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Manufactured and Natural Gas Industry

Christopher Castaneda, California State University – Sacramento

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

Manufactured Gas

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

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

Rembrandt Peale in Baltimore

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

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

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

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

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

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

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

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

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

Challenge from Electric Lighting and Consolidation

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

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

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

Natural Gas

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

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

1920s: Development of Southwestern Fields

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

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

Pipeline Advances

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

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

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

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

Samuel Insull

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

Federal Regulation

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

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

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

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

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

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

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

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

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

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

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

The Future

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

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

References:

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

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

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

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

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

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

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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The Dust Bowl

Geoff Cunfer, Southwest Minnesota State University

What Was “The Dust Bowl”?

The phrase “Dust Bowl” holds a powerful place in the American imagination. It connotes a confusing mixture of concepts. Is the Dust Bowl a place? Was it an event? An era? American popular culture employs the term in all three ways. Ask most people about the Dust Bowl and they can place it in the Middle West, though in the imagination it wanders widely, from the Rocky Mountains, through the Great Plains, to Illinois and Indiana. Many people can situate the event in the 1930s. Ask what happened then, and a variety of stories emerge. A combination of severe drought and economic depression created destitution among farmers. Millions of desperate people took to the roads, seeking relief in California where they became exploited itinerant farm laborers. Farmers plowed up a pristine wilderness for profit, and suffered ecological collapse because of their recklessness. Dust Bowl stories, like its definitions, are legion, and now approach the mythological.

The words also evoke powerful graphic images taken from art and literature. Consider these lines from the opening chapter of John Steinbeck’s The Grapes of Wrath (1939):

“Now the wind grew strong and hard and it worked at the rain crust in the corn fields. Little by little the sky was darkened by the mixing dust, and carried away. The wind grew stronger. The rain crust broke and the dust lifted up out of the fields and drove gray plumes into the air like sluggish smoke. The corn threshed the wind and made a dry, rushing sound. The finest dust did not settle back to earth now, but disappeared into the darkening sky. … The people came out of their houses and smelled the hot stinging air and covered their noses from it. And the children came out of the houses, but they did not run or shout as they would have done after a rain. Men stood by their fences and looked at the ruined corn, drying fast now, only a little green showing through the film of dust. The men were silent and they did not move often. And the women came out of the houses to stand beside their men – to feel whether this time the men would break.”

When Americans hear the words “Dust Bowl,” grainy black and white photographs of devastated landscapes and destitute people leap to mind. Dorothea Lange and Arthur Rothstein classics bring the Dust Bowl vividly to life in our imaginations (Figures [1] [2] [3] [4]). For the musically inclined, Woody Guthrie’s Dust Bowl ballads define the event with evocative lyrics such as those in “The Great Dust Storm” (Figure 5). Some of America’s most memorable art – literature, photography, music – emerged from the Dust Bowl and that art helped to define the event and build the myth in American popular culture.

The Dust Bowl was an event defined by artists and by government bureaucrats. It has become part of American mythology, an episode in the nation’s progression from the Pilgrims to Lexington and Concord, through Civil War and frontier settlement, to industrial modernization, Depression, and Dust Bowl. Many of the great themes of American history are tied up in the Dust Bowl story: agricultural settlement and frontier struggle; industrial mechanization with the arrival of tractors; the migration from farm to city, the transformation from rural to urban. Add the Great Depression and the rise of a powerful federal government, and we have covered many of the themes of a standard U.S. history survey course.

Despite the multiple uses of the phrase “Dust Bowl” it was an event which occurred in a specific place and time. The Dust Bowl was a coincidence of drought, severe wind erosion, and economic depression that occurred on the Southern and Central Great Plains during the 1930s. The drought – the longest and deepest in over a century of systematic meteorological observation – began in 1933 and continued through 1940. In 1941 rain poured down on the region, dust storms ceased, crops thrived, economic prosperity returned, and the Dust Bowl was over. But for those eight years crops failed, sandy soils blew and drifted over failed croplands, and rural people, unable to meet cash obligations, suffered through tax delinquency, farm foreclosure, business failure, and out-migration. The Dust Bowl was defined by a combination of:

  • extended severe drought and unusually high temperatures
  • episodic regional dust storms and routine localized wind erosion
  • agricultural failure, including both cropland and livestock operations
  • the collapse of the rural economy, affecting farmers, rural businesses, and local governments
  • an aggressive reform movement by the federal government
  • migration from rural to urban areas and out of the region

The Dust Bowl on the Great Plains coincided with the Great Depression. Though few plainsmen suffered directly from the 1929 stock market crash, they were too intimately connected to national and world markets to be immune from economic repercussions. The farm recession had begun in the 1920s; after the 1919 Armistice transformed Europe from an importer to an exporter of agricultural products, American farmers again faced their constant nemesis: production so high that prices were pushed downward. Farmers grew more cotton, wheat, and corn, than the market could consume, and prices fell, fell more, and then hit rock bottom by the early 1930s. Cotton, one of the staple crops of the southern plains, for example, sold for 36 cents per pound in 1919, dropped to 18 cents in 1928, then collapsed to a dismal 6 cents per pound in 1931. One irony of the Dust Bowl is that the world could not really buy all of the crops Great Plains farmers produced. Even the severe drought and crop failures of the 1930s had little impact on the flood of farm commodities inundating the world market.

Routine Dust Storms on the Southern and Central Plains

The location of the drought and the dust storms shifted from place to place between 1934 and 1940 (Figure 6 [large]). The core of the Dust Bowl was in the Texas and Oklahoma panhandles, southwestern Kansas and southeastern Colorado. The drought began on the Great Plains, from the Dakotas through Texas and New Mexico, in 1931. The following year was wetter, but 1933 and 1934 set low rainfall records across the plains. In some places is did not rain at all. Others quickly accumulated a deep deficit. Figure 7 [large] shows percent difference from average rainfall over five-year periods, with the location of the shifting Dust Bowl over top. Only a handful of counties (mapped in blue) had more rain than average between 1932 and 1940. And few counties fall into the 0 to -10 percent range. Most counties were 10 percent drier than average, or more, and more than eighty counties were at least 20 percent drier. Scientists now believe that the 1930s drought coincided with a severe La Nina event in the Pacific Ocean. Cool sea surface temperatures reduced the amount of moisture entering the jet stream and directed it south of the continental U.S. The drought was deep, extensive, and persisted for more than a decade.

Whenever there is drought on the southern and central plains dust blows. The flat topography and continental climate mean that winds are routinely high. When soil moisture declines, plant cover, whether native plants or crops, diminishes in tandem. Normally dry conditions mean that native plants typically cover less than 60 percent of the ground surface, leaving the other 40+ percent in bare, exposed soils. During the driest conditions native prairie vegetation sometimes covers less than 20 percent of the ground surface, exposing 80 percent or more of the soil to strong prairie winds. Failed crop fields are completely bare of vegetation. In these circumstances soil blows. Local wind erosion can drift soil from one field into ridges and ripples in a neighboring field (Figure 8). Stronger regional dust storms can move dirt many miles before it drifts down along fence lines and around buildings (Figure 9). In rare instances very large dust storms carry soils high into the air where they can travel for many hundreds of miles. These “black blizzards” are the most spectacular and memorable of dust storms, but happen only infrequently (Figure 10).

When wind erosion and dust storms began in the 1930s experienced plains residents hardly welcomed the development, but neither did it surprise them. Dust storms were an occasional spring occurrence from Texas and New Mexico through Kansas and Colorado. They did not happen every year, but often enough to be treated casually. This series of excerpts from the Salina, Kansas Journal and Herald in 1879 indicates that dust storms were a routine part of plains life in dry years:

“For the past few days the gentle winds have enveloped the city with dust decorations. And some of this time it has been intensely hot. Imagine the pleasantness of the situation.”

“During the past few days we have had several exhibitions of what dust can do when propelled by a gale. We had the disagreeable March winds, and saw with ample disgust the evolutions and gyrations of the dust. We have had enough of it, but will undoubtedly get much more of the same kind during this very disagreeable month.”

“Real estate moved considerably this week.”

“Another ‘hardest’ blow ever seen in Kansas … Salina was tantalized with a small sprinkle of rain Thursday afternoon. The wind and dust soon resumed full sway.”

“People have just got through digging from the pores of the skin the dirt driven there by the furious dust storms which for several days since our last issue have been lifting this county ‘clean off its toes.’ Even sinners have stood some chance of being translated with such favoring gales.”

“The wind which held high carnival in this section last Thursday, filled the air with such clouds of dust that darkness of the ‘consistency of twilight’ prevailed. Buildings across the street could not be distinguished. The title of all land about for a while was not worth a cotton hat – it was so ‘unsettled.’ It was of the nature of personal property, because it was not a ‘fixture’ and very moveable. The air was so filled with dust as to be stifling even within houses.”

The Salina newspapers reported dust storms many springs through the late nineteenth century. An item in the Journal in 1885 epitomizes the local attitude: “When the March winds commenced raising dust Monday, the average citizen calmly smiled and whispered ‘so natural!'”

What Made the 1930s Different?

Dust storms were not new to the region in the 1930s, but a number of demographic and cultural factors were new. First there were a lot more people living in the region in the 1930s than there had been in the 1880s. The population of the Great Plains – 450 counties stretching from Texas and New Mexico to the Dakotas and Montana – stood at only 800,000 in 1880; it was seven times that, at 5.6 million in 1930. The dust storms affected many more people than they had ever done before. And many of those people were relative newcomers, having only arrived in recent years. They had no personal or family memory of life in the plains, and many interpreted the arrival of episodic dust storms as an entirely new phenomenon. An example is the reminiscence by Minnie Zeller Doehring, written in 1981. Having moved with her family to western Kansas in 1906, at age 7, she reported “I remember the first Dirt storm in Western Kansas. I think it was about 1911. And a drouth that year followed by a severe winter.” Neither she nor her family had experienced any of the nineteenth century dust storms reported in local newspapers, so when one arrived during a dry spring five years after they arrived, it seemed like a brand new development.

Second, this drought and sequence of dust storms coincided with an international economic depression, the worst in two centuries of American history. The financial stresses and personal misery of the Depression blended seamlessly into the environmental disasters of drought, crop failure, farm loss, and dust. It was difficult to assign blame. Were farmers failing because of the economic crisis? Bank failures? Landlords squeezing tenants? Drought? Dust storms? In the midst of these concurrent crises emerged an activist and newly powerful federal government. Franklin Roosevelt’s New Deal roared into Washington in 1933 with a landslide mandate from voters to fix all of the ills plaguing the nation: depression, bank failures, unemployment, agricultural overproduction, underconsumption, the list went on and on. And several items quickly added to that list of ills to be fixed were rural poverty, agricultural land use, soil erosion, and dust storms.

The drought and dust storms were certainly hard on farmers. Crop failure was widespread and repeated. In 1935 46.6 million acres of crops failed on the Great Plains, with over 130 counties losing more than half their planted acreage. Many farmers lived on the edge of financial failure. In debt for land, tractor, automobile, and even for last year’s seed, one or two years with reduced income often meant bankruptcy. Tax delinquency became a serious problem throughout the plains. As land owners fell behind on their local property tax payments, county governments grew desperate. Many counties had delinquency rates over 40 percent for several consecutive years, and were faced with laying off teachers, police, and other employees. A few counties considered closing county government altogether and merging with neighboring counties. Their only alternative was to foreclose on now nearly worthless farms which they could neither rent nor sell. Many families behind on mortgage payments and taxes simply packed up and left without notice. The crisis was not restricted to farmers, bankers, and county employees. Throughout the plains sales of tractors, automobiles, and fertilizer declined in the early 1930s, affecting small town merchants across the board.

Consider the example of William and Sallie DeLoach, typical southern plains farmers who moved from farm to farm through the early twentieth century, repeatedly trying to buy land and repeatedly losing it to the bank in the face of drought or low crop prices. After an earlier failed attempt to buy land, the family invested in a 177 acre cotton farm in Lamb County, Texas in 1924, paying 30 dollars per acre. A month later they passed up a chance to sell it for 35 dollars an acre. Within three months of the purchase late summer rains failed to arrive, the cotton crop bloomed late, and the first freeze of winter killed it. Unable to make the upcoming mortgage payment, the DeLoaches forfeited their land and the 200 dollars they had already paid toward it. One bad season meant default. Through the rest of the 1920s the DeLoaches rented from Sallie’s father and farmed cotton in Lamb County. In September, 1929, just weeks before the stock market crashed, William thought the time auspicious to invest in land again, and bought 90 acres. He farmed it, then rented part of it to another farmer. Rain was plentiful in 1931, and by the end of that year DeLoach had repaid back rent to his father-in-law, paid off all outstanding debts except his land mortgage, and started 1932 in good shape. But the 1930s were hard on the southern plains, with the extended drought, dust storms, and widespread poverty. The one bright spot for farmers was the farm subsidies instituted by Franklin Roosevelt’s New Deal. In 1933 DeLoach plowed up 55 acres of already growing cotton in exchange for a check from the federal government. Lamb County led the state in the cotton reduction program, bringing nearly 1.4 million dollars into the county in 1933. Drought lingered over the Texas panhandle through 1934 and 1935, and by early 1936 DeLoach was beleaguered again. When the Supreme Court declared the Agricultural Adjustment Act (AAA) unconstitutional it appeared that federal farm subsidies would disappear. A few weeks after that decision DeLoach had a visit from his real estate agent:

Mr. Gholson came by this A.M. and wanted to know what I was going to do about my land notes. I told him I could do nothing, only let them have the land back. … I told him I had payed the school tax for 1934. Owed the state and county for 1935, also the state for 1934. All tole [sic] about $37.50. He said he would pay that and we (wife & I) could deed the land back to the Nugent people. I hate to lose the land and what I have payed on it, but I can’t do any thing else. ‘Big fish eat the little ones.’ The law is take from the poor devil that wants a home, give to the rich. I have lost about $1000.00 on the land.

A week later:

Mr. Gholson came by. Told me about the deed he had drawn in Dallas. … He said if I would pay for the deed and stamps, which would be $5.00, the deal would be closed. I asked him if that meant just as the land stood now. He said yes. He said they would pay the balance of taxes. Well, they ought to. I have payed $800.00 or better on the land, but got behind and could not do any thing else. Any way my mind is at ease. I do not think Gholson or any of the cold blooded land grafters would lose any sleep on account of taking a home away from any poor devil.

For the third time in his career DeLoach defaulted and turned over his farm. Later that month Congress rewrote the AAA legislation to meet Constitutional requirements, and the farm programs have continued ever since. With federal program income again assured, DeLoach purchased yet another 68 acre farm in September, 1936, moved the family onto it, and tried again. Other families were not as persistent, and when crop failure led to bankruptcy they packed up and left the region. The term popularly assigned to such emigrants, “Dust Bowl refugees,” assigned a single cause – dust storms – to what was in fact a complex and multi-causal event (Figure 11).

Like dust storms and agricultural setbacks, high out-migration was not new to the plains. Throughout the settlement period, from about 1870 to 1920, there was very high turnover in population. Many people moved into the region, but many moved out also. James Malin found that 10 year population turnover on the western Kansas frontier ranged from 41 to 67 percent between 1895 and 1930. Many people were half farmers, half land speculators, buying frontier land cheap (or homesteading it for free), then selling a few years later on a rising market. People moved from farm to farm, always looking for a better opportunity, often following a succession of frontiers over a lifetime, from Ohio to Illinois to Kansas to Colorado. Outmigration from the Great Plains in the 1930s was not considerably higher than it had been over the previous 50 years. What changed in the 1930s was that new immigrants stopped moving in to replace those leaving. Many rural areas of the grassland began a slow population decline that had not yet bottomed out in 2000.

The New Deal Response to Drought and Dust Storms

Emigrants from the Great Plains were not new in the 1930s. Neither was drought, agricultural crisis, or dust storms. This drought and these dust storms were certainly more severe than those that wracked the plains in 1879-1880, in the mid 1890s, and again in 1911. And more people were adversely affected because total population was higher. But what was most different about the 1930s was the response of the federal government. In past crises, when farmers went bankrupt, when grassland counties lost 20 percent of their population, when dust storms descended, the federal government stood aloof. It felt no responsibility for the problems, no popular mandate to solve them. Just the opposite was the case in the 1930s. The New Deal set out to solve the nation’s problems, and in the process contributed to the creation of the Dust Bowl as an historic event of mythological proportions.

The economic and agricultural disaster of the 1930s provided an opening for experimentation with federal land use management. The idea had begun among economists in agricultural colleges in the 1920s who proposed removing “submarginal” land from crop production. “Submarginal” referred to land low in productivity, unsuited for the production of farm crops, or incapable of profitable cultivation. A “land utilization” movement emerged in the 1920s to classify farm land as good, poor, marginal, or submarginal, and to forcibly retire the latter from production. Such rational planning aimed to reduce farm poverty, contract chronic overproduction of farm crops, and protect land vulnerable to damage. M.L. Wilson, of Montana State Agricultural College, focused the academic movement while Lewis C. Gray, at the Bureau of Agricultural Economics (BAE), led the effort within the U.S. Department of Agriculture. The land utilization movement began well before the 1930s, but the drought and dust storms of that decade provided a fortuitous justification for a land use policy already on the table, and newly created agencies like the Soil Conservation Service (SCS), the Resettlement Administration (RA), and the Farm Security Administration (FSA) were the loudest to publicize and deplore the Dust Bowl wracking America’s heartland.

Whereas the land use adjustment movement had begun as an attempt to solve chronic rural poverty, the arrival of dust storms in 1934 provided a second justification for aggressive federal action to change land use practices. Federal bureaucrats created the central narrative of the Dust Bowl, in part because it emphasized the need for these new reform agencies. The FSA launched a sophisticated public relations campaign to publicize the disaster unfolding in the Great Plains. It hired world class photographers to document the suffering of plains people, giving them specific instructions from Washington to photograph the most eroded landscapes and the most destitute people. Dorothea Lange’s photographs of emigrants on the road to California still stand as some of the most evocative images in American history (Figures 12-13). The Resettlement Administration also hired filmmaker Pare Lorentz the make a series of movies, including “The Plow that Broke the Plains.”

The narrative behind this publicity campaign was this: in the nineteenth and early twentieth centuries farmers had come to the dry western plains, encouraged by a misguided Homestead Act, where they plowed up land unsuited for farming. The grassland should have been left in native grass for grazing, but small farmers, hoping to make profits growing cash crops like wheat had plowed the land, exposing soils to relentless winds. When serious drought struck in the 1930s the wounded landscape succumbed to dust storms that devastated farms, farmers, and local economies. The result was a mass exodus of desperately poor people, a social failure caused by misuse of land. The profit motive and private land ownership were behind this failure, and only a scientifically grounded federal bureaucracy could manage land use wisely in the interests of all Americans, rather than for the profit of a few individuals. Federal agents would retire land from cultivation, return it to grassland, and teach remaining farmers how to use their land more carefully to prevent erosion. This effort would, of course, require large budgets and thousands of employees, but it was vital to resolving a rural disaster.

The New Deal government, with Congressional support and appropriations, began to put reform plan into place. A host of new agencies vied to manage the program, including the FSA, the SCS, the RA, and the Agricultural Adjustment Administration (AAA). Each implemented a variety of reforms. The RA began purchasing “submarginal” land from farmers, eventually acquiring some 10 million acres for former farmland in the Great Plains. (These lands are now mostly managed by the U.S. Forest Service as National Grasslands leased to nearby private ranchers for grazing.) The RA and the FSA worked to relocate destitute farmers on better lands, or move them out of farming altogether. The SCS established demonstration projects in counties across the nation, where local cooperator farmers implemented recommended soils conservation techniques on their farms, such as fallowing, strip cropping, contour plowing, terracing, growing cover crops, and a variety of cultivation techniques. There were efforts in each county to establish Land Use Planning Committees made of local farmers and federal agents who would have authority over land use practices on private farms. These committees functioned for several years in the late 1930s, but ended in most places by the early 1940s. The most important and expensive measure was the AAA’s development of a comprehensive system of farm subsidies, which paid farmers cash for reducing their acreage of commodity crops. The subsidies, created as an emergency Depression measure, have become routine and persist 70 years later. They brought millions of dollars into nearly every farming county in the U.S. and permanently transformed the economics of agriculture. In a multitude of innovative ways the federal government set out to remake American farming. The Dust Bowl narrative served exceedingly well to justify these massive and revolutionary changes in farming, America’s most common occupation for most of its history.

Conclusion

The Dust Bowl finally ended in 1941 with the arrival of drenching rains on the southern and central plains and with the advent of World War II. The rains restored crops and settled the dust. The war diverted public and government attention from the plains. In a telling move, the FSA photography corps was reconstituted as the Office of War Information, the propaganda wing of the government’s war effort. The narrative of World War II replaced the Dust Bowl narrative in the public’s attention. Congress diverted funding away from the Great Plains and toward mobilization. The Land Utilization Program stopped buying submarginal land and the county Land Use Planning Committees ceased. Some of the New Deal reforms became permanent. The AAA subsidy system continued through the present and the Soil Conservation Service (now the Natural Resources Conservation Service) created a stable niche promoting wise agricultural land management and soil mapping.

Ironically, overall land use on the Great Plains had changed little during the decade. About the same amount of land was devoted to crops in the second half of the twentieth century as in the first half. Farmers grew the same crops in the same mixtures. Many implemented the milder reforms promoted by New Dealers – contour plowing, terracing – but little cropland was converted back to pasture. The “submarginal” regions have continued to grow wheat, sorghum, and other crops in roughly the same quantities. Despite these facts the public has generally adopted the Dust Bowl narrative. If asked, most will identify the Dust Bowl as caused by misuse of land. The descendants of the federal agencies created in the 1930s still claim to have played a leading role in solving the crisis. Periodic droughts and dust storms have returned to the region since 1941, notably in the early 1950s and again in the 1970s. Towns in the core dust storm region still have dust storms in dry years. Lubbock, Texas, for example, experienced 35 dust storms in 1973-74. Rural depopulation continues in the Great Plains (although cities in the region have grown even faster than rural places have declined). None of these droughts, dust storms, or periods of depopulation have received the concentrated public attention that those of the 1930s did. Nonetheless, environmentalists and critics of modern agricultural systems continue to warn that unless we reform modern farming the Dust Bowl may return.

References and Additional Reading

Bonnifield, Mathew P. The Dust Bowl: Men, Dirt, and Depression. Albuquerque: University of New Mexico Press, 1979.

Cronon, William. “A Place for Stories: Nature, History, and Narrative.” Journal of American History 78 (March 1992): 1347-1376.

Cunfer, Geoff. “Causes of the Dust Bowl.” In Past Time, Past Place: GIS for History, edited by Anne Kelly Knowles, 93-104. Redlands, CA: ESRI Press, 2002.

Cunfer, Geoff. “The New Deal’s Land Utilization Program in the Great Plains.” Great Plains Quarterly 21 (Summer 2001): 193-210.

Cunfer, Geoff. On the Great Plains: Agriculture and Environment. Texas A&M University Press, 2005.

The Future of the Great Plains: Report of the Great Plains Committee. Washington: Government Printing Office, 1936.

Ganzel, Bill. Dust Bowl Descent. Lincoln: University of Nebraska Press, 1984.

Great Plains Quarterly 6 (Spring 1986), special issue on the Dust Bowl.

Gregory, James N. American Exodus: The Dust Bowl Migration and Okie Culture in California. New York: Oxford University Press, 1989.

Guthrie, Woody. Dust Bowl Ballads. New York: Folkway Records, 1964.

Gutmann, Myron P. and Geoff Cunfer. “A New Look at the Causes of the Dust Bowl.” Charles L. Wood Agricultural History Lecture Series, no. 99-1. Lubbock: International Center for Arid and Semiarid Land Studies, Texas Tech University, 1999.

Hansen, Zeynep K. and Gary D. Libecap. “Small Farms, Externalities, and the Dust Bowl of the 1930s.” Journal of Political Economy 112 (2004): 665-694.

Hurt, R. Douglas. The Dust Bowl: An Agricultural and Social History. Chicago: Nelson-Hall, 1981.

Lookingbill, Brad. Dust Bowl USA: Depression America and the Ecological Imagination, 1929-1941. Athens: Ohio University Press, 2001.

Lorentz, Pare. The Plow that Broke the Plains. Washington: Resettlement Administration, 1936.

Malin, James C. “Dust Storms, 1850-1900.” Kansas Historical Quarterly 14 (May, August, and November 1946): 129-144, 265-296; 391-413.

Malin, James C. Essays on Historiography. Ann Arbor, Michigan: Edwards Brothers, 1946.

Malin, James C. The Grassland of North America: Prolegomena to Its History. Lawrence, Kansas, privately printed, 1961.

Riney-Kehrberg, Pamela. Rooted in Dust: Surviving Drought and Depression in Southwestern Kansas. Lawrence: University Press of Kansas, 1994.

Riney-Kehrberg, Pamela, editor. Waiting on the Bounty: The Dust Bowl Diary of Mary Knackstedt Dyck. Iowa City: University of Iowa Press, 1999.

Svobida, Lawrence. Farming the Dust Bowl: A Firsthand Account from Kansas. Lawrence: University Press of Kansas, 1986.

Wooten, H.H. The Land Utilization Program, 1934 to 1964: Origin, Development, and Present Status. U.S.D.A. Economic Research Service Agricultural Economic Report no. 85. Washington: Government Printing Office, 1965.

Worster, Donald. Dust Bowl: The Southern Plains in the 1930s. New York: Oxford University Press, 1979.

Wunder, John R., Frances W. Kaye, and Vernon Carstensen. Americans View Their Dust Bowl Experience. Niwot: University Press of Colorado, 1999.

Citation: Cunfer, Geoff. “The Dust Bowl”. EH.Net Encyclopedia, edited by Robert Whaples. August 18, 2004. URL http://eh.net/encyclopedia/the-dust-bowl/

The History of the Aerospace Industry

Glenn E. Bugos, The Prologue Group

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

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

The First Half-Century

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

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

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

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

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

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

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

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

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

The Cold War

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

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

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

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

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

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

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

An International Industry

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

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

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

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

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

A Post-Cold War World

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

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

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

Bibliography

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

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

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

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

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

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

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

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

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

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

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

History and Financial Crises: Lessons from the 20th Century

Reviewer(s):Moen, Jon

Published by EH.Net (August 2013)

Christopher Kobrak and Mira Wilkins, editors, History and Financial Crises: Lessons from the 20th Century.? New York: Routledge, 2013. x + 138 pp. $140 (cloth), ISBN: 978-0-415-62297-4.

Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.

This book is a collection of six papers that were originally published as a special issue of Business History (Volume 53, Issue 2, April 2011).? It includes a new summary chapter on the use of history in understanding modern financial crises.? Two themes tied the original collection together: the roles of globalization and regulation in financial crises.? Because of the five papers chosen, the collection focuses on the 1920s and 30s.? The papers cover the experiences of the German, Swedish, British, Canadian, and U.S. financial and banking sectors just before and during the Great Depression.? Individually, the five papers draw useful lessons from historical episodes of financial crises, and I enjoyed reading them.? Because they were subject to careful peer-review, I will not review them individually.? Instead, I will review the effectiveness of the collection as a whole.

The original introductory essay and the new concluding essay distract from the five papers; they do not clearly make a case for why I should read them as a collection.? The introductory essay by Christopher Kobrak and Mira Wilkins starts with an extended discussion on the definition of a financial crisis.? It acknowledges Charles Kindleberger?s (2011) self-confessed inability to define a crisis and notes attempts to define a crisis on the basis of sudden movements in interest rates or the money supply.? Yet it ends quite unsatisfyingly with ?no absolute definition of either financial or economic crisis? (p. 5).? Later the essay apologizes for ultimately choosing a set of papers that are limited to the twentieth century, with an emphasis on the Great Depression (p. 10).? That is not bad, but the apology diminishes what the five essays do offer, as noted carefully in the next few pages.? One important point that the essay points out, however, is that not all crises covered in the special issue resulted in a collapse in demand and prices (p. 15).? Why crises do not inevitably lead to recessions or worse could be examined more.

The new, concluding essay by Christopher Kobrak is problematic.? As a stand-alone essay, I found it to be a potentially compelling survey of the relationship between financial and banking panics and the perils of making casual historical comparisons.? In particular, highlighting the relevance of the banking crises of the early 1930s rather than the spectacular stock market crash of 1929 helps in making historical comparisons with the crisis that started in 2008.? But then the essay veers off into topics that are again distracting, like musing on the loss of governmental discipline from the collapse of the Bretton Woods Agreement (p. 119).? This is odd, as the introductory essay indicates that the paper by Mark Billings and Forrest Capie emphasizes the benefits of flexible exchange rates.? The author then regrets not having an essay or more discussion of the Bank Panic of 1907, stating that it gets ?little press in financial histories? (p. 120) and then proceeds to write several pages on the Panic.? I have found quite a bit about 1907 in financial histories by Milton Friedman and Anna Schwartz (1963), Gary Gorton (2010), Richard Timberlake (1993), and Elmus Wicker (2000), just to name a few.? I may have contributed something myself.? The section on regulation (p. 123) starts out well, noting how historically regulation has always been trying to play catch-up to financial innovation.? But the subsequent discussion of the breakdown in Bretton Woods again doesn?t seem closely related to the papers of the special issue.? The discussion of ?Good Financial Crises? argues that crises that were successfully averted rarely get examined.? Wicker clearly points out that the New York Clearing House successfully dealt with the Panic of 1873, and he refers to the reactions to the Panics of 1884 and 1890 as success stories from the point of view of the Clearing House.? I mention this because there is a lot of historical analysis of specific panics out there that could have been tied into this essay.

The conclusion to the essay left me a bit puzzled.? Certainly financial markets are much more complicated today than, say, in 1907.? But is this the result of an increasing lack of social responsibility on the part of financiers today?? We are asked to compare today?s leaders with those of 1907, who ?stepped in to save a system from problems they themselves had created? (p. 131).? Whatever those problems were, I have a hard time imagining that saving his own skin was not first and foremost in J.P. Morgan?s mind, an incentive that just happened to be compatible with that of New York?s financial market in general.? Nevertheless, read the special issue or the book for the all of the essays.? Just do not expect to find a lot of lessons.

References:

Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States, 1867-1960. Princeton, NJ: University Press, 1963.

Gorton, Gary.? Slapped by the Invisible Hand: The Panic of 2007.? Oxford: Oxford University Press, 2010.

Kindleberger, Charles.? Manias, Panics, and Crashes: A History of Financial Crises, 6th edition. New York: Palgrave Macmillan, 2011.

Timberlake, Richard.? Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993.

Wicker, Elmus.? Banking Panics of the Gilded Age.? Cambridge: Cambridge University Press, 2000.
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Jon Moen is an Associate Professor in the Department of Economics at the University of Mississippi.? He has studied retirement in the United States in addition to his research on the Panic of 1907.? He is currently working on a project with Ellis Tallman of Oberlin College and the Cleveland Federal Reserve Bank on the effectiveness of the New York Clearing House in the late nineteenth and early twentieth centuries.??
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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 (August 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):Europe
North America
Time Period(s):20th Century: Pre WWII

Peddling Protectionism: Smoot-Hawley and the Great Depression

Author(s):Irwin, Douglas A.
Reviewer(s):O’Brien, Anthony Patrick

Published by EH.NET (July 2011)

Douglas A. Irwin, Peddling Protectionism:? Smoot-Hawley and the Great Depression. Princeton, NJ:? Princeton University Press, 2011. v + 244 pp. $25 (hardcover), ISBN: 978-0-691-15032-1.

Reviewed for EH.Net by Anthony Patrick O?Brien, Department of Economics, Lehigh University.

Economists love the Smoot-Hawley tariff.? Why?? Because economists hate tariffs and Smoot-Hawley is a great stick with which to beat the living daylights out of protectionists.? ?So, Mr. or Ms. Congressperson, you want to raise tariffs on imports from China?? Trying to start a trade war?? You know what happened the last time we tried that? We passed the Smoot-Hawley tariff and IT CAUSED THE GREAT DEPRESSION!? Do you want to cause another Great Depression? Do you? Huh??? This nifty little trick worked like gangbusters for Al Gore in his debate with Ross Perot on Larry King Live years ago.? True confessions time, though:? It ain?t true.? The Smoot-Hawley tariff didn?t cause the Great Depression.? The Great Depression would still have been great even if Herbert Hoover had heeded the advice of those 1,000 economists who urged him to veto Smoot-Hawley.?

Economists aren?t lying when they casually refer to Smoot-Hawley playing an important role in the Depression.? (Most economists who have studied the issue know that it didn?t.) They think, vaguely: Tariffs Being Bad + Highest Tariff Rates Ever = Big Impact.? Problem is that reasoning mixes micro with macro.? Economists hate tariffs because they interfere with the pursuit of comparative advantage, misallocate resources, and, in that sense, lead to lower incomes … in the long run.? The macro of tariffs is murkier, though.? The American on the street?s argument for protectionism goes like this:? ?Raise tariffs on imports so people will buy more things made in the USA. Then U.S. companies will produce more and hire more people.?? The thing is, as a story about the short run, that reasoning may well be correct.? Oh sure, foreign retaliation for tariff increases may slam domestic exports and there can be price level effects and exchange rate effects that have a contractionary impact, and so on.? That?s why the macro of tariffs is murky.? But, at any rate, it?s at least conceivable that Smoot-Hawley, rather than causing the Great Depression, actually caused U.S. production and employment in the early 1930s to expand.? Not by much, mind you, because foreign trade was a tiny part of the U.S. economy at that time.? But expand rather than contract.

It?s conceivable, but did it actually happen?? That?s one of several questions pondered by Douglas Irwin in this superb new book. Irwin, who is Robert E. Maxwell ?23 Professor of Arts and Sciences at Dartmouth College, has for years now been playing the part of stalwart on the ramparts of free trade, including with his indispensible Against the Tide: An Intellectual History of Free Trade (Princeton University Press, 1996).? In Peddling Protectionism, Irwin tells the story of the Smoot-Hawley tariff from its conception as an attempt by Republicans to aid a troubled agricultural sector ? an amazing 18% of all farmers had their mortgages foreclosed on between 1926 and 1929 ? through its implementation, effects on the U.S. and world economies, and later reputation.? To many economic historians it will be a familiar tale, but one that is well told.?

When Congress began work on the tariff in early 1929, newly elected President Herbert Hoover hoped that the bill could be confined to raising agricultural tariffs.? In the end, though, the final bill was comprehensive and extraordinarily detailed.? ?Detailed? is an understatement; consider the following provision quoted by Irwin from paragraph 390 of Schedule 3: ?Bottle caps of metal, collapsible tubes, and sprinkler tops, if not decorated, colored, waxed, lacquered, enameled, lithographed, electroplated, or embossed in color, 30 percent ad valorem; if decorated, colored, waxed, lacquered, enameled, lithographed, electroplated, or embossed in color, 45 percent ad valorem.? And there were nearly two hundred more closely-packed pages where that came from.

The Congressional debate dragged on for 18 months, although Irwin cites a number of economic historians who reject the idea that uncertainty caused by the debate led to the great stock market crash of October 1929.? Hoover ? to much criticism ? had communicated little of his views to Congress during those 18 months, but he readily signed the bill after its final passage in June 1930.? Hoover had famously received a petition signed by 1,028 economists urging him to veto the bill.? Then as now, economists were held in warm regard by Congress; Senator Samuel Shortridge remarked: ?I am not overawed and I am not at all disturbed by the proclamations of the college professors who never earned a dollar by the sweat of their brows by honest labor ? theorists, dreamers ? I am not so overawed or disturbed by their pronunciamentos ….?? Irwin argues persuasively that Hoover, having failed during the prolonged Congressional debate to make his views known, had no choice politically other than to sign the bill because to veto it would have undercut the Republican Congressional leadership.

In discussing the economic effects of Smoot-Hawley, Irwin begins by noting that the bill actually raised tariffs by far less than had the Fordney-McCumber tariff of 1922.? Fordney-McCumber had raised the average tariff rate by 64% (or by about 13 percentage points), whereas Smoot-Hawley increased the average tariff rate by 18% (or by 6.4 percentage points).? Smoot-Hawley?s reputation for having raised tariff rates to ?skyscraper? levels is due in part to the effects of falling prices of imports during the years following its passage.? A specific duty ? say, so many cents per bushel of wheat ? will result in a tariff that is an increasing percentage of a good?s value as the price of the good falls.? Although imports declined sharply in the early 1930s, most of that reduction is attributable to falling incomes in the United States, rather than to the effects of Smoot-Hawley.? Irwin estimates that the Smoot-Hawley accounted for only about one third of the 40% decline in imports between 1929 and 1932.

Could this reduction in imports have stimulated production in the United States by the process of ?expenditure switching? from imports to domestically produced goods?? Irwin is skeptical that this effect was large, particularly given that foreign retaliation for Smoot-Hawley helped contribute to falling U.S. exports.? In fact, he notes that retaliation by Canada alone resulted in as large a decrease in U.S. exports as the decline in imports attributable to Smoot-Hawley.? He is also skeptical of the monetarist argument proposed by Allen Meltzer that Smoot-Hawley worsened the Great Depression by causing increased gold inflows into the United States, which led to deflationary pressure on other countries.? Irwin notes that ?one problem with this argument is that there was no apparent increase in U.S. gold inflows after the tariff was imposed.?? Similarly, he doubts the argument that by reducing U.S. agricultural exports, foreign retaliation for Smoot-Hawley led to increasing defaults on farm mortgages, further weakening a reeling banking system.? Irwin believes the problems in the agricultural sector had other causes, and, in any event, foreign retaliation for Smoot-Hawley mainly involved higher tariffs on U.S. manufacturing exports, not on agricultural exports.? Finally, Irwin is skeptical of the argument that in a real business cycle model, Smoot-Hawley may have had a significant negative effect on output by raising the cost of intermediate goods.? He notes that only about 11% of imports of intermediate goods were affected by the Smoot-Hawley increases.? On balance, then, Irwin argues that Smoot-Hawley?s short-run effect on the U.S. economy was probably negative, but was certainly small.

Irwin?s book is not technical; he summarizes research findings, including his own, but does not formally present models or econometric results.? His approach makes the book quite suitable for the interested general reader, undergraduates, and economic historians and other economists interested in the life and times of Smoot-Hawley.? Finally, this volume is well priced for individual purchase and is nicely illustrated with a number of photographs and political cartoons of the day.? It is also mercifully free of the typos that plague so many university press books these days.

Anthony Patrick O?Brien is a professor of economics at Lehigh University.? He is the author of textbooks on principles of economics and money and banking (with Glenn Hubbard) and a textbook on intermediate macroeconomics (with Hubbard and Matthew Rafferty).? He has published several articles on international trade during the interwar years, including most recently, ?Retreat from Protectionism: R.B. Bennett and the Movement to Freer Trade in Canada, 1930-1935? (with Judith A. McDonald) in the Journal of Policy History.? His email address is ao01@lehigh.edu.
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Copyright (c) 2011 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 2011). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):International and Domestic Trade and Relations
Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

The Creation and Destruction of Value: The Globalization Cycle_

Author(s):James, Harold
Reviewer(s):La Croix, Sumner

Published by EH.NET (March 2010)

Harold James, The Creation and Destruction of Value: The Globalization Cycle. Cambridge, MA: Harvard University Press, 2009. x + 325 pp. $20 (hardcover), ISBN: 978-0-674-03584-3.

Reviewed for EH.NET by Sumner La Croix, Department of Economics, University of Hawaii-Manoa.

In this short, well written and carefully argued volume, Harold James ?offers reflections on the phenomenon of globalization and its cyclical propensity to generate backlashes and collapses? (p. 6). His thoughtful analysis builds upon his earlier book, The End of Globalization: Lessons from the Great Depression (2001), which argued that the anti-globalization protests at the 1999 Seattle WTO meeting lacked the coherent alternative ideologies that galvanized international responses to the 1929-1933 financial crisis. This more recent volume, boldly published in early 2009 in the midst of the ongoing financial crisis, provides extensive comparisons with the 1929-1933 crisis, considers the limits and extents of the financial revolution of the 1990s and 2000s, and emphasizes how arguments for continued globalization are often trumped in downturns ?by a political logic that looks for conflicts and competitive advantages? (p. 230).

James spends considerable space asking whether we can learn more about the 2000s financial crisis from the stock market collapse of 1929 or the widespread international bank failures of 1931. He rightly argues that a central bank could counter a 1929-style stock market crash by using conventional monetary policy to provide markets with additional liquidity and notes how the Greenspan ?put? contained the effects of the 1987 and the 2000-2001 stock market crashes (p. 94). By contrast, a 1931-style event ?is institutionally more complex and requires the reconstruction of whole banking systems? (p. 40). His analysis of 1931 emphasizes the inherent political difficulties of the German government in effectively and fairly bailing out its failing banks; this sets the stage for his analysis in the following chapter (?The weekends that made history?) of the events surrounding government bailouts (or the lack thereof) of Bear Stearns, Lehman Brothers, AIG, and numerous large commercial banks.

James?s chapter on the extent and limit of the financial revolution of the last 30 years argues that politicians, regardless of their country, party, or the historical episode, tend to echo each other in their rhetoric as a financial crisis unfolds (?we must make the financial industry a servant of the economy rather than its master?) and their calls for more government control of banks. They also quickly find out ?how difficult [this] is to accomplish when complex cross-border issues are involved? (p. 167). These difficulties were magnified during the 2000s financial crisis because of the financial deregulation of the late 1990s and the rapid innovation of complex financial instruments that were difficult to understand, not covered by existing regulations, or implemented outside the regulated boundaries of the bank. However, to respond to the financial crisis with extensive new bank regulation or outright government ownership of troubled banks is, James argues, always a highly problematic strategy. Government involvement in banks often doesn?t prevent them from taking excessive risks; it doesn?t solve the problem of banks innovating around regulations; and it can lead to pressures not just to reduce risk but also to restructure lending practices along a host of more political dimensions. In light of this discussion, it?s quite astonishing that James ends his discussion of bank regulation with a forecast that innovation in banking regulations may yet ?solve? the industry?s periodic tendency to experience financial crises in which banks play central roles. In the future, ?many banking functions can and will be handled by machines rather than by error-prone humans? (p. 172).

James?s conclusion to the volume is somewhat speculative, as it is based upon a relationship between the globalization cycle and changes in social values. He posits that for market institutions to function successfully in the long run, participants need to be guided by an external source of common values. The process of globalization tends to gradually erode these common values, and when the crisis comes, individuals become aware that resumption of the globalization cycle can only occur when society makes solid progress towards restoring its core values. In his view, ?[r]egaining trust is a long and arduous process. That is why when globalization is broken, it is not easy to put together again? (p. 277).) Or, to paraphrase the great actress Bette Davis, ?fasten your seat belts, it?s going to be a bumpy decade!?

Sumner La Croix is co-author (with Christopher Edmonds and Yao Li) of ?China Trade: Busting Gravity?s Bounds,? Journal of Asian Economics, November-December 2008, and co-editor (with Peter Petri) of Challenges to the Global Trading System: Adjustment to Globalization in the Asia-Pacific Region, New York: Routledge, 2007.

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

Celebrating Irving Fisher: The Legacy of a Great Economist

Author(s):Dimand, Robert W.
Geanakoplos, John
Reviewer(s):Jovanovic, Franck

Published by EH.NET (May 2009)

Robert W. Dimand and John Geanakoplos, editors, Celebrating Irving Fisher: The Legacy of a Great Economist. Malden, MA: Blackwell Publishing, 2005. xv + 456 pp. $40 (cloth), ISBN: 1-4051-3307-4.

Reviewed for EH.NET by Franck Jovanovic, Department of Labour, Economics and Management, TELUQ-UQAM (Universit? du Qu?bec ? Montr?al).

Irving Fisher is undeniably one of the economists who have most influenced the discipline, because, among other things, he counts among the first to have introduced mathematical economics and modern economic theory to the United States. While his excessive optimism during the 1929 stock market crash damaged his reputation as an economist, his contributions to economics covered many areas of the discipline and are still widely influential.

The major challenge of this book, edited by Robert Dimand and John Geanakoplos, therefore is to lead contemporary economists who are not historians of economic thought in a discussion of Fisher?s contributions and the themes he analyzed. The book rises to and meets its challenge. This tour de force highlights the fact that Fisher?s work continues to influence current research in economics and, as James Tobin emphasizes, ?Fisher is cited for substance rather than for history of thought? (p. 20). However, while this book focuses on Irving Fisher, it is important to specify that it is not strictly speaking a work of history of economic thought, but a work of economic analysis on contemporary themes that Fisher analyzed several decades ago.

The book is a new edition of a special issue published in 2005 in the American Journal of Economics and Sociology (Vol. 64, No. 1), which collected revised versions of papers presented at a symposium at Yale in May 1998 to commemorate the fiftieth anniversary of the death of Irving Fisher. In addition, some of these articles had previously been published, such as the three Tobin contributions or the introductory chapter which is an adaptation of Dimand (1997). By way of a dozen themes, this book presents the main contributions of Irving Fisher to the discipline of economics. Each topic is treated in one article and then commented upon by one or several other contributions, totaling twenty-seven contributions.

James Tobin and William Barber each wrote one of the two biographical articles on Fisher. They place the work of Fisher back into the institutional landscape of his time and back into the history of economics. One of their focuses is the importance of mathematical economics and of the empirical in Fisher?s work. It is his interest in mathematics that led Fisher to break with the practices of economists of his time who were influenced by political economy. In addition to these two contributions, the foreword by George Fisher, a grandson of Irving Fisher, the introductory chapter by Dimand and Geanakoplos and two chapters by James Tobin about two publications by Fisher, Elementary Principles of Economics and The Nature of Capital and Income, constitute the chapters whose content is most informative for a reader interested in economic thought.

William Brainard and Herbert Scarf analyze how Fisher studied a general equilibrium model in his thesis, defended in 1891. They use Matlab software to simulate and, consequently, test the hydraulic model (with pumps and levers) developed by Fisher; they also go beyond the analysis of Fisher by simulating the dynamics of such an equilibrium.

Robert Hall examines, in his contribution, Fisher?s proposal to stabilize the price level in an economy. He suggests that Fisher?s work is particularly relevant for countries that have no central bank, such as Chile in the second part of the twentieth century; a suggestion that James Tobin denies in his commentary on this article.

Peter Phillips focuses on two major issues for which Fisher remains known today: the question of the real rate of interest and on what nowadays is called the Fisher effect (i.e., the real interest rate is independent of the nominal interest rate). Phillips tries in particular to overcome the lack of consensus about the time series of the real rate of interest by supposing that they are not stationary and by proposing a semi-parametric model. However, as noted by John Rust in his commentary, like Phillips? contribution, the literature that attempts to test the validity of the Fisher equation ?has employed increasingly sophisticated econometric methods to test an equation that even Fisher admitted had dubious validity? (p. 175).

Robert Dimand comes back to the concept of Corridor of Stability. This concept, which was originally introduced by Leijonhufvud in 1973, states that an economy will adjust itself only if the shocks of demand are sufficiently small. Dimand suggests that this concept already existed in the work of Tobin, Keynes and Fisher. This article, based on the ?debt-deflation? theory, proposed by Fisher in 1933 to explain the importance of the crisis of the 1930s, stresses that, by separating the major shocks from the small shocks, models based on the concept of corridor of stability could explain why the adjustment mechanisms of conventional macroeconomic models are often invalid, especially during severe recessions.

The contribution of Shoven and Whalley on tax policies is based on Fisher?s book Constructive Income Taxation, published in 1942. Among all contributions to this book, this article provides the best actualization of Fisher?s work. It suggests that Fisher?s idea to replace a tax on income alone with a consumption tax (spendings tax), a progressive tax on income less savings, was particularly innovative for its time. This situation could explain the relatively small influence of Fisher?s book.

In his article, John Geanakoplos examines the theory of impatience that allows Fisher to determine the interest rate in a model of an economy with a finite number of periods. This article shows that in some overlapping generations models (OLG) the interest rate at steady state depends on impatience. Thus, it goes beyond an apparent contradiction between the results of OLG by ?proving that in stationary OLG economies with land, the interest rate at the unique steady state does depend on impatience? (p. 257).

Erwin Diewert suggests the rehabilitation of the work of Bennet and Montgomery, two authors who are contemporaries to Fisher. They developed a theory of index numbers, which is another question for which economists and statisticians still recognize Fisher?s contributions today. By this way, this article aims to offer an alternative approach to that proposed by Fisher.

The last two articles deal with considerations on the health of populations. William Nordhaus suggests that the measurement of economic welfare might be improved by including the evolution of the health of populations. In a commentary paper to Nordhaus, Robert Dimand makes links between this article and Fisher?s work. Victor Fuchs uses some recommendations and positions taken by Fisher during his life to extrapolate on how he might have assessed the evolution of health public policies taking place in the United States during the twentieth century.

This book could interest readers familiar with Fisher?s work who want to discover the current economic work on topics studied by Fisher, topics that are still central in economics. Readers who are not familiar with Fisher?s work will be probably more confused because, as such, there is no presentation of Fisher?s work. In fact, the contributions update and test some models, assumptions or findings by this economist. It is regrettable that the book, whose title suggests that it is dedicated to the work of Irving Fisher, neither offers an exhaustive presentation of the work of the author nor an analysis of his contributions. Moreover, some contributions of this book only hold a tenuous link with the work of Fisher: they seize questions that Fisher dealt with, but they do not make any direct link with the writings of Fisher. Similarly, it is unclear if the notations are those of Fisher or those of the authors; therefore it is not always possible to separate the work of interpretation done in this book from the work of Fisher himself.

References:

R. Dimand, 1997. ?Irving Fisher and Modern Macroeconomics,? American Economic Review, 87: 442?444.

A. Leijonhufvud, (1973) 1981. Information and Coordination: Essays in Macroeconomic Theory, New York: Oxford University Press.

J. Tobin, 1987. ?Irving Fisher,? in J. Eatwell, M. Milgate and P. Newman, editors, The New Palgrave: A Dictionary of Economics, vol. 2: 369?76.

Franck Jovanovic is Professor of economics at TELUQ-UQAM (Universit? du Qu?bec a Montr?al). He is working on the history of financial economics. His recent publications include the edition of a special issue of Revue d?Histoire des Sciences Humaines on the history of financial economics; ?The Construction of the Canonical History of Financial Economics,? published in History of Political Economy (40. 3: 213-42); and Pioneers of Financial Economics: Twentieth-Century Contributions, volume 2, edited with Geoffrey Poitras, Cheltenham: Edward Elgar.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

The Forgotten Man: A New History of the Great Depression

Author(s):Shlaes, Amity
Reviewer(s):Namorato, Michael V.

Published by EH.NET (August 2008)

Amity Shlaes, The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007. x + 464 pp. $27 (cloth), ISBN: 978-0-06-621170-1.

Reviewed for EH.NET by Michael V. Namorato, Department of History, University of Mississippi.

Amity Shlaes? The Forgotten Man: A New History of the Great Depression is, in many respects, a unique book. The author has written a rather lengthy account of what she believes the Great Depression was all about. She offers her own views on what caused this economic crisis, how badly it was handled by those in government, and why the economic downturn lasted so long. And, she does this by her so-called approach of looking at ?the forgotten man.? Who was this forgotten man? He or she is the one who paid the bills for the New Deal programs, who was out of work throughout the economic catastrophe, and who put faith in what those in power said. Or, at least that is what the reader is led to believe about the identity of ?the forgotten man.?

Shlaes begins by identifying a group of individuals that are followed throughout the study. All of them went to the Soviet Union on ?The Junket? and all were associated with liberal causes and ideas. These individuals included people like Stuart Chase, Rexford Tugwell, John Brophy, Paul Douglas, and Roger Baldwin. For whatever reason they had, the visit to Russia and actually talking to Joseph Stalin would have a definite impact on them. There are others, however, whom Shlaes also examines very closely ? individuals such as Andrew Mellon, Herbert Hoover, Wendell Wilkie, Father Divine, and Samuel Insull. Through these specific individuals and a few others, Shlaes examines the American economy, the Hoover presidency, and the Rooseveltian New Deal.

Shlaes goes into much detail on the programs that Calvin Coolidge and Herbert Hoover supported during their presidencies. The same is done for Franklin D. Roosevelt and the New Deal. The study begins in January 1927 and ends in January 1940. Each chapter of fifteen chapters begins with a specific date and an indication of the Dow Jones Industrial Average, the unemployment rate, or other indexes showing how the economy was doing. Of course, since this was the period of the Depression, the statistics typically showed that the American economy was not doing well nor recovering very quickly. Shlaes is particularly ?microscopic? when it comes to examining the New Deal. Whether it was the National Recovery Administration (NRA), the relief programs, the Wagner Act, court packing, the recession of 1937-38, the 1936 election, or Roosevelt?s anti-trust attack on business, she explains what happened and/or why things did not work out as the president had expected. She is very impressed, moreover, with individuals like Tugwell whom she thinks was ?too radical? for the New Deal. By the same token, she spends an inordinate amount of time on the attacks on Andrew Mellon for tax issues, Mellon?s commitment to opening the National Gallery of Art (showing that private enterprise could match government actions), or Wendell Wilkie and David Lilienthal?s fight to the finish over the TVA and the private utility industry. In short, the author gives a very detailed account of the Depression and how the government dealt with it.

Throughout all of this, she also traces those who had gone on the Soviet junket to see what happened to them over time and as the Depression deepened. In the end, Shlaes concludes that the 1920s was really a good time, a prosperous one. In her view, the stock market crash was inevitable and the subsequent depression was a breakdown of capitalism. Both Hoover and Roosevelt misjudged the crash and the depression, both mistrusted the stock market, and both overestimated what the government could accomplish. Shlaes argues that Roosevelt was more inspired by ?socialist and fascist? models, but that he lacked faith in the marketplace. The depression lasted so long and was considered the Great Depression because government intervention in the economy made it so. The struggle between private and public was continuous throughout the 1930s. And, the main reason why Roosevelt kept winning his elections was the possibility of war which loomed continuously on the horizon. In the end, the forgotten man was remembered by Wendell Willkie who understood and believed in the individual and liberalism as it should have been. If there is a hero for Shlaes, it is indeed Willkie.

In assessing this book, one point should be made clear from the very beginning. There is no doubt that the author is anti-Roosevelt and anti-New Deal. At first, the fact is subtle, but, as the book progresses, it becomes clearer that she dislikes FDR and what he did. Once the reader understands this, everything falls into place. Just as important are some specific weaknesses in the book itself. The author gets lost in ?details,? especially with the individuals that she is supposedly examining. A good case in point is Father Divine. While he is mentioned in the book from the beginning, it is not until almost the end of the study that the author even talks about him and then it is in terms of his purchasing property near the Roosevelt estate in Hyde Park. Another problem is the author?s insistence on identifying the motivation of people. Offering little or no evidence, she consistently tells the reader what and why something was being done by a particular person. Her discussion of Mellon makes one wonder whether he is a saint or a devil in disguise. Shlaes has a tendency to pick out what she wants from the evidence she has examined. This is true in the case of Tugwell. Whenever she quotes or discusses him, it is always in the context of Tugwell the radical reformer. The truth of the matter is that Tugwell can only be understood in terms of his ever-evolving and developing economic philosophy. Tugwell often ?thought out loud.? You simply cannot take what he said in 1934 and argue that this was his thinking all along. Finally, the author seems to have her own definition of what is liberal in the twentieth century. It would have helped immeasurably if she had shared her thinking with the reader from the very start.

In the end, Amity Shlaes? book is a formidable work. Whether scholars of this period agree with her or not, this study should and needs to be confronted. Perhaps, by approaching the Depression through the eyes of the so-called forgotten man, scholars may see the period in a different and more interesting way. Shlaes should be commended for her effort, whether or not one thinks that she has succeeded or failed in her work.

Michael V. Namorato is a Professor of History at the University of Mississippi. His publications include Rexford Tugwell: A Biography (Praeger, 1988) and (as editor) The Diary of Rexford G. Tugwell: The New Deal, 1932-1935 (Greenwood, 1992).

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Economic Disasters of the Twentieth Century

Author(s):Oliver, Michael J.
Aldcroft, Derek H.
Reviewer(s):Rockoff, Hugh

Published by EH.NET (June 2008)

Michael J. Oliver and Derek H. Aldcroft, editors, Economic Disasters of the Twentieth Century. Cheltenham, UK: Edward Elgar, 2007. ix + 361 pp. $125 (hardback), ISBN: 978-1-84064-589-7.

Reviewed for EH.NET by Hugh Rockoff, Department of Economics, Rutgers University.

This is a great idea for a book: economic disasters of the twentieth century. The editors, Michael Oliver and Derek Aldcroft, have written chapters on Financial Crises (Oliver) and the African Growth Disaster (Aldcroft). And they have recruited seven scholars to write chapters on other twentieth-century disasters: the First World War (John Singleton), the Great Depression (W.R. Garside), the Second World War (Niall Ferguson), OPEC Price Increases (Michael Beenstock), Inflation (Forrest Capie), Stock Market Crashes (Geoffrey E. Wood), and the Demise of the Command Economies of the Soviet Union and its Outer Empire (Steven Morewood). It is a stellar cast. Each author is an authority in his field and would make anyone’s list of the best people to write a particular essay.

The book is intended, first of all, for economic historians. These are what might be called creative surveys. The authors summarize the literature in their field, but they also try to push things forward a bit by addressing a few broad questions that haven’t been addressed fully in the literature. It is, therefore, worth looking at an essay even if it falls within your area of research. I was familiar, for example, with many of the references in Niall Ferguson’s chapter on World War II, but I still learned a lot from his extraordinary command of the literature, and his reflections on the origins, conduct, and consequences of the war. The greatest value added for me, however, came from reading Derek Aldcroft’s essay on the development failures in southern Africa, a subject about which I knew little beyond what I have read in the New York Times and the Wall Street Journal.

The book would make a good text or supplemental reading for a course in the economic history of the twentieth century, either at the advanced undergraduate or graduate level. Students love disasters. So a whole semester when they could go from one recent economic disaster to another would make for a very popular course. All of the essays would be accessible to advanced undergraduates. Only Michael Beenstock’s essay on OPEC employs algebra and graphical analysis. Many of the essays, however, assume some familiarity with the historical background and are densely packed with economic reasoning. Therefore, many undergraduates would need help mastering the essays.

Are the authors optimistic or pessimistic about our ability to learn from these economic disasters and avoid similar mistakes in the future? On the whole, the authors dealing mainly with the advanced industrial countries draw optimistic conclusions. Either the economically advanced countries will avoid economic disasters or, at a minimum, cope with them. John Singleton sets the tone in his essay on the First World War. (It is the first essay: they are arranged chronologically.) Singleton catalogs the enormous costs of the war. These include not only direct costs such as battlefield casualties and expenditures for weapons, but also indirect costs, such as the exacerbation of the influenza epidemic of 1918-19. But Singleton also points out that there were winners as well as losers. He sees Japan as (arguably) “the main economic beneficiary” of the war (p. 23). And he concludes that “The First World War was an economic disaster but, paradoxically, it also demonstrated the resilience of industrial capitalism” (p. 43). Niall Ferguson concludes his essay about World War II on an even more positive note: “Two new models of state-led production ? the American and the Soviet ? were put to the test of total war and passed it with flying colours. Those new models were then exported around the northern hemisphere, generating major improvement in economic performance nearly everywhere they were adopted or imposed” (p. 124).

W.R. Garside’s essay on the Great Depression sees an important lesson of the 1930s being applied in the 1970s: political pressure to prevent a recurrence of the high unemployment of 1930s, even at the cost of abandoning economic orthodoxies. Michael Beenstock traces fluctuations in the price of oil and in OPEC’s role in the oil market. He ends his essay by enumerating the reasons why oil price shocks are likely to be less disruptive today than they were in the 1970s. The most important factor, in his view, is improved macroeconomic policies.

Forrest Capie’s essay on inflation shows that periods of hyperinflation or very high inflation are almost always the product of “civil war or revolution or at a minimum serious social unrest” (p. 172). Weak governments faced with threats to their existence resort to the printing press. The implication is that we are unlikely to see very high inflation in advanced industrialized nations. Capie ends his essay by enumerating the many ways that nations have found to limit the potential for inflation: independent central banks, dollarization, currency boards, monetary unions and so on. Geoffrey Wood sees stock market crashes as an inevitable part of the economic scene. But he argues they need not produce macroeconomic disasters. Disasters happen when a stock market crash is combined with “banking and monetary system failures” (p. 254). The message is that we may not be able to avoid the waves of optimism and pessimism that capture the stock market from time to time, but we can avoid the policy mistakes that turn stock market crashes into macroeconomic disasters.

On the other hand, when the focus shifts to less economically advanced nations, the conclusions become pessimistic. Michael Oliver, after surveying the literature on international financial crises concludes: “… it is a sobering thought to conclude that whatever reforms are made to the international financial architecture and however robust domestic financial systems are made, economists and policy-makers will still be dealing with financial crises 100 years hence” (p. 227). Steven Morewood is not at all sure that the end of communism in the Soviet Union and its satellites was a good thing economically. “Time will tell” (p. 308) is as far as he is willing to go. The most pessimistic essay is Aldcroft’s on the African growth disaster: “Thus we can say confidently that, short of a miracle, the prospects for most of the very poor nations, and especially the SSA [Sub-Saharan Africa] group, will continue to remain very bleak indeed” (p. 348).

This is a fine collection of essays. There is no point in playing the game of awarding gold, silver, and bronze medals, as reviewers often do, because all the essays reach a high level of quality. Each of the authors is a well-regarded expert in his field and clearly capable of producing a well-crafted essay. The surprising thing, given the variability that characterizes most collected volumes, is that all of the authors came through. Each wrestled with important questions and developed his answers in detail. There were no slackers. The authors and editors are to be congratulated.

Hugh Rockoff is a professor of economics at Rutgers University and a research associate of the National Bureau of Economic Research. He recently published (with Leonard Caruana) “An Elephant in the Garden: The Allies, Spain, and Oil in World War II” in the European Review of Economic History.

Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII