lauded automaticity, even though conservatives like Frank Knight pointed out the inevitable non-automatic, non-rule, elements of administering the quantity theory.

Among other things we read that the quantity theory was * A form of approach to supply such as set forth by Bodin and Davenant. * Value of money not a function of demand, but of factors such as velocity, interest rate, or, if ruled by demand, then demand is ruled by something else.

More recently came * Marshall, Fisher [indecipherable words] – Renewed the old control approach, and united it with the Neo-Nominalist approach. – Then came in Keynes, Robertson, Pigou, Fisher. * Velocity stressed — (l’enfant terrible of previous monetary theory) becomes center of interest. – Reformulation of quantity theory in light of Velocity. – Dozens of reformulations due to differ concepts of velocity. – Changes in it, measurement, causes. * Does velocity have a life of its own — or is it a function of other things, or a constant. * Most difficult to approach from statistical, descriptive or theoretical points of view.

Earlier * The old quantity theory approach looked to money and goods (asked or assumed which is variable which is independent). * The new quantity theory looks to the ratio of savings and investment. – First appeared in a paper of Jevons, in [18]70’s.

Generally, Two types of Quantity Theory: (1) Mere functional relationship; algebraic * A formal expression for the demand for money (Pigou). * On one side is money, on the other side is the physical aspect — no causal explanation. [Single vertical line alongside in margin from (1) to here] – Banking School — there can not be an excess or deficiency of money. Price level is influenced by physical side only. (2) An explanation of the cause of exchange.

On the demand for money, we find the following:

The demand for money. * The “Banking School” of Thought — but underlies the “Currency School” too — the difference between them is on another line. * The velocity of circulation is a passive factor, or a non-changing factor. * Cost of production theory of value of metals, and of money generally. * In case of paper money, it substitutes some psychological factor for quantity — or considers quantitative changes a result of psychology. * Policy of this approach is “sound banking based on commercial paper” –“automatic control.”

This approach is more developed by businessmen than by scientists. * Men of not-systematic methods, bankers. – Tooke — descriptive, not abstract. – Adolph Wagner (Germany) – Laughlin (U.S.) — never tried to be systematic. [“!” to left of name]

This approach became that of the 19th century up to the War. * In spite of Marshall and others. * Bankers and Central Bankers wouldn’t listen to any others. * Keynes (Indian Monetary Policy — 1912) * Robertson (Industrial Fluctuation, 1915) [Bracket connects the two lines, Keynes and Robertson, with arrow pointing to next line.] – Both, at this early date, had tendencies more to the anti-quantitative than to quantitative approach. – Mill — could approach the transfer problem from an entirely different point of view from his approach to bank credit — foolish.

Writing about the Banking School, * Money a matter of quantity which can be regulated by control of its quantity by issue. – By affecting demand for money by: – Discount rate – Open market operations – Public works (governments).

As for Adam Smith, * Implies (by not discussing it) a constant elasticity of demand for money.

We also read * In the single country, value of money is based on interaction of supply of and demand for money.

There is more but altogether what is shown (1) indicates more or less conventional attention to the quantity theory as the core of monetary theory and (2) does not indicate a distinctive Chicago approach centering on the demand for money, a claim no one now seems to be making. The earlier negative position of Laughlin has fallen prey to the selective memory of any oral tradition (Friedman wrote the entry on Laughlin for The New Palgrave). Laughlin, who opposed the quantity theory, was chair of the Department of Economics for many years and was a conspicuous person in the profession. Any complete rendition of Chicago “tradition” presumably would have to include his anti-quantity theory position. Perhaps he was an embarrassment treated largely in silence. Mints may or may not deal with his view; Palyi seems to deal with it only in passing. And Friedman seems not to, as well. He is too busy inventing what he wants that tradition to be.

