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The Economics of the Civil War

Roger L. Ransom, University of California, Riverside

The Civil War has been something of an enigma for scholars studying American history. During the first half of the twentieth century, historians viewed the war as a major turning point in American economic history. Charles Beard labeled it “Second American Revolution,” claiming that “at bottom the so-called Civil War – was a social war, ending in the unquestioned establishment of a new power in the government, making vast changes – in the course of industrial development, and in the constitution inherited from the Fathers” (Beard and Beard 1927: 53). By the time of the Second World War, Louis Hacker could sum up Beard’s position by simply stating that the war’s “striking achievement was the triumph of industrial capitalism” (Hacker 1940: 373). The “Beard-Hacker Thesis” had become the most widely accepted interpretation of the economic impact of the Civil War. Harold Faulkner devoted two chapters to a discussion of the causes and consequences of the war in his 1943 textbook American Economic History (which was then in its fifth edition), claiming that “its effects upon our industrial, financial, and commercial history were profound” (1943: 340).

In the years after World War II, a new group of economic historians — many of them trained in economics departments — focused their energies on the explanation of economic growth and development in the United States. As they looked for the keys to American growth in the nineteenth century, these economic historians questioned whether the Civil War — with its enormous destruction and disruption of society — could have been a stimulus to industrialization. In his 1955 textbook on American economic history, Ross Robertson mirrored a new view of the Civil War and economic growth when he argued that “persistent, fundamental forces were at work to forge the economic system and not even the catastrophe of internecine strife could greatly affect the outcome” (1955: 249). “Except for those with a particular interest in the economics of war,” claimed Robertson, “the four year period of conflict [1861-65] has had little attraction for economic historians” (1955: 247). Over the next two decades, this became the dominant view of the Civil War’s role industrialization of the United States.

Historical research has a way of returning to the same problems over and over. The efforts to explain regional patterns of economic growth and the timing of the United States’ “take-off” into industrialization, together with extensive research into the “economics” of the slave system of the South and the impact of emancipation, brought economic historians back to questions dealing with the Civil War. By the 1990s a new generation of economic history textbooks once again examined the “economics” of the Civil War (Atack and Passell 1994; Hughes and Cain 1998; Walton and Rockoff 1998). This reconsideration of the Civil War by economic historians can be loosely grouped into four broad issues: the “economic” causes of the war; the “costs” of the war; the problem of financing the War; and a re-examination of the Hacker-Beard thesis that the War was a turning point in American economic history.

Economic Causes of the War

No one seriously doubts that the enormous economic stake the South had in its slave labor force was a major factor in the sectional disputes that erupted in the middle of the nineteenth century. Figure 1 plots the total value of all slaves in the United States from 1805 to 1860. In 1805 there were just over one million slaves worth about $300 million; fifty-five years later there were four million slaves worth close to $3 billion. In the 11 states that eventually formed the Confederacy, four out of ten people were slaves in 1860, and these people accounted for more than half the agricultural labor in those states. In the cotton regions the importance of slave labor was even greater. The value of capital invested in slaves roughly equaled the total value of all farmland and farm buildings in the South. Though the value of slaves fluctuated from year to year, there was no prolonged period during which the value of the slaves owned in the United States did not increase markedly. Looking at Figure 1, it is hardly surprising that Southern slaveowners in 1860 were optimistic about the economic future of their region. They were, after all, in the midst of an unparalleled rise in the value of their slave assets.

A major finding of the research into the economic dynamics of the slave system was to demonstrate that the rise in the value of slaves was not based upon unfounded speculation. Slave labor was the foundation of a prosperous economic system in the South. To illustrate just how important slaves were to that prosperity, Gerald Gunderson (1974) estimated what fraction of the income of a white person living in the South of 1860 was derived from the earnings of slaves. Table 1 presents Gunderson’s estimates. In the seven states where most of the cotton was grown, almost one-half the population were slaves, and they accounted for 31 percent of white people’s income; for all 11 Confederate States, slaves represented 38 percent of the population and contributed 23 percent of whites’ income. Small wonder that Southerners — even those who did not own slaves — viewed any attempt by the federal government to limit the rights of slaveowners over their property as a potentially catastrophic threat to their entire economic system. By itself, the South’s economic investment in slavery could easily explain the willingness of Southerners to risk war when faced with what they viewed as a serious threat to their “peculiar institution” after the electoral victories of the Republican Party and President Abraham Lincoln the fall of 1860.

Table 1

The Fraction of Whites’ Incomes from Slavery

State Percent of the Population That Were Slaves Per Capita Earnings of Free Whites (in dollars) Slave Earnings per Free White (in dollars) Fraction of Earnings Due to Slavery
Alabama 45 120 50 41.7
South Carolina 57 159 57 35.8
Florida 44 143 48 33.6
Georgia 44 136 40 29.4
Mississippi 55 253 74 29.2
Louisiana 47 229 54 23.6
Texas 30 134 26 19.4
Seven Cotton States 46 163 50 30.6
North Carolina 33 108 21 19.4
Tennessee 25 93 17 18.3
Arkansas 26 121 21 17.4
Virginia 32 121 21 17.4
All 11 States 38 135 35 25.9
Source: Computed from data in Gerald Gunderson (1974: 922, Table 1)

The Northern states also had a huge economic stake in slavery and the cotton trade. The first half of the nineteenth century witnessed an enormous increase in the production of short-staple cotton in the South, and most of that cotton was exported to Great Britain and Europe. Figure 2 charts the growth of cotton exports from 1815 to 1860. By the mid 1830s, cotton shipments accounted for more than half the value of all exports from the United States. Note that there is a marked similarity between the trends in the export of cotton and the rising value of the slave population depicted in Figure 1. There could be little doubt that the prosperity of the slave economy rested on its ability to produce cotton more efficiently than any other region of the world.

The income generated by this “export sector” was a major impetus for growth not only in the South, but in the rest of the economy as well. Douglass North, in his pioneering study of the antebellum U.S. economy, examined the flows of trade within the United States to demonstrate how all regions benefited from the South’s concentration on cotton production (North 1961). Northern merchants gained from Southern demands for shipping cotton to markets abroad, and from the demand by Southerners for Northern and imported consumption goods. The low price of raw cotton produced by slave labor in the American South enabled textile manufacturers — both in the United States and in Britain — to expand production and provide benefits to consumers through a declining cost of textile products. As manufacturing of all kinds expanded at home and abroad, the need for food in cities created markets for foodstuffs that could be produced in the areas north of the Ohio River. And the primary force at work was the economic stimulus from the export of Southern Cotton. When James Hammond exclaimed in 1859 that “Cotton is King!” no one rose to dispute the point.

With so much to lose on both sides of the Mason-Dixon Line, economic logic suggests that a peaceful solution to the slave issue would have made far more sense than a bloody war. Yet no solution emerged. One “economic” solution to the slave problem would be for those who objected to slavery to “buy out” the economic interest of Southern slaveholders. Under such a scheme, the federal government would purchase slaves. A major problem here was that the costs of such a scheme would have been enormous. Claudia Goldin estimates that the cost of having the government buy all the slaves in the United States in 1860, would be about $2.7 billion (1973: 85, Table 1). Obviously, such a large sum could not be paid all at once. Yet even if the payments were spread over 25 years, the annual costs of such a scheme would involve a tripling of federal government outlays (Ransom and Sutch 1990: 39-42)! The costs could be reduced substantially if instead of freeing all the slaves at once, children were left in bondage until the age of 18 or 21 (Goldin 1973:85). Yet there would remain the problem of how even those reduced costs could be distributed among various groups in the population. The cost of any “compensated” emancipation scheme was so high that even those who wished to eliminate slavery were unwilling to pay for a “buyout” of those who owned slaves.

The high cost of emancipation was not the only way in which economic forces produced strong regional tensions in the United States before 1860. The regional economic specialization, previously noted as an important cause of the economic expansion of the antebellum period, also generated very strong regional divisions on economic issues. Recent research by economic, social and political historians has reopened some of the arguments first put forward by Beard and Hacker that economic changes in the Northern states were a major factor leading to the political collapse of the 1850s. Beard and Hacker focused on the narrow economic aspects of these changes, interpreting them as the efforts of an emerging class of industrial capitalists to gain control of economic policy. More recently, historians have taken a broader view of the situation, arguing that the sectional splits on these economic issues reflected sweeping economic and social changes in the Northern and Western states that were not experienced by people in the South. The term most historians have used to describe these changes is a “market revolution.”

Source: United States Population Census, 1860.

Perhaps the best single indicator of how pervasive the “market revolution” was in the Northern and Western states is the rise of urban areas in areas where markets have become important. Map 1 plots the 292 counties that reported an “urban population” in 1860. (The 1860 Census Office defined an “urban place” as a town or city having a population of at least 2,500 people.) Table 2 presents some additional statistics on urbanization by region. In 1860 6.1 million people — roughly one out of five persons in the United States — lived in an urban county. A glance at either the map or Table 2 reveals the enormous difference in urban development in the South compared to the Northern states. More than two-thirds of all urban counties were in the Northeast and West; those two regions accounted for nearly 80 percent of the urban population of the country. By contrast, less than 7 percent of people in the 11 Southern states of Table 2 lived in urban counties.

Table 2

Urban Population of the United States in 1860a

Region Counties with Urban Populations Total Urban Population in the Region Percent of Region’s Population Living in Urban Counties Region’s Urban Population as Percent of U.S. Urban Population
Northeastb 103 3,787,337 35.75 61.66
Westc 108 1,059,755 13.45 17.25
Borderd 23 578,669 18.45 9.42
Southe 51 621,757 6.83 10.12
Far Westf 7 99,145 15.19 1.54
Totalg 292 6,141,914 19.77 100.00
Notes:

a Urban population is people living in a city or town of at least 2,500

b Includes: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.

c Includes: Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, Ohio, and Wisconsin.

d Includes: Delaware, Kentucky, Maryland, and Missouri.

e Includes: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Texas, and Virginia.

f Includes: Colorado, California, Dakotas, Nevada, New Mexico, Oregon, Utah and Washington

g includes District of Columbia

Source: U.S Census of Population, 1860.

The region along the north Atlantic Coast, with its extensive development of commerce and industry, had the largest concentration of urban population in the United States; roughly one-third of the population of the nine states defined as the Northeast in Table 2 lived in urban counties. In the South, the picture was very different. Cotton cultivation with slave labor did not require local financial services or nearby manufacturing activities that might generate urban activities. The 11 states of the Confederacy had only 51 urban counties and they were widely scattered throughout the region. Western agriculture with its emphasis on foodstuffs encouraged urban activity near to the source of production. These centers were not necessarily large; indeed, the West had roughly the same number of large and mid-sized cities as the South. However there were far more small towns scattered throughout settled regions of Ohio, Indiana, Illinois, Wisconsin and Michigan than in the Southern landscape.

Economic policy had played a prominent role in American politics since the birth of the republic in 1790. With the formation of the Whig Party in the 1830s, a number of key economic issues emerged at the national level. To illustrate the extent to which the rise of urban centers and increased market activity in the North led to a growing crisis in economic policy, historians have re-examined four specific areas of legislative action singled out by Beard and Hacker as evidence of a Congressional stalemate in 1860 (Egnal 2001; Ransom and Sutch 2001; 1989; Bensel 1990; McPherson 1988).

Land Policy

1. Land Policy. Settlement of western lands had always been a major bone of contention for slave and free-labor farms. The manner in which the federal government distributed land to people could have a major impact on the nature of farming in a region. Northerners wanted to encourage the settlement of farms which would depend primarily on family labor by offering cheap land in small parcels. Southerners feared that such a policy would make it more difficult to keep areas open for settlement by slaveholders who wanted to establish large plantations. This all came to a head with the “Homestead Act” of 1860 that would provide 160 acres of free land for anyone who wanted to settle and farm the land. Northern and western congressmen strongly favored the bill in the House of Representatives but the measure received only a single vote from slave states’ representatives. The bill passed, but President Buchanan vetoed it. (Bensel 1990: 69-72)

Transportation Improvements

2. Transportation Improvements. Following the opening of the Erie Canal in 1823, there was growing support in the North and the Northwest for government support of improvement in transportation facilities — what were termed in those days “internal improvements”. The need for government- sponsored improvements was particularly urgent in the Great Lakes region (Egnal 2001: 45-50). The appearance of the railroad in the 1840s gave added support for those advocating government subsidies to promote transportation. Southerners required far fewer internal improvements than people in the Northwest, and they tended to view federal subsidies for such projects to be part of a “deal” between western and eastern interests that held no obvious gains for the South. The bill that best illustrates the regional disputes on transportation was the Pacific Railway Bill of 1860, which proposed a transcontinental railway link to the West Coast. The bill failed to pass the House, receiving no votes from congressmen representing districts of the South where there was a significant slave population (Bensel 1990: 70-71).

The Tariff

3. The Tariff. Southerners, with their emphasis on staple agriculture and need to buy goods produced outside the South, strongly objected to the imposition of duties on imported goods. Manufacturers in the Northeast, on the other hand, supported a high tariff as protection against cheap British imports. People in the West were caught in the middle of this controversy. Like the agricultural South they disliked the idea of a high “protective” tariff that raised the cost of imports. However the tariff was also the main source of federal revenue at this time, and Westerners needed government funds for the transportation improvements they supported in Congress. As a result, a compromise reached by western and eastern interests during in the tariff debates of 1857 was to support a “moderate” tariff; with duties set high enough to generate revenue and offer some protection to Northern manufacturers while not putting too much of a burden on Western and Eastern consumers. Southerners complained that even this level of protection was excessive and that it was one more example of the willingness of the West and the North to make economic bargains at the expense of the South (Ransom and Sutch 2001; Egnal 2001:50-52).

Banking

4. Banking. The federal government’s role in the chartering and regulation of banks was a volatile political issue throughout the antebellum period. In 1834 President Andrew Jackson created a major furor when he vetoed a bill to recharter the Second Bank of the United States. Jackson’s veto ushered in a period of that was termed “free banking” in the United States, where the chartering and regulation of banks was left entirely in the hands of state governments. Banks were a relatively new economic institution at this point in time, and opinions were sharply divided over the degree to which the federal government should regulate banks. In the Northeast, where over 60 percent of all banks were located, there was strong support by 1860 for the creation of a system of banks that would be chartered and regulated by the federal government. But in the South, which had little need for local banking services, there was little enthusiasm for such a proposal. Here again, the western states were caught in the middle. While they worried that a system of “national” banks that would be controlled by the already dominant eastern banking establishment, western farmers found themselves in need of local banking services for financing their crops. By 1860 many were inclined to support the Republican proposal for a National Banking System, however Southern opposition killed the National Bank Bill in 1860 (Ransom and Sutch 2001; Bensel 1990).

The growth of an urbanized market society in the North produced more than just a legislative program of political economy that Southerners strongly resisted. Several historians have taken a much broader view of the market revolution and industrialization in the North. They see the economic conflict of North and South, in the words of Richard Brown, as “the conflict of a modernizing society” (1976: 161). A leading historian of the Civil War, James McPherson, argues that Southerners were correct when they claimed that the revolutionary program sweeping through the North threatened their way of life (1983; 1988). James Huston (1999) carries the argument one step further by arguing that Southerners were correct in their fears that the triumph of this coalition would eventually lead to an assault by Northern politicians on slave property rights.

All this provided ample argument for those clamoring for the South to leave the Union in 1861. But why did the North fight a war rather than simply letting the unhappy Southerners go in peace? It seems unlikely that anyone will ever be able to show that the “gains” from the war outweighed the “costs” in economic terms. Still, war is always a gamble, and with the neither the costs nor the benefits easily calculated before the fact, leaders are often tempted to take the risk. The evidence above certainly lent strong support for those arguing that it made sense for the South to fight if a belligerent North threatened the institution of slavery. An economic case for the North is more problematic. Most writers argue that the decision for war on Lincoln’s part was not based primarily on economic grounds. However, Gerald Gunderson points out that if, as many historians argue, Northern Republicans were intent on controlling the spread of slavery, then a war to keep the South in the Union might have made sense. Gunderson compares the “costs” of the war (which we discuss below) with the cost of “compensated” emancipation and notes that the two are roughly the same order of magnitude — 2.5 to 3.7 billion dollars (1974: 940-42). Thus, going to war made as much “economic sense” as buying out the slaveholders. Gunderson makes the further point, which has been echoed by other writers, that the only way that the North could ensure that their program to contain slavery could be “enforced” would be if the South were kept in the Union. Allowing the South to leave the Union would mean that the North could no longer control the expansion of slavery anywhere in the Western Hemisphere (Ransom 1989; Ransom and Sutch 2001; Weingast 1998; Weingast 1995; Wolfson 1995). What is novel about these interpretations of the war is that they argue it was economic pressures of “modernization” in the North that made Northern policy towards secession in 1861 far more aggressive than the traditional story of a North forced into military action by the South’s attack on Fort Sumter.

That is not to say that either side wanted war — for economic or any other reason. Abraham Lincoln probably summarized the situation as well as anyone when he observed in his second inaugural address that: “Both parties deprecated war, but one of them would make war rather than let the nation survive, and the other would accept war rather than let it perish, and the war came.”

The “Costs” of the War

The Civil War has often been called the first “modern” war. In part this reflects the enormous effort expended by both sides to conduct the war. What was the cost of this conflict? The most comprehensive effort to answer this question is the work of Claudia Goldin and Frank Lewis (1978; 1975). The Goldin and Lewis estimates of the costs of the war are presented in Table 3. The costs are divided into two groups: the direct costs which include the expenditures of state and local governments plus the loss from destruction of property and the loss of human capital from the casualties; and what Goldin and Lewis term the indirect costs of the war which include the subsequent implications of the war after 1865. Goldin and Lewis estimate that the combined outlays of both governments — in 1860 dollars — totaled $3.3 billion. To this they add $1.8 billion to account for the discounted economic value of casualties in the war, and they add $1.5 billion to account for the destruction of the war in the South. This gives a total of $6.6 billion in direct costs — with each region incurring roughly half the total.

Table 3

The Costs of the Civil War

(Millions of 1860 Dollars)

South

North

Total

Direct Costs:

Government Expenditures

1,032

2,302

3,334

Physical Destruction

1,487

1,487

Loss of Human Capital

767

1,064

1,831

Total Direct Costs of the War

3,286

3,366

6,652

Per capita

376

148

212

Indirect Costs:

Total Decline in Consumption

6,190

1,149

7,339

Less:

Effect of Emancipation

1,960

Effect of Cotton Prices

1,670

Total Indirect Costs of The War

2,560

1,149

3,709

Per capita

293

51

118

Total Costs of the War

5,846

4,515

10,361

Per capita

670

199

330

Population in 1860 (Million)

8.73

27.71

31.43

Source: Ransom, (1998: 51, Table 3-1); Goldin and Lewis. (1975; 1978)

While these figures are only a very rough estimate of the actual costs, they provide an educated guess as to the order of magnitude of the economic effort required to wage the war, and it seems likely that if there is a bias, it is to understate the total. (Thus, for example, the estimated “economic” losses from casualties ignore the emotional cost of 625,000 deaths, and the estimates of property destruction were quite conservative.) Even so, the direct cost of the war as calculated by Goldin and Lewis was 1.5 times the total gross national product of the United States for 1860 — an enormous sum in comparison with any military effort by the United States up to that point. What stands out in addition to the enormity of the bill is the disparity in the burden these costs represented to the people in the North and the South. On a per capita basis, the costs to the North population were about $150 — or roughly equal to one year’s income. The Southern burden was two and a half times that amount — $376 per man, woman and child.

Staggering though these numbers are, they represent only a fraction of the full costs of the war, which lingered long after the fighting had stopped. One way to measure the full “costs” and “benefits” of the war, Goldin and Lewis argue, is to estimate the value of the observed postwar stream of consumption in each region and compare that figure to the estimated hypothetical stream of consumption had there been no war (1975: 309-10). (All the figures for the costs in Table 3 have been adjusted to reflect their discounted value in 1860.) The Goldin and Lewis estimate for the discounted value of lost consumption for the South was $6.2 billion; for the North the estimate was $1.15 billion. Ingenious though this methodology is, it suffers from the serious drawback that consumption lost for any reason — not just the war — is included in the figure. Particularly for the South, not all the decline in output after 1860 could be directly attributed to the war; the growth in the demand for cotton that fueled the antebellum economy did not continue, and there was a dramatic change in the supply of labor due to emancipation. Consequently, Goldin and Lewis subsequently adjusted their estimate of lost consumption due to the war down to $2.56 billion for the South in order to exclude the effects of emancipation and the collapse of the cotton market. The magnitudes of the indirect effects are detailed in Table 3. After the adjustments, the estimated costs for the war totaled more than $10 billion. Allocating the costs to each region produces a per capita burden of $670 in the South and $199 in the North. What Table 3 does not show is the extent to which these expenses were spread out over a long period of time. In the North, consumption had regained its prewar level by 1873, however in the South consumption remained below its 1860 level to the end of the century. We shall return to this issue below.

Financing the War

No war in American history strained the economic resources of the economy as the Civil War did. Governments on both sides were forced to resort to borrowing on an unprecedented scale to meet the financial obligations for the war. With more developed markets and an industrial base that could ultimately produce the goods needed for the war, the Union was clearly in a better position to meet this challenge. The South, on the other hand, had always relied on either Northern or foreign capital markets for their financial needs, and they had virtually no manufacturing establishments to produce military supplies. From the outset, the Confederates relied heavily on funds borrowed outside the South to purchase supplies abroad.

Figure 3 shows the sources of revenue collected by the Union government during the war. In 1862 and 1863 the government covered less than 15 percent of its total expenditures through taxes. With the imposition of a higher tariff, excise taxes, and the introduction of the first income tax in American history, this situation improved somewhat, and by the war’s end 25 percent of the federal government revenues had been collected in taxes. But what of the other 75 percent? In 1862 Congress authorized the U.S. Treasury to issue currency notes that were not backed by gold. By the end of the war, the treasury had printed more than $250 million worth of these “Greenbacks” and, together with the issue of gold-backed notes, the printing of money accounted for 18 percent of all government revenues. This still left a huge shortfall in revenue that was not covered by either taxes or the printing of money. The remaining revenues were obtained by borrowing funds from the public. Between 1861 and 1865 the debt obligation of the Federal government increased from $65 million to $2.7 billion (including the increased issuance of notes by the Treasury). The financial markets of the North were strained by these demands, but they proved equal to the task. In all, Northerners bought almost $2 billion worth of treasury notes and absorbed $700 million of new currency. Consequently, the Northern economy was able to finance the war without a significant reduction in private consumption. While the increase in the national debt seemed enormous at the time, events were to prove that the economy was more than able to deal with it. Indeed, several economic historians have claimed that the creation and subsequent retirement of the Civil War debt ultimately proved to be a significant impetus to post-war growth (Williamson 1974; James 1984). Wartime finance also prompted a significant change in the banking system of the United States. In 1862 Congress finally passed legislation creating the National Banking System. Their motive was not only to institute the program of banking reform pressed for many years by the Whigs and the Republicans; the newly-chartered federal banks were also required to purchase large blocs of federal bonds to hold as security against the issuance of their national bank notes.

The efforts of the Confederate government to pay for their war effort were far more chaotic than in the North, and reliable expenditure and revenue data are not available. Figure 4 presents the best revenue estimates we have for the Richmond government from 1861 though November 1864 (Burdekin and Langdana 1993). Several features of Confederate finance immediately stand out in comparison to the Union effort. First is the failure of the Richmond government to finance their war expenditures through taxation. Over the course of the war, tax revenues accounted for only 11 percent of all revenues. Another contrast was the much higher fraction of revenues accounted for by the issuance of currency on the part of the Richmond government. Over a third of the Confederate government’s revenue came from the printing press. The remainder came in the form of bonds, many of which were sold abroad in either London or Amsterdam. The reliance on borrowed funds proved to be a growing problem for the Confederate treasury. By mid-1864 the costs of paying interest on outstanding government bonds absorbed more than half all government expenditures. The difficulties of collecting taxes and floating new bond issues had become so severe that in the final year of the war the total revenues collected by the Confederate Government actually declined.

The printing of money and borrowing on such a huge scale had a dramatic effect on the economic stability of the Confederacy. The best measure of this instability and eventual collapse can be seen in the behavior of prices. An index of consumer prices is plotted together with the stock on money from early 1861 to April 1865 in Figure 5. By the beginning of 1862 prices had already doubled; by middle of 1863 they had increased by a factor of 13. Up to this point, the inflation could be largely attributed to the money placed in the hands of consumers by the huge deficits of the government. Prices and the stock of money had risen at roughly the same rate. This represented a classic case of what economists call demand-pull inflation: too much money chasing too few goods. However, from the middle of 1863 on, the behavior of prices no longer mirrors the money supply. Several economic historians have suggested that at this point the prices reflect people’s confidence in the future of the Confederacy as a viable state (Burdekin and Langdana 1993; Weidenmier 2000). Figure 5 identifies three major military “turning points” between 1863 and 1865. In late 1863 and early 1864, following the Confederate defeats at Gettysburg and Vicksburg, prices rose very sharply despite a marked decrease in the growth of the money supply. When the Union offensives in Georgia and Virginia stalled in the summer of 1864, prices stabilized for a few months, only to resume their upward spiral after the fall of Atlanta in September 1864. By that time, of course, the Confederate cause was clearly doomed. By the end of the war, inflation had reached a point where the value of the Confederate currency was virtually zero. People had taken to engaging in barter or using Union dollars (if they could be found) to conduct their transactions. The collapse of the Confederate monetary system was a reflection of the overall collapse of the economy’s efforts to sustain the war effort.

The Union also experienced inflation as a result of deficit finance during the war; the consumer price index rose from 100 at the outset of the war to 175 by the end of 1865. While this is nowhere near the degree of economic disruption caused by the increase in prices experienced by the Confederacy, a doubling of prices did have an effect on how the burden of the war’s costs were distributed among various groups in each economy. Inflation is a tax, and it tends to fall on those who are least able to afford it. One group that tends to be vulnerable to a sudden rise in prices is wage earners. Table 4 presents data on prices and wages in the United States and the Confederacy. The series for wages has been adjusted to reflect the decline in purchasing power due to inflation. Not surprisingly, wage earners in the South saw the real value of their wages practically disappear by the end of the war. In the North the situation was not as severe, but wages certainly did not keep pace with prices; the real value of wages fell by about 20 percent. It is not obvious why this happened. The need for manpower in the army and the demand for war production should have created a labor shortage that would drive wages higher. While the economic situation of laborers deteriorated during the war, one must remember that wage earners in 1860 were still a relatively small share of the total labor force. Agriculture, not industry, was the largest economic sector in the north, and farmers fared much in terms of their income during the war than did wage earners in the manufacturing sector (Ransom 1998:255-64; Atack and Passell 1994:368-70).

Table 4:

Indices of Prices and Real Wages During the Civil War

(1860=100)

Union Confederate
Year Prices Real Wages Prices Real Wages
1860 100 100 100 100
1861 101 100 121 86
1862 113 93 388 35
1863 139 84 1,452 19
1864 176 77 3,992 11
1865 175 82
Source: Union: (Atack and Passell 1994: 367, Table 13.5)

Confederate: (Lerner 1954)

Overall, it is clear that the North did a far better job of mobilizing the economic resources needed to carry on the war. The greater sophistication and size of Northern markets meant that the Union government could call upon institutional arrangements that allowed for a more efficient system of redirecting resources into wartime production than was possible in the South. The Confederates depended far more upon outside resources and direct intervention in the production of goods and services for their war effort, and in the end the domestic economy could not bear up under the strain of the effort. It is worth noting in this regard, that the Union blockade, which by 1863 had largely closed down not only the external trade of the South with Europe, but also the coastal trade that had been an important element in the antebellum transportation system, may have played a more crucial part in bringing about the eventual collapse of the Southern war effort than is often recognized (Ransom 2002).

The Civil War as a Watershed in American Economic History

It is easy to see why contemporaries believed that the Civil War was a watershed event in American History. With a cost of billions of dollars and 625,000 men killed, slavery had been abolished and the Union had been preserved. Economic historians viewing the event fifty years later could note that the half-century following the Civil War had been a period of extraordinary growth and expansion of the American economy. But was the war really the “Second American Revolution” as Beard (1927) and Louis Hacker (1940) claimed? That was certainly the prevailing view as late as 1960, when Thomas Cochran (1961) published an article titled “Did the Civil War Retard Industrialization?” Cochran pointed out that, until the 1950s, there was no quantitative evidence to prove or disprove the Beard-Hacker thesis. Recent quantitative research, he argued, showed that the war had actually slowed the rate of industrial growth. Stanley Engerman expanded Cochran’s argument by attacking the Beard-Hacker claim that political changes — particularly the passage in 1862 of the Republican program of political economy that had been bottled up in Congress by Southern opposition — were instrumental in accelerating economic growth (Engerman 1966). The major thrust of these arguments was that neither the war nor the legislation was necessary for industrialization — which was already well underway by 1860. “Aside from commercial banking,” noted one commentator, “the Civil War appears not to have started or created any new patterns of economic institutional change” (Gilchrist and Lewis 1965: 174). Had there been no war, these critics argued, the trajectory of economic growth that emerged after 1870 would have done so anyway.

Despite this criticism, the notion of a “second” American Revolution lives on. Clearly the Beards and Hacker were in error in their claim that industrial growth accelerated during the war. The Civil War, like most modern wars, involved a huge effort to mobilize resources to carry on the fight. This had the effect of making it appear that the economy was expanding due to the production of military goods. However, Beard and Hacker — and a good many other historians — mistook this increased wartime activity as a net increase in output when in fact what happened is that resources were shifted away from consumer products towards wartime production (Ransom 1989: Chapter 7). But what of the larger question of political change resulting from the war? Critics of Beard and Hacker claimed that the Republican program would have eventually been enacted even if there been no war; hence the war was not a crucial turning point in economic development. The problem with this line of argument is that it completely misses the point of the Beard-Hacker argument. They would readily agree that in the absence of a war the Republican program of political economy would triumph — and that is why there was a war! Historians who argue that economic forces were an underlying cause of sectional conflicts go on to point out that war was probably the only way to settle those conflicts. In this view, the war was a watershed event in the economic development of the United States because the Union military victory ensured that the “market revolution” would not be stymied by the South’s attempt to break up the Union (Ransom 1999).

Whatever the effects of the war on industrial growth, economic historians agree that the war had a profound effect on the South. The destruction of slavery meant that the entire Southern economy had to be rebuilt. This turned out to be a monumental task; far larger than anyone at the time imagined. As noted above in the discussion of the indirect costs of the war, Southerners bore a disproportionate share of those costs and the burden persisted long after the war had ended. The failure of the postbellum Southern economy to recover has spawned a huge literature that goes well beyond the effects of the war.

Economic historians who have examined the immediate effects of the war have reached a few important conclusions. First, the idea that the South was physically destroyed by the fighting has been largely discarded. Most writers have accepted the argument of Ransom and Sutch (2001) that the major “damage” to the South from the war was the depreciation and neglect of property on farms as a significant portion of the male workforce went off to war for several years. Second was the impact of emancipation. Slaveholders lost their enormous investment in slaves as a result of emancipation. Planters were consequently strapped for capital in the years immediately after the war, and this affected their options with regard to labor contracts with the freedmen and in their dealings with capital markets to obtain credit for the planting season. The freedmen and their families responded to emancipation by withdrawing up to a third of their labor from the market. While this was a perfectly reasonable response, it had the effect of creating an apparent labor “shortage” and it convinced white landlords that a free labor system could never work with the ex-slaves; thus further complicating an already unsettled labor market. In the longer run, as Gavin Wright (1986) put it, emancipation transformed the white landowners from “laborlords” to “landlords.” This was not a simple transition. While they were able, for the most part, to cling to their landholdings, the ex-slaveholders were ultimately forced to break up the great plantations that had been the cornerstone of the antebellum Southern economy and rent small parcels of land to the freedmen under using a new form of rental contract — sharecropping. From a situation where tenancy was extremely rare, the South suddenly became an agricultural economy characterized by tenant farms.

The result was an economy that remained heavily committed not only to agriculture, but to the staple crop of cotton. Crop output in the South fell dramatically at the end of the war, and had not yet recovered its antebellum level by 1879. The loss of income was particularly hard on white Southerners; per capita income of whites in 1857 had been $125; in 1879 it was just over $80 (Ransom and Sutch 1979). Table 5 compares the economic growth of GNP in the United States with the gross crop output of the Southern states from 1874 to 1904. Over the last quarter of the nineteenth century, gross crop output in the South rose by about one percent per year at a time when the GNP of United States (including the South) was rising at twice that rate. By the end of the century, Southern per capita income had fallen to roughly two-thirds the national level, and the South was locked in a cycle of poverty that lasted well into the twentieth century. How much of this failure was due solely to the war remains open to debate. What is clear is that neither the dreams of those who fought for an independent South in 1861 nor the dreams of those who hoped that a “New South” that might emerge from the destruction of war after 1865 were realized.

Table 5Annual Rates of Growth of Gross National Product of the U.S. and the Gross Southern Crop Output, 1874 to 1904
Annual Percentage Rate of Growth
Interval Gross National Product of the U.S. Gross Southern Crop Output
1874 to 1884 2.79 1.57
1879 to 1889 1.91 1.14
1884 to 1894 0.96 1.51
1889 to 1899 1.15 0.97
1894 to 1904 2.30 0.21
1874 to 1904 2.01 1.10
Source: (Ransom and Sutch 1979: 140, Table 7.3

References

Atack, Jeremy, and Peter Passell. A New Economic View of American History from Colonial Times to 1940. Second edition. New York: W.W. Norton, 1994.

Beard, Charles, and Mary Beard. The Rise of American Civilization. Two volumes. New York: Macmillan, 1927.

Bensel, Richard F. Yankee Leviathan: The Origins of Central State Authority in America, 1859-1877. New York: Cambridge University Press, 1990.

Brown, Richard D. Modernization: The Transformation of American Life, 1600-1865. New York: Hill and Wang, 1976.

Burdekin, Richard C.K., and Farrokh K. Langdana. “War Finance in the Southern Confederacy.” Explorations in Economic History 30 (1993): 352-377.

Cochran, Thomas C. “Did the Civil War Retard Industrialization?” Mississippi Valley Historical Review 48 (September 1961): 197-210.

Egnal, Marc. “The Beards Were Right: Parties in the North, 1840-1860.” Civil War History 47 (2001): 30-56.

Engerman, Stanley L. “The Economic Impact of the Civil War.” Explorations in Entrepreneurial History, second series 3 (1966): 176-199 .

Faulkner, Harold Underwood. American Economic History. Fifth edition. New York: Harper & Brothers, 1943.

Gilchrist, David T., and W. David Lewis, editors. Economic Change in the Civil War Era. Greenville, DE: Eleutherian Mills-Hagley Foundation, 1965.

Goldin, Claudia Dale. “The Economics of Emancipation.” Journal of Economic History 33 (1973): 66-85.

Goldin, Claudia, and Frank Lewis. “The Economic Costs of the American Civil War: Estimates and Implications.” Journal of Economic History 35 (1975): 299-326.

Goldin, Claudia, and Frank Lewis. “The Post-Bellum Recovery of the South and the Cost of the Civil War: Comment.” Journal of Economic History 38 (1978): 487-492.

Gunderson, Gerald. “The Origin of the American Civil War.” Journal of Economic History 34 (1974): 915-950.

Hacker, Louis. The Triumph of American Capitalism: The Development of Forces in American History to the End of the Nineteenth Century. New York: Columbia University Press, 1940.

Hughes, J.R.T., and Louis P. Cain. American Economic History. Fifth edition. New York: Addison Wesley, 1998.

Huston, James L. “Property Rights in Slavery and the Coming of the Civil War.” Journal of Southern History 65 (1999): 249-286.

James, John. “Public Debt Management and Nineteenth-Century American Economic Growth.” Explorations in Economic History 21 (1984): 192-217.

Lerner, Eugene. “Money, Prices and Wages in the Confederacy, 1861-65.” Ph.D. dissertation, University of Chicago, Chicago, 1954.

McPherson, James M. “Antebellum Southern Exceptionalism: A New Look at an Old Question.” Civil War History 29 (1983): 230-244.

McPherson, James M. Battle Cry of Freedom: The Civil War Era. New York: Oxford University Press, 1988.

North, Douglass C. The Economic Growth of the United States, 1790-1860. Englewood Cliffs: Prentice Hall, 1961.

Ransom, Roger L. Conflict and Compromise: The Political Economy of Slavery, Emancipation, and the American Civil War. New York: Cambridge University Press, 1989.

Ransom, Roger L. “The Economic Consequences of the American Civil War.” In The Political Economy of War and Peace, edited by M. Wolfson. Norwell, MA: Kluwer Academic Publishers, 1998.

Ransom, Roger L. “Fact and Counterfact: The ‘Second American Revolution’ Revisited.” Civil War History 45 (1999): 28-60.

Ransom, Roger L. “The Historical Statistics of the Confederacy.” In The Historical Statistics of the United States, Millennial Edition, edited by Susan Carter and Richard Sutch. New York: Cambridge University Press, 2002.

Ransom, Roger L., and Richard Sutch. “Growth and Welfare in the American South in the Nineteenth Century.” Explorations in Economic History 16 (1979): 207-235.

Ransom, Roger L., and Richard Sutch. “Who Pays for Slavery?” In The Wealth of Races: The Present Value of Benefits from Past Injustices, edited by Richard F. America, 31-54. Westport, CT: Greenwood Press, 1990.

Ransom, Roger L., and Richard Sutch. “Conflicting Visions: The American Civil War as a Revolutionary Conflict.” Research in Economic History 20 (2001)

Ransom, Roger L., and Richard Sutch. One Kind of Freedom: The Economic Consequences of Emancipation. Second edition. New York: Cambridge University Press, 2001.

Robertson, Ross M. History of the American Economy. Second edition. New York: Harcourt Brace and World, 1955.

United States, Bureau of the Census. Historical Statistics of the United States, Colonial Times to 1970. Two volumes. Washington: U.S. Government Printing Office, 1975.

Walton, Gary M., and Hugh Rockoff. History of the American Economy. Eighth edition. New York: Dryden, 1998.

Weidenmier, Marc. “The Market for Confederate Bonds.” Explorations in Economic History 37 (2000): 76-97.

Weingast, Barry. “The Economic Role of Political Institutions: Market Preserving Federalism and Economic Development.” Journal of Law, Economics and Organization 11 (1995): 1:31.

Weingast, Barry R. “Political Stability and Civil War: Institutions, Commitment, and American Democracy.” In Analytic Narratives, edited by Robert Bates et al. Princeton: Princeton University Press, 1998.

Williamson, Jeffrey. “Watersheds and Turning Points: Conjectures on the Long-Term Impact of Civil War Financing.” Journal of Economic History 34 (1974): 636-661.

Wolfson, Murray. “A House Divided against Itself Cannot Stand.” Conflict Management and Peace Science 14 (1995): 115-141.

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

Citation: Ransom, Roger. “Economics of the Civil War”. EH.Net Encyclopedia, edited by Robert Whaples. August 24, 2001. URL http://eh.net/encyclopedia/the-economics-of-the-civil-war/

International Shipping Cartels

Richard Sicotte, University of Calgary

The international shipping industry has been characterized by a remarkable degree of collusion for more than a century. The two features that are most astonishing are the length of time that some of these cartels have endured, and the wide latitude that regulatory authorities have given them. Firms in many industries have attempted to collude but typically they have met with only fleeting success. Also, since the late nineteenth century the United States has prosecuted firms that fix prices under the Sherman Antitrust Act (until quite recently, most other countries were relatively lenient in their treatment of cartels). Yet in both instances ocean shipping is an exception to the rule.

Fixed Costs and the Rise of Collusion

The rise of collusive practices in ocean shipping coincides with developments in the industry that considerably raised the costs — especially the fixed costs (costs that do not vary with the amount of cargo carried) — of engaging in the business. Many economists believe that fixed costs are important because the higher that they are relative to variable costs, the more likely it is that vigorous price competition will lead to business bankruptcies. This threat of bankruptcy in the presence of price competition provides a strong incentive for firms to collude.

Liner Service vs. Tramp Shipping

The particular developments in ocean shipping that are associated with raising fixed costs are the rise of liner service and the increased use of steamships. Liner service refers to that portion of the shipping industry that follows regular schedules. Liner shipping firms promise to depart a port on a given day regardless of whether the ship is full. Liner shipping is contrasted with so-called “tramp” shipping, which involves ships setting sail at indeterminate dates, often only when they have filled their cargo or passenger capacity. Liner services involve higher fixed costs than tramp shipping not only because of larger administrative overhead, but also because the necessity of following a fixed schedule creates more stringent capacity requirements. The number of vessels required for a given liner service is determined principally by frequency, distance and speed. For example, a weekly liner service between New York and Hamburg may require four ships. Some of those vessels may depart the ports only partially full; a tramp service carrying the same amount of cargo between New York and Hamburg could conceivably require fewer ships, because the tramps can wait until they are full before departing.

Liner shipping is most often associated with steamships, although regularly scheduled service by sailing vessels was not uncommon in the early nineteenth century. But with steamships, firms found it easier to comply with the fixed schedules characteristic of liner service because steamships, unlike sailing vessels, did not depend on favorable winds in order to maintain speed. Most steamships were also much more expensive than sailing vessels. Because the cost of the vessel represents a fixed cost in the shipping industry – interest or time charter payments must be made independent of the quantity of cargo or passengers carried – the transition to steamships represented a major increase in fixed costs.

Early Attempts at Collusion

Historical accounts of steamship companies in the nineteenth century confirm that much of the motivation for collusion was to raise prices and thwart further price competition. Steamship firms serving North Atlantic routes attempted to collude as early as the 1840s, shortly after the steamship was first applied there. The first cartels that had some staying power, however, served the trade between Britain and India, and Britain and China. By the beginning of the twentieth century, liner shipping companies had established cartels on nearly all world trade routes.

Shipping Conferences and Collusion

The principal activity of shipping conferences is to meet frequently in order to fix freight rates (or passenger fares in the case of passenger shipping conferences). Freight rates are typically set by commodity, with the highest value commodities charged higher rates than lower value commodities. The process of fixing rates can be immensely complicated, because lower cost carriers will prefer that the cartel fix lower rates than higher cost carriers will prefer. Simple fixing of rates may not be satisfactory, however. On the one hand, there is no control over non-price competition. For example, carriers might all wish to schedule vessels in a similar way with the result that vessels are still not carrying at full capacity. This is especially likely if the conference rates are higher than the competitive rates, which results in a lower quantity demanded. It might also be true that if firms are not competing on price, they may have an incentive to invest in higher quality vessels so as to attract more customers. Finally, collusion on prices must be enforceable. The cartels must be able to detect and deter member firms from secretly cutting rates and thereby attracting larger volumes. Clearly ocean carriers have much to gain from colluding on more than price.

Pooling Arrangements

Some cartels coordinate sailing schedules or create exclusive territories (control over specific ports or ranges of ports), and there has been at least one case in which the firms even restricted investment in newer, larger and faster ships. One of the most prevalent innovations introduced by conferences is a mechanism known as the “pool.” In a pool, the firms are each assigned a percentage of the total freight (or passengers) carried or revenue earned. The secretary of the conference collects data from the firms in order to make the pool operational. The firms that exceed their quotas must make payments to the firms that do not achieve their quotas. In this manner, the incentive to compete for greater volumes is diminished substantially. Similarly, quota arrangements might be devised and enforced such that lower cost firms carry greater amounts of freight than higher cost firms, which leads to greater aggregate profits. Still, agreements that extend beyond simple price-fixing are more costly to negotiate and carry out.

Factors Associated with Successful Collusion

In a study of a large number of freight cartels in the early twentieth century, it was found that approximately half of shipping conferences were of a stricter variety that included mechanisms like the pool or coordinated schedules. Evidence suggests that certain factors facilitated the negotiation and maintenance of these more complex cartel contracts. One of the most important factors was multi-market contact among cartel firms. Multi-market contact occurs when ocean carriers engage one another on more than one trade route. For example, if the firms in a given conference also participated together in other conferences, the conferences that they participated in were more likely to be of the stricter variety than if the firms in a given conference participated in other conferences, but not with each other. Evidence that multi-market contact facilitates collusion has also been found in other industries, such as airlines and hotels. Multi-market contact is thought to be important for two reasons. First, firms will be less likely to violate agreements because if they do so, they risk retaliation in many, if not most of the routes that they serve. Second, when firms have more experience working together, this may build trust and otherwise reduce the organizational and monitoring costs of maintaining higher degrees of collusion.

Another factor that was an important determinant of the extent of collusion was if a given conference happened to be dominated by a very large firm. Presumably, such dominant firms were more able to impose and enforce the terms of a complex agreement. Conferences with fewer members were also more likely to reach pooling or quantity agreements in addition to price-fixing. This is consistent with other works on cartels that have found that the fewer the number of firms, the easier it is to negotiate a cartel contract.

Responses to the Threat of Entry

A vital issue for shipping conferences is the threat of entry by non-conference (independent) ocean carriers, including tramps. The more successful that a cartel is in obtaining profits, the more incentives there are for new firms to enter the route to share in the spoils. Shipping conferences typically have employed two kinds of strategies against entrants and potential entrants. First, they often engage in predatory behavior (drastic cutting of rates) in response to entry. Rate wars reduce entrants’ incentives to stay in the business. Rate wars also send a signal to potential entrants that the cartel will respond strongly to any entry. This is meant to deter firms from entering the conference’s domain. There is evidence that conferences were more likely to engage in predatory behavior against weak entrants than well-established firms with substantial financial resources.

The second strategy that shipping conferences employ against entrants is to offer exclusive contracts to their customers. With such contracts, exporters or importers receive a discounted freight rate in exchange for a commitment to exclusively use the services of conference vessels. Breaches of the commitments carried financial penalties. In the case of one such exclusive contract, the deferred rebate, conferences withhold all or a portion of the rebate earned during a given period of time until continued allegiance to the conference could be verified, usually through the examination of statistics or by simply having agents observe the loading of competitors’ ships.

The Effects of Shipping Cartels on Social Welfare

Shipping conferences have been embroiled in a long-running controversy about their ultimate effects on social welfare. On the one hand, there is a school of thought that the cartel behavior is clearly detrimental, because through their participation in cartels firms are able to charge higher rates than would otherwise be obtained. On the other hand, the conferences themselves defend their practices as necessary for the very existence of the liner industry and undeniable benefits that regularly scheduled service brings for businesses and passengers. They argue that competition in liner shipping is unsustainable and destructive, and that the conferences are an efficient solution to an otherwise intractable market problem. If competition were to reign, the conferences argue that rates would immediately fall to un-remunerative depths and firms would all be driven to bankruptcy, or that only a monopoly would remain, which would be far worse than the cartel system. The destructive competition argument has recently been advocated by economic theorists using the economic concept of the core, which is the set of competitive equilibria. These theorists argue the core of the liner shipping market is empty – that is, there does not exist a competitive equilibrium and that conferences represent an efficient response to the problem. The controversy remains unresolved.

Governments’ Responses to Shipping Cartels

Throughout most of the past 125 years, governments have been very receptive to the arguments of destructive competition as applied to the ocean shipping industry. In 1909 the United Kingdom’s Royal Commission on Shipping Rings (conferences) issued a report in which the majority of the commission found that the conference system was necessary and its practices justified. The United States Congress first investigated the phenomenon immediately prior to World War I, and issued a report in 1914 also accepting the basic tenets of the destructive competition argument. The United States Shipping Act of 1916 granted shipping conferences conditional immunity from the nation’s antitrust laws, although Congress prohibited deferred rebates, which it deemed excessive. Other countries’ policies ranged from acquiescence to open support and encouragement.

The United States policy was relatively hard-line by contrast. After World War I, the United States required that all conferences be “open,” that is that any firm that wished to join the conference could not be excluded. This contrasted with the “closed” conference system employed on trade routes not involving the United States. Further, conferences were required to file copies of their agreements with a government agency charged with oversight of the industry.

After World War II, governments’ attitudes toward shipping conferences gradually hardened. The United States Congress again investigated the conference system after complaints of abuse were made in the 1950s. Court challenges to the conference system and some of its practices were made in the United States in the 1950s and 1960s. The United Nations also issued a Code of Conduct for Liner Conferences in 1974 (although it did not come into effect until 1983) to ensure that conferences accepted the lines of less developed countries as members.

Containerships and the Decline of Conferences

The liner shipping business was transformed after 1960 by the introduction of containerships. Containerships are one element in a global transportation network of unprecedented speed and security. Sea containers are inter-changed between ocean vessels, railcars and trucking chassis. Global point-to-point transportation firms and alliances are increasingly common and there is some question as to the continued relevance of shipping conferences in this inter-modal competitive environment. Indeed, non-conference carriers have become more prevalent in recent years and are carrying a greater proportion of freight than they did in the past.

Further, the United States Shipping Acts of 1984 and 1998 have weakened the ability of conferences to police their own members by mandating that firms have the right of “independent action” on rates and that they are permitted to negotiate large quantity “service contracts” with customers outside the conference price-fixing agreement. The European Commission has also regulated conferences more severely since the late 1980s. Additionally, exporters and importers are increasingly organized on an international level and have expressed their concerns about the conference system with increasing force. With their prodding, the Organization for Economic Cooperation and Development is currently reviewing liner conference pricing policies and other practices. The current decade is likely to see some very interesting developments in the area of international shipping conferences.

Further Reading:

Boyce, Gordon. Information, Mediation, and Institutional Development: The Rise of Large-Scale Enterprise in British Shipping, 1870-1919. Manchester, UK: Manchester University Press, 1995.

Deakin, Brian, and T. Seward. Shipping Conferences: A Study of Their Origins, Development and Economic Practices. Cambridge: Cambridge University Press, 1973.

Deltas, George, Konstantinos Serfes and Richard Sicotte. “American Shipping Cartels in the Pre-World War I Era.” Research in Economic History 19 (1999): 1-38.

Harley, Knick. “The Shift from Sailing Ships to Steamships, 1850-1890: A Study in Technological Change and Its Diffusion.” In Essays on a Mature Economy: Britain after 1840, edited by D.N. McCloskey. Princeton: Princeton University Press, 1971.

Hyde, Francis. Cunard and the North Atlantic, 1840-1973. Atlantic Highlands, NJ: Humanities Press, 1975.

Marriner, Sheila and Francis Hyde. The Senior John Samuel Swire, 1825-98: Management in Far Eastern Shipping Trades. Liverpool: Liverpool University Press, 1967.

Marx, Daniel. International Shipping Cartels: A Study of Industrial Self-Regulation by Shipping Conferences. Princeton: Princeton University Press, 1953.

Organization for Economic Cooperation and Development. Directorate for Science, Technology and Industry. Division of Transport. Regulatory Issues in International Maritime Transport. www.oecd.org/subject/regreform/products/Maritime_Trans.pdf Paris: OECD, 2001.

Pirrong, Stephen Craig. “An Application of the Core Theory to the Analysis of Ocean Shipping Markets.” Journal of Law and Economics 35, no. 1 (1992): 89-131.

Podolny, Joel and Fiona Scott Morton. “Social Status, Entry and Predation: the Case of British Shipping Cartels, 1879-1929.” Journal of Industrial Economics 47, no. 1 (1999): 41-67.

Scott Morton, Fiona. “Entry and Predation: British Shipping Cartels, 1879-1929.” Journal of Economics and Management Strategy 6, no. 4 (1997): 679-724.

Sjostrom, William. “Collusion in Ocean Shipping: A Test of Monopoly and Empty Core Models.” Journal of Political Economy 97, no. 5 (1989): 1160-79.

Stopford, Martin. Maritime Economics. New York: Routledge, 1997.

United Kingdom. Royal Commission on Shipping Rings. Report. Cmnd. 4668. London: His Majesty’s Printing Office, 1909.

United States. Advisory Commission on Conferences in Ocean Shipping. Report to the President and the Congress of the Advisory Commission on Conferences in Ocean Shipping. Washington: The Commission, 1992.

United States. House of Representatives. Committee on Merchant Marine and Fisheries. Report of the Committee on Merchant Marine and Fisheries on Steamship Agreements and Affiliations in the American Foreign and Domestic Trade under H. Res. 587. Document No. 805, 63rd Congress, Second Session. Washington: GPO, 1914.

United States. House of Representatives. Subcommittee on Antitrust. The Ocean Freight Industry. Report No. 1419, 87th Congress, Second Session. Washington: GPO, 1962.

Citation: Sicotte, Richard. “International Shipping Cartels”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/international-shipping-cartels/

Bankruptcy Law in the United States

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

Date Event
1789 The Constitution empowers Congress to enact uniform laws on the subject of bankruptcy.
1800 First bankruptcy law is enacted. The law allows only for involuntary bankruptcy of traders.
1803 First bankruptcy law is repealed amid complaints of excessive expenses and corruption.
1841 Second bankruptcy law is enacted in the wake of the Panics of 1837 and 1839. The law allows both voluntary and involuntary bankruptcy.
1843 1841 Bankruptcy Act is repealed, amid complaints about expenses and corruption.
1867 Prompted by demands arising from financial failures during the Panic of 1857 and the Civil War, Congress enacts the third bankruptcy law.
1874 The 1867 Bankruptcy Act is amended to allow for compositions.
1878 The 1867 Bankruptcy Law is repealed.
1881 The National Convention of Boards of Trade is formed to lobby for bankruptcy legislation.
1889 The National Convention of Representatives of Commercial Bodies is formed to lobby for bankruptcy legislation. The president of the Convention, Jay L. Torrey, drafts a bankruptcy bill.
1898 Congress passes a bankruptcy bill based on the Torrey bill.
1933-34 The 1898 Bankruptcy Act is amended to include railroad reorganization, corporate reorganization, and individual debtor arrangements.
1938 The Chandler Act amends the 1898 Bankruptcy Act, creating a menu of options for both business and non-business debtors.
1978 The 1898 Bankruptcy Act is replaced by The Bankruptcy Reform Act.

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

Year Petitions
1867 7,345
1868 29,539
1869 5,921
1870 4,301
1871 5,438
1872 6,074

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

Percentage of
Receiverships Mileage in Mileage put in
Year Established Receivership Receivership
1870 3 531 1
1871 4 644 1.07
1872 4 535 0.81
1873 10 1,357 1.93
1874 33 4,414 6.1
1875 43 7,340 9.91
1876 25 4,714 6.14
1877 33 3,090 3.91
1878 27 2,371 2.9
1879 12 1,102 1.27
1880 13 940 1.01
1881 5 110 0.11
1882 13 912 0.79
1883 12 2,041 1.68
1884 40 8,731 6.96
1885 44 7,523 5.86
1886 12 1,602 1.17
1887 10 1,114 0.74
1888 22 3,205 2.05
1889 24 3,784 2.35
1890 20 2,460 1.48
1891 29 2,017 1.18
1892 40 4,313 2.46
1893 132 27,570 15.51
1894 50 4,139 2.31
1895 32 3,227 1.78
1896 39 3,715 2.03
1897 21 1,536 0.83

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

Petitions per Percentage
Year Voluntary Involuntary Total 10,000 Population Involuntary
1899 20,994 1,452 22,446 3.00 6.47
1900 20,128 1,810 21,938 2.88 8.25
1901 17,015 1,992 19,007 2.45 10.48
1902 16,374 2,108 18,482 2.33 11.41
1903 14,308 2,567 16,875 2.09 15.21
1904 13,784 3,298 17,082 2.08 19.31
1905 13,852 3,094 16,946 2.02 18.26
1906 10,526 2,446 12,972 1.52 18.86
1907 11,127 3,033 14,160 1.63 21.42
1908 13,109 4,709 17,818 2.01 26.43
1909 13,638 4,380 18,018 1.99 24.31
1910 14,059 3,994 18,053 1.95 22.12
1911 14,907 4,431 19,338 2.06 22.91
1912 15,313 4,432 19,745 2.07 22.45
1913 16,361 4,569 20,930 2.15 21.83
1914 17,924 5,035 22,959 2.32 21.93
1915 21,979 5,653 27,632 2.75 20.46
1916 23,027 4,341 27,368 2.68 15.86
1917 21,161 3,677 24,838 2.41 14.80
1918 17,261 3,124 20,385 1.98 15.32
1919 12,035 2,013 14,048 1.34 14.33
1920 11,333 2,225 13,558 1.27 16.41
1921 16,645 6,167 22,812 2.10 27.03
1922 28,879 9,286 38,165 3.47 24.33
1923 33,922 7,832 41,754 3.73 18.76
1924 36,977 6,542 43,519 3.81 15.03
1925 39,328 6,313 45,641 3.94 13.83
1926 40,962 5,412 46,374 3.95 11.67
1927 43,070 5,688 48,758 4.10 11.67
1928 47,136 5,928 53,064 4.40 11.17
1929 51,930 5,350 57,280 4.70 9.34
1930 57,299 5,546 62,845 5.11 8.82
1931 58,780 6,555 65,335 5.27 10.03
1932 62,475 7,574 70,049 5.61 10.81
1933 56,049 6,207 62,256 4.96 9.97
1934 58,888 4.66
1935 69,153 5.43
1936 60,624 4.73
1937 55,842 1,643 57,485 4.46 2.86
1938 55,137 2,169 57,306 4.41 3.78
1939 48,865 2,132 50,997 3.90 4.18
1940 43,902 1,752 45,654 3.46 3.84
1941 47,581 1,491 49,072 3.69 3.04
1942 44,366 1,295 45,661 3.41 2.84
1943 30,913 649 31,562 2.35 2.06
1944 17,629 277 17,906 1.35 1.55
1945 11,101 264 11,365 0.86 2.38
1946 8,293 268 8,561 0.61 3.13
1947 9,657 697 10,354 0.72 6.73
1948 13,546 1,029 14,575 1.00 7.06
1949 18,882 1,240 20,122 1.35 6.16
1950 25,263 1,369 26,632 1.76 5.14
1951 26,594 1,099 27,693 1.81 3.97
1952 25,890 1,059 26,949 1.73 3.93
1953 29,815 1,064 30,879 1.95 3.45
1954 41,335 1,398 42,733 2.65 3.27
1955 47,650 1,249 48,899 2.98 2.55
1956 50,655 1,240 51,895 3.10 2.39
1957 60,335 1,189 61,524 3.61 1.93
1958 76,048 1,413 77,461 4.47 1.82
1959 85,502 1,288 86,790 4.90 1.48
1960 94,414 1,296 95,710 5.43 1.35
1961 124,386 1,444 125,830 6.99 1.15
1962 122,499 1,382 123,881 6.77 1.12
1963 128,405 1,409 129,814 6.99 1.09
1964 141,828 1,339 143,167 7.60 0.94
1965 149,820 1,317 151,137 7.91 0.87
1966 161,840 1,165 163,005 8.42 0.72
1967 173,884 1,241 175,125 8.95 0.71
1968 164,592 1,001 165,593 8.39 0.60
1969 154,054 946 155,000 7.77 0.61
1970 161,366 1,085 162,451 8.07 0.67
1971 167,149 1,215 168,364 8.26 0.72
1972 152,840 1,094 153,934 7.33 0.71
1973 144,929 985 145,914 6.89 0.68
1974 156,958 1,009 157,967 7.39 0.64
1975 208,064 1,266 209,330 9.69 0.60
1976 207,926 1,141 209,067 9.59 0.55
1977 180,062 1,132 181,194 8.23 0.62
1978 167,776 995 168,771 7.58 0.59
1979 182,344 915 183,259 8.14 0.50
1980 359,768 1,184 360,952 15.85 0.33
1981 358,997 1,332 360,329 15.67 0.37
1982 366,331 1,535 367,866 15.84 0.42
1983 373,064 1,670 374,734 15.99 0.45
1984 342,848 1,447 344,295 14.57 0.42
1985 362,939 1,597 364,536 15.29 0.44
1986 476,214 1,642 477,856 19.86 0.34
1987 559,658 1,620 561,278 23.12 0.29
1988 593,158 1,409 594,567 24.27 0.24
1989 641,528 1,465 642,993 25.71 0.23
1990 723,886 1,598 725,484 29.03 0.22
1991 878,626 1,773 880,399 34.85 0.20
1992 971,047 1,443 972,490 38.08 0.15
1993 917,350 1,384 918,734 35.60 0.15
1994 844,087 1,170 845,257 32.43 0.14
1995 856,991 1,113 858,104 32.62 0.13
1996 1,040,915 1,195 1,042,110 39.26 0.11
1997 1,315,782 1,217 1,316,999 49.16 0.09

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

Percentage of Cases
Year Wage Earners With No Assets
1899 5,288 51.12
1900 7,516 40.52
1901 7,068 48.99
1902 6,859 47.25
1903 4,852 41.36
1904 5,291 40.55
1905 5,426 40.75
1906 2,748 42.29
1907 3,257 42.11
1908 3,492 40.29
1909 3,528 38.46
1910 4,366 36.49
1911 4,139 48.14
1912 4,161 50.70
1913 4,863 49.63
1914 5,773 49.96
1915 6,632 49.88
1916 6,418 53.29
1917 7,787 57.12
1918 8,230 57.05
1919 6,743 64.53
1920 5,601 67.41
1921 5,897 65.66
1922 7,550 52.70
1923 10,173 61.10
1924 13,126 62.17
1925 14,444 61.23
1926 16,770 64.02
1927 18,494 64.86
1928 21,510 63.19
1929 25,478 67.34
1930 28,979 68.44
1931 29,698 69.15
1932 29,742 66.25
1933 27,385 62.76

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

Failures per
Year Failures 10,000 Firms
1870 3,546 83
1871 2,915 64
1872 4,069 81
1873 5,183 105
1874 5,830 104
1875 7,740 128
1876 9,092 142
1877 8,872 139
1878 10,478 158
1879 6,658 95
1880 4,735 63
1881 5,582 71
1882 6,738 82
1883 9,184 106
1884 10,968 121
1885 10,637 116
1886 9,834 101
1887 9,634 97
1888 10,679 103
1889 10,882 103
1890 10,907 99
1891 12,273 107
1892 10,344 89
1893 15,242 130
1894 13,885 123
1895 13,197 112
1896 15,088 133
1897 13,351 125
1898 12,186 111
1899 9,337 82
1900 10,774 92
1901 11,002 90
1902 11,615 93
1903 12,069 94
1904 12,199 92
1905 11,520 85
1906 10,682 77
1907 11,725 83
1908 15,690 108
1909 12,924 87
1910 12,652 84
1911 13,441 88
1912 15,452 100
1913 16,037 98
1914 18,280 118
1915 22,156 133
1916 16,993 100
1917 13,855 80
1918 9,982 59
1919 6,451 37
1920 8,881 48
1921 19,652 102
1922 23,676 120
1923 18,718 93
1924 20,615 100
1925 21,214 100
1926 21,773 101
1927 23,146 106
1928 23,842 109
1929 22,909 104
1930 26,355 122
1931 28,285 133
1932 31,822 154
1933 19,859 100
1934 12,091 61
1935 12,244 62
1936 9,607 48
1937 9,490 46
1938 12,836 61
1939 14,768 70
1940 13,619 63
1941 11,848 55
1942 9,405 45
1943 3,221 16
1944 1,222 7
1945 809 4
1946 1,129 5
1947 3,474 14
1948 5,250 20
1949 9,246 34
1950 9,162 34
1951 8,058 31
1952 7,611 29
1953 8,862 33
1954 11,086 42
1955 10,969 42
1956 12,686 48
1957 13,739 52
1958 14,964 56
1959 14,053 52
1960 15,445 57
1961 17,075 64
1962 15,782 61
1963 14,374 56
1964 13,501 53
1965 13,514 53
1966 13,061 52
1967 12,364 49
1968 9,636 39
1969 9,154 37
1970 10,748 44
1971 10,326 42
1972 9,566 38
1973 9,345 36
1974 9,915 38
1975 11,432 43
1976 9,628 35
1977 7,919 28
1978 6,619 24
1979 7,564 28
1980 11,742 42
1981 16,794 61
1982 24,908 88
1983 31,334 110
1984 52,078 107
1985 57,078 115
1986 61,616 120
1987 61,111 102
1988 57,098 98
1989 50,631 65
1990 60,747 74
1991 88,140 107
1992 97,069 110
1993 86,133 96
1994 71,558 86
1995 71,128 82
1996 71,931 86
1997 84,342 89

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/

Morris Plan Banks

Ronnie J. Phillips and David Mushinski, Colorado State University

Morris Plan banks were at the forefront of an explosion of consumer credit that started at the beginning of the second decade of the twentieth century and they became the prominent institution for providing consumer credit to the poor through the 1920s. At the time Morris Plan banks first appeared in 1910, few institutions existed for provision of consumer credit to low- and middle-income individuals. Aside from retailers, the primary provider of consumer credit to the poor was the loan shark. Other institutions designed to provide consumer credit were also being introduced at that time.

For example, credit unions, transplanted from Europe, were appearing. Against this backdrop, Morris Plan banks became the leading provider of consumer credit to the poor in the United States for two decades. By 1931, there were 109 Morris Plan banks operating in 142 cities with an annual volume of loans of about $220,000,000. (See chart above)

Morris’s Principles of Lending to the Poor

Morris Plan banks can be traced to the concerns of Arthur J. Morris. Mr. Morris, a Virginia lawyer, found it troubling that a securely employed workman, seeking a small loan, was denied access to credit from local banks and was forced to borrow from loan sharks. Morris thought that a country that denied bank loans to a large part of its population had a “weak spot” in its banking system. Morris then began a study of the various banking laws in the U.S. in the hopes that some type of “banking institution could be evolved that would correct the existing evils and supply credit to the needy” (Herzog 1928, 12-13). Morris’ study resulted in his establishing a set of principles for lending to the poor. Those principles were:

1. Character, plus earning power, is a proper basis of credit.
2. Loans made on this basis of credit must carry the privilege of repayment over a period long enough to match the earning power of the borrower.
3.Money so borrowed should always be for some constructive and useful purpose.

How Morris Plan Loans Worked

The formal lending process may be presented with an example. Consider a borrower who sought a $100 loan. An interest rate would be set and a fee deducted from this face value amount, perhaps $8 total ($6 interest, $2 fee). The borrower would then subscribe to $92 worth of what were called Class C installment certificates. The borrower did not directly pay back the loan, but rather over the course of the year purchased the Class C certificates. At the end of the loan period, the borrower exchanged the Class C certificates for cash to pay back the original loan. It is important to note that the loans were not secured with collateral. Instead, borrowers had to find two cosigners who were well acquainted with the borrower and who were of similar economic standing (i.e., they had similar and steady earning power).

The emergence of Morris Plan banks in the early twentieth century is an example of an institutional structure appearing organically in response to a perceived need and through the private sector to satisfy a consumer need. Unlike many modern institutions that provide micro-credit, Morris Plan banks developed as a profit-making institution within the private sector. They came into existence at a time when there were not adequate institutions to supply consumer credit to the poor and, within a matter of years, commercial banks had adopted their basic lending principles.

The Morris Plan lending structure would appear to have been devised by someone informed by recent studies of micro-credit institutions. The cosigner requirement of the lending structure imposed a type of joint liability which would induce responses that reduced the transaction costs associated with the lending process and alleviated adverse selection and enforcement problems which have been identified in the micro-credit literature as sources of credit market failures. Evidence supports the presence of these incentives in the Morris Plan lending structure.

The lending structure also appears to have been attuned to the unique nature of Americans generally. Indeed, the contrasting experiences of credit unions and Morris Plan banks during this period has lessons for the creation of financial institutions which supply micro-credit. In designing micro-credit institutions, lenders should consider the social and cultural context into which the institution is to be introduced. In the present context, the Morris Plan structure was more attuned to the individuality of typical Americans than were credit unions. Of course, this is a point that has not been lost on researchers in this area (e.g., Ghatak and Guinnane (1999), and Pickering and Mushinski (2001)).

Critics of the Morris Plan

It should also be noted that the Morris Plan was not without critics, especially from the Russell Sage Foundation which viewed the lending procedure to be misleading at best, and at worst, an attempt to defraud the borrowers. Hence, many viewed the profit-seeking Morris Plan institutions as little better, and in some respects worse, than loan-sharks.

The Decline of Morris Plan Banks

The demise of the Morris Plan institutions begins with the full recovery of banking after the Great Depression. By that time, however, the basic Morris Plan idea of providing small consumer loans to individuals had been fully incorporated into commercial bank lending practices. By 1924, commercial banks in New York began to offer small consumer loans. As bank charters were altered by states, and eventually by legislation at the Federal level, the size of consumer lending by Morris Plan banks was dwarfed by commercial banks that offered the additional convenience of accepting demand deposits. In addition, credit cards and consumer installment credit decreased the uniqueness and demand for loans from Morris Plan institutions. By the post-war period, the Morris Plan banks, though still active, were only a small segment of consumer lending. Today, there are still two chartered banks in the U.S. with Morris Plan in their name, but they are small community savings banks and no longer operating strictly on the Morris Plan principles.

References

Clark, Evans. Financing the Consumer. New York and London: Harper and Brothers Publishers, 1933. (Contains comparative data on consumer credit institutions as of the early 1930s.)

Ghatak, Maitreesh and Timothy W. Guinnane . “The Economics of Lending with Joint Liability: Theory and Practice.” Journal of Development Economics 60 (1999): 195-228.

Herzog, Peter W. The Morris Plan of Industrial Banking. A. W. Shaw Company: Chicago. 1928. (An early study of Morris Plan institutions.)

McBlair, Robert. The Morris Plan of Industrial Banking. Fidelity Corporation of America, 1913. (This publication reads much like a prospectus for potential investors in Morris Plan institutions.)

Mushinski, David and Ronnie J. Phillips. “Micro-credit.” In International Encyclopedia of Business and Management, 8 volumes, edited by Malcolm Warner. London: Thomson Learning, 2001.

Pickering, Kathleen and David Mushinski. “Cultural Aspects of Credit Institutions: Transplanting the Grameen Bank Credit Group Structure to the Pine Ridge Indian Reservation.” Journal of Economic Issues (2001): 459-467.

Robinson, Louis N. “The Morris Plan.” American Economic Review 21, no. 2 (1931): 222-235. (A fair but critical view of the Morris Plan institutions.)

Robinson, Louis N. and Rolf Nugent. Regulation of the Small Loan Business. New York: Russell Sage Foundation, 1935. (An important study of the regulation side of small loans.)

Saulnier, Raymond J. Industrial Banking Companies and Their Credit Practices. New York: National Bureau of Economic Research, 1940. (This study covers the years 1928-1939 and provides an analysis of post-Great Depression changes in Morris Plan and other industrial loan banks.)

Citation: Mushinski, David and Ronnie Phillips. “Morris Plan Banks”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/morris-plan-banks/

Antebellum Banking in the United States

Howard Bodenhorn, Lafayette College

The first legitimate commercial bank in the United States was the Bank of North America founded in 1781. Encouraged by Alexander Hamilton, Robert Morris persuaded the Continental Congress to charter the bank, which loaned to the cash-strapped Revolutionary government as well as private citizens, mostly Philadelphia merchants. The possibilities of commercial banking had been widely recognized by many colonists, but British law forbade the establishment of commercial, limited-liability banks in the colonies. Given that many of the colonists’ grievances against Parliament centered on economic and monetary issues, it is not surprising that one of the earliest acts of the Continental Congress was the establishment of a bank.

The introduction of banking to the U.S. was viewed as an important first step in forming an independent nation because banks supplied a medium of exchange (banknotes1 and deposits) in an economy perpetually strangled by shortages of specie money and credit, because they animated industry, and because they fostered wealth creation and promoted well-being. In the last case, contemporaries typically viewed banks as an integral part of a wider system of government-sponsored commercial infrastructure. Like schools, bridges, road, canals, river clearing and harbor improvements, the benefits of banks were expected to accrue to everyone even if dividends accrued only to shareholders.

Financial Sector Growth

By 1800 each major U.S. port city had at least one commercial bank serving the local mercantile community. As city banks proved themselves, banking spread into smaller cities and towns and expanded their clientele. Although most banks specialized in mercantile lending, others served artisans and farmers. In 1820 there were 327 commercial banks and several mutual savings banks that promoted thrift among the poor. Thus, at the onset of the antebellum period (defined here as the period between 1820 and 1860), urban residents were familiar with the intermediary function of banks and used bank-supplied currencies (deposits and banknotes) for most transactions. Table 1 reports the number of banks and the value of loans outstanding at year end between 1820 and 1860. During the era, the number of banks increased from 327 to 1,562 and total loans increased from just over $55.1 million to $691.9 million. Bank-supplied credit in the U.S. economy increased at a remarkable annual average rate of 6.3 percent. Growth in the financial sector, then outpaced growth in aggregate economic activity. Nominal gross domestic product increased an average annual rate of about 4.3 percent over the same interval. This essay discusses how regional regulatory structures evolved as the banking sector grew and radiated out from northeastern cities to the hinterlands.

Table 1
Number of Banks and Total Loans, 1820-1860

Year Banks Loans ($ millions)
1820 327 55.1
1821 273 71.9
1822 267 56.0
1823 274 75.9
1824 300 73.8
1825 330 88.7
1826 331 104.8
1827 333 90.5
1828 355 100.3
1829 369 103.0
1830 381 115.3
1831 424 149.0
1832 464 152.5
1833 517 222.9
1834 506 324.1
1835 704 365.1
1836 713 457.5
1837 788 525.1
1838 829 485.6
1839 840 492.3
1840 901 462.9
1841 784 386.5
1842 692 324.0
1843 691 254.5
1844 696 264.9
1845 707 288.6
1846 707 312.1
1847 715 310.3
1848 751 344.5
1849 782 332.3
1850 824 364.2
1851 879 413.8
1852 913 429.8
1853 750 408.9
1854 1208 557.4
1855 1307 576.1
1856 1398 634.2
1857 1416 684.5
1858 1422 583.2
1859 1476 657.2
1860 1562 691.9

Sources: Fenstermaker (1965); U.S. Comptroller of the Currency (1931).

Adaptability

As important as early American banks were in the process of capital accumulation, perhaps their most notable feature was their adaptability. Kuznets (1958) argues that one measure of the financial sector’s value is how and to what extent it evolves with changing economic conditions. Put in place to perform certain functions under one set of economic circumstances, how did it alter its behavior and service the needs of borrowers as circumstances changed. One benefit of the federalist U.S. political system was that states were given the freedom to establish systems reflecting local needs and preferences. While the political structure deserves credit in promoting regional adaptations, North (1994) credits the adaptability of America’s formal rules and informal constraints that rewarded adventurism in the economic, as well as the noneconomic, sphere. Differences in geography, climate, crop mix, manufacturing activity, population density and a host of other variables were reflected in different state banking systems. Rhode Island’s banks bore little resemblance to those in far away Louisiana or Missouri, or even those in neighboring Connecticut. Each state’s banks took a different form, but their purpose was the same; namely, to provide the state’s citizens with monetary and intermediary services and to promote the general economic welfare. This section provides a sketch of regional differences. A more detailed discussion can be found in Bodenhorn (2002).

State Banking in New England

New England’s banks most resemble the common conception of the antebellum bank. They were relatively small, unit banks; their stock was closely held; they granted loans to local farmers, merchants and artisans with whom the bank’s managers had more than a passing familiarity; and the state took little direct interest in their daily operations.

Of the banking systems put in place in the antebellum era, New England’s is typically viewed as the most stable and conservative. Friedman and Schwartz (1986) attribute their stability to an Old World concern with business reputations, familial ties, and personal legacies. New England was long settled, its society well established, and its business community mature and respected throughout the Atlantic trading network. Wealthy businessmen and bankers with strong ties to the community — like the Browns of Providence or the Bowdoins of Boston — emphasized stability not just because doing so benefited and reflected well on them, but because they realized that bad banking was bad for everyone’s business.

Besides their reputation for soundness, the two defining characteristics of New England’s early banks were their insider nature and their small size. The typical New England bank was small compared to banks in other regions. Table 2 shows that in 1820 the average Massachusetts country bank was about the same size as a Pennsylvania country bank, but both were only about half the size of a Virginia bank. A Rhode Island bank was about one-third the size of a Massachusetts or Pennsylvania bank and a mere one-sixth as large as Virginia’s banks. By 1850 the average Massachusetts bank declined relatively, operating on about two-thirds the paid-in capital of a Pennsylvania country bank. Rhode Island’s banks also shrank relative to Pennsylvania’s and were tiny compared to the large branch banks in the South and West.

Table 2
Average Bank Size by Capital and Lending in 1820 and 1850 Selected States and Cities
(in $ thousands)

1820
Capital
Loans 1850 Capital Loans
Massachusetts $374.5 $480.4 $293.5 $494.0
except Boston 176.6 230.8 170.3 281.9
Rhode Island 95.7 103.2 186.0 246.2
except Providence 60.6 72.0 79.5 108.5
New York na na 246.8 516.3
except NYC na na 126.7 240.1
Pennsylvania 221.8 262.9 340.2 674.6
except Philadelphia 162.6 195.2 246.0 420.7
Virginia1,2 351.5 340.0 270.3 504.5
South Carolina2 na na 938.5 1,471.5
Kentucky2 na na 439.4 727.3

Notes: 1 Virginia figures for 1822. 2 Figures represent branch averages.

Source: Bodenhorn (2002).

Explanations for New England Banks’ Relatively Small Size

Several explanations have been offered for the relatively small size of New England’s banks. Contemporaries attributed it to the New England states’ propensity to tax bank capital, which was thought to work to the detriment of large banks. They argued that large banks circulated fewer banknotes per dollar of capital. The result was a progressive tax that fell disproportionately on large banks. Data compiled from Massachusetts’s bank reports suggest that large banks were not disadvantaged by the capital tax. It was a fact, as contemporaries believed, that large banks paid higher taxes per dollar of circulating banknotes, but a potentially better benchmark is the tax to loan ratio because large banks made more use of deposits than small banks. The tax to loan ratio was remarkably constant across both bank size and time, averaging just 0.6 percent between 1834 and 1855. Moreover, there is evidence of constant to modestly increasing returns to scale in New England banking. Large banks were generally at least as profitable as small banks in all years between 1834 and 1860, and slightly more so in many.

Lamoreaux (1993) offers a different explanation for the modest size of the region’s banks. New England’s banks, she argues, were not impersonal financial intermediaries. Rather, they acted as the financial arms of extended kinship trading networks. Throughout the antebellum era banks catered to insiders: directors, officers, shareholders, or business partners and kin of directors, officers, shareholders and business partners. Such preferences toward insiders represented the perpetuation of the eighteenth-century custom of pooling capital to finance family enterprises. In the nineteenth century the practice continued under corporate auspices. The corporate form, in fact, facilitated raising capital in greater amounts than the family unit could raise on its own. But because the banks kept their loans within a relatively small circle of business connections, it was not until the late nineteenth century that bank size increased.2

Once the kinship orientation of the region’s banks was established it perpetuated itself. When outsiders could not obtain loans from existing insider organizations, they formed their own insider bank. In doing so the promoters assured themselves of a steady supply of credit and created engines of economic mobility for kinship networks formerly closed off from many sources of credit. State legislatures accommodated the practice through their liberal chartering policies. By 1860, Rhode Island had 91 banks, Maine had 68, New Hampshire 51, Vermont 44, Connecticut 74 and Massachusetts 178.

The Suffolk System

One of the most commented on characteristic of New England’s banking system was its unique regional banknote redemption and clearing mechanism. Established by the Suffolk Bank of Boston in the early 1820s, the system became known as the Suffolk System. With so many banks in New England, each issuing it own form of currency, it was sometimes difficult for merchants, farmers, artisans, and even other bankers, to discriminate between real and bogus banknotes, or to discriminate between good and bad bankers. Moreover, the rural-urban terms of trade pulled most banknotes toward the region’s port cities. Because country merchants and farmers were typically indebted to city merchants, country banknotes tended to flow toward the cities, Boston more so than any other. By the second decade of the nineteenth century, country banknotes became a constant irritant for city bankers. City bankers believed that country issues displaced Boston banknotes in local transactions. More irritating though was the constant demand by the city banks’ customers to accept country banknotes on deposit, which placed the burden of interbank clearing on the city banks.3

In 1803 the city banks embarked on a first attempt to deal with country banknotes. They joined together, bought up a large quantity of country banknotes, and returned them to the country banks for redemption into specie. This effort to reduce country banknote circulation encountered so many obstacles that it was quickly abandoned. Several other schemes were hatched in the next two decades, but none proved any more successful than the 1803 plan.

The Suffolk Bank was chartered in 1818 and within a year embarked on a novel scheme to deal with the influx of country banknotes. The Suffolk sponsored a consortium of Boston bank in which each member appointed the Suffolk as its lone agent in the collection and redemption of country banknotes. In addition, each city bank contributed to a fund used to purchase and redeem country banknotes. When the Suffolk collected a large quantity of a country bank’s notes, it presented them for immediate redemption with an ultimatum: Join in a regular and organized redemption system or be subject to further unannounced redemption calls.4 Country banks objected to the Suffolk’s proposal, because it required them to keep noninterest-earning assets on deposit with the Suffolk in amounts equal to their average weekly redemptions at the city banks. Most country banks initially refused to join the redemption network, but after the Suffolk made good on a few redemption threats, the system achieved near universal membership.

Early interpretations of the Suffolk system, like those of Redlich (1949) and Hammond (1957), portray the Suffolk as a proto-central bank, which acted as a restraining influence that exercised some control over the region’s banking system and money supply. Recent studies are less quick to pronounce the Suffolk a successful experiment in early central banking. Mullineaux (1987) argues that the Suffolk’s redemption system was actually self-defeating. Instead of making country banknotes less desirable in Boston, the fact that they became readily redeemable there made them perfect substitutes for banknotes issued by Boston’s prestigious banks. This policy made country banknotes more desirable, which made it more, not less, difficult for Boston’s banks to keep their own notes in circulation.

Fenstermaker and Filer (1986) also contest the long-held view that the Suffolk exercised control over the region’s money supply (banknotes and deposits). Indeed, the Suffolk’s system was self-defeating in this regard as well. By increasing confidence in the value of a randomly encountered banknote, people were willing to hold increases in banknotes issues. In an interesting twist on the traditional interpretation, a possible outcome of the Suffolk system is that New England may have grown increasingly financial backward as a direct result of the region’s unique clearing system. Because banknotes were viewed as relatively safe and easily redeemed, the next big financial innovation — deposit banking — in New England lagged far behind other regions. With such wide acceptance of banknotes, there was no reason for banks to encourage the use of deposits and little reason for consumers to switch over.

Summary: New England Banks

New England’s banking system can be summarized as follows: Small unit banks predominated; many banks catered to small groups of capitalists bound by personal and familial ties; banking was becoming increasingly interconnected with other lines of business, such as insurance, shipping and manufacturing; the state took little direct interest in the daily operations of the banks and its supervisory role amounted to little more than a demand that every bank submit an unaudited balance sheet at year’s end; and that the Suffolk developed an interbank clearing system that facilitated the use of banknotes throughout the region, but had little effective control over the region’s money supply.

Banking in the Middle Atlantic Region

Pennsylvania

After 1810 or so, many bank charters were granted in New England, but not because of the presumption that the bank would promote the commonweal. Charters were granted for the personal gain of the promoter and the shareholders and in proportion to the personal, political and economic influence of the bank’s founders. No New England state took a significant financial stake in its banks. In both respects, New England differed markedly from states in other regions. From the beginning of state-chartered commercial banking in Pennsylvania, the state took a direct interest in the operations and profits of its banks. The Bank of North America was the obvious case: chartered to provide support to the colonial belligerents and the fledgling nation. Because the bank was popularly perceived to be dominated by Philadelphia’s Federalist merchants, who rarely loaned to outsiders, support for the bank waned.5 After a pitched political battle in which the Bank of North America’s charter was revoked and reinstated, the legislature chartered the Bank of Pennsylvania in 1793. As its name implies, this bank became the financial arm of the state. Pennsylvania subscribed $1 million of the bank’s capital, giving it the right to appoint six of thirteen directors and a $500,000 line of credit. The bank benefited by becoming the state’s fiscal agent, which guaranteed a constant inflow of deposits from regular treasury operations as well as western land sales.

By 1803 the demand for loans outstripped the existing banks’ supply and a plan for a new bank, the Philadelphia Bank, was hatched and its promoters petitioned the legislature for a charter. The existing banks lobbied against the charter, and nearly sank the new bank’s chances until it established a precedent that lasted throughout the antebellum era. Its promoters bribed the legislature with a payment of $135,000 in return for the charter, handed over one-sixth of its shares, and opened a line of credit for the state.

Between 1803 and 1814, the only other bank chartered in Pennsylvania was the Farmers and Mechanics Bank of Philadelphia, which established a second substantive precedent that persisted throughout the era. Existing banks followed a strict real-bills lending policy, restricting lending to merchants at very short terms of 30 to 90 days.6 Their adherence to a real-bills philosophy left a growing community of artisans, manufacturers and farmers on the outside looking in. The Farmers and Mechanics Bank was chartered to serve excluded groups. At least seven of its thirteen directors had to be farmers, artisans or manufacturers and the bank was required to lend the equivalent of 10 percent of its capital to farmers on mortgage for at least one year. In later years, banks were established to provide services to even more narrowly defined groups. Within a decade or two, most substantial port cities had banks with names like Merchants Bank, Planters Bank, Farmers Bank, and Mechanics Bank. By 1860 it was common to find banks with names like Leather Manufacturers Bank, Grocers Bank, Drovers Bank, and Importers Bank. Indeed, the Emigrant Savings Bank in New York City served Irish immigrants almost exclusively. In the other instances, it is not known how much of a bank’s lending was directed toward the occupational group included in its name. The adoption of such names may have been marketing ploys as much as mission statements. Only further research will reveal the answer.

New York

State-chartered banking in New York arrived less auspiciously than it had in Philadelphia or Boston. The Bank of New York opened in 1784, but operated without a charter and in open violation of state law until 1791 when the legislature finally sanctioned it. The city’s second bank obtained its charter surreptitiously. Alexander Hamilton was one of the driving forces behind the Bank of New York, and his long-time nemesis, Aaron Burr, was determined to establish a competing bank. Unable to get a charter from a Federalist legislature, Burr and his colleagues petitioned to incorporate a company to supply fresh water to the inhabitants of Manhattan Island. Burr tucked a clause into the charter of the Manhattan Company (the predecessor to today’s Chase Manhattan Bank) granting the water company the right to employ any excess capital in financial transactions. Once chartered, the company’s directors announced that $500,000 of its capital would be invested in banking.7 Thereafter, banking grew more quickly in New York than in Philadelphia, so that by 1812 New York had seven banks compared to the three operating in Philadelphia.

Deposit Insurance

Despite its inauspicious banking beginnings, New York introduced two innovations that influenced American banking down to the present. The Safety Fund system, introduced in 1829, was the nation’s first experiment in bank liability insurance (similar to that provided by the Federal Deposit Insurance Corporation today). The 1829 act authorized the appointment of bank regulators charged with regular inspections of member banks. An equally novel aspect was that it established an insurance fund insuring holders of banknotes and deposits against loss from bank failure. Ultimately, the insurance fund was insufficient to protect all bank creditors from loss during the panic of 1837 when eleven failures in rapid succession all but bankrupted the insurance fund, which delayed noteholder and depositor recoveries for months, even years. Even though the Safety Fund failed to provide its promised protections, it was an important episode in the subsequent evolution of American banking. Several Midwestern states instituted deposit insurance in the early twentieth century, and the federal government adopted it after the banking panics in the 1930s resulted in the failure of thousands of banks in which millions of depositors lost money.

“Free Banking”

Although the Safety Fund was nearly bankrupted in the late 1830s, it continued to insure a number of banks up to the mid 1860s when it was finally closed. No new banks joined the Safety Fund system after 1838 with the introduction of free banking — New York’s second significant banking innovation. Free banking represented a compromise between those most concerned with the underlying safety and stability of the currency and those most concerned with competition and freeing the country’s entrepreneurs from unduly harsh and anticompetitive restraints. Under free banking, a prospective banker could start a bank anywhere he saw fit, provided he met a few regulatory requirements. Each free bank’s capital was invested in state or federal bonds that were turned over to the state’s treasurer. If a bank failed to redeem even a single note into specie, the treasurer initiated bankruptcy proceedings and banknote holders were reimbursed from the sale of the bonds.

Actually Michigan preempted New York’s claim to be the first free-banking state, but Michigan’s 1837 law was modeled closely after a bill then under debate in New York’s legislature. Ultimately, New York’s influence was profound in this as well, because free banking became one of the century’s most widely copied financial innovations. By 1860 eighteen states adopted free banking laws closely resembling New York’s law. Three other states introduced watered-down variants. Eventually, the post-Civil War system of national banking adopted many of the substantive provisions of New York’s 1838 act.

Both the Safety Fund system and free banking were attempts to protect society from losses resulting from bank failures and to entice people to hold financial assets. Banks and bank-supplied currency were novel developments in the hinterlands in the early nineteenth century and many rural inhabitants were skeptical about the value of small pieces of paper. They were more familiar with gold and silver. Getting them to exchange one for the other was a slow process, and one that relied heavily on trust. But trust was built slowly and destroyed quickly. The failure of a single bank could, in a week, destroy the confidence in a system built up over a decade. New York’s experiments were designed to mitigate, if not eliminate, the negative consequences of bank failures. New York’s Safety Fund, then, differed in the details but not in intent, from New England’s Suffolk system. Bankers and legislators in each region grappled with the difficult issue of protecting a fragile but vital sector of the economy. Each region responded to the problem differently. The South and West settled on yet another solution.

Banking in the South and West

One distinguishing characteristic of southern and western banks was their extensive branch networks. Pennsylvania provided for branch banking in the early nineteenth century and two banks jointly opened about ten branches. In both instances, however, the branches became a net liability. The Philadelphia Bank opened four branches in 1809 and by 1811 was forced to pass on its semi-annual dividends because losses at the branches offset profits at the Philadelphia office. At bottom, branch losses resulted from a combination of ineffective central office oversight and unrealistic expectations about the scale and scope of hinterland lending. Philadelphia’s bank directors instructed branch managers to invest in high-grade commercial paper or real bills. Rural banks found a limited number of such lending opportunities and quickly turned to mortgage-based lending. Many of these loans fell into arrears and were ultimately written when land sales faltered.

Branch Banking

Unlike Pennsylvania, where branch banking failed, branch banks throughout the South and West thrived. The Bank of Virginia, founded in 1804, was the first state-chartered branch bank and up to the Civil War branch banks served the state’s financial needs. Several small, independent banks were chartered in the 1850s, but they never threatened the dominance of Virginia’s “Big Six” banks. Virginia’s branch banks, unlike Pennsylvania’s, were profitable. In 1821, for example, the net return to capital at the Farmers Bank of Virginia’s home office in Richmond was 5.4 percent. Returns at its branches ranged from a low of 3 percent at Norfolk (which was consistently the low-profit branch) to 9 percent in Winchester. In 1835, the last year the bank reported separate branch statistics, net returns to capital at the Farmers Bank’s branches ranged from 2.9 and 11.7 percent, with an average of 7.9 percent.

The low profits at the Norfolk branch represent a net subsidy from the state’s banking sector to the political system, which was not immune to the same kind of infrastructure boosterism that erupted in New York, Pennsylvania, Maryland and elsewhere. In the immediate post-Revolutionary era, the value of exports shipped from Virginia’s ports (Norfolk and Alexandria) slightly exceeded the value shipped from Baltimore. In the 1790s the numbers turned sharply in Baltimore’s favor and Virginia entered the internal-improvements craze and the battle for western shipments. Banks represented the first phase of the state’s internal improvements plan in that many believed that Baltimore’s new-found advantage resulted from easier credit supplied by the city’s banks. If Norfolk, with one of the best natural harbors on the North American Atlantic coast, was to compete with other port cities, it needed banks and the state required three of the state’s Big Six branch banks to operate branches there. Despite its natural advantages, Norfolk never became an important entrepot and it probably had more bank capital than it required. This pattern was repeated elsewhere. Other states required their branch banks to serve markets such as Memphis, Louisville, Natchez and Mobile that might, with the proper infrastructure grow into important ports.

State Involvement and Intervention in Banking

The second distinguishing characteristic of southern and western banking was sweeping state involvement and intervention. Virginia, for example, interjected the state into the banking system by taking significant stakes in its first chartered banks (providing an implicit subsidy) and by requiring them, once they established themselves, to subsidize the state’s continuing internal improvements programs of the 1820s and 1830s. Indiana followed such a strategy. So, too, did Kentucky, Louisiana, Mississippi, Illinois, Kentucky, Tennessee and Georgia in different degrees. South Carolina followed a wholly different strategy. On one hand, it chartered several banks in which it took no financial interest. On the other, it chartered the Bank of the State of South Carolina, a bank wholly owned by the state and designed to lend to planters and farmers who complained constantly that the state’s existing banks served only the urban mercantile community. The state-owned bank eventually divided its lending between merchants, farmers and artisans and dominated South Carolina’s financial sector.

The 1820s and 1830s witnessed a deluge of new banks in the South and West, with a corresponding increase in state involvement. No state matched Louisiana’s breadth of involvement in the 1830s when it chartered three distinct types of banks: commercial banks that served merchants and manufacturers; improvement banks that financed various internal improvements projects; and property banks that extended long-term mortgage credit to planters and other property holders. Louisiana’s improvement banks included the New Orleans Canal and Banking Company that built a canal connecting Lake Ponchartrain to the Mississippi River. The Exchange and Banking Company and the New Orleans Improvement and Banking Company were required to build and operate hotels. The New Orleans Gas Light and Banking Company constructed and operated gas streetlights in New Orleans and five other cities. Finally, the Carrollton Railroad and Banking Company and the Atchafalaya Railroad and Banking Company were rail construction companies whose bank subsidiaries subsidized railroad construction.

“Commonwealth Ideal” and Inflationary Banking

Louisiana’s 1830s banking exuberance reflected what some historians label the “commonwealth ideal” of banking; that is, the promotion of the general welfare through the promotion of banks. Legislatures in the South and West, however, never demonstrated a greater commitment to the commonwealth ideal than during the tough times of the early 1820s. With the collapse of the post-war land boom in 1819, a political coalition of debt-strapped landowners lobbied legislatures throughout the region for relief and its focus was banking. Relief advocates lobbied for inflationary banking that would reduce the real burden of debts taken on during prior flush times.

Several western states responded to these calls and chartered state-subsidized and state-managed banks designed to reinflate their embattled economies. Chartered in 1821, the Bank of the Commonwealth of Kentucky loaned on mortgages at longer than customary periods and all Kentucky landowners were eligible for $1,000 loans. The loans allowed landowners to discharge their existing debts without being forced to liquidate their property at ruinously low prices. Although the bank’s notes were not redeemable into specie, they were given currency in two ways. First, they were accepted at the state treasury in tax payments. Second, the state passed a law that forced creditors to accept the notes in payment of existing debts or agree to delay collection for two years.

The commonwealth ideal was not unique to Kentucky. During the depression of the 1820s, Tennessee chartered the State Bank of Tennessee, Illinois chartered the State Bank of Illinois and Louisiana chartered the Louisiana State Bank. Although they took slightly different forms, they all had the same intent; namely, to relieve distressed and embarrassed farmers, planters and land owners. What all these banks shared in common was the notion that the state should promote the general welfare and economic growth. In this instance, and again during the depression of the 1840s, state-owned banks were organized to minimize the transfer of property when economic conditions demanded wholesale liquidation. Such liquidation would have been inefficient and imposed unnecessary hardship on a large fraction of the population. To the extent that hastily chartered relief banks forestalled inefficient liquidation, they served their purpose. Although most of these banks eventually became insolvent, requiring taxpayer bailouts, we cannot label them unsuccessful. They reinflated economies and allowed for an orderly disposal of property. Determining if the net benefits were positive or negative requires more research, but for the moment we are forced to accept the possibility that the region’s state-owned banks of the 1820s and 1840s advanced the commonweal.

Conclusion: Banks and Economic Growth

Despite notable differences in the specific form and structure of each region’s banking system, they were all aimed squarely at a common goal; namely, realizing that region’s economic potential. Banks helped achieve the goal in two ways. First, banks monetized economies, which reduced the costs of transacting and helped smooth consumption and production across time. It was no longer necessary for every farm family to inventory their entire harvest. They could sell most of it, and expend the proceeds on consumption goods as the need arose until the next harvest brought a new cash infusion. Crop and livestock inventories are prone to substantial losses and an increased use of money reduced them significantly. Second, banks provided credit, which unleashed entrepreneurial spirits and talents. A complete appreciation of early American banking recognizes the banks’ contribution to antebellum America’s economic growth.

Bibliographic Essay

Because of the large number of sources used to construct the essay, the essay was more readable and less cluttered by including a brief bibliographic essay. A full bibliography is included at the end.

Good general histories of antebellum banking include Dewey (1910), Fenstermaker (1965), Gouge (1833), Hammond (1957), Knox (1903), Redlich (1949), and Trescott (1963). If only one book is read on antebellum banking, Hammond’s (1957) Pulitzer-Prize winning book remains the best choice.

The literature on New England banking is not particularly large, and the more important historical interpretations of state-wide systems include Chadbourne (1936), Hasse (1946, 1957), Simonton (1971), Spencer (1949), and Stokes (1902). Gras (1937) does an excellent job of placing the history of a single bank within the larger regional and national context. In a recent book and a number of articles Lamoreaux (1994 and sources therein) provides a compelling and eminently readable reinterpretation of the region’s banking structure. Nathan Appleton (1831, 1856) provides a contemporary observer’s interpretation, while Walker (1857) provides an entertaining if perverse and satirical history of a fictional New England bank. Martin (1969) provides details of bank share prices and dividend payments from the establishment of the first banks in Boston through the end of the nineteenth century. Less technical studies of the Suffolk system include Lake (1947), Trivoli (1979) and Whitney (1878); more technical interpretations include Calomiris and Kahn (1996), Mullineaux (1987), and Rolnick, Smith and Weber (1998).

The literature on Middle Atlantic banking is huge, but the better state-level histories include Bryan (1899), Daniels (1976), and Holdsworth (1928). The better studies of individual banks include Adams (1978), Lewis (1882), Nevins (1934), and Wainwright (1953). Chaddock (1910) provides a general history of the Safety Fund system. Golembe (1960) places it in the context of modern deposit insurance, while Bodenhorn (1996) and Calomiris (1989) provide modern analyses. A recent revival of interest in free banking has brought about a veritable explosion in the number of studies on the subject, but the better introductory ones remain Rockoff (1974, 1985), Rolnick and Weber (1982, 1983), and Dwyer (1996).

The literature on southern and western banking is large and of highly variable quality, but I have found the following to be the most readable and useful general sources: Caldwell (1935), Duke (1895), Esary (1912), Golembe (1978), Huntington (1915), Green (1972), Lesesne (1970), Royalty (1979), Schweikart (1987) and Starnes (1931).

References and Further Reading

Adams, Donald R., Jr. Finance and Enterprise in Early America: A Study of Stephen Girard’s Bank, 1812-1831. Philadelphia: University of Pennsylvania Press, 1978.

Alter, George, Claudia Goldin and Elyce Rotella. “The Savings of Ordinary Americans: The Philadelphia Saving Fund Society in the Mid-Nineteenth-Century.” Journal of Economic History 54, no. 4 (December 1994): 735-67.

Appleton, Nathan. A Defence of Country Banks: Being a Reply to a Pamphlet Entitled ‘An Examination of the Banking System of Massachusetts, in Reference to the Renewal of the Bank Charters.’ Boston: Stimpson & Clapp, 1831.

Appleton, Nathan. Bank Bills or Paper Currency and the Banking System of Massachusetts with Remarks on Present High Prices. Boston: Little, Brown and Company, 1856.

Berry, Thomas Senior. Revised Annual Estimates of American Gross National Product: Preliminary Estimates of Four Major Components of Demand, 1789-1889. Richmond: University of Richmond Bostwick Paper No. 3, 1978.

Bodenhorn, Howard. “Zombie Banks and the Demise of New York’s Safety Fund.” Eastern Economic Journal 22, no. 1 (1996): 21-34.

Bodenhorn, Howard. “Private Banking in Antebellum Virginia: Thomas Branch & Sons of Petersburg.” Business History Review 71, no. 4 (1997): 513-42.

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

Bodenhorn, Howard. State Banking in Early America: A New Economic History. New York: Oxford University Press, 2002.

Bryan, Alfred C. A History of State Banking in Maryland. Baltimore: Johns Hopkins University Press, 1899.

Caldwell, Stephen A. A Banking History of Louisiana. Baton Rouge: Louisiana State University Press, 1935.

Calomiris, Charles W. “Deposit Insurance: Lessons from the Record.” Federal Reserve Bank of Chicago Economic Perspectives 13 (1989): 10-30.

Calomiris, Charles W., and Charles Kahn. “The Efficiency of Self-Regulated Payments Systems: Learnings from the Suffolk System.” Journal of Money, Credit, and Banking 28, no. 4 (1996): 766-97.

Chadbourne, Walter W. A History of Banking in Maine, 1799-1930. Orono: University of Maine Press, 1936.

Chaddock, Robert E. The Safety Fund Banking System in New York, 1829-1866. Washington, D.C.: Government Printing Office, 1910.

Daniels, Belden L. Pennsylvania: Birthplace of Banking in America. Harrisburg: Pennsylvania Bankers Association, 1976.

Davis, Lance, and Robert E. Gallman. “Capital Formation in the United States during the Nineteenth Century.” In Cambridge Economic History of Europe (Vol. 7, Part 2), edited by Peter Mathias and M.M. Postan, 1-69. Cambridge: Cambridge University Press, 1978.

Davis, Lance, and Robert E. Gallman. “Savings, Investment, and Economic Growth: The United States in the Nineteenth Century.” In Capitalism in Context: Essays on Economic Development and Cultural Change in Honor of R.M. Hartwell, edited by John A. James and Mark Thomas, 202-29. Chicago: University of Chicago Press, 1994.

Dewey, Davis R. State Banking before the Civil War. Washington, D.C.: Government Printing Office, 1910.

Duke, Basil W. History of the Bank of Kentucky, 1792-1895. Louisville: J.P. Morton, 1895.

Dwyer, Gerald P., Jr. “Wildcat Banking, Banking Panics, and Free Banking in the United States.” Federal Reserve Bank of Atlanta Economic Review 81, no. 3 (1996): 1-20.

Engerman, Stanley L., and Robert E. Gallman. “U.S. Economic Growth, 1783-1860.” Research in Economic History 8 (1983): 1-46.

Esary, Logan. State Banking in Indiana, 1814-1873. Indiana University Studies No. 15. Bloomington: Indiana University Press, 1912.

Fenstermaker, J. Van. The Development of American Commercial Banking, 1782-1837. Kent, Ohio: Kent State University, 1965.

Fenstermaker, J. Van, and John E. Filer. “Impact of the First and Second Banks of the United States and the Suffolk System on New England Bank Money, 1791-1837.” Journal of Money, Credit, and Banking 18, no. 1 (1986): 28-40.

Friedman, Milton, and Anna J. Schwartz. “Has the Government Any Role in Money?” Journal of Monetary Economics 17, no. 1 (1986): 37-62.

Gallman, Robert E. “American Economic Growth before the Civil War: The Testimony of the Capital Stock Estimates.” In American Economic Growth and Standards of Living before the Civil War, edited by Robert E. Gallman and John Joseph Wallis, 79-115. Chicago: University of Chicago Press, 1992.

Goldsmith, Raymond. Financial Structure and Development. New Haven: Yale University Press, 1969.

Golembe, Carter H. “The Deposit Insurance Legislation of 1933: An Examination of its Antecedents and Purposes.” Political Science Quarterly 76, no. 2 (1960): 181-200.

Golembe, Carter H. State Banks and the Economic Development of the West. New York: Arno Press, 1978.

Gouge, William M. A Short History of Paper Money and Banking in the United States. Philadelphia: T.W. Ustick, 1833.

Gras, N.S.B. The Massachusetts First National Bank of Boston, 1784-1934. Cambridge, MA: Harvard University Press, 1937.

Green, George D. Finance and Economic Development in the Old South: Louisiana Banking, 1804-1861. Stanford: Stanford University Press, 1972.

Hammond, Bray. Banks and Politics in America from the Revolution to the Civil War. Princeton: Princeton University Press, 1957.

Hasse, William F., Jr. A History of Banking in New Haven, Connecticut. New Haven: privately printed, 1946.

Hasse, William F., Jr. A History of Money and Banking in Connecticut. New Haven: privately printed, 1957.

Holdsworth, John Thom. Financing an Empire: History of Banking in Pennsylvania. Chicago: S.J. Clarke Publishing Company, 1928.

Huntington, Charles Clifford. A History of Banking and Currency in Ohio before the Civil War. Columbus: F. J. Herr Printing Company, 1915.

Knox, John Jay. A History of Banking in the United States. New York: Bradford Rhodes & Company, 1903.

Kuznets, Simon. “Foreword.” In Financial Intermediaries in the American Economy, by Raymond W. Goldsmith. Princeton: Princeton University Press, 1958.

Lake, Wilfred. “The End of the Suffolk System.” Journal of Economic History 7, no. 4 (1947): 183-207.

Lamoreaux, Naomi R. Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England. Cambridge: Cambridge University Press, 1994.

Lesesne, J. Mauldin. The Bank of the State of South Carolina. Columbia: University of South Carolina Press, 1970.

Lewis, Lawrence, Jr. A History of the Bank of North America: The First Bank Chartered in the United States. Philadelphia: J.B. Lippincott & Company, 1882.

Lockard, Paul A. Banks, Insider Lending and Industries of the Connecticut River Valley of Massachusetts, 1813-1860. Unpublished Ph.D. thesis, University of Massachusetts, 2000.

Martin, Joseph G. A Century of Finance. New York: Greenwood Press, 1969.

Moulton, H.G. “Commercial Banking and Capital Formation.” Journal of Political Economy 26 (1918): 484-508, 638-63, 705-31, 849-81.

Mullineaux, Donald J. “Competitive Monies and the Suffolk Banking System: A Contractual Perspective.” Southern Economic Journal 53 (1987): 884-98.

Nevins, Allan. History of the Bank of New York and Trust Company, 1784 to 1934. New York: privately printed, 1934.

New York. Bank Commissioners. “Annual Report of the Bank Commissioners.” New York General Assembly Document No. 74. Albany, 1835.

North, Douglass. “Institutional Change in American Economic History.” In American Economic Development in Historical Perspective, edited by Thomas Weiss and Donald Schaefer, 87-98. Stanford: Stanford University Press, 1994.

Rappaport, George David. Stability and Change in Revolutionary Pennsylvania: Banking, Politics, and Social Structure. University Park, PA: The Pennsylvania State University Press, 1996.

Redlich, Fritz. The Molding of American Banking: Men and Ideas. New York: Hafner Publishing Company, 1947.

Rockoff, Hugh. “The Free Banking Era: A Reexamination.” Journal of Money, Credit, and Banking 6, no. 2 (1974): 141-67.

Rockoff, Hugh. “New Evidence on the Free Banking Era in the United States.” American Economic Review 75, no. 4 (1985): 886-89.

Rolnick, Arthur J., and Warren E. Weber. “Free Banking, Wildcat Banking, and Shinplasters.” Federal Reserve Bank of Minneapolis Quarterly Review 6 (1982): 10-19.

Rolnick, Arthur J., and Warren E. Weber. “New Evidence on the Free Banking Era.” American Economic Review 73, no. 5 (1983): 1080-91.

Rolnick, Arthur J., Bruce D. Smith, and Warren E. Weber. “Lessons from a Laissez-Faire Payments System: The Suffolk Banking System (1825-58).” Federal Reserve Bank of Minneapolis Quarterly Review 22, no. 3 (1998): 11-21.

Royalty, Dale. “Banking and the Commonwealth Ideal in Kentucky, 1806-1822.” Register of the Kentucky Historical Society 77 (1979): 91-107.

Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profit, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA: Harvard University Press, 1934.

Schweikart, Larry. Banking in the American South from the Age of Jackson to Reconstruction. Baton Rouge: Louisiana State University Press, 1987.

Simonton, William G. Maine and the Panic of 1837. Unpublished master’s thesis: University of Maine, 1971.

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

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 Joseph Wallis, 345-78. Chicago: University of Chicago Press, 1992.

Spencer, Charles, Jr. The First Bank of Boston, 1784-1949. New York: Newcomen Society, 1949.

Starnes, George T. Sixty Years of Branch Banking in Virginia. New York: Macmillan Company, 1931.

Stokes, Howard Kemble. Chartered Banking in Rhode Island, 1791-1900. Providence: Preston & Rounds Company, 1902.

Sylla, Richard. “Forgotten Men of Money: Private Bankers in Early U.S. History.” Journal of Economic History 36, no. 2 (1976):

Temin, Peter. The Jacksonian Economy. New York: W. W. Norton & Company, 1969.

Trescott, Paul B. Financing American Enterprise: The Story of Commercial Banking. New York: Harper & Row, 1963.

Trivoli, George. The Suffolk Bank: A Study of a Free-Enterprise Clearing System. London: The Adam Smith Institute, 1979.

U.S. Comptroller of the Currency. Annual Report of the Comptroller of the Currency. Washington, D.C.: Government Printing Office, 1931.

Wainwright, Nicholas B. History of the Philadelphia National Bank. Philadelphia: William F. Fell Company, 1953.

Walker, Amasa. History of the Wickaboag Bank. Boston: Crosby, Nichols & Company, 1857.

Wallis, John Joseph. “What Caused the Panic of 1839?” Unpublished working paper, University of Maryland, October 2000.

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.

Whitney, David R. The Suffolk Bank. Cambridge, MA: Riverside Press, 1878.

Wright, Robert E. “Artisans, Banks, Credit, and the Election of 1800.” The Pennsylvania Magazine of History and Biography 122, no. 3 (July 1998), 211-239.

Wright, Robert E. “Bank Ownership and Lending Patterns in New York and Pennsylvania, 1781-1831.” Business History Review 73, no. 1 (Spring 1999), 40-60.

1 Banknotes were small demonination IOUs printed by banks and circulated as currency. Modern U.S. money are simply banknotes issued by the Federal Reserve Bank, which has a monopoly privilege in the issue of legal tender currency. In antebellum American, when a bank made a loan, the borrower was typically handed banknotes with a face value equal to the dollar value of the loan. The borrower then spent these banknotes in purchasing goods and services, putting them into circulation. Contemporary law held that banks were required to redeem banknotes into gold and silver legal tender on demand. Banks found it profitable to issue notes because they typically held about 30 percent of the total value of banknotes in circulation as reserves. Thus, banks were able to leverage $30 in gold and silver into $100 in loans that returned about 7 percent interest on average.

2 Paul Lockard (2000) challenges Lamoreaux’s interpretation. In a study of 4 banks in the Connecticut River valley, Lockard finds that insiders did not dominate these banks’ resources. As provocative as Lockard’s findings are, he draws conclusions from a small and unrepresentative sample. Two of his four sample banks were savings banks, which were designed as quasi-charitable organizations designed to encourage savings by the working classes and provide small loans. Thus, Lockard’s sample is effectively reduced to two banks. At these two banks, he identifies about 10 percent of loans as insider loans, but readily admits that he cannot always distinguish between insiders and outsiders. For a recent study of how early Americans used savings banks, see Alter, Goldin and Rotella (1994). The literature on savings banks is so large that it cannot be be given its due here.

3 Interbank clearing involves the settling of balances between banks. Modern banks cash checks drawn on other banks and credit the funds to the depositor. The Federal Reserve system provides clearing services between banks. The accepting bank sends the checks to the Federal Reserve, who credits the sending bank’s accounts and sends the checks back to the bank on which they were drawn for reimbursement. In the antebellum era, interbank clearing involved sending banknotes back to issuing banks. Because New England had so many small and scattered banks, the costs of returning banknotes to their issuers were large and sometimes avoided by recirculating notes of distant banks rather than returning them. Regular clearings and redemptions served an important purpose, however, because they kept banks in touch with the current market conditions. A massive redemption of notes was indicative of a declining demand for money and credit. Because the bank’s reserves were drawn down with the redemptions, it was forced to reduce its volume of loans in accord with changing demand conditions.

4 The law held that banknotes were redeemable on demand into gold or silver coin or bullion. If a bank refused to redeem even a single $1 banknote, the banknote holder could have the bank closed and liquidated to recover his or her claim against it.

5 Rappaport (1996) found that the bank’s loans were about equally divided between insiders (shareholders and shareholders’ family and business associates) and outsiders, but nonshareholders received loans about 30 percent smaller than shareholders. The issue remains about whether this bank was an “insider” bank, and depends largely on one’s definition. Any modern bank which made half of its loans to shareholders and their families would be viewed as an “insider” bank. It is less clear where the line can be usefully drawn for antebellum banks.

6 Real-bills lending followed from a nineteenth-century banking philosophy, which held that bank lending should be used to finance the warehousing or wholesaling of already-produced goods. Loans made on these bases were thought to be self-liquidating in that the loan was made against readily sold collateral actually in the hands of a merchant. Under the real-bills doctrine, the banks’ proper functions were to bridge the gap between production and retail sale of goods. A strict adherence to real-bills tenets excluded loans on property (mortgages), loans on goods in process (trade credit), or loans to start-up firms (venture capital). Thus, real-bills lending prescribed a limited role for banks and bank credit. Few banks were strict adherents to the doctrine, but many followed it in large part.

7 Robert E. Wright (1998) offers a different interpretation, but notes that Burr pushed the bill through at the end of a busy legislative session so that many legislators voted on the bill without having read it thoroughly

Citation: Bodenhorn, Howard. “Antebellum Banking in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008. URL http://eh.net/encyclopedia/antebellum-banking-in-the-united-states/

The Economic History of Australia from 1788: An Introduction

Bernard Attard, University of Leicester

Introduction

The economic benefits of establishing a British colony in Australia in 1788 were not immediately obvious. The Government’s motives have been debated but the settlement’s early character and prospects were dominated by its original function as a jail. Colonization nevertheless began a radical change in the pattern of human activity and resource use in that part of the world, and by the 1890s a highly successful settler economy had been established on the basis of a favorable climate in large parts of the southeast (including Tasmania ) and the southwest corner; the suitability of land for European pastoralism and agriculture; an abundance of mineral wealth; and the ease with which these resources were appropriated from the indigenous population. This article will focus on the creation of a colonial economy from 1788 and its structural change during the twentieth century. To simplify, it will divide Australian economic history into four periods, two of which overlap. These are defined by the foundation of the ‘bridgehead economy’ before 1820; the growth of a colonial economy between 1820 and 1930; the rise of manufacturing and the protectionist state between 1891 and 1973; and the experience of liberalization and structural change since 1973. The article will conclude by suggesting briefly some of the similarities between Australia and other comparable settler economies, as well as the ways in which it has differed from them.

The Bridgehead Economy, 1788-1820

The description ‘bridgehead economy’ was used by one of Australia’s foremost economic historians, N. G. Butlin to refer to the earliest decades of British occupation when the colony was essentially a penal institution. The main settlements were at Port Jackson (modern Sydney, 1788) in New South Wales and Hobart (1804) in what was then Van Diemen’s Land (modern Tasmania). The colony barely survived its first years and was largely neglected for much of the following quarter-century while the British government was preoccupied by the war with France. An important beginning was nevertheless made in the creation of a private economy to support the penal regime. Above all, agriculture was established on the basis of land grants to senior officials and emancipated convicts, and limited freedoms were allowed to convicts to supply a range of goods and services. Although economic life depended heavily on the government Commissariat as a supplier of goods, money and foreign exchange, individual rights in property and labor were recognized, and private markets for both started to function. In 1808, the recall of the New South Wales Corps, whose officers had benefited most from access to land and imported goods (thus hopelessly entangling public and private interests), coupled with the appointment of a new governor, Lachlan Macquarie, in the following year, brought about a greater separation of the private economy from the activities and interests of the colonial government. With a significant increase in the numbers transported after 1810, New South Wales’ future became more secure. As laborers, craftsmen, clerks and tradesmen, many convicts possessed the skills required in the new settlements. As their terms expired, they also added permanently to the free population. Over time, this would inevitably change the colony’s character.

Natural Resources and the Colonial Economy, 1820-1930

Pastoral and Rural Expansion

For Butlin, the developments around 1810 were a turning point in the creation of a ‘colonial’ economy. Many historians have preferred to view those during the 1820s as more significant. From that decade, economic growth was based increasingly upon the production of fine wool and other rural commodities for markets in Britain and the industrializing economies of northwestern Europe. This growth was interrupted by two major depressions during the 1840s and 1890s and stimulated in complex ways by the rich gold discoveries in Victoria in 1851, but the underlying dynamics were essentially unchanged. At different times, the extraction of natural resources, whether maritime before the 1840s or later gold and other minerals, was also important. Agriculture, local manufacturing and construction industries expanded to meet the immediate needs of growing populations, which concentrated increasingly in the main urban centers. The colonial economy’s structure, growth of population and significance of urbanization are illustrated in tables 1 and 2. The opportunities for large profits in pastoralism and mining attracted considerable amounts of British capital, while expansion generally was supported by enormous government outlays for transport, communication and urban infrastructures, which also depended heavily on British finance. As the economy expanded, large-scale immigration became necessary to satisfy the growing demand for workers, especially after the end of convict transportation to the eastern mainland in 1840. The costs of immigration were subsidized by colonial governments, with settlers coming predominantly from the United Kingdom and bringing skills that contributed enormously to the economy’s growth. All this provided the foundation for the establishment of free colonial societies. In turn, the institutions associated with these — including the rule of law, secure property rights, and stable and democratic political systems — created conditions that, on balance, fostered growth. In addition to New South Wales, four other British colonies were established on the mainland: Western Australia (1829), South Australia (1836), Victoria (1851) and Queensland (1859). Van Diemen’s Land (Tasmania after 1856) became a separate colony in 1825. From the 1850s, these colonies acquired responsible government. In 1901, they federated, creating the Commonwealth of Australia.

Table 1
The Colonial Economy: Percentage Shares of GDP, 1891 Prices, 1861-1911

Pastoral Other rural Mining Manuf. Building Services Rent
1861 9.3 13.0 17.5 14.2 8.4 28.8 8.6
1891 16.1 12.4 6.7 16.6 8.5 29.2 10.3
1911 14.8 16.7 9.0 17.1 5.3 28.7 8.3

Source: Haig (2001), Table A1. Totals do not sum to 100 because of rounding.

Table 2
Colonial Populations (thousands), 1851-1911

Australia Colonies Cities
NSW Victoria Sydney Melbourne
1851 257 100 46 54 29
1861 669 198 328 96 125
1891 1,704 608 598 400 473
1911 2,313 858 656 648 593

Source: McCarty (1974), p. 21; Vamplew (1987), POP 26-34.

The process of colonial growth began with two related developments. First, in 1820, Macquarie responded to land pressure in the districts immediately surrounding Sydney by relaxing restrictions on settlement. Soon the outward movement of herdsmen seeking new pastures became uncontrollable. From the 1820s, the British authorities also encouraged private enterprise by the wholesale assignment of convicts to private employers and easy access to land. In 1831, the principles of systematic colonization popularized by Edward Gibbon Wakefield (1796-1862) were put into practice in New South Wales with the substitution of land sales for grants in order to finance immigration. This, however, did not affect the continued outward movement of pastoralists who simply occupied land where could find it beyond the official limits of settlement. By 1840, they had claimed a vast swathe of territory two hundred miles in depth running from Moreton Bay in the north (the site of modern Brisbane) through the Port Phillip District (the future colony of Victoria, whose capital Melbourne was marked out in 1837) to Adelaide in South Australia. The absence of any legal title meant that these intruders became known as ‘squatters’ and the terms of their tenure were not finally settled until 1846 after a prolonged political struggle with the Governor of New South Wales, Sir George Gipps.

The impact of the original penal settlements on the indigenous population had been enormous. The consequences of squatting after 1820 were equally devastating as the land and natural resources upon which indigenous hunter-gathering activities and environmental management depended were appropriated on a massive scale. Aboriginal populations collapsed in the face of disease, violence and forced removal until they survived only on the margins of the new pastoral economy, on government reserves, or in the arid parts of the continent least touched by white settlement. The process would be repeated again in northern Australia during the second half of the century.

For the colonists this could happen because Australia was considered terra nullius, vacant land freely available for occupation and exploitation. The encouragement of private enterprise, the reception of Wakefieldian ideas, and the wholesale spread of white settlement were all part of a profound transformation in official and private perceptions of Australia’s prospects and economic value as a British colony. Millennia of fire-stick management to assist hunter-gathering had created inland grasslands in the southeast that were ideally suited to the production of fine wool. Both the physical environment and the official incentives just described raised expectations of considerable profits to be made in pastoral enterprise and attracted a growing stream of British capital in the form of organizations like the Australian Agricultural Company (1824); new corporate settlements in Western Australia (1829) and South Australia (1836); and, from the 1830s, British banks and mortgage companies formed to operate in the colonies. By the 1830s, wool had overtaken whale oil as the colony’s most important export, and by 1850 New South Wales had displaced Germany as the main overseas supplier to British industry (see table 3). Allowing for the colonial economy’s growing complexity, the cycle of growth based upon land settlement, exports and British capital would be repeated twice. The first pastoral boom ended in a depression which was at its worst during 1842-43. Although output continued to grow during the 1840s, the best land had been occupied in the absence of substantial investment in fencing and water supplies. Without further geographical expansion, opportunities for high profits were reduced and the flow of British capital dried up, contributing to a wider downturn caused by drought and mercantile failure.

Table 3
Imports of Wool into Britain (thousands of bales), 1830-50

German Australian
1830 74.5 8.0
1840 63.3 41.0
1850 30.5 137.2

Source: Sinclair (1976), p. 46

When pastoral growth revived during the 1860s, borrowed funds were used to fence properties and secure access to water. This in turn allowed a further extension of pastoral production into the more environmentally fragile semi-arid interior districts of New South Wales, particularly during the 1880s. As the mobs of sheep moved further inland, colonial governments increased the scale of their railway construction programs, some competing to capture the freight to ports. Technical innovation and government sponsorship of land settlement brought greater diversity to the rural economy (see table 4). Exports of South Australian wheat started in the 1870s. The development of drought resistant grain varieties from the turn of the century led to an enormous expansion of sown acreage in both the southeast and southwest. From the 1880s, sugar production increased in Queensland, although mainly for the domestic market. From the 1890s, refrigeration made it possible to export meat, dairy products and fruit.

Table 4
Australian Exports (percentages of total value of exports), 1881-1928/29

Wool Minerals Wheat,flour Butter Meat Fruit
1881-90 54.1 27.2 5.3 0.1 1.2 0.2
1891-1900 43.5 33.1 2.9 2.4 4.1 0.3
1901-13 34.3 35.4 9.7 4.1 5.1 0.5
1920/21-1928/29 42.9 8.8 20.5 5.6 4.6 2.2

Source: Sinclair (1976), p. 166

Gold and Its Consequences

Alongside rural growth and diversification, the remarkable gold discoveries in central Victoria in 1851 brought increased complexity to the process of economic development. The news sparked an immediate surge of gold seekers into the colony, which was soon reinforced by a flood of overseas migrants. Until the 1870s, gold displaced wool as Australia’s most valuable export. Rural industries either expanded output (wheat in South Australia) or, in the case of pastoralists, switched production to meat and tallow, to supply a much larger domestic market. Minerals had been extracted since earliest settlement and, while yields on the Victorian gold fields soon declined, rich mineral deposits continued to be found. During the 1880s alone these included silver, lead and zinc at Broken Hill in New South Wales; copper at Mount Lyell in Tasmania; and gold at Charters Towers and Mount Morgan in Queensland. From 1893, what eventually became the richest goldfields in Australia were discovered at Coolgardie in Western Australia. The mining industry’s overall contribution to output and exports is illustrated in tables 1 and 4.

In Victoria, the deposits of easily extracted alluvial gold were soon exhausted and mining was taken over by companies that could command the financial and organizational resources needed to work the deep lodes. But the enormous permanent addition to the colonial population caused by the gold rush had profound effects throughout eastern Australia, dramatically accelerating the growth of the local market and workforce, and deeply disturbing the social balance that had emerged during the decade before. Between 1851 and 1861, the Australian population more than doubled. In Victoria it increased sevenfold; Melbourne outgrew Sydney, Chicago and San Francisco (see table 2). Significantly enlarged populations required social infrastructure, political representation, employment and land; and the new colonial legislatures were compelled to respond. The way this was played out varied between colonies but the common outcomes were the introduction of manhood suffrage, access to land through ‘free selection’ of small holdings, and, in the Victorian case, the introduction of a protectionist tariff in 1865. The particular age structure of the migrants of the 1850s also had long-term effects on the building cycle, notably in Victoria. The demand for housing accelerated during the 1880s, as the children of the gold generation matured and established their own households. With pastoral expansion and public investment also nearing their peaks, the colony experienced a speculative boom which added to the imbalances already being caused by falling export prices and rising overseas debt. The boom ended with the wholesale collapse of building companies, mortgage banks and other financial institutions during 1891-92 and the stoppage of much of the banking system during 1893.

The depression of the 1890s was worst in Victoria. Its impact on employment was softened by the Western Australian gold discoveries, which drew population away, but the colonial economy had grown to such an extent since the 1850s that the stimulus provided by the earlier gold finds could not be repeated. Severe drought in eastern Australia from the mid-1890s until 1903 caused the pastoral industry to contract. Yet, as we have seen, technological innovation also created opportunities for other rural producers, who were now heavily supported by government with little direct involvement by foreign investors. The final phase of rural expansion, with its associated public investment in rural (and increasingly urban) infrastructure continued until the end of the 1920s. Yields declined, however, as farmers moved onto the most marginal land. The terms of trade also deteriorated with the oversupply of several commodities in world markets after the First World War. As a result, the burden of servicing foreign debt rose once again. Australia’s position as a capital importer and exporter of natural resources meant that the Great Depression arrived early. From late 1929, the closure of overseas capital markets and collapse of export prices forced the Federal Government to take drastic measures to protect the balance of payments. The falls in investment and income transmitted the contraction to the rest of the economy. By 1932, average monthly unemployment amongst trade union members was over 22 percent. Although natural resource industries continued to have enduring importance as earners of foreign exchange, the Depression finally ended the long period in which land settlement and technical innovation had together provided a secure foundation for economic growth.

Manufacturing and the Protected Economy, 1891-1973

The ‘Australian Settlement’

There is a considerable chronological overlap between the previous section, which surveyed the growth of a colonial economy during the nineteenth century based on the exploitation of natural resources, and this one because it is a convenient way of approaching the two most important developments in Australian economic history between Federation and the 1970s: the enormous increase in government regulation after 1901 and, closely linked to this, the expansion of domestic manufacturing, which from the Second World War became the most dynamic part of the Australian economy.

The creation of the Commonwealth of Australia on 1 January 1901 broadened the opportunities for public intervention in private markets. The new Federal Government was given clearly-defined but limited powers over obviously ‘national’ matters like customs duties. The rest, including many affecting economic development and social welfare, remained with the states. The most immediate economic consequence was the abolition of inter-colonial tariffs and the establishment of a single Australian market. But the Commonwealth also soon set about transferring to the national level several institutions that different the colonies had experimented with during the 1890s. These included arrangements for the compulsory arbitration of industrial disputes by government tribunals, which also had the power to fix wages, and a discriminatory ‘white Australia’ immigration policy designed to exclude non-Europeans from the labor market. Both were partly responses to organized labor’s electoral success during the 1890s. Urban business and professional interests had always been represented in colonial legislatures; during the 1910s, rural producers also formed their own political parties. Subsequently, state and federal governments were typically formed by the either Australian Labor Party or coalitions of urban conservatives and the Country Party. The constituencies they each represented were thus able to influence the regulatory structure to protect themselves against the full impact of market outcomes, whether in the form of import competition, volatile commodity prices or uncertain employment conditions. The institutional arrangements they created have been described as the ‘Australian settlement’ because they balanced competing producer interests and arguably provided a stable framework for economic development until the 1970s, despite the inevitable costs.

The Growth of Manufacturing

An important part of the ‘Australian settlement’ was the imposition of a uniform federal tariff and its eventual elaboration into a system of ‘protection all round’. The original intended beneficiaries were manufacturers and their employees; indeed, when the first protectionist tariff was introduced in 1907, its operation was linked to the requirement that employers pay their workers ‘fair and reasonable wages’. Manufacturing’s actual contribution to economic growth before Federation has been controversial. The population influx of the 1850s widened opportunities for import-substitution but the best evidence suggests that manufacturing grew slowly as the industrial workforce increased (see table 1). Production was small-scale and confined largely to the processing of rural products and raw materials; assembly and repair-work; or the manufacture of goods for immediate consumption (e.g. soap and candle-making, brewing and distilling). Clothing and textile output was limited to a few lines. For all manufacturing, growth was restrained by the market’s small size and the limited opportunities for technical change it afforded.

After Federation, production was stimulated by several factors: rural expansion, the increasing use of agricultural machinery and refrigeration equipment, and the growing propensity of farm incomes to be spent locally. The removal of inter-colonial tariffs may also have helped. The statistical evidence indicates that between 1901 and the outbreak of the First World War manufacturing grew faster than the economy as a whole, while output per worker increased. But manufacturers also aspired mainly to supply the domestic market and expended increasing energy on retaining privileged access. Tariffs rose considerably between the two world wars. Some sectors became more capital intensive, particularly with the establishment of a local steel industry, the beginnings of automobile manufacture, and the greater use of electricity. But, except during the first half of the 1920s, there was little increase in labor productivity and the inter-war expansion of textile manufacturing reflected the heavy bias towards import substitution. Not until the Second World War and after did manufacturing growth accelerate and extend to those sectors most characteristic of an advance industrial economy (table 5). Amongst these were automobiles, chemicals, electrical and electronic equipment, and iron-and-steel. Growth was sustained during 1950s by similar factors to those operating in other countries during the ‘long boom’, including a growing stream of American direct investment, access to new and better technology, and stable conditions of full employment.

Table 5
Manufacturing and the Australian Economy, 1913-1949

1938-39 prices
Manufacturing share of GDP % Manufacturing annual rate of growth % GDP, annual rate of growth %
1913/14 21.9
1928/29 23.6 2.6 2.1
1948/49 29.8 3.4 2.2

Calculated from Haig (2001), Table A2. Rates of change are average annual changes since the previous year in the first column.

Manufacturing peaked in the mid-1960s at about 28 percent of national output (measured in 1968-69 prices) but natural resource industries remained the most important suppliers of exports. Since the 1920s, over-supply in world markets and the need to compensate farmers for manufacturing protection, had meant that virtually all rural industries, with the exception of wool, had been drawn into a complicated system of subsidies, price controls and market interventions at both federal and state levels. The post-war boom in the world economy increased demand for commodities, benefiting rural producers but also creating new opportunities for Australian miners. Most important of all, the first surge of breakneck growth in East Asia opened a vast new market for iron ore, coal and other mining products. Britain’s significance as a trading partner had declined markedly since the 1950s. By the end of the 1960s, Japan overtook it as Australia’s largest customer, while the United States was now the main provider of imports.

The mining bonanza contributed to the boom conditions experienced generally after 1950. The Federal Government played its part by using the full range of macroeconomic policies that were also increasingly familiar in similar western countries to secure stability and full employment. It encouraged high immigration, relaxing the entry criteria to allow in large numbers of southern Europeans, who added directly to the workforce, but also brought knowledge and experience. With state governments, the Commonwealth increased expenditure on education significantly, effectively entering the field for the first time after 1945. Access to secondary education was widened with the abandonment of fees in government schools and federal finance secured an enormous expansion of university places, especially after 1960. Some weaknesses remained. Enrolment rates after primary school were below those in many industrial countries and funding for technical education was poor. Despite this, the Australian population’s rising levels of education and skill continued to be important additional sources of growth. Finally, although government advisers expressed misgivings, industry policy remained determinedly interventionist. While state governments competed to attract manufacturing investment with tax and other incentives, by the 1960s protection had reached its highest level, with Australia playing virtually no part in the General Agreement on Tariffs and Trade (GATT), despite being an original signatory. The effects of rising tariffs since 1900 were evident in the considerable decline in Australia’s openness to trade (Table 6). Yet, as the post-war boom approached its end, the country still relied upon commodity exports and foreign investment to purchase the manufactures it was unable to produce itself. The impossibility of sustaining growth in this way was already becoming clear, even though the full implications would only be felt during the decades to come.

Table 6
Trade (Exports Plus Imports)
as a Share of GDP, Current Prices, %

1900/1 44.9
1928/29 36.9
1938/38 32.7
1964/65 33.3
1972/73 29.5

Calculated from Vamplew (1987), ANA 119-129.

Liberalization and Structural Change, 1973-2005

From the beginning of the 1970s, instability in the world economy and weakness at home ended Australia’s experience of the post-war boom. During the following decades, manufacturing’s share in output (table 7) and employment fell, while the long-term relative decline of commodity prices meant that natural resources could no longer be relied on to cover the cost of imports, let alone the long-standing deficits in payments for services, migrant remittances and interest on foreign debt. Until the early 1990s, Australia also suffered from persistent inflation and rising unemployment (which remained permanently higher, see chart 1). As a consequence, per capita incomes fluctuated during the 1970s, and the economy contracted in absolute terms during 1982-83 and 1990-91.

Even before the 1970s, new sources of growth and rising living standards had been needed, but the opportunities for economic change were restricted by the elaborate regulatory structure that had evolved since Federation. During that decade itself, policy and outlook were essentially defensive and backward looking, despite calls for reform and some willingness to alter the tariff. Governments sought to protect employment in established industries, while dependence on mineral exports actually increased as a result of the commodity booms at the decade’s beginning and end. By the 1980s, however, it was clear that the country’s existing institutions were failing and fundamental reform was required.

Table 7
The Australian Economy, 1974-2004

A. Percentage shares of value-added, constant prices

1974 1984 1994 2002
Agriculture 4.4 4.3 3.0 2.7
Manufacturing 18.1 15.2 13.3 11.8
Other industry, inc. mining 14.2 14.0 14.6 14.4
Services 63.4 66.4 69.1 71.1

B. Per capita GDP, annual average rate of growth %, constant prices

1973-84 1.2
1984-94 1.7
1994-2004 2.5

Calculated from World Bank, World Development Indicators (Sept. 2005).

Figure 1
Unemployment, 1971-2005, percent

Unemployment, 1971-2005, percent

Source: Reserve Bank of Australia (1988); Reserve Bank of Australia, G07Hist.xls. Survey data at August. The method of data collection changed in 1978.

The catalyst was the resumption of the relative fall of commodity prices since the Second World War which meant that the cost of purchasing manufactured goods inexorably rose for primary producers. The decline had been temporarily reversed by the oil shocks of the 1970s but, from the 1980/81 financial year until the decade’s end, the value of Australia’s merchandise imports exceeded that of merchandise exports in every year but two. The overall deficit on current account measured as a proportion of GDP also moved became permanently higher, averaging around 4.7 percent. During the 1930s, deflation had been followed by the further closing of the Australian economy. There was no longer much scope for this. Manufacturing had stagnated since the 1960s, suffering especially from the inflation of wage and other costs during the 1970s. It was particularly badly affected by the recession of 1982-83, when unemployment rose to almost ten percent, its highest level since the Great Depression. In 1983, a new federal Labor Government led by Bob Hawke sought to engineer a recovery through an ‘Accord’ with the trade union movement which aimed at creating employment by holding down real wages. But under Hawke and his Treasurer, Paul Keating — who warned colorfully that otherwise the country risked becoming a ‘banana republic’ — Labor also started to introduce broader reforms to increase the efficiency of Australian firms by improving their access to foreign finance and exposing them to greater competition. Costs would fall and exports of more profitable manufactures increase, reducing the economy’s dependence on commodities. During the 1980s and 1990s, the reforms deepened and widened, extending to state governments and continuing with the election of a conservative Liberal-National Party government under John Howard in 1996, as each act of deregulation invited further measures to consolidate them and increase their effectiveness. Key reforms included the floating of the Australian dollar and the deregulation of the financial system; the progressive removal of protection of most manufacturing and agriculture; the dismantling of the centralized system of wage-fixing; taxation reform; and the promotion of greater competition and better resource use through privatization and the restructuring of publicly-owned corporations, the elimination of government monopolies, and the deregulation of sectors like transport and telecommunications. In contrast with the 1930s, the prospects of further domestic reform were improved by an increasingly favorable international climate. Australia contributed by joining other nations in the Cairns Group to negotiate reductions of agricultural protection during the Uruguay round of GATT negotiations and by promoting regional liberalization through the Asia Pacific Economic Cooperation (APEC) forum.

Table 8
Exports and Openness, 1983-2004

Shares of total exports, % Shares of GDP: exports + imports, %
Goods Services
Rural Resource Manuf. Other
1983 30 34 9 3 24 26
1989 23 37 11 5 24 27
1999 20 34 17 4 24 37
2004 18 33 19 6 23 39

Calculated from: Reserve Bank of Australia, G10Hist.xls and H03Hist.xls; World Bank, World Development Indicators (Sept. 2005). Chain volume measures, except shares of GDP, 1983, which are at current prices.

The extent to which institutional reform had successfully brought about long-term structural change was still not clear at the end of the century. Recovery from the 1982-83 recession was based upon a strong revival of employment. By contrast, the uninterrupted growth experienced since 1992 arose from increases in the combined productivity of workers and capital. If this persisted, it was a historic change in the sources of growth from reliance on the accumulation of capital and the increase of the workforce to improvements in the efficiency of both. From the 1990s, the Australian economy also became more open (table 8). Manufactured goods increased their share of exports, while rural products continued to decline. Yet, although growth was more broadly-based, rapid and sustained (table 7), the country continued to experience large trade and current account deficits, which were augmented by the considerable increase of foreign debt after financial deregulation during the 1980s. Unemployment also failed to return to its pre-1974 level of around 2 percent, although much of the permanent rise occurred during the mid to late 1970s. In 2005, it remained 5 percent (Figure 1). Institutional reform clearly contributed to these changes in economic structure and performance but they were also influenced by other factors, including falling transport costs, the communications and information revolutions, the greater openness of the international economy, and the remarkable burst of economic growth during the century’s final decades in southeast and east Asia, above all China. Reform was also complemented by policies to provide the skills needed in a technologically-sophisticated, increasingly service-oriented economy. Retention rates in the last years of secondary education doubled during the 1980s, followed by a sharp increase of enrolments in technical colleges and universities. By 2002, total expenditure on education as a proportion of national income had caught up with the average of member countries of the OECD (Table 9). Shortages were nevertheless beginning to be experienced in the engineering and other skilled trades, raising questions about some priorities and the diminishing relative financial contribution of government to tertiary education.

Table 9
Tertiary Enrolments and Education Expenditure, 2002

Tertiary enrolments, gross percent Education expenditure as a proportion of GDP, percent
Australia 63.22 6.0
OECD 61.68 5.8
United States 70.67 7.2

Source: World Bank, World Development Indicators (Sept. 2005); OECD (2005). Gross enrolments are total enrolments, regardless of age, as a proportion of the population in the relevant official age group. OECD enrolments are for fifteen high-income members only.

Summing Up: The Australian Economy in a Wider Context

Virtually since the beginning of European occupation, the Australian economy had provided the original British colonizers, generations of migrants, and the descendants of both with a remarkably high standard of living. Towards the end of the nineteenth century, this was by all measures the highest in the world (see table 10). After 1900, national income per member of the population slipped behind that of several countries, but continued to compare favorably with most. In 2004, Australia was ranked behind only Norway and Sweden in the United Nation’s Human Development Index. Economic historians have differed over the sources of growth that made this possible. Butlin emphasized the significance of local factors like the unusually high rate of urbanization and the expansion of domestic manufacturing. In important respects, however, Australia was subject to the same forces as other European settler societies in New Zealand and Latin America, and its development bore striking similarities to theirs. From the 1820s, its economy grew as one frontier of an expanding western capitalism. With its close institutional ties to, and complementarities with, the most dynamic parts of the world economy, it drew capital and migrants from them, supplied them with commodities, and shared the benefits of their growth. Like other settler societies, it sought population growth as an end in itself and, from the turn of the nineteenth century, aspired to the creation of a national manufacturing base. Finally, when openness to the world economy appeared to threaten growth and living standards, governments intervened to regulate and protect with broader social objectives in mind. But there were also striking contrasts with other settler economies, notably those in Latin America like Argentina, with which it has been frequently compared. In particular, Australia responded to successive challenges to growth by finding new opportunities for wealth creation with a minimum of political disturbance, social conflict or economic instability, while sharing a rising national income as widely as possible.

Table 10
Per capita GDP in Australia, United States and Argentina
(1990 international dollars)

Australia United States Argentina
1870 3,641 2,457 1,311
1890 4,433 3,396 2,152
1950 7,493 9,561 4,987
1998 20,390 27,331 9,219

Sources: Australia: GDP, Haig (2001) as converted in Maddison (2003); all other data Maddison (1995) and (2001)

From the mid-twentieth century, Australia’s experience also resembled that of many advanced western countries. This included the post-war willingness to use macroeconomic policy to maintain growth and full employment; and, after the 1970s, the abandonment of much government intervention in private markets while at the same time retaining strong social services and seeking to improve education and training. Australia also experienced a similar relative decline of manufacturing, permanent rise of unemployment, and transition to a more service-based economy typical of high income countries. By the beginning of the new millennium, services accounted for over 70 percent of national income (table 7). Australia remained vulnerable as an exporter of commodities and importer of capital but its endowment of natural resources and the skills of its population were also creating opportunities. The country was again favorably positioned to take advantage of growth in the most dynamic parts of the world economy, particularly China. With the final abandonment of the White Australia policy during the 1970s, it had also started to integrate more closely with its region. This was further evidence of the capacity to change that allowed Australians to face the future with confidence.

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Economic History of Tractors in the United States

William J. White, Research Triangle Institute

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

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

Technical Description

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

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

Background and Technological History

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

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

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

The First Gasoline Tractors

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

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

Technological Improvements

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

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

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

A Dominant Design Emerges

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

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

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

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

Development of Related Equipment

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

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

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

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

Recent Developments

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

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

Production and Corporate History

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

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

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

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

Deere

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

Social and Economic Significance

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

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

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

References for Further Study

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Charleston Orphan House: Children?s Lives in the First Public Orphan House in America

Author(s):Murray, John E.
Reviewer(s):Rothenberg, Winifred B.

Published by EH.Net (July 2013)
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John E. Murray, The Charleston Orphan House: Children?s Lives in the First Public Orphan House in America. Chicago: University of Chicago Press, 2013.? xx + 268 pp. (hardcover), $30 (hardcover), ISBN: 978-0-226-92409-0.

Reviewed for EH.Net by Winifred B. Rothenberg, Department of Economics, Tufts University.

The first public orphanage in America was founded not in Boston, citadel of civic virtue, but in Charleston, South Carolina. Because it was the first, it is not unreasonable to assume that it became the blueprint after which all other municipal orphanages were modeled ? which is to say, it set the dimensions of the ?great confinement? within which forsaken children would live for generations to come. Sufficient reason, then, for the Charleston Orphan House to have attracted the attention of John E. Murray, whose previous publications on orphans, paupers, child labor, charity, literacy, epidemic disease, a Shaker community, and the history of health insurance in America testify to a tender and enduring concern for ?the least of these.? Scholars less tender-hearted than Murray may wonder why a book on one southern orphanage should be of interest to economic historians, to which Murray can reply that charity ? or, more accurately, altruism ? has engaged the likes of Arrow, Debreu, Sen, Kahneman, and innumerable others in arcane conversations around rational expectations, decision theory, social welfare functions, intergenerational wealth transfers, the theory of the firm, and the specification of a Happiness GNP measure.

The narrative density of Murray?s book comes from his exhaustive research in the Orphan House archives. He has managed to link at least 500 children by name to their life-cycle events, allowing him to track at least a quarter of the 2,000 children who passed through the orphanage. Beyond that, it appears that he has found every donor, every Commissioners? report, every repair bill, contract, bill of sale, loan application, housekeeping account, public health inspection, doctor?s order, teacher?s diary, minister?s sermon, church attendance record, and the testimony of every impoverished and widowed parent on behalf of his child at risk. Murray calls this archive ?the single greatest collection of first-person reports on work and family lives of the [white, that?s important] poor anywhere in the United States? (p. 4).

First in the course of his ten chapters are the conditions in the House. They are Dickensian. Visitors found it ?miserable,? ?extremely comfortless,? ?appalling,? ?swathed in darkness,? ?beds drenched with water when it rained,? without light, without sheets, without beds or bedsteads, waste water leaking into the drinking wells, one toilet for 100 children, privies in the vegetable garden. ?Yet many children hoped to enter the institution? (p. 66). It improved over time, and Murray moves on to devote a chapter each to the financing, management, diet, discipline, education, training, and medical care offered to the children. In chapters 8 and 9 where Murray follows the young people into apprenticeships and beyond, he opens the orphanage up and out to the urban, industrial, and export-driven economy of the Charleston that will have to absorb them. The book ends with an Epilogue, and it is there, as I read him, that Murray relaxes the courtesies that have constrained him thus far, and ?tells it like it is.? It is there that he undertakes to answer the question: what really motivated the Commissioners to fund a public orphanage in Charleston? But more about that later.
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For this reviewer, the gold standard for a project like Murray?s is Civic Charity in a Golden Age by Anne E.C. McCants (1997), a magisterial study of the Municipal Orphanage of Amsterdam from its founding in 1578 to its demise in 1815. I have adapted from that book and applied to Murray?s a list of six large questions which project these two institutions onto a wide and consequential canvas. I want to use these questions as a heuristic device upon which to hang the balance of this review.

1. What impulse motivated the founding of the public orphanage?
2. In what sense was the public orphanage ?public??
3. What role did state, county, and city government play?
4. Why did the charitable impulse take institutional form? In the case of abandoned children, was there no other solution?
5. Or was the choice of an institutional solution dictated in some way by the consilience (E.O.Wilson?s term: ?accordance of two or more lines of induction drawn from different sets of phenomena?) of capitalism, urbanization, secularism, and the nuclear family that emerged in America at the end of the eighteenth century?
6. Did the orphanage effect genuine redistribution, or was it rather ?an elaborate ploy? to perpetuate the inequality that had motivated it? This last will not be discussed in this review, which is already too long, but will remain as a question ? if only to tease the righteous.

McCants?s book does not appear in Murray?s bibliography, but these questions are the nuts and bolts, the What, When, Who, Where, and Why of his story no less than of hers. And while some are dealt with implicitly in his text, until the Epilogue none of them is discussed explicitly, and I wish they had been.

When the orphanage was founded in 1790, there were 8,089 white persons in Charleston, and 8,270 black persons, and of the blacks 7,684 were slaves, and 586 were freed blacks. Complicating things was the revolution in Haiti the following year. The uneasy equilibrium in Charleston was overwhelmed by a wave Haitian ?migr?s, of the white elite, yes, but mostly by a new population of slaves, free blacks, and mulatto refugees. Complicating things further was that as the number of freed blacks in the city increased, so did the share that were mulatto. White anxiety about mulattoes would reach such a level by 1848 that Charleston would require by law that all freed people wear a tag identifying them as black, and carry proof of manumission, at risk being re-enslaved.

In this climate it will come as no surprise to learn that the Charleston Orphan House and the Free School associated with it admitted only white children; not just white but who, while certifiably poor, were not very poor, in fact whose homes were decent enough to pass an inspection.? Thus defended, the orphanage played an important part in forging a race-based ?alliance of whites? against blacks that cut across, was orthogonal to and subversive of the class-based alliance that a new industrial working class was trying to build against capital. ?It is this link between civic society and racial unity that helps explain the puzzling question, why the first (and for many years the only) large-scale public orphanage in America should have been built in Charleston? (p. 199). ?Charleston was unique in the early republic in creating the charitable orphan house because in no other city did the elite need to make common cause with the white poor and working class against the potential common black enemy? (p. 201). ?Webs of white cooperation reached across class lines, as if the other half of Charleston?s population weren?t there at all? (p. 204).

Amsterdam?s public orphanage was also restricted: open only to citizens of Amsterdam, tax payers, members of the Dutch Reform (Calvinist) church, wealth-holders, of the ?middling classes.? If the Charleston orphanage was an oasis of white unity, and the Amsterdam orphanage was an oasis of middling unity, then in what sense were they ?public??

To answer that, begin with the meaning of “private”: how do we understand “private”? Sir William Blackstone, the great eighteenth century jurist, defined private property for the ages. It is, he wrote, ?that despotic dominion which one man claims and exercises over the things of this world in total exclusion of the rights of any other individual in the universe.?

If ?private? is the right to exclude, then is ?public? the obligation to include?? It doesn?t appear so. Public swimming pools, public housing, public schools, public water fountains, public transportation, public lands, public access to the Internet … all of these masquerade as forms of Commons but they have all, at one time or another, been ?restricted? against some portion of the public: against unmarried couples, single women, families with children, families with pets, against smokers, blacks, Asians, Jews, Latinos, and on and on ? that sorry history is too well known. We are no closer to discovering the meaning of ?public.?

The Oxford English Dictionary makes short shrift of a definition: “of or provided by the state rather than an independent, commercial company”; “ordinary people in general”; “done, perceived or existing in open view.” Of these the only relevant definition for our purposes is the first: “of or provided by the State.” The Charleston orphanage, even if not of the State, was provided by the State.? Then how can it assert a privacy right to exclude?

There were three sources of funds for the orphanage: donations, income from the institution?s own assets, support from all levels of government. Accounting for (in the sense of keeping account of) the donations will always be problematical to the extent that it is a non-market transaction. Gift-giving is driven not by reciprocity but ?by the pursuit of ?regard?: the approbation of others? (Avner Offer, ?Between the Gift and the Market,? Economic History Review, 1997).? To keep account of a gift is a small desecration of a private benevolence. But inevitably the charitable impulse would have waned as the increasing pace of commercial development both of the port and of the city would have lured private wealth into emerging capital markets and land speculation.

Market sources of income, however, were built into the endowment of the institution by design. The orphanage earned income on its holdings of B.U.S. bonds; and by law the value of all escheated estates in South Carolina (the estates of those who died intestate and without heirs) automatically reverted to the orphanage, along with ?small bits of wealth belonging to the children? (p. 24).

But eventually the institution needed to depend ?heavily? for its ongoing expenses on contributions from what we now call the public sector. To the extent that the ?public? orphanage was supported by the public, where did the city, county, or state get the money?? Were these pay-outs opportunistic, or were they funded? And if funded, was it supported from taxes or bond issues? If taxes, what kind: property taxes? A poor tax? Port duties? Excise taxes? If so, on what? I found this discussion to be the thinnest in the book, but on the answers to these sorts of questions depends the question we asked above, by what right does a public institution assert a privacy right to exclude?

What was left unsaid about the sources of government funding in the Charleston book is sharpened by the contrast with how much it is possible to say about it in the Amsterdam book. Unlike every level of government in the U.S., the city of Amsterdam appears to have faced no inhibitions on its power to tax income and spending directly. Every ?foreigner? applying for citizenship of the city was obliged to pay a fee in support of the orphanage. Additional support came from taxes levied on burials and marriages; real property was taxed; taxes were levied on all who worked for wages; and excise taxes were levied on all consumption. In addition, graduates of the orphanage were expected to ?give back? to support its upkeep; revenue was earned from the sale of the girls? needlework. Most significant were the assets bequeathed to the children and held in fiduciary trust for them until their maturity, which assets were prudently invested by the orphanage in real estate, commercial property, commercial paper, and annuities, such that by 1790, private donations accounted for only 8% of the income of the Amsterdam Burgerweeshuis.

Institutionalizing orphaned children is so bad an idea that one wonders if some other solution could not have been found. Why did institutional care prevail over alternatives like foster care, adoption, and government support to extended families?
a) Was institutionalization motivated by a rational calculation of its relative efficiency? Were there in fact economies of scale in warehousing children as there are in warehousing, say, Amazon?s inventory of CDs?
b) Or should we look to a moment in time, say 1780-1810 ? the consilience of the Four Modernizations: capitalism, urbanization, secularism, and the nuclear family ? to provide the clue? There are American historians (I among them) who see the decade of the 1780s as an ?Axial Moment? in American history ? ?the most critical moment in the entire history of America,? wrote Gordon Wood in The New York Review of Books (1994) ? in which, in the midst of ?Deep Change? in almost everything else, family responsibility for the intimate care of the aged, the young, the crippled, the alcoholic, the violent, the developmentally challenged, the homeless, the (oops!) pregnant, and the insane were professionalized and transferred to institutions.
c) Or was institutionalization motivated by the nature of institutions themselves which, in the language of the New Institutional Economics, ?provide incentives to agents to work through formal and informal rules and their enforcement? (John Nye, 2003). In the case of the Orphan House ? ?a white island in a sea of blacks? (p. 199) ? what Nye calls ?the institutions-rules nexus? must have provided a measure of security to the increasingly anxious people of Charleston in whom, says Murray, was lurking always the fear of a slave rebellion in the city at large. An ?institutions-rules nexus? to suppress any disorder in the orphan house would have been projected outward to repress any disorder in the society at large.

??The Orphan House was an integral part of the city?s collection of institutions that maintained the prevailing social order the foundation of which was white unity… [It] was at once an integral part of the most repressive social order in America and the most humane and progressive child-care institution in America, and it remained both for decades? (p. 12).
?
John Murray?s book has turned out to be provocative and utterly absorbing.

Winifred B. Rothenberg?s publications include From Market Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850 (University of Chicago Press, 1992).?
???
Copyright (c) 2013 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2013). All EH.Net reviews are archived at http://www.eh.net/BookReview

Subject(s):Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):North America
Time Period(s):18th Century
19th Century

A Nation of Small Shareholders: Marketing Wall Street after World War II

Author(s):Traflet, Janice M.
Reviewer(s):Doti, Lynne Pierson

Published by EH.Net (July 2013)
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Janice M. Traflet, A Nation of Small Shareholders: Marketing Wall Street after World War II. Baltimore: Johns Hopkins University Press, 2013. xi + 242 pp. $45 (hardcover), ISBN: 978-1-4214-0902-3.

Reviewed for EH.Net by Lynne Pierson Doti, School of Business and Economics, Chapman University

Don?t let the frivolous dust jacket fool you. While A Nation of Small Shareholders is very readable, it represents some very serious scholarship. Janice Traflet is a bona fide historian and an excellent writer. Moreover, as an associate professor in the School of Management at Bucknell University, she has a strong understanding about how a financial business operates. With this perspective, she has produced a unique history of how the New York Stock Exchange marketed equities to the consumer, especially in the 1950s and 1960s.

After World War II, the New York Stock Exchange (NYSE) and the average household had ambivalent attitudes about each other.? The NYSE watched covetously as consumer income rose and households invested heavily in bonds, life insurance and homes.? However, a JP Morgan partner Thomas Lamont represented the attitudes of many market experts when he blamed the 1929 crash on these investors of moderate means (as he put it, ?every Tom, Dick and Harry?) and hoped these people would not be in the market in the future. It was also true that the average household remembered the shadow of 1929 and preferred safer, more accessible and better marketed investments to shares of stock.

After the 1930s though, tightened regulations, particularly by the Securities and Exchange Commission (SEC), a reorganization of the NYSE board, and the rising number and reputation of companies listed on the NYSE made even average-income consumers feel that stocks could be a safe investment.? About that time, a few brokerage houses began marketing stocks to the ?small investor.? Those brokerage firms who were members of the NYSE were mildly encouraged to make these appeals ?as long as advertisements were truthful and in good taste? (p. 41).

Charles Merrill was a leader in marketing stocks and had a conservative reputation stemming from his 1928 warnings to clients to reduce their risk. In 1940, his brokerage firm began an advertising campaign directed toward potential clients with modest amounts of investment funds. The firm would become a leader in this type of marketing in the 1950s, not only advertising in print, but also offering investment seminars and information booths to educate their customers.

Some of the earlier Merrill ads explained how a stock exchange encouraged the operation of a free market. The NYSE discussed starting a similar campaign, but found the members would not financially support it. However, when G. Keith Funston became the new president of the NYSE in 1951, he made it clear that the board would be engaged in marketing. Serving the NYSE until 1967, he established the advertising theme as soon as he decorated his office with a picture of Independence Hall. Buying stocks listed on the NYSE was investing in America. He said the NYSE was the ?epitome of free enterprise? (p. 73). A few years later, Funston started a department to coordinate the marketing efforts of industry and trade associations, companies listed on the NYSE and institutions that invested in those companies. The NYSE?s own slogan became ?Own Your Share of American Business.? The campaign to make stock ownership synonymous with patriotism and anti-communism was soon prevalent in many advertisements. A rising stock market in 1953 and 1954 also helped boost stock ownership.

There was still a problem attracting investors with limited funds. Commissions were dependent on the size of the order. The NYSE and some brokerage firms developed a monthly investment plan (MIP) to allow customers to commit to paying a monthly sum for a set period. Rather than saving up for a ?round lot? of 100 shares, the customer would gain ownership of the shares as they paid for them. As the price of the stock fluctuated, each monthly payment earned more or less shares. This was a solid plan for investors who only wanted to buy stock in one or a few companies, but mutual funds offered greater portfolio diversification and experienced very strong growth in the 1950s. ?In 1940, less than 300,000 mutual fund accounts existed. By 1955, the number of mutual fund accounts had ballooned to more than two million? (p. 105). This was in spite of the fact that mutual funds were still not allowed to advertise (but did sell door-to-door!).

In the mid-1950s, the NYSE established a department for public education. The department coordinated free speakers and produced brochures for consumers. By the 1960s the exchange provided thousands of lectures a year in libraries, service clubs and other venues that would attract the smaller investments.

The NYSE would be substantially changed in the 1960s and 1970s. An increase in the importance of institutional trading of securities resulted from consumers investments in mutual funds, pension funds and life insurance. For the exchange, the focus turned from marketing to operating efficiency.

The 1980s saw the beginning of the long bull market and the end of fixed commissions. With the end of fixed commissions and the internet came e-trading by small investors. The story comes full circle, from overcoming consumer fear of the equity market in the post war period to the 2001-2002 declines in the market, which once again created fear among small investors.

The focus of this book is on the NYSE and its experiences attracting the average consumer into stock investment, in the post-war period. However, as such it adds an important piece to the literature on the history of the American equity market. Financial historians like Robert Sobel (The Big Board: A History of the New York Stock Market) or Charles Geisst (100 Years of Wall Street) will benefit greatly by this meticulous research. The book will also be interesting to general business historians and to marketing students, academics and business professionals.

Lynne Pierson Doti is the David and Sandra Stone Professor of Economics at the Argyros School of Business and Economics, Chapman University. She is currently working on a book on the history of real estate financing in California. ldoti@chapman.edu.

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

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