George Boyer, Cornell University

A compulsory system of poor relief was instituted in England during the reign of Elizabeth I. Although the role played by poor relief was significantly modified by the Poor Law Amendment Act of 1834, the Crusade Against Outrelief of the 1870s, and the adoption of various social insurance programs in the early twentieth century, the Poor Law continued to assist the poor until it was replaced by the welfare state in 1948. For nearly three centuries, the Poor Law constituted “a welfare state in miniature,” relieving the elderly, widows, children, the sick, the disabled, and the unemployed and underemployed (Blaug 1964). This essay will outline the changing role played by the Poor Law, focusing on the eighteenth and nineteenth centuries.

The Origins of the Poor Law

While legislation dealing with vagrants and beggars dates back to the fourteenth century, perhaps the first English poor law legislation was enacted in 1536, instructing each parish to undertake voluntary weekly collections to assist the “impotent” poor. The parish had been the basic unit of local government since at least the fourteenth century, although Parliament imposed few if any civic functions on parishes before the sixteenth century. Parliament adopted several other statutes relating to the poor in the next sixty years, culminating with the Acts of 1597-98 and 1601 (43 Eliz. I c. 2), which established a compulsory system of poor relief that was administered and financed at the parish (local) level. These Acts laid the groundwork for the system of poor relief up to the adoption of the Poor Law Amendment Act in 1834. Relief was to be administered by a group of overseers, who were to assess a compulsory property tax, known as the poor rate, to assist those within the parish “having no means to maintain them.” The poor were divided into three groups: able-bodied adults, children, and the old or non-able-bodied (impotent). The overseers were instructed to put the able-bodied to work, to give apprenticeships to poor children, and to provide “competent sums of money” to relieve the impotent.

Deteriorating economic conditions and loss of traditional forms of charity in the 1500s

The Elizabethan Poor Law was adopted largely in response to a serious deterioration in economic circumstances, combined with a decline in more traditional forms of charitable assistance. Sixteenth century England experienced rapid inflation, caused by rapid population growth, the debasement of the coinage in 1526 and 1544-46, and the inflow of American silver. Grain prices more than tripled from 1490-1509 to 1550-69, and then increased by an additional 73 percent from 1550-69 to 1590-1609. The prices of other commodities increased nearly as rapidly — the Phelps Brown and Hopkins price index rose by 391 percent from 1495-1504 to 1595-1604. Nominal wages increased at a much slower rate than did prices; as a result, real wages of agricultural and building laborers and of skilled craftsmen declined by about 60 percent over the course of the sixteenth century. This decline in purchasing power led to severe hardship for a large share of the population. Conditions were especially bad in 1595-98, when four consecutive poor harvests led to famine conditions. At the same time that the number of workers living in poverty increased, the supply of charitable assistance declined. The dissolution of the monasteries in 1536-40, followed by the dissolution of religious guilds, fraternities, almshouses, and hospitals in 1545-49, “destroyed much of the institutional fabric which had provided charity for the poor in the past” (Slack 1990). Given the circumstances, the Acts of 1597-98 and 1601 can be seen as an attempt by Parliament both to prevent starvation and to control public order.

The Poor Law, 1601-1750

It is difficult to determine how quickly parishes implemented the Poor Law. Paul Slack (1990) contends that in 1660 a third or more of parishes regularly were collecting poor rates, and that by 1700 poor rates were universal. The Board of Trade estimated that in 1696 expenditures on poor relief totaled £400,000 (see Table 1), slightly less than 1 percent of national income. No official statistics exist for this period concerning the number of persons relieved or the demographic characteristics of those relieved, but it is possible to get some idea of the makeup of the “pauper host” from local studies undertaken by historians. These suggest that, during the seventeenth century, the bulk of relief recipients were elderly, orphans, or widows with young children. In the first half of the century, orphans and lone-parent children made up a particularly large share of the relief rolls, while by the late seventeenth century in many parishes a majority of those collecting regular weekly “pensions” were aged sixty or older. Female pensioners outnumbered males by as much as three to one (Smith 1996). On average, the payment of weekly pensions made up about two-thirds of relief spending in the late seventeenth and early eighteenth centuries; the remainder went to casual benefits, often to able-bodied males in need of short-term relief because of sickness or unemployment.

Settlement Act of 1662

One of the issues that arose in the administration of relief was that of entitlement: did everyone within a parish have a legal right to relief? Parliament addressed this question in the Settlement Act of 1662, which formalized the notion that each person had a parish of settlement, and which gave parishes the right to remove within forty days of arrival any newcomer deemed “likely to be chargeable” as well as any non-settled applicant for relief. While Adam Smith, and some historians, argued that the Settlement Law put a serious brake on labor mobility, available evidence suggests that parishes used it selectively, to keep out economically undesirable migrants such as single women, older workers, and men with large families.

Relief expenditures increased sharply in the first half of the eighteenth century, as can be seen in Table 1. Nominal expenditures increased by 72 percent from 1696 to 1748-50 despite the fact that prices were falling and population was growing slowly; real expenditures per capita increased by 84 percent. A large part of this rise was due to increasing pension benefits, especially for the elderly. Some areas also experienced an increase in the number of able-bodied relief recipients. In an attempt to deter some of the poor from applying for relief, Parliament in 1723 adopted the Workhouse Test Act, which empowered parishes to deny relief to any applicant who refused to enter a workhouse. While many parishes established workhouses as a result of the Act, these were often short-lived, and the vast majority of paupers continued to receive outdoor relief (that is, relief in their own homes).

The Poor Law, 1750-1834

The period from 1750 to 1820 witnessed an explosion in relief expenditures. Real per capita expenditures more than doubled from 1748-50 to 1803, and remained at a high level until the Poor Law was amended in 1834 (see Table 1). Relief expenditures increased from 1.0% of GDP in 1748-50 to a peak of 2.7% of GDP in 1818-20 (Lindert 1998). The demographic characteristics of the pauper host changed considerably in the late eighteenth and early nineteenth centuries, especially in the rural south and east of England. There was a sharp increase in numbers receiving casual benefits, as opposed to regular weekly pensions. The age distribution of those on relief became younger — the share of paupers who were prime-aged (20- 59) increased significantly, and the share aged 60 and over declined. Finally, the share of relief recipients in the south and east who were male increased from about a third in 1760 to nearly two-thirds in 1820. In the north and west there also were shifts toward prime-age males and casual relief, but the magnitude of these changes was far smaller than elsewhere (King 2000).

Gilbert’s Act and the Removal Act

There were two major pieces of legislation during this period. Gilbert’s Act (1782) empowered parishes to join together to form unions for the purpose of relieving their poor. The Act stated that only the impotent poor should be relieved in workhouses; the able-bodied should either be found work or granted outdoor relief. To a large extent, Gilbert’s Act simply legitimized the policies of a large number of parishes that found outdoor relief both less and expensive and more humane that workhouse relief. The other major piece of legislation was the Removal Act of 1795, which amended the Settlement Law so that no non-settled person could be removed from a parish unless he or she applied for relief.

Speenhamland System and other forms of poor relief

During this period, relief for the able-bodied took various forms, the most important of which were: allowances-in-aid-of-wages (the so-called Speenhamland system), child allowances for laborers with large families, and payments to seasonally unemployed agricultural laborers. The system of allowances-in-aid-of-wages was adopted by magistrates and parish overseers throughout large parts of southern England to assist the poor during crisis periods. The most famous allowance scale, though by no means the first, was that adopted by Berkshire magistrates at Speenhamland on May 6, 1795. Under the allowance system, a household head (whether employed or unemployed) was guaranteed a minimum weekly income, the level of which was determined by the price of bread and by the size of his or her family. Such scales typically were instituted only during years of high food prices, such as 1795-96 and 1800-01, and removed when prices declined. Child allowance payments were widespread in the rural south and east, which suggests that laborers’ wages were too low to support large families. The typical parish paid a small weekly sum to laborers with four or more children under age 10 or 12. Seasonal unemployment had been a problem for agricultural laborers long before 1750, but the extent of seasonality increased in the second half of the eighteenth century as farmers in southern and eastern England responded to the sharp increase in grain prices by increasing their specialization in grain production. The increase in seasonal unemployment, combined with the decline in other sources of income, forced many agricultural laborers to apply for poor relief during the winter.

Regional differences in relief expenditures and recipients

Table 2 reports data for fifteen counties located throughout England on per capita relief expenditures for the years ending in March 1783-85, 1803, 1812, and 1831, and on relief recipients in 1802-03. Per capita expenditures were higher on average in agricultural counties than in more industrial counties, and were especially high in the grain-producing southern counties — Oxford, Berkshire, Essex, Suffolk, and Sussex. The share of the population receiving poor relief in 1802-03 varied significantly across counties, being 15 to 23 percent in the grain- producing south and less than 10 percent in the north. The demographic characteristics of those relieved also differed across regions. In particular, the share of relief recipients who were elderly or disabled was higher in the north and west than it was in the south; by implication, the share that were able-bodied was higher in the south and east than elsewhere. Economic historians typically have concluded that these regional differences in relief expenditures and numbers on relief were caused by differences in economic circumstances; that is, poverty was more of a problem in the agricultural south and east than it was in the pastoral southwest or in the more industrial north (Blaug 1963; Boyer 1990). More recently, King (2000) has argued that the regional differences in poor relief were determined not by economic structure but rather by “very different welfare cultures on the part of both the poor and the poor law administrators.”

Causes of the Increase in Relief to Able-bodied Males

What caused the increase in the number of able-bodied males on relief? In the second half of the eighteenth century, a large share of rural households in southern England suffered significant declines in real income. County-level cross-sectional data suggest that, on average, real wages for day laborers in agriculture declined by 19 percent from 1767-70 to 1795 in fifteen southern grain-producing counties, then remained roughly constant from 1795 to 1824, before increasing to a level in 1832 about 10 percent above that of 1770 (Bowley 1898). Farm-level time-series data yield a similar result — real wages in the southeast declined by 13 percent from 1770-79 to 1800-09, and remained low until the 1820s (Clark 2001).

Enclosures

Some historians contend that the Parliamentary enclosure movement, and the plowing over of commons and waste land, reduced the access of rural households to land for growing food, grazing animals, and gathering fuel, and led to the immiseration of large numbers of agricultural laborers and their families (Hammond and Hammond 1911; Humphries 1990). More recent research, however, suggests that only a relatively small share of agricultural laborers had common rights, and that there was little open access common land in southeastern England by 1750 (Shaw-Taylor 2001; Clark and Clark 2001). Thus, the Hammonds and Humphries probably overstated the effect of late eighteenth-century enclosures on agricultural laborers’ living standards, although those laborers who had common rights must have been hurt by enclosures.

Declining cottage industry

Finally, in some parts of the south and east, women and children were employed in wool spinning, lace making, straw plaiting, and other cottage industries. Employment opportunities in wool spinning, the largest cottage industry, declined in the late eighteenth century, and employment in the other cottage industries declined in the early nineteenth century (Pinchbeck 1930; Boyer 1990). The decline of cottage industry reduced the ability of women and children to contribute to household income. This, in combination with the decline in agricultural laborers’ wage rates and, in some villages, the loss of common rights, caused many rural household’s incomes in southern England to fall dangerously close to subsistence by 1795.

North and Midlands

The situation was different in the north and midlands. The real wages of day laborers in agriculture remained roughly constant from 1770 to 1810, and then increased sharply, so that by the 1820s wages were about 50 percent higher than they were in 1770 (Clark 2001). Moreover, while some parts of the north and midlands experienced a decline in cottage industry, in Lancashire and the West Riding of Yorkshire the concentration of textile production led to increased employment opportunities for women and children.

The Political Economy of the Poor Law, 1795-1834

A comparison of English poor relief with poor relief on the European continent reveals a puzzle: from 1795 to 1834 relief expenditures per capita, and expenditures as a share of national product, were significantly higher in England than on the continent. However, differences in spending between England and the continent were relatively small before 1795 and after 1834 (Lindert 1998). Simple economic explanations cannot account for the different patterns of English and continental relief.

Labor-hiring farmers take advantage of the poor relief system

The increase in relief spending in the late-eighteenth and early-nineteenth centuries was partly a result of politically-dominant farmers taking advantage of the poor relief system to shift some of their labor costs onto other taxpayers (Boyer 1990). Most rural parish vestries were dominated by labor-hiring farmers as a result of “the principle of weighting the right to vote according to the amount of property occupied,” introduced by Gilbert’s Act (1782), and extended in 1818 by the Parish Vestry Act (Brundage 1978). Relief expenditures were financed by a tax levied on all parishioners whose property value exceeded some minimum level. A typical rural parish’s taxpayers can be divided into two groups: labor-hiring farmers and non-labor-hiring taxpayers (family farmers, shopkeepers, and artisans). In grain-producing areas, where there were large seasonal variations in the demand for labor, labor-hiring farmers anxious to secure an adequate peak season labor force were able to reduce costs by laying off unneeded workers during slack seasons and having them collect poor relief. Large farmers used their political power to tailor the administration of poor relief so as to lower their labor costs. Thus, some share of the increase in relief spending in the early nineteenth century represented a subsidy to labor-hiring farmers rather than a transfer from farmers and other taxpayers to agricultural laborers and their families. In pasture farming areas, where the demand for labor was fairly constant over the year, it was not in farmers’ interests to shed labor during the winter, and the number of able-bodied laborers receiving casual relief was smaller. The Poor Law Amendment Act of 1834 reduced the political power of labor-hiring farmers, which helps to account for the decline in relief expenditures after that date.

The New Poor Law, 1834-70

The increase in spending on poor relief in the late eighteenth and early nineteenth centuries, combined with the attacks on the Poor Laws by Thomas Malthus and other political economists and the agricultural laborers’ revolt of 1830-31 (the Captain Swing riots), led the government in 1832 to appoint the Royal Commission to Investigate the Poor Laws. The Commission published its report, written by Nassau Senior and Edwin Chadwick, in March 1834. The report, described by historian R. H. Tawney (1926) as “brilliant, influential and wildly unhistorical,” called for sweeping reforms of the Poor Law, including the grouping of parishes into Poor Law unions, the abolition of outdoor relief for the able-bodied and their families, and the appointment of a centralized Poor Law Commission to direct the administration of poor relief. Soon after the report was published Parliament adopted the Poor Law Amendment Act of 1834, which implemented some of the report’s recommendations and left others, like the regulation of outdoor relief, to the three newly appointed Poor Law Commissioners.

By 1839 the vast majority of rural parishes had been grouped into poor law unions, and most of these had built or were building workhouses. On the other hand, the Commission met with strong opposition when it attempted in 1837 to set up unions in the industrial north, and the implementation of the New Poor Law was delayed in several industrial cities. In an attempt to regulate the granting of relief to able-bodied males, the Commission, and its replacement in 1847, the Poor Law Board, issued several orders to selected Poor Law Unions. The Outdoor Labour Test Order of 1842, sent to unions without workhouses or where the workhouse test was deemed unenforceable, stated that able-bodied males could be given outdoor relief only if they were set to work by the union. The Outdoor Relief Prohibitory Order of 1844 prohibited outdoor relief for both able-bodied males and females except on account of sickness or “sudden and urgent necessity.” The Outdoor Relief Regulation Order of 1852 extended the labor test for those relieved outside of workhouses.

Historical debate about the effect of the New Poor Law

Historians do not agree on the effect of the New Poor Law on the local administration of relief. Some contend that the orders regulating outdoor relief largely were evaded by both rural and urban unions, many of whom continued to grant outdoor relief to unemployed and underemployed males (Rose 1970; Digby 1975). Others point to the falling numbers of able- bodied males receiving relief in the national statistics and the widespread construction of union workhouses, and conclude that the New Poor Law succeeded in abolishing outdoor relief for the able-bodied by 1850 (Williams 1981). A recent study by Lees (1998) found that in three London parishes and six provincial towns in the years around 1850 large numbers of prime-age males continued to apply for relief, and that a majority of those assisted were granted outdoor relief. The Poor Law also played an important role in assisting the unemployed in industrial cities during the cyclical downturns of 1841-42 and 1847-48 and the Lancashire cotton famine of 1862-65 (Boot 1990; Boyer 1997). There is no doubt, however, that spending on poor relief declined after 1834 (see Table 1). Real per capita relief expenditures fell by 43 percent from 1831 to 1841, and increased slowly thereafter.

Beginning in 1840, data on the number of persons receiving poor relief are available for two days a year, January 1 and July 1; the “official” estimates in Table 1 of the annual number relieved were constructed as the average of the number relieved on these two dates. Studies conducted by Poor Law administrators indicate that the number recorded in the day counts was less than half the number assisted during the year. Lees’s “revised” estimates of annual relief recipients (see Table 1) assumes that the ratio of actual to counted paupers was 2.24 for 1850- 1900 and 2.15 for 1905-14; these suggest that from 1850 to 1870 about 10 percent of the population was assisted by the Poor Law each year. Given the temporary nature of most spells of relief, over a three year period as much as 25 percent of the population made use of the Poor Law (Lees 1998).

The Crusade Against Outrelief

In the 1870s Poor Law unions throughout England and Wales curtailed outdoor relief for all types of paupers. This change in policy, known as the Crusade Against Outrelief, was not a result of new government regulations, although it was encouraged by the newly formed Local Government Board (LGB). The Board was aided in convincing the public of the need for reform by the propaganda of the Charity Organization Society (COS), founded in 1869. The LGB and the COS maintained that the ready availability of outdoor relief destroyed the self-reliance of the poor. The COS went on to argue that the shift from outdoor to workhouse relief would significantly reduce the demand for assistance, since most applicants would refuse to enter workhouses, and therefore reduce Poor Law expenditures. A policy that promised to raise the morals of the poor and reduce taxes was hard for most Poor Law unions to resist (MacKinnon 1987).

The effect of the Crusade can be seen in Table 1. The deterrent effect associated with the workhouse led to a sharp fall in numbers on relief — from 1871 to 1876, the number of paupers receiving outdoor relief fell by 33 percent. The share of paupers relieved in workhouses increased from 12-15 percent in 1841-71 to 22 percent in 1880, and it continued to rise to 35 percent in 1911. The extent of the crusade varied considerably across poor law unions. Urban unions typically relieved a much larger share of their paupers in workhouses than did rural unions, but there were significant differences in practice across cities. In 1893, over 70 percent of the paupers in Liverpool, Manchester, Birmingham, and in many London Poor Law unions received indoor relief; however, in Leeds, Bradford, Newcastle, Nottingham and several other industrial and mining cities the majority of paupers continued to receive outdoor relief (Booth 1894).

Change in the attitude of the poor toward relief

The last third of the nineteenth century also witnessed a change in the attitude of the poor towards relief. Prior to 1870, a large share of the working class regarded access to public relief as an entitlement, although they rejected the workhouse as a form of relief. Their opinions changed over time, however, and by the end of the century most workers viewed poor relief as stigmatizing (Lees 1998). This change in perceptions led many poor people to go to great lengths to avoid applying for relief, and available evidence suggests that there were large differences between poverty rates and pauperism rates in late Victorian Britain. For example, in York in 1900, 3,451 persons received poor relief at some point during the year, less than half of the 7,230 persons estimated by Rowntree to be living in primary poverty.

The Declining Role of the Poor Law, 1870-1914

Increased availability of alternative sources of assistance

The share of the population on relief fell sharply from 1871 to 1876, and then continued to decline, at a much slower pace, until 1914. Real per capita relief expenditures increased from 1876 to 1914, largely because the Poor Law provided increasing amounts of medical care for the poor. Otherwise, the role played by the Poor Law declined over this period, due in large part to an increase in the availability of alternative sources of assistance. There was a sharp increase in the second half of the nineteenth century in the membership of friendly societies — mutual help associations providing sickness, accident, and death benefits, and sometimes old age (superannuation) benefits — and of trade unions providing mutual insurance policies. The benefits provided workers and their families with some protection against income loss, and few who belonged to friendly societies or unions providing “friendly” benefits ever needed to apply to the Poor Law for assistance.

Work relief

Local governments continued to assist unemployed males after 1870, but typically not through the Poor Law. Beginning with the Chamberlain Circular in 1886 the Local Government Board encouraged cities to set up work relief projects when unemployment was high. The circular stated that “it is not desirable that the working classes should be familiarised with Poor Law relief,” and that the work provided should “not involve the stigma of pauperism.” In 1905 Parliament adopted the Unemployed Workman Act, which established in all large cities distress committees to provide temporary employment to workers who were unemployed because of a “dislocation of trade.”

Liberal welfare reforms, 1906-1911

Between 1906 and 1911 Parliament passed several pieces of social welfare legislation collectively known as the Liberal welfare reforms. These laws provided free meals and medical inspections (later treatment) for needy school children (1906, 1907, 1912) and weekly pensions for poor persons over age 70 (1908), and established national sickness and unemployment insurance (1911). The Liberal reforms purposely reduced the role played by poor relief, and paved the way for the abolition of the Poor Law.

The Last Years of the Poor Law

During the interwar period the Poor Law served as a residual safety net, assisting those who fell through the cracks of the existing social insurance policies. The high unemployment of 1921-38 led to a sharp increase in numbers on relief. The official count of relief recipients rose from 748,000 in 1914 to 1,449,000 in 1922; the number relieved averaged 1,379,800 from 1922 to 1938. A large share of those on relief were unemployed workers and their dependents, especially in 1922-26. Despite the extension of unemployment insurance in 1920 to virtually all workers except the self-employed and those in agriculture or domestic service, there still were large numbers who either did not qualify for unemployment benefits or who had exhausted their benefits, and many of them turned to the Poor Law for assistance. The vast majority were given outdoor relief; from 1921 to 1923 the number of outdoor relief recipients increased by 1,051,000 while the number receiving indoor relieve increased by 21,000.

The Poor Law becomes redundant and is repealed

Despite the important role played by poor relief during the interwar period, the government continued to adopt policies, which bypassed the Poor Law and left it “to die by attrition and surgical removals of essential organs” (Lees 1998). The Local Government Act of 1929 abolished the Poor Law unions, and transferred the administration of poor relief to the counties and county boroughs. In 1934 the responsibility for assisting those unemployed who were outside the unemployment insurance system was transferred from the Poor Law to the Unemployment Assistance Board. Finally, from 1945 to 1948, Parliament adopted a series of laws that together formed the basis for the welfare state, and made the Poor Law redundant. The National Assistance Act of 1948 officially repealed all existing Poor Law legislation, and replaced the Poor Law with the National Assistance Board to act as a residual relief agency.

Table 1
Relief Expenditures and Numbers on Relief, 1696-1936

Notes: Relief expenditure data are for the year ended on March 25. In calculating real per capita expenditures, I used cost of living and population data for the previous year.

Table 2
County-level Poor Relief Data, 1783-1831

References

Blaug, Mark. “The Myth of the Old Poor Law and the Making of the New.” Journal of Economic History 23 (1963): 151-84.

Blaug, Mark. “The Poor Law Report Re-examined.” Journal of Economic History (1964) 24: 229-45.

Boot, H. M. “Unemployment and Poor Law Relief in Manchester, 1845-50.” Social History 15 (1990): 217-28.

Booth, Charles. The Aged Poor in England and Wales. London: MacMillan, 1894.

Boyer, George R. “Poor Relief, Informal Assistance, and Short Time during the Lancashire Cotton Famine.” Explorations in Economic History 34 (1997): 56-76.

Boyer, George R. An Economic History of the English Poor Law, 1750-1850. Cambridge: Cambridge University Press, 1990.

Brundage, Anthony. The Making of the New Poor Law. New Brunswick, N.J.: Rutgers University Press, 1978.

Clark, Gregory. “Farm Wages and Living Standards in the Industrial Revolution: England, 1670-1869.” Economic History Review, 2nd series 54 (2001): 477-505.

Clark, Gregory and Anthony Clark. “Common Rights to Land in England, 1475-1839.” Journal of Economic History 61 (2001): 1009-36.

Digby, Anne. “The Labour Market and the Continuity of Social Policy after 1834: The Case of the Eastern Counties.” Economic History Review, 2nd series 28 (1975): 69-83.

Eastwood, David. Governing Rural England: Tradition and Transformation in Local Government, 1780-1840. Oxford: Clarendon Press, 1994.

Fraser, Derek, editor. The New Poor Law in the Nineteenth Century. London: Macmillan, 1976.

Hammond, J. L. and Barbara Hammond. The Village Labourer, 1760-1832. London: Longmans, Green, and Co., 1911.

Hampson, E. M. The Treatment of Poverty in Cambridgeshire, 1597-1834. Cambridge: Cambridge University Press, 1934

Humphries, Jane. “Enclosures, Common Rights, and Women: The Proletarianization of Families in the Late Eighteenth and Early Nineteenth Centuries.” Journal of Economic History 50 (1990): 17-42.

King, Steven. Poverty and Welfare in England, 1700-1850: A Regional Perspective. Manchester: Manchester University Press, 2000.

Lees, Lynn Hollen. The Solidarities of Strangers: The English Poor Laws and the People, 1770-1948. Cambridge: Cambridge University Press, 1998.

Lindert, Peter H. “Poor Relief before the Welfare State: Britain versus the Continent, 1780- 1880.” European Review of Economic History 2 (1998): 101-40.

MacKinnon, Mary. “English Poor Law Policy and the Crusade Against Outrelief.” Journal of Economic History 47 (1987): 603-25.

Marshall, J. D. The Old Poor Law, 1795-1834. 2nd edition. London: Macmillan, 1985.

Pinchbeck, Ivy. Women Workers and the Industrial Revolution, 1750-1850. London: Routledge, 1930.

Pound, John. Poverty and Vagrancy in Tudor England, 2nd edition. London: Longmans, 1986.

Rose, Michael E. “The New Poor Law in an Industrial Area.” In The Industrial Revolution, edited by R.M. Hartwell. Oxford: Oxford University Press, 1970.

Rose, Michael E. The English Poor Law, 1780-1930. Newton Abbot: David & Charles, 1971.

Shaw-Taylor, Leigh. “Parliamentary Enclosure and the Emergence of an English Agricultural Proletariat.” Journal of Economic History 61 (2001): 640-62.

Slack, Paul. Poverty and Policy in Tudor and Stuart England. London: Longmans, 1988.

Slack, Paul. The English Poor Law, 1531-1782. London: Macmillan, 1990.

Smith, Richard (1996). “Charity, Self-interest and Welfare: Reflections from Demographic and Family History.” In Charity, Self-Interest and Welfare in the English Past, edited by Martin Daunton. NewYork: St Martin’s.

Sokoll, Thomas. Household and Family among the Poor: The Case of Two Essex Communities in the Late Eighteenth and Early Nineteenth Centuries. Bochum: Universitätsverlag Brockmeyer, 1993.

Solar, Peter M. “Poor Relief and English Economic Development before the Industrial Revolution.” Economic History Review, 2nd series 48 (1995): 1-22.

Tawney, R. H. Religion and the Rise of Capitalism: A Historical Study. London: J. Murray, 1926.

Webb, Sidney and Beatrice Webb. English Poor Law History. Part I: The Old Poor Law. London: Longmans, 1927.

Williams, Karel. From Pauperism to Poverty. London: Routledge, 1981.

Joshua Rosenbloom, University of Kansas

One of the most important implications of modern microeconomic theory is that perfectly competitive markets produce an efficient allocation of resources. Historically, however, most markets have not approached the level of organization of this theoretical ideal. Instead of the costless and instantaneous communication envisioned in theory, market participants must rely on a set of incomplete and often costly channels of communication to learn about conditions of supply and demand; and they may face significant transaction costs to act on the information that they have acquired through these channels.

The economic history of labor market institutions is concerned with identifying the mechanisms that have facilitated the allocation of labor effort in the economy at different times, tracing the historical processes by which they have responded to shifting circumstances, and understanding how these mechanisms affected the allocation of labor as well as the distribution of labor’s products in different epochs.

Labor market institutions include both formal organizations (such as union hiring halls, government labor exchanges, and third party intermediaries such as employment agents), and informal mechanisms of communication such as word-of-mouth about employment opportunities passed between family and friends. The impact of these institutions is broad ranging. It includes the geographic allocation of labor (migration and urbanization), decisions about education and training of workers (investment in human capital), inequality (relative wages), the allocation of time between paid work and other activities such as household production, education, and leisure, and fertility (the allocation of time between production and reproduction).

Because each worker possesses a unique bundle of skills and attributes and each job is different, labor market transactions require the communication of a relatively large amount of information. In other words, the transactions costs involved in the exchange of labor are relatively high. The result is that the barriers separating different labor markets have sometimes been quite high, and these markets are relatively poorly integrated with one another.

The frictions inherent in the labor market mean that even during macroeconomic expansions there may be both a significant number of unemployed workers and a large number of unfilled vacancies. When viewed from some distance and looked at in the long-run, however, what is most striking is how effective labor market institutions have been in adapting to the shifting patterns of supply and demand in the economy. Over the past two centuries American labor markets have accomplished a massive redistribution of labor out of agriculture into manufacturing, and then from manufacturing into services. At the same time they have accomplished a huge geographic reallocation of labor between the United States and other parts of the world as well as within the United States itself, both across states and regions and from rural locations to urban areas.

This essay is organized topically, beginning with a discussion of the evolution of institutions involved in the allocation of labor across space and then taking up the development of institutions that fostered the allocation of labor across industries and sectors. The third section considers issues related to labor market performance.

The Geographic Distribution of Labor

One of the dominant themes of American history is the process of European settlement (and the concomitant displacement of the native population). This movement of population is in essence a labor market phenomenon. From the beginning of European settlement in what became the United States, labor markets were characterized by the scarcity of labor in relation to abundant land and natural resources. Labor scarcity raised labor productivity and enabled ordinary Americans to enjoy a higher standard of living than comparable Europeans. Counterbalancing these inducements to migration, however, were the high costs of travel across the Atlantic and the significant risks posed by settlement in frontier regions. Over time, technological changes lowered the costs of communication and transportation. But exploiting these advantages required the parallel development of new labor market institutions.

Trans-Atlantic Migration in the Colonial Period

During the seventeenth and eighteenth centuries a variety of labor market institutions developed to facilitate the movement of labor in response to the opportunities created by American factor proportions. While some immigrants migrated on their own, the majority of immigrants were either indentured servants or African slaves.

Because of the cost of passage—which exceeded half a year’s income for a typical British immigrant and a full year’s income for a typical German immigrant—only a small portion of European migrants could afford to pay for their passage to the Americas (Grubb 1985a). They did so by signing contracts, or “indentures,” committing themselves to work for a fixed number of years in the future—their labor being their only viable asset—with British merchants, who then sold these contracts to colonists after their ship reached America. Indentured servitude was introduced by the Virginia Company in 1619 and appears to have arisen from a combination of the terms of two other types of labor contract widely used in England at the time: service in husbandry and apprenticeship (Galenson 1981). In other cases, migrants borrowed money for their passage and committed to repay merchants by pledging to sell themselves as servants in America, a practice known as “redemptioner servitude (Grubb 1986). Redemptioners bore increased risk because they could not predict in advance what terms they might be able to negotiate for their labor, but presumably they did so because of other benefits, such as the opportunity to choose their own master, and to select where they would be employed.

Although data on immigration for the colonial period are scattered and incomplete a number of scholars have estimated that between half and three quarters of European immigrants arriving in the colonies came as indentured or redemptioner servants. Using data for the end of the colonial period Grubb (1985b) found that close to three-quarters of English immigrants to Pennsylvania and nearly 60 percent of German immigrants arrived as servants.

A number of scholars have examined the terms of indenture and redemptioner contracts in some detail (see, e.g., Galenson 1981; Grubb 1985a). They find that consistent with the existence of a well-functioning market, the terms of service varied in response to differences in individual productivity, employment conditions, and the balance of supply and demand in different locations.

The other major source of labor for the colonies was the forced migration of African slaves. Slavery had been introduced in the West Indies at an early date, but it was not until the late seventeenth century that significant numbers of slaves began to be imported into the mainland colonies. From 1700 to 1780 the proportion of blacks in the Chesapeake region grew from 13 percent to around 40 percent. In South Carolina and Georgia, the black share of the population climbed from 18 percent to 41 percent in the same period (McCusker and Menard, 1985, p. 222). Galenson (1984) explains the transition from indentured European to enslaved African labor as the result of shifts in supply and demand conditions in England and the trans-Atlantic slave market. Conditions in Europe improved after 1650, reducing the supply of indentured servants, while at the same time increased competition in the slave trade was lowering the price of slaves (Dunn 1984). In some sense the colonies’ early experience with indentured servants paved the way for the transition to slavery. Like slaves, indentured servants were unfree, and ownership of their labor could be freely transferred from one owner to another. Unlike slaves, however, they could look forward to eventually becoming free (Morgan 1971).

Over time a marked regional division in labor market institutions emerged in colonial America. The use of slaves was concentrated in the Chesapeake and Lower South, where the presence of staple export crops (rice, indigo and tobacco) provided economic rewards for expanding the scale of cultivation beyond the size achievable with family labor. European immigrants (primarily indentured servants) tended to concentrate in the Chesapeake and Middle Colonies, where servants could expect to find the greatest opportunities to enter agriculture once they had completed their term of service. While New England was able to support self-sufficient farmers, its climate and soil were not conducive to the expansion of commercial agriculture, with the result that it attracted relatively few slaves, indentured servants, or free immigrants. These patterns are illustrated in Table 1, which summarizes the composition and destinations of English emigrants in the years 1773 to 1776.

Table 1

English Emigration to the American Colonies, by Destination and Type, 1773-76

Source: Grubb (1985b, p. 334).

International Migration in the Nineteenth and Twentieth Centuries

American independence marks a turning point in the development of labor market institutions. In 1808 Congress prohibited the importation of slaves. Meanwhile, the use of indentured servitude to finance the migration of European immigrants fell into disuse. As a result, most subsequent migration was at least nominally free migration.

The high cost of migration and the economic uncertainties of the new nation help to explain the relatively low level of immigration in the early years of the nineteenth century. But as the costs of transportation fell, the volume of immigration rose dramatically over the course of the century. Transportation costs were of course only one of the obstacles to international population movements. At least as important were problems of communication. Potential migrants might know in a general way that the United States offered greater economic opportunities than were available at home, but acting on this information required the development of labor market institutions that could effectively link job-seekers with employers.

For the most part, the labor market institutions that emerged in the nineteenth century to direct international migration were “informal” and thus difficult to document. As Rosenbloom (2002, ch. 2) describes, however, word-of-mouth played an important role in labor markets at this time. Many immigrants were following in the footsteps of friends or relatives already in the United States. Often these initial pioneers provided material assistance—helping to purchase ship and train tickets, providing housing—as well as information. The consequences of this so-called “chain migration” are readily reflected in a variety of kinds of evidence. Numerous studies of specific migration streams have documented the role of a small group of initial migrants in facilitating subsequent migration (for example, Barton 1975; Kamphoefner 1987; Gjerde 1985). At a more aggregate level, settlement patterns confirm the tendency of immigrants from different countries to concentrate in different cities (Ward 1971, p. 77; Galloway, Vedder and Shukla 1974).

Informal word-of-mouth communication was an effective labor market institution because it served both employers and job-seekers. For job-seekers the recommendations of friends and relatives were more reliable than those of third parties and often came with additional assistance. For employers the recommendations of current employees served as a kind of screening mechanism, since their employees were unlikely to encourage the immigration of unreliable workers.

While chain migration can explain a quantitatively large part of the redistribution of labor in the nineteenth century it is still necessary to explain how these chains came into existence in the first place. Chain migration always coexisted with another set of more formal labor market institutions that grew up largely to serve employers who could not rely on their existing labor force to recruit new hires (such as railroad construction companies). Labor agents, often themselves immigrants, acted as intermediaries between these employers and job-seekers, providing labor market information and frequently acting as translators for immigrants who could not speak English. Steamship companies operating between Europe and the United States also employed agents to help recruit potential migrants (Rosenbloom 2002, ch. 3).

By the 1840s networks of labor agents along with boarding houses serving immigrants and other similar support networks were well established in New York, Boston, and other major immigrant destinations. The services of these agents were well documented in published guides and most Europeans considering immigration must have known that they could turn to these commercial intermediaries if they lacked friends and family to guide them. After some time working in America these immigrants, if they were successful, would find steadier employment and begin to direct subsequent migration, thus establishing a new link in the stream of chain migration.

The economic impacts of immigration are theoretically ambiguous. Increased labor supply, by itself, would tend to lower wages—benefiting employers and hurting workers. But because immigrants are also consumers, the resulting increase in demand for goods and services will increase the demand for labor, partially offsetting the depressing effect of immigration on wages. As long as the labor to capital ratio rises, however, immigration will necessarily lower wages. But if, as was true in the late nineteenth century, foreign lending follows foreign labor, then there may be no negative impact on wages (Carter and Sutch 1999). Whatever the theoretical considerations, however, immigration became an increasingly controversial political issue during the late nineteenth and early twentieth centuries. While employers and some immigrant groups supported continued immigration, there was a growing nativist sentiment among other segments of the population. Anti-immigrant sentiments appear to have arisen out of a mix of perceived economic effects and concern about the implications of the ethnic, religious and cultural differences between immigrants and the native born.

In 1882, Congress passed the Chinese Exclusion Act. Subsequent legislative efforts to impose further restrictions on immigration passed Congress but foundered on presidential vetoes. The balance of political forces shifted, however, in the wake of World War I. In 1917 a literacy requirement was imposed for the first time, and in 1921 an Emergency Quota Act was passed (Goldin 1994).

With the passage of the Emergency Quota Act in 1921 and subsequent legislation culminating in the National Origins Act, the volume of immigration dropped sharply. Since this time international migration into the United States has been controlled to varying degrees by legal restrictions. Variations in the rules have produced variations in the volume of legal immigration. Meanwhile the persistence of large wage gaps between the United States and Mexico and other developing countries has encouraged a substantial volume of illegal immigration. It remains the case, however, that most of this migration—both legal and illegal—continues to be directed by chains of friends and relatives.

Recent trends in outsourcing and off-shoring have begun to create a new channel by which lower-wage workers outside the United States can respond to the country’s high wages without physically relocating. Workers in India, China, and elsewhere possessing technical skills can now provide services such as data entry or technical support by phone and over the internet. While the novelty of this phenomenon has attracted considerable attention, the actual volume of jobs moved off-shore remains limited, and there are important obstacles to overcome before more jobs can be carried out remotely (Edwards 2004).

Internal Migration in the Nineteenth and Twentieth Centuries

At the same time that American economic development created international imbalances between labor supply and demand it also created internal disequilibrium. Fertile land and abundant natural resources drew population toward less densely settled regions in the West. Over the course of the century, advances in transportation technologies lowered the cost of shipping goods from interior regions, vastly expanding the area available for settlement. Meanwhile transportation advances and technological innovations encouraged the growth of manufacturing and fueled increased urbanization. The movement of population and economic activity from the Eastern Seaboard into the interior of the continent and from rural to urban areas in response to these incentives is an important element of U.S. economic history in the nineteenth century.

In the pre-Civil War era, the labor market response to frontier expansion differed substantially between North and South, with profound effects on patterns of settlement and regional development. Much of the cost of migration is a result of the need to gather information about opportunities in potential destinations. In the South, plantation owners could spread these costs over a relatively large number of potential migrants—i.e., their slaves. Plantations were also relatively self-sufficient, requiring little urban or commercial infrastructure to make them economically viable. Moreover, the existence of well-established markets for slaves allowed western planters to expand their labor force by purchasing additional labor from eastern plantations.

In the North, on the other hand, migration took place through the relocation of small, family farms. Fixed costs of gathering information and the risks of migration loomed larger in these farmers’ calculations than they did for slaveholders, and they were more dependent on the presence of urban merchants to supply them with inputs and market their products. Consequently the task of mobilizing labor fell to promoters who bought up large tracts of land at low prices and then subdivided them into individual lots. To increase the value of these lands promoters offered loans, actively encourage the development of urban services such as blacksmith shops, grain merchants, wagon builders and general stores, and recruited settlers. With the spread of railroads, railroad construction companies also played a role in encouraging settlement along their routes to speed the development of traffic.

The differences in processes of westward migration in the North and South were reflected in the divergence of rates of urbanization, transportation infrastructure investment, manufacturing employment, and population density, all of which were higher in the North than in the South in 1860 (Wright 1986, pp. 19-29).

The Distribution of Labor among Economic Activities

Over the course of U.S. economic development technological changes and shifting consumption patterns have caused the demand for labor to increase in manufacturing and services and decline in agriculture and other extractive activities. These broad changes are illustrated in Table 2. As technological changes have increased the advantages of specialization and the division of labor, more and more economic activity has moved outside the scope of the household, and the boundaries of the labor market have been enlarged. As a result more and more women have moved into the paid labor force. On the other hand, with the increasing importance of formal education, there has been a decline in the number of children in the labor force (Whaples 2005).

Table 2

Sectoral Distribution of the Labor Force, 1800-1999

Notes and Sources: 1800 and 1850 from Weiss (1986), pp. 646-49; remaining years from Hughes and Cain (2003), 547-48. For 1900-1999 Forestry and Fishing are included in the Agricultural labor force.

As these changes have taken place they have placed strains on existing labor market institutions and encouraged the development of new mechanisms to facilitate the distribution of labor. Over the course of the last century and a half the tendency has been a movement away from something approximating a “spot” market characterized by short-term employment relationships in which wages are equated to the marginal product of labor, and toward a much more complex and rule-bound set of long-term transactions (Goldin 2000, p. 586) While certain segments of the labor market still involve relatively anonymous and short-lived transactions, workers and employers are much more likely today to enter into long-term employment relationships that are expected to last for many years.

The evolution of labor market institutions in response to these shifting demands has been anything but smooth. During the late nineteenth century the expansion of organized labor was accompanied by often violent labor-management conflict (Friedman 2002). Not until the New Deal did unions gain widespread acceptance and a legal right to bargain. Yet even today, union organizing efforts are often met with considerable hostility.

Conflicts over union organizing efforts inevitably involved state and federal governments because the legal environment directly affected the bargaining power of both sides, and shifting legal opinions and legislative changes played an important part in determining the outcome of these contests. State and federal governments were also drawn into labor markets as various groups sought to limit hours of work, set minimum wages, provide support for disabled workers, and respond to other perceived shortcomings of existing arrangements. It would be wrong, however, to see the growth of government regulation as simply a movement from freer to more regulated markets. The ability to exchange goods and services rests ultimately on the legal system, and to this extent there has never been an entirely unregulated market. In addition, labor market transactions are never as simple as the anonymous exchange of other goods or services. Because the identities of individual buyers and sellers matter and the long-term nature of many employment relationships, adjustments can occur along other margins besides wages, and many of these dimensions involve externalities that affect all workers at a particular establishment, or possibly workers in an entire industry or sector.

Government regulations have responded in many cases to needs voiced by participants on both sides of the labor market for assistance to achieve desired ends. That has not, of course, prevented both workers and employers from seeking to use government to alter the way in which the gains from trade are distributed within the market.

The Agricultural Labor Market

At the beginning of the nineteenth century most labor was employed in agriculture, and, with the exception of large slave plantations, most agricultural labor was performed on small, family-run farms. There were markets for temporary and seasonal agricultural laborers to supplement family labor supply, but in most parts of the country outside the South, families remained the dominant institution directing the allocation of farm labor. Reliable estimates of the number of farm workers are not readily available before 1860, when the federal Census first enumerated “farm laborers.” At this time census enumerators found about 800 thousand such workers, implying an average of less than one-half farm worker per farm. Interpretation of this figure is complicated, however, and it may either overstate the amount of hired help—since farm laborers included unpaid family workers—or understate it—since it excluded those who reported their occupation simply as “laborer” and may have spent some of their time working in agriculture (Wright 1988, p. 193). A possibly more reliable indicator is provided by the percentage of gross value of farm output spent on wage labor. This figure fell from 11.4 percent in 1870 to around 8 percent by 1900, indicating that hired labor was on average becoming even less important (Wright 1988, pp. 194-95).

In the South, after the Civil War, arrangements were more complicated. Former plantation owners continued to own large tracts of land that required labor if they were to be made productive. Meanwhile former slaves needed access to land and capital if they were to support themselves. While some land owners turned to wage labor to work their land, most relied heavily on institutions like sharecropping. On the supply side, croppers viewed this form of employment as a rung on the “agricultural ladder” that would lead eventually to tenancy and possibly ownership. Because climbing the agricultural ladder meant establishing one’s credit-worthiness with local lenders, southern farm laborers tended to sort themselves into two categories: locally established (mostly older, married men) croppers and renters on the one hand, and mobile wage laborers (mostly younger and unmarried) on the other. While the labor market for each of these types of workers appears to have been relatively competitive, the barriers between the two markets remained relatively high (Wright 1987, p. 111).

While the predominant pattern in agriculture then was one of small, family-operated units, there was an important countervailing trend toward specialization that both depended on, and encouraged the emergence of a more specialized market for farm labor. Because specialization in a single crop increased the seasonality of labor demand, farmers could not afford to employ labor year-round, but had to depend on migrant workers. The use of seasonal gangs of migrant wage laborers developed earliest in California in the 1870s and 1880s, where employers relied heavily on Chinese immigrants. Following restrictions on Chinese entry, they were replaced first by Japanese, and later by Mexican workers (Wright 1988, pp. 201-204).

The Emergence of Internal Labor Markets

Outside of agriculture, at the beginning of the nineteenth century most manufacturing took place in small establishments. Hired labor might consist of a small number of apprentices, or, as in the early New England textile mills, a few child laborers hired from nearby farms (Ware 1931). As a result labor market institutions remained small-scale and informal, and institutions for training and skill acquisition remained correspondingly limited. Workers learned on the job as apprentices or helpers; advancement came through establishing themselves as independent producers rather than through internal promotion.

With the growth of manufacturing, and the spread of factory methods of production, especially in the years after the end of the Civil War, an increasing number of people could expect to spend their working-lives as employees. One reflection of this change was the emergence in the 1870s of the problem of unemployment. During the depression of 1873 for the first time cities throughout the country had to contend with large masses of industrial workers thrown out of work and unable to support themselves through, in the language of the time, “no fault of their own” (Keyssar 1986, ch. 2).

The growth of large factories and the creation of new kinds of labor skills specific to a particular employer created returns to sustaining long-term employment relationships. As workers acquired job- and employer-specific skills their productivity increased giving rise to gains that were available only so long as the employment relationship persisted. Employers did little, however, to encourage long-term employment relationships. Instead authority over hiring, promotion and retention was commonly delegated to foremen or inside contractors (Nelson 1975, pp. 34-54). In the latter case, skilled craftsmen operated in effect as their own bosses contracting with the firm to supply components or finished products for an agreed price, and taking responsibility for hiring and managing their own assistants.

These arrangements were well suited to promoting external mobility. Foremen were often drawn from the immigrant community and could easily tap into word-of-mouth channels of recruitment. But these benefits came increasingly into conflict with rising costs of hiring and training workers.

The informality of personnel policies prior to World War I seems likely to have discouraged lasting employment relationships, and it is true that rates of labor turnover at the beginning of the twentieth century were considerably higher than they were to be later (Owen, 2004). Scattered evidence on the duration of employment relationships gathered by various state labor bureaus at the end of the century suggests, however, at least some workers did establish lasting employment relationship (Carter 1988; Carter and Savocca 1990; Jacoby and Sharma 1992; James 1994).

The growing awareness of the costs of labor-turnover and informal, casual labor relations led reformers to advocate the establishment of more centralized and formal processes of hiring, firing and promotion, along with the establishment of internal job-ladders, and deferred payment plans to help bind workers and employers. The implementation of these reforms did not make significant headway, however, until the 1920s (Slichter 1929). Why employers began to establish internal labor markets in the 1920s remains in dispute. While some scholars emphasize pressure from workers (Jacoby 1984; 1985) others have stressed that it was largely a response to the rising costs of labor turnover (Edwards 1979).

The Government and the Labor Market

The growth of large factories contributed to rising labor tensions in the late nineteenth- and early twentieth-centuries. Issues like hours of work, safety, and working conditions all have a significant public goods aspect. While market forces of entry and exit will force employers to adopt policies that are sufficient to attract the marginal worker (the one just indifferent between staying and leaving), less mobile workers may find that their interests are not adequately represented (Freeman and Medoff 1984). One solution is to establish mechanisms for collective bargaining, and the years after the American Civil War were characterized by significant progress in the growth of organized labor (Friedman 2002). Unionization efforts, however, met strong opposition from employers, and suffered from the obstacles created by the American legal system’s bias toward protecting property and the freedom of contract. Under prevailing legal interpretation, strikes were often found by the courts to be conspiracies in restraint of trade with the result that the apparatus of government was often arrayed against labor.

Although efforts to win significant improvements in working conditions were rarely successful, there were still areas where there was room for mutually beneficial change. One such area involved the provision of disability insurance for workers injured on the job. Traditionally, injured workers had turned to the courts to adjudicate liability for industrial accidents. Legal proceedings were costly and their outcome unpredictable. By the early 1910s it became clear to all sides that a system of disability insurance was preferable to reliance on the courts. Resolution of this problem, however, required the intervention of state legislatures to establish mandatory state workers compensation insurance schemes and remove the issue from the courts. Once introduced workers compensation schemes spread quickly: nine states passed legislation in 1911; 13 more had joined the bandwagon by 1913, and by 1920 44 states had such legislation (Fishback 2001).

Along with workers compensation state legislatures in the late nineteenth century also considered legislation restricting hours of work. Prevailing legal interpretations limited the effectiveness of such efforts for adult males. But rules restricting hours for women and children were found to be acceptable. The federal government passed legislation restricting the employment of children under 14 in 1916, but this law was found unconstitutional in 1916 (Goldin 2000, p. 612-13).

The economic crisis of the 1930s triggered a new wave of government interventions in the labor market. During the 1930s the federal government granted unions the right to organize legally, established a system of unemployment, disability and old age insurance, and established minimum wage and overtime pay provisions.

In 1933 the National Industrial Recovery Act included provisions legalizing unions’ right to bargain collectively. Although the NIRA was eventually ruled to be unconstitutional, the key labor provisions of the Act were reinstated in the Wagner Act of 1935. While some of the provisions of the Wagner Act were modified in 1947 by the Taft-Hartley Act, its passage marks the beginning of the golden age of organized labor. Union membership jumped very quickly after 1935 from around 12 percent of the non-agricultural labor force to nearly 30 percent, and by the late 1940s had attained a peak of 35 percent, where it stabilized. Since the 1960s, however, union membership has declined steadily, to the point where it is now back at pre-Wagner Act levels.

The Social Security Act of 1935 introduced a federal unemployment insurance scheme that was operated in partnership with state governments and financed through a tax on employers. It also created government old age and disability insurance. In 1938, the federal Fair Labor Standards Act provided for minimum wages and for overtime pay. At first the coverage of these provisions was limited, but it has been steadily increased in subsequent years to cover most industries today.

In the post-war era, the federal government has expanded its role in managing labor markets both directly—through the establishment of occupational safety regulations, and anti-discrimination laws, for example—and indirectly—through its efforts to manage the macroeconomy to insure maximum employment.

A further expansion of federal involvement in labor markets began in 1964 with passage of the Civil Rights Act, which prohibited employment discrimination against both minorities and women. In 1967 the Age Discrimination and Employment Act was passed prohibiting discrimination against people aged 40 to 70 in regard to hiring, firing, working conditions and pay. The Family and Medical Leave Act of 1994 allows for unpaid leave to care for infants, children and other sick relatives (Goldin 2000, p. 614).

Whether state and federal legislation has significantly affected labor market outcomes remains unclear. Most economists would argue that the majority of labor’s gains in the past century would have occurred even in the absence of government intervention. Rather than shaping market outcomes, many legislative initiatives emerged as a result of underlying changes that were making advances possible. According to Claudia Goldin (2000, p. 553) “government intervention often reinforced existing trends, as in the decline of child labor, the narrowing of the wage structure, and the decrease in hours of work.” In other cases, such as Workers Compensation and pensions, legislation helped to establish the basis for markets.

The Changing Boundaries of the Labor Market

The rise of factories and urban employment had implications that went far beyond the labor market itself. On farms women and children had found ready employment (Craig 1993, ch. 4). But when the male household head worked for wages, employment opportunities for other family members were more limited. Late nineteenth-century convention largely dictated that married women did not work outside the home unless their husband was dead or incapacitated (Goldin 1990, p. 119-20). Children, on the other hand, were often viewed as supplementary earners in blue-collar households at this time.

Since 1900 changes in relative earnings power related to shifts in technology have encouraged women to enter the paid labor market while purchasing more of the goods and services that were previously produced within the home. At the same time, the rising value of formal education has lead to the withdrawal of child labor from the market and increased investment in formal education (Whaples 2005). During the first half of the twentieth century high school education became nearly universal. And since World War II, there has been a rapid increase in the number of college educated workers in the U.S. economy (Goldin 2000, p. 609-12).

Assessing the Efficiency of Labor Market Institutions

The function of labor markets is to match workers and jobs. As this essay has described the mechanisms by which labor markets have accomplished this task have changed considerably as the American economy has developed. A central issue for economic historians is to assess how changing labor market institutions have affected the efficiency of labor markets. This leads to three sets of questions. The first concerns the long-run efficiency of market processes in allocating labor across space and economic activities. The second involves the response of labor markets to short-run macroeconomic fluctuations. The third deals with wage determination and the distribution of income.

Long-Run Efficiency and Wage Gaps

Efforts to evaluate the efficiency of market allocation begin with what is commonly know as the “law of one price,” which states that within an efficient market the wage of similar workers doing similar work under similar circumstances should be equalized. The ideal of complete equalization is, of course, unlikely to be achieved given the high information and transactions costs that characterize labor markets. Thus, conclusions are usually couched in relative terms, comparing the efficiency of one market at one point in time with those of some other markets at other points in time. A further complication in measuring wage equalization is the need to compare homogeneous workers and to control for other differences (such as cost of living and non-pecuniary amenities).

Falling transportation and communications costs have encouraged a trend toward diminishing wage gaps over time, but this trend has not always been consistent over time, nor has it applied to all markets in equal measure. That said, what stands out is in fact the relative strength of forces of market arbitrage that have operated in many contexts to promote wage convergence.

At the beginning of the nineteenth century, the costs of trans-Atlantic migration were still quite high and international wage gaps large. By the 1840s, however, vast improvements in shipping cut the costs of migration, and gave rise to an era of dramatic international wage equalization (O’Rourke and Williamson 1999, ch. 2; Williamson 1995). Figure 1 shows the movement of real wages relative to the United States in a selection of European countries. After the beginning of mass immigration wage differentials began to fall substantially in one country after another. International wage convergence continued up until the 1880s, when it appears that the accelerating growth of the American economy outstripped European labor supply responses and reversed wage convergence briefly. World War I and subsequent immigration restrictions caused a sharper break, and contributed to widening international wage differences during the middle portion of the twentieth century. From World War II until about 1980, European wage levels once again began to converge toward the U.S., but this convergence reflected largely internally-generated improvements in European living standards rather then labor market pressures.

Figure 1

Relative Real Wages of Selected European Countries, 1830-1980 (US = 100)

Source: Williamson (1995), Tables A2.1-A2.3.

Wage convergence also took place within some parts of the United States during the nineteenth century. Figure 2 traces wages in the North Central and Southern regions of the U.S relative to those in the Northeast across the period from 1820 to the early twentieth century. Within the United States, wages in the North Central region of the country were 30 to 40 percent higher than in the East in the 1820s (Margo 2000a, ch. 5). Thereafter, wage gaps declined substantially, falling to the 10-20 percent range before the Civil War. Despite some temporary divergence during the war, wage gaps had fallen to 5 to 10 percent by the 1880s and 1890s. Much of this decline was made possible by faster and less expensive means of transportation, but it was also dependent on the development of labor market institutions linking the two regions, for while transportation improvements helped to link East and West, there was no corresponding North-South integration. While southern wages hovered near levels in the Northeast prior to the Civil War, they fell substantially below northern levels after the Civil War, as Figure 2 illustrates.

Figure 2

Relative Regional Real Wage Rates in the United States, 1825-1984

(Northeast = 100 in each year)

Notes and sources: Rosenbloom (2002, p. 133); Montgomery (1992). It is not possible to assemble entirely consistent data on regional wage variations over such an extended period. The nature of the wage data, the precise geographic coverage of the data, and the estimates of regional cost-of-living indices are all different. The earliest wage data—Margo (2000); Sundstrom and Rosenbloom (1993) and Coelho and Shepherd (1976) are all based on occupational wage rates from payroll records for specific occupations; Rosenbloom (1996) uses average earnings across all manufacturing workers; while Montgomery (1992) uses individual level wage data drawn from the Current Population Survey, and calculates geographic variations using a regression technique to control for individual differences in human capital and industry of employment. I used the relative real wages that Montgomery (1992) reported for workers in manufacturing, and used an unweighted average of wages across the cities in each region to arrive at relative regional real wages. Interested readers should consult the various underlying sources for further details.

Despite the large North-South wage gap Table 3 shows there was relatively little migration out of the South until large-scale foreign immigration came to an end. Migration from the South during World War I and the 1920s created a basis for future chain migration, but the Great Depression of the 1930s interrupted this process of adjustment. Not until the 1940s did the North-South wage gap begin to decline substantially (Wright 1986, pp. 71-80). By the 1970s the southern wage disadvantage had largely disappeared, and because of the decline fortunes of older manufacturing districts and the rise of Sunbelt cities, wages in the South now exceed those in the Northeast (Coelho and Ghali 1971; Bellante 1979; Sahling and Smith 1983; Montgomery 1992). Despite these shocks, however, the overall variation in wages appears comparable to levels attained by the end of the nineteenth century. Montgomery (1992), for example finds that from 1974 to 1984 the standard deviation of wages across SMSAs was only about 10 percent of the average wage.

Table 3

Net Migration by Region, and Race, 1870-1950

Note: Net migration is calculated as the difference between the actual increase in population over each decade and the predicted increase based on age and sex specific mortality rates and the demographic structure of the region’s population at the beginning of the decade. If the actual increase exceeds the predicted increase this implies a net migration into the region; if the actual increase is less than predicted this implies net migration out of the region. The states included in the Southern region are Oklahoma, Texas, Arkansas, Louisiana, Mississippi, Alabama, Tennessee, Kentucky, West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida.

Source: Eldridge and Thomas (1964, pp. 90, 99).

In addition to geographic wage gaps economists have considered gaps between farm and city, between black and white workers, between men and women, and between different industries. The literature on these topics is quite extensive and this essay can only touch on a few of the more general themes raised here as they relate to U.S. economic history.

Studies of farm-city wage gaps are a variant of the broader literature on geographic wage variation, related to the general movement of labor from farms to urban manufacturing and services. Here comparisons are complicated by the need to adjust for the non-wage perquisites that farm laborers typically received, which could be almost as large as cash wages. The issue of whether such gaps existed in the nineteenth century has important implications for whether the pace of industrialization was impeded by the lack of adequate labor supply responses. By the second half of the nineteenth century at least, it appears that farm-manufacturing wage gaps were small and markets were relatively integrated (Wright 1988, pp. 204-5). Margo (2000, ch. 4) offers evidence of a high degree of equalization within local labor markets between farm and urban wages as early as 1860. Making comparisons within counties and states, he reports that farm wages were within 10 percent of urban wages in eight states. Analyzing data from the late nineteenth century through the 1930s, Hatton and Williamson (1991) find that farm and city wages were nearly equal within U.S. regions by the 1890s. It appears, however that during the Great Depression farm wages were much more flexible than urban wages causing a large gap to emerge at this time (Alston and Williamson 1991).

Much attention has been focused on trends in wage gaps by race and sex. The twentieth century has seen a substantial convergence in both of these differentials. Table 4 displays comparisons of earnings of black males relative to white males for full time workers. In 1940, full-time black male workers earned only about 43 percent of what white male full-time workers did. By 1980 the racial pay ratio had risen to nearly 73 percent, but there has been little subsequent progress. Until the mid-1960s these gains can be attributed primarily to migration from the low-wage South to higher paying areas in the North, and to increases in the quantity and quality of black education over time (Margo 1995; Smith and Welch 1990). Since then, however, most gains have been due to shifts in relative pay within regions. Although it is clear that discrimination was a key factor in limiting access to education, the role of discrimination within the labor market in contributing to these differentials has been a more controversial topic (see Wright 1986, pp. 127-34). But the episodic nature of black wage gains, especially after 1964 is compelling evidence that discrimination has played a role historically in earnings differences and that federal anti-discrimination legislation was a crucial factor in reducing its effects (Donohue and Heckman 1991).

Table 4

Black Male Wages as a Percentage of White Male Wages, 1940-2004

Notes and Sources: Data for 1940 through 1980 are based on Census data as reported in Smith and Welch (1989, Table 8). Data for 1990 are from Ehrenberg and Smith (2000, Table 12.4) and refer to earnings of full time, full year workers. Data from 2004 are for median weekly earnings of full-time wage and salary workers derived from data in the Current Population Survey accessed on-line from the Bureau of Labor Statistic on 13 December 2005; URL ftp://ftp.bls.gov/pub/special.requests/lf/aat37.txt.

Male-Female wage gaps have also narrowed substantially over time. In the 1820s women’s earnings in manufacturing were a little less than 40 percent of those of men, but this ratio rose over time reaching about 55 percent by the 1920s. Across all sectors women’s relative pay rose during the first half of the twentieth century, but gains in female wages stalled during the 1950s and 1960s at the time when female labor force participation began to increase rapidly. Beginning in the late 1970s or early 1980s, relative female pay began to rise again, and today women earn about 80 percent what men do (Goldin 1990, table 3.2; Goldin 2000, pp. 606-8). Part of this remaining difference is explained by differences in the occupational distribution of men and women, with women tending to be concentrated in lower paying jobs. Whether these differences are the result of persistent discrimination or arise because of differences in productivity or a choice by women to trade off greater flexibility in terms of labor market commitment for lower pay remains controversial.

In addition to locational, sectoral, racial and gender wage differentials, economists have also documented and analyzed differences by industry. Krueger and Summers (1987) find that there are pronounced differences in wages by industry within well-specified occupational classes, and that these differentials have remained relatively stable over several decades. One interpretation of this phenomenon is that in industries with substantial market power workers are able to extract some of the monopoly rents as higher pay. An alternative view is that workers are in fact heterogeneous, and differences in wages reflect a process of sorting in which higher paying industries attract more able workers.

The Response to Short-run Macroeconomic Fluctuations

The existence of unemployment is one of the clearest indications of the persistent frictions that characterize labor markets. As described earlier, the concept of unemployment first entered common discussion with the growth of the factory labor force in the 1870s. Unemployment was not a visible social phenomenon in an agricultural economy, although there was undoubtedly a great deal of hidden underemployment.

Although one might have expected that the shift from spot toward more contractual labor markets would have increased rigidities in the employment relationship that would result in higher levels of unemployment there is in fact no evidence of any long-run increase in the level of unemployment.

Contemporaneous measurements of the rate of unemployment only began in 1940. Prior to this date, economic historians have had to estimate unemployment levels from a variety of other sources. Decennial censuses provide benchmark levels, but it is necessary to interpolate between these benchmarks based on other series. Conclusions about long-run changes in unemployment behavior depend to a large extent on the method used to interpolate between benchmark dates. Estimates prepared by Stanley Lebergott (1964) suggest that the average level of unemployment and its volatility have declined between the pre-1930 and post-World War II periods. Christina Romer (1986a, 1986b), however, has argued that there was no decline in volatility. Rather, she argues that the apparent change in behavior is the result of Lebergott’s interpolation procedure.

While the aggregate behavior of unemployment has changed surprisingly little over the past century, the changing nature of employment relationships has been reflected much more clearly in changes in the distribution of the burden of unemployment (Goldin 2000, pp. 591-97). At the beginning of the twentieth century, unemployment was relatively widespread, and largely unrelated to personal characteristics. Thus many employees faced great uncertainty about the permanence of their employment relationship. Today, on the other hand, unemployment is highly concentrated: falling heavily on the least skilled, the youngest, and the non-white segments of the labor force. Thus, the movement away from spot markets has tended to create a two-tier labor market in which some workers are highly vulnerable to economic fluctuations, while others remain largely insulated from economic shocks.

Wage Determination and Distributional Issues

American economic growth has generated vast increases in the material standard of living. Real gross domestic product per capita, for example, has increased more than twenty-fold since 1820 (Steckel 2002). This growth in total output has in large part been passed on to labor in the form of higher wages. Although labor’s share of national output has fluctuated somewhat, in the long-run it has remained surprisingly stable. According to Abramovitz and David (2000, p. 20), labor received 65 percent of national income in the years 1800-1855. Labor’s share dropped in the late nineteenth and early twentieth centuries, falling to a low of 54 percent of national income between 1890 and 1927, but has since risen, reaching 65 percent again in 1966-1989. Thus, over the long term, labor income has grown at the same rate as total output in the economy.

The distribution of labor’s gains across different groups in the labor force has also varied over time. I have already discussed patterns of wage variation by race and gender, but another important issue revolves around the overall level of inequality of pay, and differences in pay between groups of skilled and unskilled workers. Careful research by Picketty and Saez (2003) using individual income tax returns has documented changes in the overall distribution of income in the United States since 1913. They find that inequality has followed a U-shaped pattern over the course of the twentieth century. Inequality was relatively high at the beginning of the period they consider, fell sharply during World War II, held steady until the early 1970s and then began to increase, reaching levels comparable to those in the early twentieth century by the 1990s.

An important factor in the rising inequality of income since 1970 has been growing dispersion in wage rates. The wage differential between workers in the 90^th percentile of the wage distribution and those in the 10^th percentile increased by 49 percent between 1969 and 1995 (Plotnick et al 2000, pp. 357-58). These shifts are mirrored in increased premiums earned by college graduates relative to high school graduates. Two primary explanations have been advanced for these trends. First, there is evidence that technological changes—especially those associated with the increased use of information technology—has increased relative demand for more educated workers (Murnane, Willett and Levy (1995). Second, increased global integration has allowed low-wage manufacturing industries overseas to compete more effectively with U.S. manufacturers, thus depressing wages in what have traditionally been high-paying blue collar jobs.

Efforts to expand the scope of analysis over a longer-run encounter problems with more limited data. Based on selected wage ratios of skilled and unskilled workers Willamson and Lindert (1980) have argued that there was an increase in wage inequality over the course of the nineteenth century. But other scholars have argued that the wage series that Williamson and Lindert used are unreliable (Margo 2000b, pp. 224-28).

Conclusions

The history of labor market institutions in the United States illustrates the point that real world economies are substantially more complex than the simplest textbook models. Instead of a disinterested and omniscient auctioneer, the process of matching buyers and sellers takes place through the actions of self-interested market participants. The resulting labor market institutions do not respond immediately and precisely to shifting patterns of incentives. Rather they are subject to historical forces of increasing-returns and lock-in that cause them to change gradually and along path-dependent trajectories.

For all of these departures from the theoretically ideal market, however, the history of labor markets in the United States can also be seen as a confirmation of the remarkable power of market processes of allocation. From the beginning of European settlement in mainland North America, labor markets have done a remarkable job of responding to shifting patterns of demand and supply. Not only have they accomplished the massive geographic shifts associated with the settlement of the United States, but they have also dealt with huge structural changes induced by the sustained pace of technological change.

References

Abramovitz, Moses and Paul A. David. “American Macroeconomic Growth in the Era of Knowledge-Based Progress: The Long-Run Perspective.” In The Cambridge Economic History of the United States, Volume 3: The Twentieth Century, edited by Stanley L. Engerman and Robert Gallman. New York: Cambridge University Press, 2000.

Alston, Lee J. and Jeffery G. Williamson. “The Earnings Gap between Agricultural and Manufacturing Laborers, 1925-1941. Journal of Economic History 51, no. 1 (1991): 83-99.

Barton, Josef J. Peasants and Strangers: Italians, Rumanians, and Slovaks in an American City, 1890-1950. Cambridge, MA: Harvard University Press, 1975.

Bellante, Don. “The North-South Differential and the Migration of Heterogeneous Labor.” American Economic Review 69, no. 1 (1979): 166-75.

Carter, Susan B. “The Changing Importance of Lifetime Jobs in the U.S. Economy, 1892-1978.” Industrial Relations 27 (1988): 287-300.

Carter, Susan B. and Elizabeth Savoca. “Labor Mobility and Lengthy Jobs in Nineteenth-Century America.” Journal of Economic History 50, no. 1 (1990): 1-16.

Carter, Susan B. and Richard Sutch. “Historical Perspectives on the Economic Consequences of Immigration into the United States.” In The Handbook of International Migration: The American Experience, edited by Charles Hirschman, Philip Kasinitz and Josh DeWind. New York: Russell Sage Foundation, 1999.

Coelho, Philip R.P. and Moheb A. Ghali. “The End of the North-South Wage Differential.” American Economic Review 61, no. 5 (1971): 932-37.

Coelho, Philip R.P. and James F. Shepherd. “Regional Differences in Real Wages: The United States in 1851-1880.” Explorations in Economic History 13 (1976): 203-30.

Craig, Lee A. To Sow One Acre More: Childbearing and Farm Productivity in the Antebellum North. Baltimore: Johns Hopkins University Press, 1993.

Donahue, John H. III and James J. Heckman. “Continuous versus Episodic Change: The Impact of Civil Rights Policy on the Economic Status of Blacks.” Journal of Economic Literature 29, no. 4 (1991): 1603-43.

Dunn, Richard S. “Servants and Slaves: The Recruitment and Employment of Labor.” In Colonial British America: Essays in the New History of the Early Modern Era, edited by Jack P. Greene and J.R. Pole. Baltimore: Johns Hopkins University Press, 1984.

Edwards, B. “A World of Work: A Survey of Outsourcing.” Economist 13 November 2004.

Edwards, Richard. Contested Terrain: The Transformation of the Workplace in the Twentieth Century. New York: Basic Books, 1979.

Ehrenberg, Ronald G. and Robert S. Smith. Modern Labor Economics: Theory and Public Policy, seventh edition. Reading, MA; Addison-Wesley, 2000.

Eldridge, Hope T. and Dorothy Swaine Thomas. Population Redistribution and Economic Growth, United States 1870-1950, vol. 3: Demographic Analyses and Interrelations. Philadelphia: American Philosophical Society, 1964.

Fishback, Price V. “Workers’ Compensation.” EH.Net Encyclopedia, edited by Robert Whaples. August 15, 2001. URL http://www.eh.net/encyclopedia/articles/fishback.workers.compensation.

Freeman, Richard and James Medoff. What Do Unions Do? New York: Basic Books, 1984.

Friedman, Gerald (2002). “Labor Unions in the United States.” EH.Net Encyclopedia, edited by Robert Whaples. May 8, 2002. URL http://www.eh.net/encyclopedia/articles/friedman.unions.us.

Galenson, David W. White Servitude in Colonial America. New York: Cambridge University Press, 1981.

Galenson, David W. “The Rise and Fall of Indentured Servitude in the Americas: An Economic Analysis.” Journal of Economic History 44, no. 1 (1984): 1-26.

Galloway, Lowell E., Richard K. Vedder and Vishwa Shukla. “The Distribution of the Immigrant Population in the United States: An Econometric Analysis.” Explorations in Economic History 11 (1974): 213-26.

Gjerde, John. From Peasants to Farmers: Migration from Balestrand, Norway to the Upper Middle West. New York: Cambridge University Press, 1985.

Goldin, Claudia. “The Political Economy of Immigration Restriction in the United States, 1890 to 1921.” In The Regulated Economy: A Historical Approach to Political Economy, edited by Claudia Goldin and Gary Libecap. Chicago: University of Chicago Press, 1994.

Goldin, Claudia. “Labor Markets in the Twentieth Century.” In The Cambridge Economic History of the United States, Volume 3: The Twentieth Century, edited by Stanley L. Engerman and Robert Gallman. Cambridge: Cambridge University Press, 2000.

Grubb, Farley. “The Market for Indentured Immigrants: Evidence on the Efficiency of Forward Labor Contracting in Philadelphia, 1745-1773.” Journal of Economic History 45, no. 4 (1985a): 855-68.

Grubb, Farley. “The Incidence of Servitude in Trans-Atlantic Migration, 1771-1804.” Explorations in Economic History 22 (1985b): 316-39.

Grubb, Farley. “Redemptioner Immigration to Pennsylvania: Evidence on Contract Choice and Profitability.” Journal of Economic History 46, no. 2 (1986): 407-18.

Hatton, Timothy J. and Jeffrey G. Williamson (1991). “Integrated and Segmented Labor Markets: Thinking in Two Sectors.” Journal of Economic History 51, no. 2 (1991): 413-25.

Hughes, Jonathan and Louis Cain. American Economic History, sixth edition. Boston: Addison-Wesley, 2003.

Jacoby, Sanford M. “The Development of Internal Labor markets in American Manufacturing Firms.” In Internal Labor Markets, edited by Paul Osterman, 23-69. Cambridge, MA: MIT Press, 1984

Jacoby, Sanford M. Employing Bureaucracy: Managers, Unions, and the Transformation of Work in American Industry, 1900-1945. New York: Columbia University Press, 1985.

Jacoby, Sanford M. and Sunil Sharma. “Employment Duration and Industrial Labor Mobility in the United States, 1880-1980.” Journal of Economic History 52, no. 1 (1992): 161-79.

James, John A. “Job Tenure in the Gilded Age.” In Labour Market Evolution: The Economic History of Market Integration, Wage Flexibility, and the Employment Relation, edited by George Grantham and Mary MacKinnon. New York: Routledge, 1994.

Kamphoefner, Walter D. The Westfalians: From Germany to Missouri. Princeton, NJ: Princeton University Press, 1987.

Keyssar, Alexander. Out of Work: The First Century of Unemployment in Massachusetts. New York: Cambridge University Press, 1986.

Krueger, Alan B. and Lawrence H. Summers. “Reflections on the Inter-Industry Wage Structure.” In Unemployment and the Structure of Labor Markets, edited by Kevin Lang and Jonathan Leonard, 17-47. Oxford: Blackwell, 1987.

Lebergott, Stanley. Manpower in Economic Growth: The American Record since 1800. New York: McGraw-Hill, 1964.

Margo, Robert. “Explaining Black-White Wage Convergence, 1940-1950: The Role of the Great Compression.” Industrial and Labor Relations Review 48 (1995): 470-81.

Margo, Robert. Wages and Labor Markets in the United States, 1820-1860. Chicago: University of Chicago Press, 2000a.

Margo, Robert. “The Labor Force in the Nineteenth Century.” In The Cambridge Economic History of the United States, Volume 2: The Long Nineteenth Century, edited by Stanley L. Engerman and Robert E. Gallman, 207-44. New York: Cambridge University Press, 2000b.

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

Montgomery, Edward. “Evidence on Metropolitan Wage Differences across Industries and over Time.” Journal of Urban Economics 31 (1992): 69-83.

Morgan, Edmund S. “The Labor Problem at Jamestown, 1607-18.” American Historical Review 76 (1971): 595-611.

Murnane, Richard J., John B. Willett and Frank Levy. “The Growing Importance of Cognitive Skills in Wage Determination.” Review of Economics and Statistics 77 (1995): 251-66

Nelson, Daniel. Managers and Workers: Origins of the New Factory System in the United States, 1880-1920. Madison: University of Wisconsin Press, 1975.

O’Rourke, Kevin H. and Jeffrey G. Williamson. Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy. Cambridge, MA: MIT Press, 1999.

Owen, Laura. “History of Labor Turnover in the U.S.” EH.Net Encyclopedia, edited by Robert Whaples. April 30, 2004. URL http://www.eh.net/encyclopedia/articles/owen.turnover.

Piketty, Thomas and Emmanuel Saez. “Income Inequality in the United States, 1913-1998.” Quarterly Journal of Economics 118 (2003): 1-39.

Plotnick, Robert D. et al. “The Twentieth-Century Record of Inequality and Poverty in the United States” In The Cambridge Economic History of the United States, Volume 3: The Twentieth Century, edited by Stanley L. Engerman and Robert Gallman. New York: Cambridge University Press, 2000.

Romer, Christina. “New Estimates of Prewar Gross National Product and Unemployment.” Journal of Economic History 46, no. 2 (1986a): 341-52.

Romer, Christina. “Spurious Volatility in Historical Unemployment Data.” Journal of Political Economy 94 (1986b): 1-37.

Rosenbloom, Joshua L. “Was There a National Labor Market at the End of the Nineteenth Century? New Evidence on Earnings in Manufacturing.” Journal of Economic History 56, no. 3 (1996): 626-56.

Rosenbloom, Joshua L. Looking for Work, Searching for Workers: American Labor Markets during Industrialization. New York: Cambridge University Press, 2002.

Slichter, Sumner H. “The Current Labor Policies of American Industries.” Quarterly Journal of Economics 43 (1929): 393-435.

Sahling, Leonard G. and Sharon P. Smith. “Regional Wage Differentials: Has the South Risen Again?” Review of Economics and Statistics 65 (1983): 131-35.

Smith, James P. and Finis R. Welch. “Black Economic Progress after Myrdal.” Journal of Economic Literature 27 (1989): 519-64.

Steckel, Richard. “A History of the Standard of Living in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. July 22, 2002. URL http://eh.net/encyclopedia/article/steckel.standard.living.us

Sundstrom, William A. and Joshua L. Rosenbloom. “Occupational Differences in the Dispersion of Wages and Working Hours: Labor Market Integration in the United States, 1890-1903.” Explorations in Economic History 30 (1993): 379-408.

Ward, David. Cities and Immigrants: A Geography of Change in Nineteenth-Century America. New York: Oxford University Press, 1971.

Ware, Caroline F. The Early New England Cotton Manufacture: A Study in Industrial Beginnings. Boston: Houghton Mifflin, 1931.

Weiss, Thomas. “Revised Estimates of the United States Workforce, 1800-1860.” In Long Term Factors in American Economic Growth, edited by Stanley L. Engerman and Robert E. Gallman, 641-78. Chicago: University of Chicago, 1986.

Whaples, Robert. “Child Labor in the United States.” EH.Net Encyclopedia, edited by Robert Whaples. October 8, 2005. URL http://eh.net/encyclopedia/article/whaples.childlabor.

Williamson, Jeffrey G. “The Evolution of Global Labor Markets since 1830: Background Evidence and Hypotheses.” Explorations in Economic History 32 (1995): 141-96.

Williamson, Jeffrey G. and Peter H. Lindert. American Inequality: A Macroeconomic History. New York: Academic Press, 1980.

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

Wright, Gavin. “Postbellum Southern Labor Markets.” In Quantity and Quiddity: Essays in U.S. Economic History, edited by Peter Kilby. Middletown, CT: Wesleyan University Press, 1987.

Wright, Gavin. “American Agriculture and the Labor Market: What Happened to Proletarianization?” Agricultural History 62 (1988): 182-209.

Citation: Rosenbloom, Joshua. “The History of American Labor Market Institutions and Outcomes”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-history-of-american-labor-market-institutions-and-outcomes/

David R. Meyer, Brown University

The Puzzle of Industrialization

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

The problem with the “impoverished agriculture” theory

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

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

Synergy between Agriculture and Manufacturing

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

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

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

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

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

Manufactures Which Were Produced for Large Market Areas

Shoes and Tinware

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

Cotton Textiles

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

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

The Impact of Transportation Improvements

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

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

Agricultural Prosperity Continues

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

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

Metropolitan Industrial Complexes

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

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

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

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

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

Manufactures for Eastern and National Markets

Shoes

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

Cotton Textiles

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

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

Capital Investment in Cotton Textiles

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

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

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

Connecticut’s Industries

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

Difficulty of Duplicating Eastern Methods in the Midwest

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

The American Manufacturing Belt

The Midwest Joins the American Manufacturing Belt after 1860

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

Lack of Industrialization in the South

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

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

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

Additional Readings

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

McMurry, Sally. Transforming Rural Life: Dairying Families and Agricultural Change, 1820-1885. Baltimore: Johns Hopkins University Press, 1995.

McNall, Neil A. An Agricultural History of the Genesee Valley, 1790-1860. Philadelphia: University of Pennsylvania Press, 1952.

Majewski, John. A House Dividing: Economic Development in Pennsylvania and Virginia Before the Civil War. New York: Cambridge University Press, 2000.

Mancall, Peter C. Valley of Opportunity: Economic Culture along the Upper Susquehanna, 1700-1800. Ithaca, NY: Cornell University Press, 1991.

Margo, Robert A. Wages and Labor Markets in the United States, 1820-1860. Chicago: University of Chicago Press, 2000.

Meyer, David R. “The Division of Labor and the Market Areas of Manufacturing Firms.” Sociological Forum 3 (1988): 433-53.

Meyer, David R. “Emergence of the American Manufacturing Belt: An Interpretation.” Journal of Historical Geography 9 (1983): 145-74.

Meyer, David R. “The Industrial Retardation of Southern Cities, 1860-1880.” Explorations in Economic History 25 (1988): 366-86.

Meyer, David R. “Midwestern Industrialization and the American Manufacturing Belt in the Nineteenth Century.” Journal of Economic History 49 (1989): 921-37.

Ransom, Roger L. “Interregional Canals and Economic Specialization in the Antebellum United States.” Explorations in Entrepreneurial History 5, no. 1 (1967-68): 12-35.

Roberts, Christopher. The Middlesex Canal, 1793-1860. Cambridge, MA: Harvard University Press, 1938.

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

Scranton, Philip. Proprietary Capitalism: The Textile Manufacture at Philadelphia, 1800-1885. New York: Cambridge University Press, 1983.

Shlakman, Vera. “Economic History of a Factory Town: A Study of Chicopee, Massachusetts.” Smith College Studies in History 20, nos. 1-4 (1934-35): 1-264.

Sokoloff, Kenneth L. “Invention, Innovation, and Manufacturing Productivity Growth in the Antebellum Northeast.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John J. Wallis, 345-78. Chicago: University of Chicago Press, 1992.

Sokoloff, Kenneth L. “Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846.” Journal of Economic History 48 (1988): 813-50.

Sokoloff, Kenneth L. “Productivity Growth in Manufacturing during Early Industrialization: Evidence from the American Northeast, 1820-1860.” In Long-Term Factors in American Economic Growth, edited by Stanley L. Engerman and Robert E. Gallman, 679-729. Chicago: University of Chicago Press, 1986.

Ware, Caroline F. The Early New England Cotton Manufacture: A Study in Industrial Beginnings. Boston: Houghton Mifflin, 1931.

Weiss, Thomas. “Economic Growth before 1860: Revised Conjectures.” In American Economic Development in Historical Perspective, edited by Thomas Weiss and Donald Schaefer, 11-27. Stanford, CA: Stanford University Press, 1994.

Weiss, Thomas. “Long-Term Changes in U.S. Agricultural Output per Worker, 1800-1900.” Economic History Review 46 (1993): 324-41.

Weiss, Thomas. “U.S. Labor Force Estimates and Economic Growth, 1800-1860.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis, 19-75. Chicago University of Chicago Press, 1992.

Wood, Frederic J. The Turnpikes of New England. Boston: Marshall Jones, 1919.

Wood, Gordon S. The Radicalism of the American Revolution. New York: Alfred A. Knopf, 1992.

Zevin, Robert B. “The Growth of Cotton Textile Production after 1815.” In The Reinterpretation of American Economic History, edited by Robert W. Fogel and Stanley L. Engerman, 122-47. New York: Harper & Row, 1971.

David T Flynn, University of North Dakota

Overview of Credit versus Barter and Cash

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

Barter

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

Money’s advantages

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

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

Credit’s advantages

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

Uncertainty about the scope of credit

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

Table 1

Percentage of Purchases by Type

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

Indications of the importance of credit

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

The Different Types of Credit

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

Overseas credit

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

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

Domestic credit: book credit and promissory notes

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

Figure 1

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

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

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

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

Repayment means and examples

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

Table 2

Percentage of Payments by Category

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

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

Figure 2

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

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

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

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

Complexity of the credit system

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

The Duration of Credit

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

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

Figure 3

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

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

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

Figure 4

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

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

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

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

Table 3

Expected Duration for Connecticut Debts, Lower and Upper Bound

Table 4

Expectation Duration for Massachusetts Debts, Lower and Upper Bound

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

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

Other estimates of duration of book credit

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

Duration of promissory notes

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

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

The Interest Practices of Merchants

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

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

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

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

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

Estimates of interest rates

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

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

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

Conclusions

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

References

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Further Reading:

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

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

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

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

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

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

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

Bradley Hansen, Mary Washington College

Since 1996 over a million people a year have filed for bankruptcy in the United States. Most seek a discharge of debts in exchange for having their assets liquidated for the benefit of their creditors. The rest seek the assistance of bankruptcy courts in working out arrangements with their creditors. The law has not always been so kind to insolvent debtors. Throughout most of the nineteenth century there was no bankruptcy law in the United States, and most debtors found it impossible to receive a discharge from their debts. Early in the century debtors could have expected even harsher treatment, such as imprisonment for debt.

Table 1. Chronology of Bankruptcy Law in The United States, 1789-1978

To say that there was no bankruptcy law in the United States for most of the nineteenth century is not to say that there were no laws governing insolvency or the collection of debts. Americans have always relied on credit and have always had laws governing the collection of debts. Debtor-creditor laws and their enforcement are important because they influence the supply and demand for credit. Laws that do not encourage the repayment of debts increase risk for creditors and reduce the supply of credit. On the other hand, laws that are too strict also have costs. Strict laws such as imprisonment for debt can discourage entrepreneurs from experimenting. Many of America’s most famous entrepreneurs, such as Henry Ford, failed at least once before making their fortunes.

Over the last two hundred years the United States has shifted from a legal regime that was primarily directed at the strict enforcement of debt contracts to one that provides numerous means to alter the terms of debt contracts. As the economy developed groups of people became convinced that strict enforcement of credit contracts was unfair, inefficient, contrary to the public interest, or simply not in their own self interest. Periodic financial crises in the nineteenth century generated demands for bankruptcy laws to discharge debts. They also led to the introduction of voluntary bankruptcy and the extension of the right to file for bankruptcy to all individuals. The expansion of interstate commerce in the late nineteenth century led to demands for a uniform and efficient bankruptcy law throughout the United States. The rise of railroads gave rise to a demand for corporate reorganization. The expansion of consumer credit in the twentieth century and the rise in consumer bankruptcy cases led to the introduction of arrangements into bankruptcy law, and continue to fuel demands for revision of bankruptcy law today.

Origins of American Bankruptcy Law

Like much of American law, the origins of both state laws for the collection of debt and federal bankruptcy law can be found in England. State laws are, in general, derived from common law procedures for the collection of debt. Under the common law a variety of procedures evolved to aid a creditor in collecting a debt. Generally, the creditor can obtain a judgment from a court for the amount that he is owed and then have a legal official seize some of the debtor’s property or wages to satisfy this judgement. In the past a defaulting debtor could also be placed in prison to coerce repayment. Bankruptcy law does not replace other collection laws but does supercede them. Creditors still use procedures such as garnishing a debtor’s wages, but if the debtor or another creditor files for bankruptcy such collection efforts are stopped.

Under the U.S. Constitution, adopted 1789, bankruptcy law became a federal law in the United States. There are two clauses of the Constitution that influenced the evolution of bankruptcy law. First, in Article One, Section Eight Congress was empowered to enact uniform laws on the subject of bankruptcy. Second, the Contract Clause prohibited states from passing laws that impair the obligation of contracts. Courts have generally interpreted these clauses so as to give wide latitude to the federal government to alter the obligations of debt contracts while restricting state governments. States, however, are not completely barred from altering the terms of contracts. In its 1827 decision on Ogden vs. Saunders the Supreme Court declared that states could pass laws that granted a discharge for debts that were incurred after the law was passed; however, a state discharge can not be binding on creditors who are citizens of other states.

The evolution of bankruptcy law in the United States can be divided into two periods. In the first period, which encompasses most of the nineteenth century, Congress enacted three laws in the wake of financial crises. In each case the law was repealed within a few years amid complaints of high costs and corruption. The second period begins in 1881 when associations of merchants and manufacturers banded together to form a national association to lobby for a federal bankruptcy law. In contrast to previous demands for bankruptcy law, which were prompted largely by crises, late nineteenth century demands for bankruptcy law were for a permanent law suited to the needs of a commercial nation. In 1898 the Act to Establish a Uniform System of Bankruptcy was enacted and the United States has had a bankruptcy law ever since.

The Temporary Bankruptcy Acts of 1800, 1841 and 1867

Congress first exercised its power to enact uniform laws on bankruptcy in 1800. The debates in the Annals of Congress are brief but suggest that the demand for the law arose from individuals who were in financial distress. The law was modeled after the English bankruptcy law of the time. The law applied only to traders. Creditors could file a bankruptcy petition against a debtor, the debtor’s assets would be divided on a pro rata basis among his creditors, and the debtor would receive a discharge. Although debtors could not file a voluntary bankruptcy petition, it was generally believed that many debtors asked a friendly creditor to petition them into the bankruptcy court so that they could obtain a discharge. The law was intended to remain in effect for five years. Complaints that the law was expensive to administer, that it was difficult and costly to travel to federal courts, and that the law provided opportunities for fraud led to its repeal after only two years. Similar complaints were to follow the passage of subsequent bankruptcy laws.

Bankruptcy law largely disappeared from national politics until the Panic of 1839. A few petitions and memorials were sent to Congress in the wake of the Panic of 1819, but no law was passed. The Panic of 1839 and the recession that followed it brought forward a flood of petitions and memorials for bankruptcy legislation. Memorials typically declared that many business people had been brought to ruin by economic conditions that were beyond their control not through any fault of their own. In the wake of the Panic, Whigs made the attack on Democratic economic policies and the passage of bankruptcy relief central parts of their platform. After gaining control of Congress and the Presidency, the Whigs pushed through the 1841 Bankruptcy Act. The law went into effect February 2, 1842.

Like its predecessor, the Bankruptcy Act of 1841 was short-lived. The law was repealed March 3, 1843. The rapid about-face on bankruptcy was the result of the collapse of a bargain between Northern and Southern Whigs. Democrats overwhelmingly opposed the passage of the Act and supported its repeal. Southern Whigs also generally opposed a federal bankruptcy law. Northern Whigs appear to have obtained the Southern Whigs votes for passage by agreeing to distribute the proceeds from the sales of federal lands to the states. A majority of Southern Whigs voted for passage but then reversed their votes the next year. Despite its short life, over 41,000 petitions for bankruptcy, most of them voluntary, were filed under the 1841 law.

The primary innovations of the Bankruptcy Act of 1841 were the introduction of voluntary bankruptcy and the widening of the scope of occupations that could use the law. With the introduction of voluntary bankruptcy, debtors no longer had to resort to the assistance of a friendly creditor. Unlike the previous law in which only traders could become bankrupts, under the 1841 Act traders, bankers, brokers, factors, underwriters, and marine insurers could be made involuntary bankrupts and any person could apply for voluntary bankruptcy.

After repeal of the Bankruptcy Act of 1841, the subject of bankruptcy again disappeared from congressional consideration until the Panic of 1857, when appeals for a bankruptcy law resurfaced. The financial distress caused to Northern merchants by the Civil War further fueled demands for bankruptcy legislation. Though demands for a bankruptcy law persisted throughout the War, considerable opposition also existed to passing a law before the War was over. In the first Congress after the end of the War, the Bankruptcy Act of 1867 was enacted. The 1867 Act was amended several times and lasted longer than its predecessors. An 1874 amendment added compositions to bankruptcy law for the first time. Under the composition provision a debtor could offer a plan to distribute his assets among his creditors to settle the case. Again, complaints of excessive fees and expenses led to the repeal of the Bankruptcy Act in 1878. Table 2 shows the number of petitions filed under the 1867 law between 1867 and 1872.

Table 2. Bankruptcy Petitions, 1867-1872

Source: Expenses of Proceedings in Bankruptcy In United States Courts. Senate Executive Document 19 (43-1) 1580.

During the first three quarters of the nineteenth century the demand for bankruptcy legislation rose with financial panics and fell as they passed. Many people came to believe that the forces that brought people to insolvency were often beyond their control and that to give them a fresh start was not only fair but in the best interest of society. Burdened with debts they had no hope of paying they had no incentive to be productive, creditors would take anything they earned. Freed from these debts they could once again become productive members of society. The spread of the belief that debtors should not be subjected to the harshest elements of debt collection law can also be seen in numerous state laws enacted during the nineteenth century. Homestead and exemption laws declared property that creditors could not take. Stay and moratoria laws were passed during recessions to stall collection efforts. Over the course of the nineteenth century, states also abolished imprisonment for debt.

Demand For A Permanent Bankruptcy Law

The repeal of the 1867 Bankruptcy Act was followed almost immediately by a well-organized movement to obtain a new Bankruptcy law. A national campaign by merchants and manufacturers to obtain bankruptcy legislation began in 1881 when The New York Board of Trade and Transportation organized a National Convention of Boards of Trade.The participants at the Convention endorsed a bankruptcy bill prepared by John Lowell, a judge from Massachusetts. They continued to lobby for the bill throughout the 1880s.

After failing to obtain passage of the Lowell bill, associations of merchants and manufacturers met again in 1889. Under the name of The National Convention of Representatives of Commercial Bodies they held meetings in St. Louis and in Minneapolis. The president of the Convention, a lawyer and businessman named Jay Torrey, drafted a bill that the Convention lobbied for throughout the 1890s. The bill allowed both voluntary and involuntary petitions, though wage earners and farmers could not be made involuntary bankrupts. The bill was primarily directed at liquidation but did include a provision for composition. A composition had to be approved by a majority of creditors in both number and value. In a compromise with states’ rights advocates, the bill declared that exemptions would be determined by the states.

The merchants and manufacturers, who organized the conventions, provided credit to their customers whenever they delivered goods in advance of payment. They were troubled by three features of state debtor-creditor laws. First, the details of collection laws varied from state to state, forcing them to learn the laws in all the states in which they wished to sell goods. Second, many state laws discriminated against foreign creditors, that is, creditors who were not citizens of the state. Third, many of the state laws provided for a first-come, first-served distribution of assets rather than a pro rata division. With the first-come, first-served rule, the first creditor to go to court could claim all the assets necessary to pay his debts leaving the last to receive nothing. The first-come, first-served rule of collection tended to create incentives for creditors to race to be the first to file a claim. The effect of this rule was described by Jay Torrey: “If a creditor suspects his debtor is in financial trouble, he usually commences an attachment suit, and as a result the debtor is thrown into liquidation irrespective of whether he is solvent or insolvent. This course is ordinarily imperative because if he does not pursue that course some other creditor will.” Thus the law could actually precipitate business failures. As interstate commerce expanded in the late nineteenth century more merchants and manufacturers experienced these three problems

Merchants and manufacturers also found it easier to form a national organization in the late nineteenth century because of the growth of trade associations, boards of trade, chambers of commerce and other commercial organizations. By forming a national organization composed of businessmen’s associations from all over the country, merchants and manufacturers were able to act in unison in drafting a bankruptcy bill and lobbying for a bankruptcy bill. The bill they drafted not only provided uniformity and a pro rata distribution, but was designed to prevent the excessive fees and expenses that had been a major complaint against previous bankruptcy laws.

As early as 1884, the Republican Party supported the bankruptcy bills put forward by the merchants and manufacturers. A majority in both the Republican and Democratic parties supported bankruptcy legislation during the late nineteenth century. It took nearly twenty years to enact bankruptcy legislation because they supported different versions of bankruptcy law. The Democratic Party supported bills that were purely voluntary (creditors could not initiate proceedings) and temporary (the law would only remain in effect for a few years). The requirement that the law be temporary was crucial to Democrats because a vote for a permanent bankruptcy law would have been a vote for the expansion of federal power and against states’ rights, a central component of Democratic policy. Throughout the 1880s and 1890s, votes on bankruptcy split strictly along party lines. The majority of Republicans preferred the status quo to the Democrats bills and the majority of Democrats preferred the status quo to the Republican bills. Because control of Congress was split between the two parties for most of the last quarter of the nineteenth century neither side could force through their version of bankruptcy law. This period of divided government ended with the 55th Congress, in which the Bankruptcy Act of 1898 was passed.

Railroad Receivership and the Origins of Corporate Reorganization

The 1898 Bankruptcy Act was designed to aid creditors in liquidation of an insolvent debtor’s assets, but one of the important features of current bankruptcy law is the provision for reorganization of insolvent corporations. To find the origins of corporate reorganization one has to look outside the early evolution of bankruptcy law and look instead at the evolution of receiverships for insolvent railroads. A receiver is an individual appointed by a court to take control of some property, but courts in the nineteenth century developed this tool as a means to reorganize troubled railroads. The first reorganization through receivership occurred in 1846, when a Georgia court appointed a receiver over the insolvent Munroe Railway Co. and successfully reorganized it as the Macon and Western Railway. In the last two decades of the nineteenth century the number of receiverships increased dramatically; see Table 3. In theory, courts were supposed to appoint an indifferent party as receiver, and the receiver was merely to conserve the railroad while the best means to liquidate it was ascertained. In fact, judges routinely appointed the president, vice-president or other officers of the insolvent railway and assigned them the task of getting the railroad back on its feet. The object of the receivership was typically a sale of the railroad as a whole. But the sale was at least partly a fiction. The sole bidder was usually a committee of the bondholders using their bonds as payment. Thus the receivership involved a financial reorganization of the firm in which the bond and stock holders of the railroad traded in their old securities for new ones. The task of the reorganizers was to find a plan acceptable to the bondholders. For example, in the Wabash receivership of 1886, first mortgage bondholders ultimately agreed to exchange their 7 percent bonds for new ones of 5 percent. The sale resulted in the creation of a new railroad with the assets of the old. Often the transformation was simply a matter of changing “Railway” to “Railroad” in the name of the corporation. Throughout the late nineteenth and early twentieth centuries judges denied other corporations the right to reorganize through receivership. They emphasized that railroads were special because of their importance to the public.

Unlike the credit supplied by merchants and manufacturers, much of the debt of railroads was secured. For example, bondholders might have a mortgage that said they could claim a specific line of track if the railroad failed to make its bond payments. If a railroad became insolvent different groups of bondholders might claim different parts of the railroad. Such piecemeal liquidation of a business presented two problems in the case of railroads. First, many people believed that piecemeal liquidation would destroy much of the value of the assets. In his 1859 Treatise on the Law of Railways, Isaac Redfield explained that, “The railway, like a complicated machine, consists of a great number of parts, the combined action of which is necessary to produce revenue.” Second, railroads were regarded as quasi-public corporations. They were given subsidies and special privileges. Their charters often stated that their corporate status had been granted in exchange for service to the public. Courts were reluctant to treat railroads like other enterprises when they became insolvent and instead used receivership proceedings to make sure that the railroad continued to operate while its finances were reorganized.

Table 3. Railroad Receiverships, 1870-1897

Source: Swain, H. H. “Economic Aspects of Railroad Receivership.” Economic Studies 3, (1898): 53-161.

Depression Era Bankruptcy Reforms

Reorganization and bankruptcy were brought together by the amendments to the 1898 Bankruptcy Act during the Great Depression. By the late 1920s, a number of problems had become apparent with both the bankruptcy law and receivership. Table 4 shows the number of bankruptcy petitions filed each year since the law was enacted. The use of consumer credit expanded rapidly in the 1920s and so did wage earner bankruptcy cases. As Table 5 shows, voluntary bankruptcy by wage earners became an increasingly large proportion of bankruptcy petitions. Unlike mercantile bankruptcy cases, in many wage earner cases there were no assets. Expecting no return, many creditors paid little attention to bankruptcy cases and corruption spread in the bankruptcy courts. An investigation into bankruptcy in the southern district of New York recorded numerous abuses and led to the disbarment of of more than a dozen lawyers. In the wake of the investigation President Hoover appointed Thomas Thacher to investigate bankruptcy procedure in the United States. The Thacher Report recommended that an administrative staff be created to oversee bankruptcies. The bankruptcy administrators would be empowered to investigate bankrupts and reject requests for discharge. The report also suggested that many debtors could pay their debts if given an opportunity to work out an arrangement with their creditors. It suggested that procedures for the adjustment or extension of debts be added to the law. Corporate lawyers also identified three problems with the corporate receiverships. First, it was necessary to obtain an ancillary receivership in each federal district in which the corporation had assets. Second, some creditors might try to withhold their approval of a reorganization plan in exchange for a better deal for themselves. Third, judges were unwilling to apply reorganization through receivership to corporations other than railroads. Consequently, the Thacher report suggested that procedures for corporate reorganization also be incorporated into bankruptcy law.

Table 4. Bankruptcy Petitions Filed, 1899-1997

Sources: 1899-1938 Annual Report of the Attorney General of the United States; 1939-1997; and Statistical Abstract of the United States. Various years. The Report of the Attorney General did not provide the numbers voluntary and involuntary from 1934-36.

Table 5. Wage Earner Bankruptcy and No Asset Cases, 1899-1933

Sources: 1899-1938 Annual Report of the Attorney General of the United States; 1939-1997; and Statistical Abstract of the United States. Various years. The Report of the Attorney General did not provide the numbers voluntary and involuntary from 1934-36.

In 1933, Congress enacted amendments that allowed farmers and wage earners to seek arrangements. Arrangements offered more flexibility than compositions. Debtors could offer to pay all or part of their debts over a longer period of time. Congress also added section 77, which provided for railroad reorganization. Section 77 solved two of the problems that had plagued corporate reorganization. Bankruptcy courts had jurisdiction of the assets throughout the country so that ancillary receiverships were not needed. The amendment also alleviated the holdout problem by making 2/3 votes of a class of creditors binding on all the members of the class. In 1934, Congress extended reorganization to non-railroad corporations as well. The Thacher Report’s recommendations for a bankruptcy administrator were not enacted, largely because of opposition from bankruptcy lawyers. The 1898 Bankruptcy Act had created a well-organized group with a vested interest in the evolution of the law–bankruptcy lawyers.

Although the 1933-34 reforms were ones that bankruptcy lawyers and judges had wanted, many of them believed that the law could be further improved. In 1932, The Commercial Law League, the American Bar Association, the National Association of Credit Management and the National Association of Referees in Bankruptcy joined together to form the National Bankruptcy Conference. The culmination of their efforts was the Chandler Act of 1938. The Chandler Act created a menu of options for both individual and corporate debtors. Debtors could choose traditional liquidation. They could seek an arrangement with their creditors through Chapter 10 of the Act. They could attempt to obtain an extension through Chapter 12. A corporation could seek an arrangement through Chapter 11 or reorganization through Chapter 10. Chapter 11 only allowed corporations to alter their unsecured debt, whereas Chapter 10 allowed reorganization of both secured and unsecured debt. However, corporations tended to prefer Chapter 11 because Chapter 10 required Securities and Exchange Commission review for all publicly traded firms with more than $250,000 in liabilities.

By 1938 modern American bankruptcy law had obtained its central features. The law dealt with all types of individuals and businesses. It allowed both voluntary and involuntary petitions. It enabled debtors to choose liquidation and a discharge, or to choose some type of readjustment of their debts. By 1939, the vast majority of bankruptcy cases were, as they are now, voluntary consumer bankruptcy cases. After 1939 involuntary bankruptcy cases never again rose above 2,000. (See Table 4). The decline of involuntary bankruptcy cases appears to have been associated with the decline in business failures. According to Dun and Bradstreet, the number of failures per 10,000 listed concerns averaged 100 per year from 1870 to 1933. From 1934-1988 the failure rate averaged 50 per 10,000 concerns. The failure rate did not rise above 70 per 10,000 listed concerns again until the 1980s. Also, the number of failures, which had averaged over 20,000 a year in the 1920s did not reach 20,000 a year again until the 1980s. The mercantile failures which had so troubled late nineteenth century merchants and manufacturers were much less of a problem after the Great Depression.

Table 6. Business Failures, 1870-1997

Source: United States. Historical Statistics of the United States: Bicentennial Edition. 1975; and United States. Statistical Abstract of the United States. Washington D.C.: GPO. Various years.

The Bankruptcy Reform Act of 1978

In contrast to the decline in business failures, personal bankruptcy climbed steadily. Prompted by a rise in personal bankruptcy in the 1960s, Congress initiated an investigation of bankruptcy law that culminated in the Bankruptcy Reform Act of 1978, which replaced the much amended 1898 Bankruptcy Act. The Bankruptcy Reform Act, also known as the Bankruptcy Code or just “the Code”, maintains the menu of options for debtors embodied in the Chandler Act. It provides Chapter 7 liquidation for businesses and individuals, Chapter 11 reorganization, Chapter 13 adjustment of debts for individuals with regular income, and Chapter 12 readjustment for farmers. In 1991, seventy-one percent of all cases were Chapter 7 and twenty-seven percent were Chapter 13. Many of the changes introduced by the Code made bankruptcy, especially Chapter 13, more attractive to debtors. The number of bankruptcy petitions did climb rapidly after the law was enacted. Lobbying by creditor groups and a Supreme Court decision that ruled certain administrative parts of the Act unconstitutional led to the Bankruptcy Amendments and Federal Judgeship Act of 1984. The 1984 amendments attempted to roll back some of the pro-debtor provisions of the Code. Because bankruptcy filings continued their rapid ascent after the 1984, recent studies have tended to look toward changes in other factors, such as consumer finance, to explain the explosion in bankruptcy cases.

Bankruptcy law continues to evolve. To understand the evolution of bankruptcy law is to understand why groups of people came to believe that existing debt collection law was inadequate and to see how those people were able to use courts and legislatures to change the law. In the early nineteenth century demands were largely driven by victims of financial crises. In the late nineteenth century, merchants and manufacturers demanded a law that would facilitate interstate commerce. Unlike its predecessors, the 1898 Bankruptcy Act was not repealed after a few years and over time it gave rise to a group with a vested interest in bankruptcy law, bankruptcy lawyers. Bankruptcy lawyers have played a prominent role in drafting and lobbying for bankruptcy reform since the 1930s. Credit card companies and customers may be expected to play a significant role in changing bankruptcy law in the future.

References

Balleisen, Edward. Navigating Failure: Bankruptcy and Commercial Society in Antebellum America. Chapel Hill: University of North Carolina Press. 2001.

Balleisen, Edward. “Vulture Capitalism in Antebellum America: The 1841 Federal Bankruptcy Act and the Exploitation of Financial Distress.” Business History Review 70, Spring (1996): 473-516

Berglof, Erik and Howard Rosenthal (1999) “The Political Economy of American Bankruptcy: The Evidence from Roll Call Voting, 1800-1978.” working paper, Princeton University.

Coleman, Peter J. Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607-1900. Madison: The State Historical Society of Wisconsin. 1974.

Hansen, Bradley. “The Political Economy of Bankruptcy: The 1898 Act to Establish A Uniform System of Bankruptcy.” Essays in Economic and Business History 15, (1997):155-71.

Hansen, Bradley. “Commercial Associations and the Creation of a National Economy: The Demand for Federal Bankruptcy Law.” Business History Review 72, Spring (1998): 86-113.

Hansen, Bradley. “The People’s Welfare and the Origins of Corporate Reorganization: The Wabash Receivership Reconsidered.” Business History Review 74, Autumn (2000): 377-405.

Martin, Albro. “Railroads and the Equity Receivership: An Essay on Institutional Change.” Journal of Economic History 34, (1974): 685-709.

Matthews, Barbara. Forgive Us Our Debts: Bankruptcy And Insolvency in America, 1763-1841. Ph. D. diss. Brown University. 1994.

Moss, David and Gibbs A. Johnson. “The Rise of Consumer Bankruptcy: Evolution, Revolution or Both?” American Bankruptcy Law Journal 73, Spring (1999): 311-51.

Sandage, Scott. Deadbeats, Drunkards and Dreamers: A Cultural History of Failure in America, 1819-1893. Ph. D. diss. Rutgers University. 1995.

Skeel, David A. “An Evolutionary Theory of Corporate Law and Corporate Bankruptcy.” Vanderbilt Law Review, 51 (1998):1325-1398.

Skeel, David A. “The Genius of the 1898 Bankruptcy Act.” Bankruptcy Developments Journal 15, (1999): 321-341.

Skeel, David A. Debt’s Dominion: A History of Bankruptcy Law in America. Princeton: Princeton University Press. 2001.

Sullivan, Theresa, Elizabeth Warren and Jay Westbrook. As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America. Oxford: Oxford University Press. 1989.

Swain, H.H. “Economic Aspects of Railroad Receivership.” Economic Studies 3, (1898): 53-161.

Tufano, Peter. “Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U. S. Railroads in the Nineteenth Century.” Business History Review 71, Spring (1997):1-40.

United States. Report of the Attorney-General. Washington D.C.: GPO. Various years.

United States. Statistical Abstract of the United States. Washington D.C.: GPO. Various years.

United States. Historical Statistics of the United States: Bicentennial Edition. 1975.

Warren, Charles. Bankruptcy In United States History. Cambridge: Harvard University Press. 1935.

Citation: Hansen, Bradley. “Bankruptcy Law in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/bankruptcy-law-in-the-united-states/

Thomas N. Maloney, University of Utah

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

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

Table 1: Characteristics of Households in 1900 and 1990

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

Table 2: Characteristics of Individuals in 1900 and 1990

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

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

1900-1915: Continuation of Nineteenth-Century Patterns

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

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

1916-1964: Migration and Urbanization

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

Table 3: Share of African Americans Residing in the South

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

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

Access to Jobs in the North

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

Unions

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

Conditions around 1940

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

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

Gains during the 1940s and 1950s

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

Table 4: Mean Annual Earnings of Wage and Salary Workers

Aged 20 and Over

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

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

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

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

Unemployment

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

1965-1999: Civil Rights and New Challenges

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

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

Return to Stagnation in Relative Income

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

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

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

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

Beyond the Labor Market: Persistent Gaps in Wealth and Health

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

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

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

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

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

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

Summary and Conclusions

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

Sources

Butler, Richard J., James J. Heckman, and Brook Payner. “The Impact of the Economy and the State on the Economic Status of Blacks: A Study of South Carolina.” In Markets in History: Economic Studies of the Past, edited by David W. Galenson, 52-96. New York: Cambridge University Press, 1989.

Collins, William J. “Race, Roosevelt, and Wartime Production: Fair Employment in World War II Labor Markets.” American Economic Review 91, no. 1 (2001): 272-86.

Conley, Dalton. Being Black, Living in the Red: Race, Wealth, and Social Policy in America. Berkeley, CA: University of California Press, 1999.

Donohue, John H. III, and James Heckman. “Continuous vs. Episodic Change: The Impact of Civil Rights Policy on the Economic Status of Blacks.” Journal of Economic Literature 29, no. 4 (1991): 1603-43.

Goldin, Claudia, and Robert A. Margo. “The Great Compression: The Wage Structure in the United States at Mid-Century.” Quarterly Journal of Economics 107, no. 1 (1992): 1-34.

Halcoussis, Dennis and Gary Anderson. “The Political Economy of Legal Segregation: Jim Crow and Racial Employment Patterns.” Economics and Politics 8, no. 1 (1996): 1-15.

Herbst, Alma. The Negro in the Slaughtering and Meat Packing Industry in Chicago. New York: Houghton Mifflin, 1932.

Higgs, Robert. Competition and Coercion: Blacks in the American Economy 1865-1914. New York: Cambridge University Press, 1977.

Jaynes, Gerald David and Robin M. Williams, Jr., editors. A Common Destiny: Blacks and American Society. Washington, DC: National Academy Press, 1989.

Johnson, Daniel M. and Rex R. Campbell. Black Migration in America: A Social Demographic History. Durham, NC: Duke University Press, 1981.

Juhn, Chinhui, Kevin M. Murphy, and Brooks Pierce. “Accounting for the Slowdown in Black-White Wage Convergence.” In Workers and Their Wages: Changing Patterns in the United States, edited by Marvin H. Kosters, 107-43. Washington, DC: AEI Press, 1991.

Kaminski, Robert, and Andrea Adams. Educational Attainment in the US: March 1991 and 1990 (Current Population Reports P20-462). Washington, DC: US Census Bureau, May 1992.

Kasarda, John D. Urban Industrial Transition and the Underclass. In The Ghetto Underclass: Social Science Perspectives, edited by William J. Wilson, 43-64. Newberry Park, CA: Russell Sage, 1993.

Kennedy, Louise V. The Negro Peasant Turns Cityward: The Effects of Recent Migrations to Northern Centers. New York: Columbia University Press, 1930.

Leonard, Jonathan S. “The Impact of Affirmative Action Regulation and Equal Employment Law on Black Employment.” Journal of Economic Perspectives 4, no. 4 (1990): 47-64.

Maloney, Thomas N. “Wage Compression and Wage Inequality between Black and White Males in the United States, 1940-1960.” Journal of Economic History 54, no. 2 (1994): 358-81.

Maloney, Thomas N. “Racial Segregation, Working Conditions, and Workers’ Health: Evidence from the A.M. Byers Company, 1916-1930.” Explorations in Economic History 35, no. 3 (1998): 272-295.

Maloney, Thomas N., and Warren C. Whatley. “Making the Effort: The Contours of Racial Discrimination in Detroit’s Labor Markets, 1920-1940.” Journal of Economic History 55, no. 3 (1995): 465-93.

Margo, Robert A. Race and Schooling in the South, 1880-1950. Chicago: University of Chicago Press, 1990.

Margo, Robert A. “Explaining Black-White Wage Convergence, 1940-1950.” Industrial and Labor Relations Review 48, no. 3 (1995): 470-81.

Marshall, Ray F. The Negro and Organized Labor. NY: John Wiley and Sons, 1965.

Minino, Arialdi M., and Betty L. Smith. “Deaths: Preliminary Data for 2000” National Vital Statistics Reports 49, no. 12 (2001).

Oliver, Melvin L., and Thomas M. Shapiro. Race and Wealth. Review of Black Political Economy 17, no. 4 (1989): 5-25.

Ruggles, Steven, and Matthew Sobek. Integrated Public Use Microdata Series: Version 2.0. Minneapolis: Social Historical Research Laboratory, University of Minnesota, 1997.

Sugrue, Thomas J. The Origins of the Urban Crisis: Race and Inequality in Postwar Detroit. NJ: Princeton University Press, 1996.

Sundstrom, William A. “Last Hired, First Fired? Unemployment and Urban Black Workers During the Great Depression.” Journal of Economic History 52, no. 2 (1992): 416-29.

United States Bureau of the Census. Statistical Abstract of the United States 1973 (94th Edition). Washington, DC: Department of Commerce, Bureau of the Census, 1973.

United States Bureau of the Census. Historical Statistics of the United States: Colonial Times to 1970. Washington, DC: Department of Commerce, Bureau of the Census, 1975.

United States Bureau of the Census. Statistical Abstract of the United States 1985 (105th Edition). Washington, DC: Department of Commerce, Bureau of the Census, 1985.

United States Bureau of the Census. Statistical Abstract of the United States 1996 (116th Edition). Washington, DC: Department of Commerce, Bureau of the Census, 1996.

Vedder, Richard K. and Lowell Gallaway. “Racial Differences in Unemployment in the United States, 1890-1980.” Journal of Economic History 52, no. 3 (1992): 696-702.

Whatley, Warren C. “African-American Strikebreaking from the Civil War to the New Deal.” Social Science History 17, no. 4 (1993): 525-58.

Wilson, William J. The Truly Disadvantaged: The Inner City, the Underclass, and Public Policy. Chicago, IL: University of Chicago Press, 1987.

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

Citation: Maloney, Thomas. “African Americans in the Twentieth Century”. EH.Net Encyclopedia, edited by Robert Whaples. January 14, 2002. URL http://eh.net/encyclopedia/african-americans-in-the-twentieth-century/