In partial summary, therefore, Leeson is correct that no oral tradition existed at Chicago by 1932-33 with the substance initially identified by Friedman. If one clearly existed (and it is not certain that one did), it likely was different from and more complex, and likely more ambiguous, than what Friedman proposed. And surely the conversation of one year’s graduate students, by itself, is no “oral tradition.” As Leeson shows, they most certainly did not all agree on issues, though this was the framework that they, and Mints, apparently employed to inform their arguments. Graduate students discussed “macroeconomic” issues using a framework that was in some ways similar to Friedman’s 1956 restatement. Friedman’s assertion only has “some validity” if “intense student discussion is admissible as an ‘oral tradition’…” Friedman’s assertion has more validity than Patinkin gave it credit for, but calling it a “tradition” vastly overstates the case (see Leeson 2000b). Both Friedman and Patinkin exaggerated their case. Friedman was a polemicist who sought influence; Patinkin was an historian whose framework was losing influence. There was an element of justification for Friedman’s assertion — he had not invented it in the 1950s, as some detractors suggested. “Traditions” are potent rhetorical devices, and Friedman sought to make the most of this rhetorical device to serve his counter-revolution.

Note:

1. Robert Dimand comments in re Hardy as follows: “With regard to F. Taylor Ostrander’s notes on Charles O. Hardy’s lectures in Economics 330 (graduate money and banking) in 1933-34, I suspect that Hardy (whose maintained a Chicago connection even though he was primarily at Brookings) was central to bringing Keynes’s Treatise on Money into Chicago monetary economics. Hardy reviewed the first volume of Keynes (1930) in AER (1931) and wrote a review-article in JPE (1931) about the second volume. Hardy was a particularly enthusiastic and perceptive reviewer of TM (perceptive enough that his enthusiasm did not extend to the “fundamental equations”), so if demand for money entered Chicago monetary economics from TM, Hardy’s lectures may well have been the conduit. In addition, Keynes had expounded the central message of TM at the University of Chicago in three Harris Foundation Lectures on “Economic Analysis of Unemployment” in May and June 1931.Chicago was not isolated from such British developments: Sir William Beveridge presented what became Part II of his Unemployment: A Problem of Industry, 1909 and 1930 (1930) as a series of lectures at the University of Chicago in autumn 1929.”

Dimand continues, saying, “Another stimulus at that time would have been Irving Fisher’s Theory of Interest (1930). Hardy’s review of TM chided Keynes for misunderstanding Fisher’s real/nominal interest distinction, and Frank Knight’s 1931 JPE review-article shows that Fisher (1930) received attention at Chicago (although Knight concentrated on Fisher’s real rate analysis). McCallum and Goodfriend, in their New Palgrave article on money demand, identify (as Patinkin did) Fisher (1930, p. 216) as the first unambiguously correct statement of the marginal opportunity cost of holding money.” (Dimand to Samuels, January 13, 2005)

References:

Graham Bannock, R. E. Baxter, and R. Rees, 1972. The Penguin Dictionary of Economics, Hamondsworth, pp. 338-9.

L.E. Johnson, Robert D. Ley, and Tom Cate, 1997. “Quantity Theory of Money,” in Thomas Cate, Geoff Harcourt, and David C. Colander, editors, An Encyclopedia of Keynesian Economics, Cheltenham, UK: Edward Elgar, pp. 517-526.

Robert Leeson, 2000a. The Eclipse of Keynesianism: The Political Economy of the Chicago Counter-Revolution, New York: Palgrave.

Robert Leeson, 2000b. “Patinkin, Johnson, and the Shadow of Friedman,” History of Political Economy 32, no. 4, pp. 733-763.

Robert Leeson, 2003. Ideology and the International Economy: The Decline and Fall of Bretton Woods, Basingstoke: Palgrave Macmillan.

David W. Pearce, editor, 1992. The MIT Dictionary of Modern Economics, Cambridge, MA: MIT Press, pp. 356-7.

Heinz Rieter, 1998. “Quantity Theory of Money,” in Heinz D. Kurz and Neri Salvadori, editors, The Elgar Companion to Classical Economics, Cheltenham, UK: Edward Elgar. Volume 2, pp. 239-248.

Donald Rutherford, 1995. Routledge Dictionary of Economics, London: Routledge, p. 379.

Warren J. Samuels, 2000. Review of Milton and Rose D. Friedman, Two Lucky People: Memoirs. Chicago: University of Chicago Press, 1998. Research in the History of Economic Thought and Methodology 18A, 2000, pp. 241-252.

Warren J. Samuels is Professor Emeritus at Michigan State University. He is working on the use of the concept of the Invisible Hand in economics. He acknowledges with thanks comments on an earlier draft by Robert Dimand and Robert Leeson.

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Technological Change and the Evolution of Corporate Innovation: The Structure of Patenting, 1890-1990

Author(s):Andersen, Birgitte
Reviewer(s):Khan, B. Zorina

Published by EH.NET (July 2001)

Birgitte Andersen, Technological Change and the Evolution of Corporate

Innovation: The Structure of Patenting, 1890-1990. Cheltenham, UK: Edward

Elgar, 2001. viii + 285 pp. $90 (cloth), ISBN: 1-84064-121-5.

Reviewed for EH.NET by B. Zorina Khan, Department of Economics, Bowdoin

College.

The research in this book is dedicated to the proposition that technological

change is best treated from an “evolutionary system perspective.” This

perspective raises “the difficult questions about what is it which constitutes

a distinct unit of membership, and what the processes are which create the

changing structure of this membership, and which explain how systems emerge,

grow, decline and disappear.” It also “applies a capability perspective to the

dynamics of industries, in which the industry systems’ populations are derived

from the changing distribution of capabilities of firms within industries,

participating in the generation and exploitation of the common knowledge

bases. This latter competence bloc view on systemic change is taken from one

of the most comprehensive attempts to investigate the systemic aspects of

innovation and competition at the microeconomic level, and which is provided

by Eliasson (1997) and colleagues” (p. 13).

The analysis is based on a data set of patents filed in the United States

between 1890 and 1990. Most scholars who use these data issue the caveat that

patents provide an imperfect index of inventive activity (since many

inventions are not patented), and a quite poor measure of innovation (since

few patents result in the commercialization of the underlying invention). This

is especially true in the modern period, because firms have tended to

appropriate returns through other means than property rights in patents.

Birgitte Andersen (Senior Lecturer, Department of Management, Birbeck College,

University of London) instead contends that previous research supports the

view that the propensity for corporations to patent is between 66 percent and

87 percent, and that “40% to 60% of total patent applications actually

progress to innovations” (p.20). Given these assumptions, the author proceeds

to analyze stocks of patents in order to draw conclusions about the nature of

technological innovation during the past century. Moreover, it is “argued that

patent data can serve as a proxy for accumulated technological impact or

socio-economic importance” (p. 25).

The data are organized in terms of technology classes. Based on this measure,

technology appears to progress in terms of small incremental improvements

instead of large fluctuations or discontinuous waves of creative destruction.

Technological change seems to have become more complementary and interrelated

over time. Contagion models are commonly used to examine the diffusion of new

products and technologies, and other studies have found that the pattern of

commercialization follows an S-shape. The book devotes one chapter to fitting

logistic curves to the accumulated patent stocks, and presents forty-four

graphs of the results for the various categories as well as twenty pages of

tabulated information on the properties of the associated cycles, which

confirm the logistic fit.

Time series analysts tend to speculate about the existence of long cycles or

waves in innovations by grouping key or basic applications of technology.

Andersen focuses on takeoffs in patents accumulated over time. She identifies

a wave between 1926-1934 associated with chemical technologies, and electrical

and mechanical inventions; a second wave between 1957-78 for chemical,

electrical, mechanical and transportation patents; and a third currently

underway in pharmaceuticals and biotechnology, electrical devices, and

mechanical technologies. For instance, the interwar chemical industry was

propelled by patented discoveries relating to distillation, coal and petroleum

products, and bleaching and dying; whereas the postwar period was noted for

chemical patents in synthetic resins and fibers, photographic chemistry, and

agricultural chemicals. (On the other hand, she finds no takeoffs in the

patent records for the periods between 1934-1947 and 1977-1985.) These

takeoffs tend to be introduced in the industrial area that is closest to the

particular technology, although over time this pattern appears to have become

attenuated because patents have become more interrelated.

At the firm level, the book categorizes some 284 large corporations in

existence between 1930 through 1990 in terms of their status as technological

followers or leaders and their degree of specialization in the fastest growing

fields of patenting. The author tracks changes in status over time, and argues

that firms do not readily develop capabilities in new areas. When there are

radical changes in technology former leaders lose standing although their

advantage is not completely eroded. The following chapter explores a data set

that includes “corporate technological top-leaders and largest contributors,”

such as Philips, Corning, Dow, and Chrysler. The patterns suggest that the

degree of concentration in technological leadership has fallen over time, and

declined most rapidly during periods when the growth in patent stock was

highest. Since only a few specific examples are sketchily discussed to

illustrate the process, the mechanisms that account for the prevalence of

statis, path dependence or change within corporations remain unclear.

In the final chapter the author’s overall conclusions are outlined in special

boxes and labeled as “Stylised Facts” I through XXI. These include insights

such as “some trajectories are more likely to be followed than others”

(Stylised Fact II), and “the innovative and competitive landscape underpinning

the dynamics of firms within industries is constantly changing” (Stylised Fact

XIII). Some of these Facts look very similar to each other (X and XXI, for

instance.) They are further clarified by explanations in the following vein:

“although technology develops over a broad complex technological front, some

technologies within the broad system are in the forefront or at takeoff at

certain times, and other technologies at other times” (p. 251).

The price of this book is $90, so it is difficult to understand why the

publisher appears to have economized by not employing an editor. This is the

only way one can reasonably explain the numerous grammatical and spelling

errors, logical non sequiturs, inaccuracies, misquotes, opaque prose, and

prolific use of jargon that clutter almost every page. According to the book

jacket, the potential audience for this book includes economists, historians

of technology, students, business analysts and policy makers. In reality the

market is most likely limited to libraries with porous budget constraints.

B. Zorina Khan is Assistant Professor, Department of Economics, Bowdoin

College. She has most recently published “‘Not for Ornament': Patenting

Activity by Women Inventors,” Journal of Interdisciplinary History,

Fall 2000; and (co-authored with Kenneth L. Sokoloff) “The Early Development

of Intellectual Property Institutions in the United States,” Journal of

Economic Perspectives, Fall 2001. She is the author of a book on the

economic history of patents and copyrights (forthcoming, Cambridge University

Press).

Subject(s):History of Technology, including Technological Change
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Inventing Ourselves Out of Jobs?: America’s Debate over Technological Unemployment, 1929-1981

Author(s):Bix, Amy Sue
Reviewer(s):Zieger, Robert H.

Published by EH.NET (September 2000)

Amy Sue Bix. Inventing Ourselves Out of Jobs?: America’s Debate over

Technological Unemployment, 1929-1981. Studies in Industry and Society.

Baltimore and London: Johns Hopkins University Press, 2000. x + 376 pp.

Illustrations and index. $45.00 (cloth). ISBN 0-8018-6244-2.

Reviewed for H-Business and EH.NET by Robert H. Zieger, Department of History,

University of Florida.

Men (and Women) at Work?

Inventing Ourselves Out of Jobs? is an able and lucidly written account

of the ongoing debate in the United States over the effects of technology on

employment. Drawing on a wide range of published materials as well as on

corporate, labor, and governmental archives, Amy Sue Bix traces in rich detail

the views of three generations of policy makers, labor leaders, engineers, and

business executives to come about the relationship between expanding

productivity and the availability of jobs. A notable feature of the debate has

been the absence of a definitive empirical method for weighing the impact of

technology on employment. Thus, over the seventy years covered in the book

(which deals with developments over the past twenty years as well as with the

period indicated in the title), celebrants and critics of workplace technology

have tended to make the same arguments, often with the same rhetorical

embellishments. According to corporate leaders, engineers, and other partisans

of labor-saving technology, expanding production inevitably lowers prices,

increases consumption, and boosts employment. Labor leaders, social critics,

and troubled politicians, on the other hand, have focused technology’s role in

work force reduction and have argued that promises of long-term growth in job

opportunities have proved unduly optimistic or even illusory.

In Bix’s telling, however, virtually no one called for an end to technological

advance. Laborites, for example, have accepted and even celebrated

technology-facilitated productivity gains, arguing only that workers should

share in them through shorter hours, higher wages, and greater voice in the

actual implementation of new workplace regimes. Three generations of labor

leaders, from William Green and John L. Lewis in the 1930s through Walter

Reuther in the 1950s and John Sweeney currently have repudiated Ludism,

confining their critique of job-related technology to advocacy of

worker-friendly regulation, job training, and the passing on of productivity

savings to workers and consumers. Critical of the blithe optimism of corporate

spokesmen and their scientific and engineering allies that productivity gains

lead inexorably to expanded (and enriched) employment opportunities, even those

most troubled by job loss have accepted the inevitably of continuous workplace

transformation.

Employers have dismissed concerns about job loss, although often in a

defensive idiom. Equating technological advance with progress, and, in turn,

a commitment to progress with national identity, corporate leaders and their

scientific allies have painted a bright new world of abundance and ease.

Rejecting calls for public intervention in the development and application of

labor-saving devices, business leaders such as Henry Ford and machine-tool

innovator John Diebold acknowledged that inevitably some workers would be

displaced and might suffer local and temporary hardships. But the advantages

of expanded production and its concomitant proliferation of consumer goods far

outweighed these minor side effects. Popular writers and editorial cartoonists

might depict soulless robots and inexorable machines spitting out superfluous

unemployed workers as well as appliances and amenities, but resistance to the

machine was in fact ignorant, self-defeating, and even unpatriotic. “Workplace

mechanization,” writes Bix in summary of industrialists’ views, “represented

the inevitable, the only possible way to attain national success.” (166-67).

She quotes economist Benjamin Anderson: “on no account,” declared this banking

analyst of the 1930s, “must we retard or interfere with the most rapid

utilization of new inventions.” (166)

The debate over technology and unemployment has waxed and waned since the onset

of the Great Depression. It raged most fiercely during the 1930s, when

joblessness rose to catastrophic proportions. During World War II, full

employment and military needs dampened it. It re-emerged, now stimulated by

early computerization and other forms of electronic replication, during the

prosperous era of the 1950s and early 1960s, with labor leaders such as Walter

Reuther calling attention to the problem of lingering unemployment amidst

otherwise bright economic prospects. Congressional hearings in 1955 on what

was now called “automation” demonstrated that even during good times, the

specter of worker redundancy walked hand-in-hand with the promise of a brave

new consumerist world. By the late 1970s and into the 1980s, of course, the

computer revolution raised these issues in a new idiom, although corporate

down-sizing, globalization, and widening income disparities have tended to

merge discrete apprehensions about technology’s adverse effects with broader

concerns about job security and living standards.

Bix touches on a wide range of industries and employment situations in

surveying the technology-vs.-unemployment theme. Drawing on TNEC and WPA

studies, she examines the experiences of telephone operators, musicians, steel

workers, coal miners, and railwaymen buffeted by the demands of new

technologies in the 1930s. In the 1950s and 1960s, it was the turn of

packinghouse workers, longshoremen, clerical workers, and electrical workers.

Unions attempted various strategies in an effort to cope with mechanical

displacement. In the 1930s, the musicians union, faced with the substitution

of recorded music for live orchestras in movie houses, launched a massive

public relations campaign, hoping futilely to stimulate an outraged public to

demand live music. In the 1950s, the West Coast Longshoremen’s Union followed

an opposite course, capitulating to what its leaders regarded as the inevitable

inroads of containerization while securing for its existing membership generous

severance and manning reduction payments.

Bix’s account of the protracted and continuing debate over technology and work

is enlivened by frequent references to popular literature and films. In

addition, drawings and cartoons, some hailing the brave new future of a

worker-less future, others depicting with grim foreboding the social chaos sure

to afflict hapless displaced workers, give the debate vivid expression.

Inventing Ourselves Out of Jobs? also brings to attention governmental

efforts in the 1930s, primarily through studies conducted by the Works Progress

Administration and testimony offered at the Temporary National Economic

Committee congressional hearings, to establish an empirical basis for weighing

the impact of industrial technology on employment. The latter chapters ably

survey a wide range of opinion drawn from more contemporary sources, attesting

to the continuing pertinence of concern about the relationship between

employment and technology.

Inventing Ourselves Out of Jobs touches on but explores only briefly a

number of key themes that the general subject would seem to entail. The book

is more of a history of discourse about employment and technology than it is a

social history of the subject. Thus, themes of gender and, especially, race

receive only brief explicit exposition, for example. The social context in

which employers and engineers devise and implement labor-saving devices

likewise is only glancingly dealt with. Thus, for example, some observers have

argued that rapid mechanization of labor- intensive departments in metal

working, paper making, and meat packing after World War II represented less a

technological imperative than an effort on the part of employers to curtail

African American employment in operations that had proven unusually susceptible

to worker militancy and trade union pressure. This is not an issue that

captures Bix’s attention, however.

Likewise, Bix invokes but never quite explores in detail the implications of

the consumerist justifications to which employers increasingly turned in

justifying their resort to labor-saving measures. In 1951, Fortune magazine

published a special edition titled “USA-The Permanent Revolution,” boldly

proclaiming that mass affluence and its attendant consumerism constituted the

real revolution of the 20th century. In the 1960s, social critics such as

Herbert Marcuse, Charles Reich, Paul Goodman, E. F. Schumacher, and Christopher

Lasch-none of whom receives mention in Inventing Ourselves Out of

Jobs?-expressed the reverse of this kind of celebration of material plenty,

which in corporate America’s view depended on continuous technological

innovation. In a sense, competing visions of America centering on consumerism

(and, thus, technology) are the modern echo of the 18th century debate between

adherents of the civic republic and partisans of a commercial republic.

Implicit also, but underdeveloped in the book, is the question as to whether

work can remain an adequate vehicle for the social identities that before the

Great Depression it conveyed. Many of the jobs that Americans hold today are

far removed from productive enterprise, at least as it has traditionally been

understood. Technological advance and productivity gains have made it possible

for televangelists, day traders, and historians to flourish. Why these

particular occupations should attain public certification while other kinds of

non-productive employment languish or are suppressed is a question of culture

and politics, not one of technology per se.

Bix suggests rather than asserts her own sympathies. Her prose comes alive

when she exposes the fatuities and excesses of technology celebrants while

taking on a more troubled and somber tone when exploring the plight of the

displaced and dissident. Her dismay with those who equate America’s purposes

and promises with technological progress and consumerist indulgence is evident,

although never strident. She seems reluctant to concede that ordinary people

might have benefitted from technological innovation and at times flirts with

nostalgia for the good old days of man-killing coal mines and lethal railroad

work. Even so, Inventing Ourselves Out of Jobs? is a useful survey of

the ongoing debate over the relationships between technology and work in the

modern United States.

Robert Zieger has worked extensively in the fields of American labour history

and twentieth century history. His latest book is America’s Great War: World

War One and the American Experience, Rowman & Littlefield, 2000.

Subject(s):History of Technology, including Technological Change
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII